THE COMMISSIONER OF INCOME TAX-IV, AHMEDABADversusM/S. SHREE RAMA MULTI TECH LTD.

                         [2018] 3 S.C.R. 927                               927


  THE COMMISSIONER OF INCOME TAX-IV, AHMEDABAD                             A
                                   v.
             M/S. SHREE RAMA MULTI TECH LTD.
                   (Civil Appeal No. 6391 of 2013)
                           APRIL 24, 2018                                  B
  [R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]
       Income Tax Act, 1961 – Deduction – Share application money
deposited in bank – Interest income earned therefrom – Claim for
set off of interest income against the public issue expenses – Held:
                                                                           C
If the share application money that is received is deposited in the
bank in light of the statutory mandatory requirement then the
accrued interest is not liable to be taxed and is eligible for deduction
against the public issue expenses – Such interest earned is
inextricably linked with requirement of company to raise share
capital and is thus adjustable towards the expenditures involved           D
for the share issue.
      Income Tax Act, 1961 – Deduction vis-a-vis income from other
sources – Distinction between – Held: If there is any surplus money
which is lying idle and it has been deposited in the bank for the
purpose of earning interest then it is liable to be taxed as income        E
from other sources but if the income accrued is merely incidental
and not the prime purpose of doing the act in question which resulted
into accrual of some additional income then the income is not liable
to be assessed and is eligible to be claimed as deduction.
      Dismissing the appeals, the Court                                    F
      HELD: 1. The Respondent was statutorily required to keep
share application money in the separate account till the allotment
of shares was completed. Interest earned on such separately kept
amount was to be adjusted towards expenditure for raising share
capital. Therefore, interest earned was inextricably linked with           G
requirement of company to raise share capital and was thus
adjustable towards the expenditures involved for the share issue.
Interest earned from share application money statutorily required
to be kept in separate account was being adjusted towards the
cost of raising share capital. [Para 9][932-C, E]
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                                  927
928            SUPREME COURT REPORTS                      [2018] 3 S.C.R.


A            2. The issue of share relates to capital structure of the
      company and hence expenses incurred in connection with the
      issue of shares are to be capitalized because the purpose of such
      deposit is not to make some additional income but to comply
      with the statutory requirement, and interest accrued on such
      deposit is merely incidental. In the instant case, the Respondent
B
      was statutorily required to keep the share application money in
      the bank till the allotment of shares was complete. In that sense,
      the interest accrued to such deposit of money in the bank is liable
      to be set-off against the public issue expenses that the company
      has incurred as the interest earned was inextricably linked with
C     requirement of the company to raise share capital and was thus
      adjustable towards the expenditure involved for the share issue.
      The High Court was right in upholding the decision of the Tribunal
      that the interest income earned out of the share application money
      is liable to be set off against the public issue expenses. [Paras
      12, 13][933-D-F, G]
D
            Commissioner of Income Tax v. Bokaro Steel Ltd.
            reported in (1999) 236 ITR 315 (SC); Commissioner
            of Income Tax v. Karnal Co-operative Sugar Mills Ltd.
            (2000) 243 ITR 2 (SC) – relied on.
E                            Case Law Reference
            (1999) 236 ITR 315 (SC)          relied on       Para 7
            (2000) 243 ITR 2 (SC)            relied on       Para 11
            CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6391
F     of 2013.
            From the Judgment and Order dated 18.12.2012 of the High Court
      of Gujarat at Ahmedabad in Tax Appeal No. 235 of 2012.
                                      WITH
            C. A. No. 8336 of 2013.
G
             Arijit Prasad, Ms. Gargi Khanna (for Mrs. Anil Katiyar), Advs.
      for the Appellant.
           Amar Dave, P. S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew,
      Ms. Shruti Jose, Advs. for the Respondent.
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    COMMISSIONER OF INCOME TAX-IV, AHMEDABAD v.                               929
            SHREE RAMA MULTI TECH LTD.

