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: 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 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 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
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 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]
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 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 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]
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.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.