2022 (9) TMI 1258 - HC - Income Tax

Expenditure incurred by the appellant in connection with the public issue of share application - setting off interest against expenses on public issue - Whether not to be deducted from the interest received on the share application monies from the banks? - whether interest accrued on account of deposit of share application money is taxable income at the hands of the assessee? - HELD THAT - If money is deposited in the bank for the purpose of earning interest and accordingly interest is earned, then it is liable to be taxed as income from other sources. But, if the interest income accrued is merely incidental and not the prime purpose of earning interest income which resulted into accrual of some additional income, then such income is not liable to be assessed; eligible to be claimed as deduction. Applying the above ratio, Supreme Court Shree Rama Multi Tech Ltd. 2018 (4) TMI 1374 - SUPREME COURT held that if the share application money received is deposited in the bank in the light of statutory mandatory requirement then the accrued interest is not liable to be taxed and would be eligible for deduction against public issue expenses. On the above basis, Supreme Court held that interest income earned out of the share application money is liable to be set off against the public issue expenses. On thorough consideration of all aspects of the matter, we are of the view that the above decision of the Supreme Court in Shree Rama Multi Tech Ltd. 2018 (4) TMI 1374 - SUPREME COURT is squarely applicable to the facts of the present case. Accordingly, we answer the substantial question of law framed in favour of the assessee.

Summary

Issues Involved:
1. Interpretation of tax law regarding the treatment of interest income accrued on share application money.
2. Determination of whether interest earned on share application money is taxable income.
3. Assessment of whether interest income can be set off against public issue expenses.

Analysis:

Issue 1: Interpretation of Tax Law
The case involved two appeals, I.T.T.A.Nos.138 of 2004 and 9 of 2005, arising from the Income Tax Appellate Tribunal's orders for the assessment year 1995-96. The appellant, a pharmaceutical company, contended that interest accrued on share application money was not taxable. The assessing officer, however, disagreed, citing expenses incurred during the pre-operation period as not eligible for set off against interest income.

Issue 2: Taxability of Interest Income
The assessing officer and the Commissioner of Income Tax (Appeals) held that interest income from share application money was taxable based on precedents from the Andhra Pradesh High Court and the Delhi High Court. The Tribunal also upheld this view, relying on a previous decision in a similar case involving Midwest Iron and Steel Co. Ltd.

Issue 3: Set Off Against Expenses
The appellant argued that a recent Supreme Court decision in CIT v. Shree Rama Multi Tech Ltd. supported their claim that interest income should be set off against public issue expenses. The respondent contended that the facts in the Supreme Court case were distinguishable. Upon review, the High Court found that the Supreme Court's decision applied directly to the present case. It held that if share application money is deposited in the bank as per statutory requirements, the interest accrued is not taxable and can be set off against public issue expenses.

In conclusion, the High Court ruled in favor of the appellant, allowing the appeals and setting aside the Tribunal's order. The decision was based on the interpretation of tax law, the taxability of interest income, and the eligibility of interest income for set off against specific expenses.