REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 6391 of 2013 Commissioner of Income Tax IV, Ahmedabad ..Appellant(s) Versus M/s. Shree Rama Multi Tech Ltd ..Respondent(s) WITH CIVIL APPEAL NO. 8336 OF 2013 JUDGMENT R.K. Agrawal, J. 1) present appeal has been preferred against impugned final judgment and order dated 18.12.2012 passed by High Court of Gujarat in Tax Appeal No. 235 of 2012 whereby Division Bench of High Court dismissed appeal filed by Revenue appellant herein against judgment and Signature Not Verified order dated 21.10.2011 passed by Income Tax Appellate Digitally signed by SWETA DHYANI Date: 2018.04.24 17:14:42 IST Reason: Tribunal (in short Tribunal ) in ITA No.1039/Ahd./2007 and ITA No. 240/Ahd./2008. 1 2) Brief facts: a) Respondent M/s. Shree Rama Multi Tech Ltd. is engaged in manufacture of multi layer tubes and other specialty packaging and plastic products. dispute in present case relates to Assessment Years 1999 2000, 2000 2001 and 2001 2002. Respondent filed its return of income for Assessment Year 2000 2001 declaring total income of Rs 20,00,59,650/ . However, Assessing Officer, vide order dated 31.03.2003, passed order of assessment assessing taxable income at Rs 27,61,14,254/ . But same came to be modified in light of decision given by Tribunal dated 16.12.2004 in ITA No. 1481/Ahd./2004 and ITA No. 1685/Ahd./2004 wherein Tribunal has directed for re adjudication on certain matters including that of set off as claimed under head of interest on share application money. In pursuance of Order passed by Tribunal dated 16.12.2004, total income was re determined at Rs. 17,30,88,691/ by Assessing Officer vide order dated 29.12.2004 but was restricted to 20,00,59,650/ in 2 view of proviso to Section 240(b) of Income Tax Act, 1961 (in short IT Act ). (b) Aggrieved by aforesaid order, Respondent went in appeal before learned Commissioner of Income Tax (Appeals). Learned CIT (Appeals), vide order dated 09.01.2006, allowed appeal filed by Respondent while directing Assessing Officer to grant relief by re computing income and modifying tax calculation without applying proviso to Section 240 of IT Act. In meanwhile, re assessment proceedings were initiated in accordance with Section 147 of IT Act on ground that Assessing Officer has reason to believe that income for said Assessment Year has escaped assessment. Finally, on 21.03.2006, Assessing Officer determined total income at Rs 20,66,29,165/ . (c) Being aggrieved by order dated 21.03.2006 in not allowing set off of interest income against public issue expenses in accordance with directions of Tribunal while rejecting claim for deduction of interest income of Rs. 1,71,30,212/ from public issue expenses, Respondent went 3 in appeal before CIT (Appeals) by filing CIT (A) ACITC 8/74/2006 2007. Learned CIT (Appeals), vide order dated 05.01.2007, partly allowed appeal filed by Respondent while affirming findings of Assessing Officer in not allowing set off of interest income from share application money. (d) Being aggrieved by order passed by learned CIT (Appeals), both parties filed cross appeals before Tribunal. Tribunal, by common judgment dated 21.10.2011, allowed claim of Respondent with respect to deduction on account of interest income of Rs 1,71,30,212 and remanded matter back to Assessing Officer on other issues. (e) Being aggrieved, Revenue filed appeal before High Court being ITA No. 235 of 2012. Division Bench of High Court, vide order dated 18.12.2012, dismissed appeal on point of taxability of interest income. (f) Aggrieved by order dated 18.12.2012, appellant has filed this appeal before this Court. 4 3) Heard learned counsel for parties and perused factual matrix of case. Point(s) for consideration: 4) Whether in facts and circumstances of present case, interest accrued on account of deposit of share application money is taxable income at hands of Respondent? Rival contentions: 5) Learned counsel appearing on behalf of Appellant contended that impugned final order passed by High Court is against law and facts of present case. He further contended that High Court grossly erred in relying on its earlier order dated 26.07.2011 passed in Tax Appeal No. 315 of 2010 titled Assistant Commissioner of Income Tax vs. Panama Petrochem Ltd. and not appreciating fact that Department could not file petition for special leave before this Court due to low tax effect being Rs. 9,81,541/ wherein it was held that interest income occurred by keeping amount of share application money in bank account is liable to be set off against public issue expenses. 5 6) Learned counsel for appellant finally contended that law is well settled that interest income is always regarded as of revenue nature unless it is received by way of damages or compensation. present case is not related either to damages or compensation and High Court erred in arriving on such conclusion which is not in accordance with law and is liable to be aside. 