2003 (12) TMI 45 - HC - Income Tax

Interest earned on short-term deposits of share application money Accrual of income - It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. Therefore, the allotment process in this case was not completed in the AY 1992-93, but was completed only in the subsequent assessment year. It is only after that allotment process was completed in all respects, interest that had accrued on the application money kept in a separate bank account was capable of being regarded as belonging to the assessee Thus, Tribunal was right in law in holding that the interest earned did not accrue to the assessee during the AY 1992-93

Summary

Issues:
Whether interest earned on short-term deposits of share application money accrues to the assessee during the assessment year 1992-93?

Analysis:
The case involved a public limited company that conducted a public share issue in early 1992. The application money received was deposited for a short period, and the interest earned on these deposits was disputed as taxable income for the assessment year 1992-93. The Assessing Officer considered the interest accrued before March 31, 1992, as taxable under "Income from other sources" due to the company not commencing business that year. The Commissioner of Income-tax upheld this decision. However, the Tribunal, on appeal by the assessee, ruled in favor of the company, stating the interest did not accrue during the relevant assessment year.

The legal analysis delves into Section 73 of the Companies Act, 1956, which mandates companies to keep application money in a separate bank account until the allotment process is completed. The section outlines scenarios where the company must repay the money to applicants, emphasizing the trust nature of the funds. The interest earned on such funds is not immediately available for the company's use until the allotment process concludes and refunds are made. The interest only becomes company income when the trust terminates post-completion of the allotment process.

The judgment highlights that interest earned on application money is not company income until the allotment process is finalized. The Tribunal correctly concluded that the allotment process was completed in the subsequent assessment year, making the interest accrued on the application money taxable only after this completion. Thus, the judgment favored the assessee over the Revenue, emphasizing the critical timing of the allotment process completion in determining the accrual of interest income on application money.