2018 (4) TMI 1374 - SC - Income Tax

Setoff of public issue expenses with Interest accrued - taxability of interest accrued on account of deposit of share application money - Held that - If the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. In the present case, the Respondent was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be setoff against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue. - Decided against revenue

Issues:
- Appeal against the judgment of the High Court of Gujarat in Tax Appeal No. 235 of 2012
- Taxability of interest accrued on deposit of share application money

Analysis:

Issue 1: Appeal against the High Court Judgment
The appeal was filed against the final judgment of the High Court of Gujarat in Tax Appeal No. 235 of 2012. The Division Bench of the High Court had dismissed the appeal filed by the Revenue regarding the taxability of interest income. The Tribunal had allowed the claim of the Respondent regarding the deduction of interest income and remanded other issues back to the Assessing Officer. The High Court upheld the decision of the Tribunal, leading to the appeal before the Supreme Court.

Issue 2: Taxability of Interest on Share Application Money
The main contention revolved around whether the interest accrued on the deposit of share application money was taxable income for the Respondent. The Appellant argued that the interest income should be taxed as revenue nature income unless received as damages or compensation. However, the Respondent cited the case of Commissioner of Income Tax vs. Bokaro Steel Ltd., emphasizing that the interest earned was linked to the requirement of raising share capital and should be adjustable towards the expenses for the share issue.

The Supreme Court analyzed the facts and statutory requirements, noting that the interest earned was connected to the need to raise share capital. The Court found that the interest income was inextricably linked to the company's obligation to raise share capital and therefore could be adjusted against the expenditure for the share issue. Referring to previous judgments, the Court highlighted that if the income accrued was incidental and not the primary purpose of the act, it should be eligible for deduction. The Court concluded that the interest earned on the share application money was not liable to be taxed and could be set off against the public issue expenses, as it was related to the capital structure of the company.

In light of the above analysis, the Supreme Court upheld the decision of the High Court and dismissed the appeals. The Court found that the interest income earned from the share application money was eligible for deduction against the public issue expenses, in accordance with the statutory requirements and the purpose of raising share capital.

The parties were directed to bear their own costs, and the judgment was delivered accordingly.

← Previous Next →