2016 (7) TMI 257 - AT - Income Tax

Allowability of interest on share application money - interest expenditure incurred on share application money received from shareholders - Held that - We are of the view that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of share are subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion. Therefore, payment of interest of share application money cannot be treated differently in the Income-tax Act. Once the contention of the assessee that the money has been utilized for the purpose of business remains un-disputed, there is no justification to hold the issue against the assessee. Accordingly, the claim of interest expenditure on share application money as revenue expenditure deserves to be allowed. AO is directed to delete the addition on merits. See Rohit Exhaust Systems Pvt. Ltd. 2012 (10) TMI 1101 - ITAT PUNE - Decided in favour of assessee

Summary

Issues Involved:

1. Compliance with Section 147 of the Income-tax Act, 1961.
2. Allowability of interest expenditure on share application money under Sections 36(1)(iii) and 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Compliance with Section 147 of the Income-tax Act, 1961:

The legal objection raised by the assessee concerns assessment years 2004-05, 2007-08, and 2008-09. The assessee argued that the objections against reasons recorded under Section 148(2) were not disposed of. The notice under Section 148 was issued on 08.07.2010 and served on 26.10.2010. The assessee acknowledged receipt of reasons recorded under Section 148(2) but did not file legal objections until 07.12.2011. The Assessing Officer (AO) observed that due to the limitation for completing the assessment by 31.12.2011, no speaking order was needed. The Tribunal found that the delay in filing objections was on the part of the assessee, not the AO. The Supreme Court in G.K.N. Driveshafts India Ltd. vs. ITO directed AOs to dispose of objections by passing a speaking order, based on natural justice. However, the assessee failed to demonstrate timely filing of objections, leading to the Tribunal's decision against the assessee. This reasoning was also applied to assessment years 2007-08 and 2008-09.

2. Allowability of Interest Expenditure on Share Application Money:

The solitary issue on merits involved the disallowance of interest expenditure incurred on share application money received from shareholders. The assessee, a closely held company, engaged in milk processing and manufacturing, claimed interest expenses on share application money pending allotment. The AO disallowed the interest expenditure under Sections 36(1)(iii) and 37(1), arguing that the share application money did not constitute borrowing and was not for business purposes. The CIT(A) endorsed the AO's findings, emphasizing that the share application money was intended for equity, not borrowed capital.

The Tribunal examined the facts and noted that the share application money was utilized for business purposes. The Tribunal found that the issue was covered by the Co-ordinate Bench of ITAT in the case of Rohit Exhaust Systems Pvt. Ltd., where interest on share application money was allowed on the principles of commercial expediency. The Tribunal agreed with the assessee's contention that share application money per se cannot be equated with share capital and the obligation to return the money is implicit in non-allotment. Consequently, the payment of interest on share application money was considered revenue expenditure, and the AO was directed to delete the addition on merits.

Conclusion:

The Tribunal decided against the assessee on the preliminary legal objection regarding Section 147 compliance due to the delay in filing objections. On the merits, the Tribunal allowed the assessee's claim for interest expenditure on share application money, treating it as revenue expenditure. The appeals for assessment years 2004-05, 2005-06, 2007-08 to 2009-10 were disposed of in favor of the assessee on this issue.