      The Judgment of the Court was delivered by                              A
      R. K. AGRAWAL, J. 1. The present appeal has been preferred
against the impugned final judgment and order dated 18.12.2012 passed
by the High Court of Gujarat in Tax Appeal No. 235 of 2012 whereby
the Division Bench of the High Court dismissed the appeal filed by the
Revenue-the appellant herein against the judgment and order dated             B
21.10.2011 passed by the Income Tax Appellate Tribunal (in short ‘The
Tribunal”) in ITA No.1039/Ahd./2007 and ITA No. 240/Ahd./2008.
      2. Brief facts:-
       a) The Respondent - M/s. Shree Rama Multi Tech Ltd. is engaged
in the manufacture of multi-layer tubes and other specialty packaging         C
and plastic products. The dispute in the present case relates to Assessment
Years 1999-2000, 2000-2001 and 2001-2002. The Respondent filed its
return of income for the Assessment Year 2000-2001 declaring a total
income of Rs 20,00,59,650/-. However, the Assessing Officer, vide order
dated 31.03.2003, passed an order of assessment assessing the taxable         D
income at Rs 27,61,14,254/-. But the same came to be modified in light
of the decision given by the Tribunal dated 16.12.2004 in ITA No. 1481/
Ahd./2004 and ITA No. 1685/Ahd./2004 wherein the Tribunal has directed
for re-adjudication on certain matters including that of set-off as claimed
under the head of interest on share application money. In pursuance of
the Order passed by the Tribunal dated 16.12.2004, the total income           E
was re-determined at Rs. 17,30,88,691/- by the Assessing Officer vide
order dated 29.12.2004 but was restricted to 20,00,59,650/- in view of
proviso to Section 240(b) of Income Tax Act, 1961 (in short ‘the IT
Act’).
       (b) Aggrieved by the aforesaid order, the Respondent went in           F
appeal before learned Commissioner of Income Tax (Appeals). Learned
CIT (Appeals), vide order dated 09.01.2006, allowed the appeal filed by
the Respondent while directing the Assessing Officer to grant relief by
re-computing the income and modifying the tax calculation without
applying the proviso to Section 240 of the IT Act. In the meanwhile, re-      G
assessment proceedings were initiated in accordance with Section 147
of the IT Act on the ground that the Assessing Officer has reason to
believe that income for the said Assessment Year has escaped
assessment. Finally, on 21.03.2006, the Assessing Officer determined
the total income at Rs 20,66,29,165/-.
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930             SUPREME COURT REPORTS                           [2018] 3 S.C.R.


A            (c) Being aggrieved by the order dated 21.03.2006 in not allowing
      set off of the interest income against the public issue expenses in
      accordance with the directions of the Tribunal while rejecting the claim
      for the deduction of interest income of Rs. 1,71,30,212/- from public
      issue expenses, the Respondent went in appeal before the CIT (Appeals)
      by filing CIT (A) ACITC 8/74/2006-2007. Learned CIT (Appeals), vide
B
      order dated 05.01.2007, partly allowed the appeal filed by the Respondent
      while affirming the findings of the Assessing Officer in not allowing set
      off of interest income from share application money.
             (d) Being aggrieved by the order passed by learned CIT (Appeals),
      both the parties filed cross-appeals before the Tribunal. The Tribunal, by
C     a common judgment dated 21.10.2011, allowed the claim of the
      Respondent with respect to the deduction on account of interest income
      of Rs 1,71,30,212 and remanded the matter back to the Assessing Officer
      on other issues.
             (e) Being aggrieved, the Revenue filed an appeal before the High
D     Court being ITA No. 235 of 2012. A Division Bench of the High Court,
      vide order dated 18.12.2012, dismissed the appeal on the point of taxability
      of the interest income.
             (f) Aggrieved by the order dated 18.12.2012, the appellant has
      filed this appeal before this Court.
E
            3. Heard learned counsel for the parties and perused the factual
      matrix of the case.
            Point(s) for consideration:-
             4. Whether in the facts and circumstances of the present case,
F     interest accrued on account of deposit of share application money is
      taxable income at the hands of the Respondent?
            Rival contentions:-
             5. Learned counsel appearing on behalf of the Appellant contended
      that the impugned final order passed by the High Court is against law
G     and facts of the present case. He further contended that the 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 the fact that the
      Department could not file a petition for special leave before this Court
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    COMMISSIONER OF INCOME TAX-IV, AHMEDABAD v.                              931
    SHREE RAMA MULTI TECH LTD. [R. K. AGRAWAL, J.]

due to low tax effect being Rs. 9,81,541/- wherein it was held that the      A
interest income occurred by keeping the amount of share application
money in a bank account is liable to be set-off against the public issue
expenses.
      6. Learned counsel for the appellant finally contended that the
law is well settled that the interest income is always regarded as of        B
revenue nature unless it is received by way of damages or compensation.
The present case is not related either to damages or compensation and
the High Court erred in arriving on such a conclusion which is not in
accordance with law and is liable to be aside.
       7. Per contra, learned counsel appearing on behalf of the             C
Respondent submitted that the case is squarely covered under the
Commissioner of Income Tax vs. Bokaro Steel Ltd. reported in (1999)
236 ITR 315 (SC). Learned counsel finally submitted that the judgment
of the High Court was well within the parameters of law and requires no
interference.
                                                                             D
      Discussion:-
       8. The Respondent company had come out with initial public issue
during the year under consideration and the amount of share application
money received was deposited with the banks on which interest of Rs.
1,71,30,202/- was earned which was shown in the return of income             E
originally filed as income from other sources which was also referred to
in Col. 13(d) of the Tax Audit report filed under Section 44AB of the IT
Act. Even though initially the income from the interest was shown as
income from other sources in the return of income, however, the
Respondent had raised an additional ground before the Tribunal to allow
the set off of such interest against the public issue expenses. The issue    F
was examined by the Tribunal and was set aside for fresh adjudication
by the Assessing Officer. During the course of fresh proceedings, an
opportunity was given to the Respondent to file the details of interest on
share application money. The Respondent stated that the details of
interest income on share application money was already furnished at          G
Annexure No. 7 of their letter dated 11.03.2003 at the time of original
assessment. The verification of the said Annexure reveals that the
Respondent had earned the interest income on FDRs placed with the
bank, however, the period for which such FDRs were placed and the
specific period of the interest earned was not found to have been
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932            SUPREME COURT REPORTS                          [2018] 3 S.C.R.


