2015 (9) TMI 861 - SC - Income Tax

Taxability of interest income - interest accrued on the allotment of the shares - selection of assessment year - Held that - As the amount of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income. It is not in dispute that in the year 1993-1994, the assessee had shown the income on account of interest received in the income tax returns and paid the tax thereupon. We, thus, do not find any error in the order passed by the High Court holding that the interest income has accrued only in the Assessment Year 1993-1994 and was taxable in that year only and not in the Assessment Year 1992-1993. - Decided in favour of assessee.

Summary

Issues: Taxability of interest income accrued from public issue of shares.

Analysis:
The main issue in this case was the taxability of interest income earned by the assessee from a public issue of shares. The Assessing Officer sought to tax the interest income in the Assessment Year 1992-1993, as the money was received between January and February 1992. However, the assessee argued that the interest income accrued only upon the allotment of shares in June 1992, falling within the Financial Year 1993-1994. The crux of the matter was whether the interest income should be taxed in the year of receipt or in the year when the shares were allotted.

The High Court accepted the assessee's contention based on Section 73 of the Companies Act. The court emphasized that the money collected from intending subscribers was held in trust until the allotment process was completed. It was highlighted that the interest earned on the application money could only be considered as income of the company once the trust terminated, and the money became available for the company's use. The court clarified that until all moneys payable to applicants were refunded, the interest earned remained within a trust in favor of the applicants.

The High Court's decision was based on the understanding that the interest income accrued to the company only when the trust terminated, and the amount became available for the company's use. The court emphasized that the interest earned on the application money could not be utilized by the company until the allotment process was completed and all refunds were made. Therefore, the interest income was held to have accrued in the Assessment Year 1993-1994, aligning with the assessee's argument.

The Supreme Court upheld the High Court's decision, stating that the interest income accrued only in the Assessment Year 1993-1994 and was taxable in that year. The court found no error in the High Court's order and dismissed the appeal accordingly. The judgment clarified the principles governing the taxability of interest income earned from public issues of shares, emphasizing the importance of the trust relationship between the company and the applicants until the allotment process was finalized.