Income Tax Deduction on Share Application Money: Supreme Court Upholds Tribunal’s Decision

The case of The Commissioner of Income Tax-IV, Ahmedabad vs. M/s. Shree Rama Multi Tech Ltd. revolves around the taxability of interest income earned on share application money and whether it should be set off against public issue expenses. The Supreme Court examined whether the High Court correctly upheld the decision of the Income Tax Appellate Tribunal (ITAT), which ruled in favor of the respondent company.

The appeal was filed by the Income Tax Department challenging the Gujarat High Court’s decision, which dismissed the revenue’s contention that interest accrued on share application money was taxable as revenue income. The Supreme Court upheld the High Court’s decision and ruled that the interest earned was inextricably linked with the statutory requirement to keep share application money in a separate account, making it eligible for deduction.

Background of the Case

M/s. Shree Rama Multi Tech Ltd., engaged in manufacturing multi-layer tubes and other specialty packaging products, filed its return of income for the assessment year 2000-2001. It declared a total income of Rs. 20,00,59,650. However, the Assessing Officer initially assessed the taxable income at Rs. 27,61,14,254, which was later modified to Rs. 17,30,88,691 following an ITAT ruling on certain disputed issues.

The dispute arose when the Assessing Officer refused to allow a set-off for interest income of Rs. 1,71,30,212 earned on share application money, treating it as taxable under “income from other sources.” The respondent challenged this decision, and the matter eventually reached the Supreme Court.

Arguments by the Parties

Petitioner’s Arguments (Income Tax Department)

The Income Tax Department contended that:

• The High Court erred in applying the ruling of Commissioner of Income Tax vs. Bokaro Steel Ltd., which dealt with a different factual matrix.
• Interest income is generally considered taxable unless it is compensatory or linked to damages.
• The interest earned on share application money should be taxed as revenue income.

Respondent’s Arguments (M/s. Shree Rama Multi Tech Ltd.)

The respondent company argued that:

• The company was legally required to keep share application money in a separate account until allotment.
• The interest earned was directly related to capital formation and should be adjusted against public issue expenses.
• The Tribunal had correctly applied the principles laid down in previous Supreme Court rulings.

Supreme Court’s Analysis

The Supreme Court analyzed the applicability of precedents and the nature of the income:

• The requirement to hold share application money in a separate account was a statutory obligation.
• Interest earned was not an independent source of income but incidental to the company’s compliance with legal requirements.
• The principle set in Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd. applied, where interest earned on statutory deposits was considered deductible.

Key Observations by the Court

The Supreme Court ruled:

“Interest earned from share application money statutorily required to be kept in a separate account was being adjusted towards the cost of raising share capital. In that view, we are of the opinion that the High Court was right in allowing such deduction.”

Final Judgment

The Supreme Court dismissed the appeal and upheld the High Court’s ruling. It ruled:

“The interest income earned out of the share application money is liable to be set off against public issue expenses. The judgment of the High Court in remanding the matter to the Tribunal on other issues requires no interference.”

Conclusion

This case reinforces the principle that income earned from mandatory deposits required by law should not be treated as revenue income. The ruling clarifies that interest earned on share application money is eligible for deduction against capital expenses, benefiting companies involved in public issues.

Petitioner Name: The Commissioner of Income Tax-IV, Ahmedabad.
Respondent Name: M/s. Shree Rama Multi Tech Ltd..
Judgment By: Justice R.K. Agrawal, Justice Abhay Manohar Sapre.
Place Of Incident: Ahmedabad, Gujarat.
Judgment Date: 24-04-2018.

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