A     mentioned. Under the circumstances, it was not possible to identify as
      to what portion of interest earned on FDRs was relating to the period
      prior to the allotment of shares or after the allotment of shares. Keeping
      in view the specific guidelines of the Tribunal in this regard and in the
      absence of specific working of interest for pre-allotment and post-
      allotment, the claim of the Respondent was not allowed and added to the
B
      total income under the head income from the other sources as was
      declared in the original return of income filed by the Respondent.
              9. Coming back to the facts of the case, we may reiterate that the
      Respondent was statutorily required to keep share application money in
      the separate account till the allotment of shares was completed. Interest
C     earned on such separately kept amount was to be adjusted towards
      expenditure for raising share capital. We are, therefore, of the opinion
      that interest earned was inextricably linked with requirement of company
      to raise share capital and was thus adjustable towards the expenditures
      involved for the share issue. Though learned counsel for the Appellant
D     contended that part of the share application money would normally have
      to be returned to unsuccessful applicants, and therefore, the entire share
      application money would not ultimately be appropriated by the 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
E     was being adjusted towards the cost of raising share capital. In that
      view of the matter, we are of the opinion that the High Court was right
      in allowing such deduction.
             10. In light of the above developments in the case, the question of
      law has been decided by this Court in case in Bokaro Steel Ltd. (supra),
F     wherein the company was set up to produce steel. When the construction
      of plant was yet not completed, company earned interest on advances to
      contractor, rent from quarters let out to employees of the 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
G     background that this Court held that the amounts were directly connected
      to and incidental to construction of plant by the company, amounts were
      capital receipts and not income from any independent source.
            11. Further, the rationale of judgment of Bokaro Steel Ltd. (supra)
      was followed in Commissioner of Income Tax vs. Karnal Co-operative
H     Sugar Mills Ltd. (2000) 243 ITR 2 (SC). In this case, the company had
    COMMISSIONER OF INCOME TAX-IV, AHMEDABAD v.                                 933
    SHREE RAMA MULTI TECH LTD. [R. K. AGRAWAL, J.]

deposited certain amount with the bank to open letter of credit for purchase    A
of machinery for setting up plant. On the money so deposited, it earned
interest. In that background, this Court observed that this is not a case
where any surplus shares capital money which was lying idle had been
deposited in the bank for the purpose of earning interest. The deposit of
money is directly linked with the purchase of plant and machinery.
                                                                                B
        12. The 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 the bank for the purpose of earning interest then it is liable
to be taxed as income from other sources but if the income accrued is
merely incidental and not the prime purpose of doing the act in question
which resulted into accrual of some additional income then the income is        C
not liable to be assessed and is eligible to be claimed as deduction. Putting
the above rationale in terms of the present case, if the share application
money that is received is deposited in the bank in light of the statutory
mandatory requirement then the accrued interest is not liable to be taxed
and is eligible for deduction against the public issue expenses. The issue      D
of share relates to capital structure of the company and hence expenses
incurred in connection with the issue of shares are to be capitalized
because the purpose of such deposit is not to make some additional
income but to comply with the statutory requirement, and interest accrued
on such deposit is merely incidental. In the present case, the Respondent
was statutorily required to keep the share application money in the bank        E
till the allotment of shares was complete. In that sense, we are of the
view that the High Court was right in holding that the interest accrued to
such deposit of money in the bank is liable to be set-off against the
public issue expenses that the company has incurred as the interest earned
was inextricably linked with requirement of the company to raise share          F
capital and was thus adjustable towards the expenditure involved for the
share issue.
      13. In view of the forgoing discussion, we are of the view that the
High Court was right in upholding the decision of the Tribunal dated
21.10.2011 that the interest income earned out of the share application         G
money is liable to be set off against the public issue expenses. The
judgment passed by the Division Bench of the High Court in remanding
the matter to the Tribunal on other issues requires no interference.


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934              SUPREME COURT REPORTS                    [2018] 3 S.C.R.


A            14. The appeals are accordingly dismissed. The parties to bear
      their own cost.


      Devika Gujral                                         Appeals dismissed.

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