7) Per contra, learned counsel appearing on behalf of Respondent submitted that case is squarely covered under Commissioner of Income Tax vs. Bokaro Steel Ltd. reported in (1999) 236 ITR 315 (SC). Learned counsel finally submitted that judgment of High Court was well within parameters of law and requires no interference. Discussion: 8) Respondent company had come out with initial public issue during year under consideration and amount of share application money received was deposited with banks on which interest of Rs. 1,71,30,202/ was earned which was shown in return of income originally filed as income from 6 other sources which was also referred to in Col. 13(d) of Tax Audit report filed under Section 44AB of IT Act. Even though initially income from interest was shown as income from other sources in return of income, however, Respondent had raised additional ground before Tribunal to allow set off of such interest against public issue expenses. issue was examined by Tribunal and was set aside for fresh adjudication by Assessing Officer. During course of fresh proceedings, opportunity was given to Respondent to file details of interest on share application money. Respondent stated that details of interest income on share application money was already furnished at Annexure No. 7 of their letter dated 11.03.2003 at time of original assessment. verification of said Annexure reveals that Respondent had earned interest income on FDRs placed with bank, however, period for which such FDRs were placed and specific period of interest earned was not found to have been mentioned. Under circumstances, it was not possible to identify as to what portion of interest earned on FDRs was 7 relating to period prior to allotment of shares or after allotment of shares. Keeping in view specific guidelines of Tribunal in this regard and in absence of specific working of interest for pre allotment and post allotment, claim of Respondent was not allowed and added to total income under head income from other sources as was declared in original return of income filed by Respondent. 9) Coming back to facts of case, we may reiterate that Respondent was statutorily required to keep share application money in separate account till allotment of shares was completed. Interest earned on such separately kept amount was to be adjusted towards expenditure for raising share capital. We are, therefore, of opinion that interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards expenditures involved for share issue. Though learned counsel for Appellant contended that part of share application money would normally have to be returned to unsuccessful applicants, and therefore, entire share application money would not 8 ultimately be appropriated by Company, insofar as present case is concerned, we do not see how this factor would make any significant difference. Interest earned from share application money statutorily required to be kept in separate account was being adjusted towards cost of raising share capital. In that view of matter, we are of opinion that High Court was right in allowing such deduction. 10) In light of above developments in case, question of law has been decided by this Court in case in Bokaro Steel Ltd. (supra), wherein company was set up to produce steel. When construction of plant was yet not completed, company earned interest on advances to contractor, rent from quarters let out to employees of contractor as well as other income such as hire charges on plant and machinery let out to contractor, royalty on stones removed from its land. It was in this background that this Court held that amounts were directly connected to and incidental to construction of plant by company, amounts were capital receipts and not income from any independent source. 9 11) Further, rationale of judgment of Bokaro Steel Ltd. (supra) was followed in Commissioner of Income Tax vs. Karnal Co operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). In this case, company had deposited certain amount with bank to open letter of credit for purchase of machinery for setting up plant. On money so deposited, it earned interest. In that background, this Court observed that this is not case where any surplus shares capital money which was lying idle had been deposited in bank for purpose of earning interest. deposit of money is directly linked with purchase of plant and machinery. 12) common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has been deposited in bank for purpose of earning interest then it is liable to be taxed as income from other sources but if income accrued is merely incidental and not prime purpose of doing act in question which resulted into accrual of some additional income then income is not liable to be assessed and is eligible to be claimed as deduction. Putting 10 above rationale in terms of present case, if share application money that is received is deposited in bank in light of statutory mandatory requirement then accrued interest is not liable to be taxed and is eligible for deduction against public issue expenses. issue of share relates to capital structure of company and hence expenses incurred in connection with issue of shares are to be capitalized because purpose of such deposit is not to make some additional income but to comply with statutory requirement, and interest accrued on such deposit is merely incidental. In present case, Respondent was statutorily required to keep share application money in bank till allotment of shares was complete. In that sense, we are of view that High Court was right in holding that interest accrued to such deposit of money in bank is liable to be set off against public issue expenses that company has incurred as interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards expenditure involved for share issue. 11 13) In view of forgoing discussion, we are of view that High Court was right in upholding decision of Tribunal dated 21.10.2011 that interest income earned out of share application money is liable to be set off against public issue expenses. judgment passed by Division Bench of High Court in remanding matter to Tribunal on other issues requires no interference. 14) appeals are accordingly dismissed. parties to bear their own cost. ..... J. (R.K. AGRAWAL) . . J. (ABHAY MANOHAR SAPRE) NEW DELHI; APRIL 24, 2018. 12 TheCommissionerofIncome-tax-IV, Ahmedabad v. ShreeRamaMultiTechLtd