By TIOL News Service

NEW DELHI, APRIL 25, 2018: THE issue is - Whether interest income earned from deposit of share application money statutorily required to be kept in separate account is incidental in nature and the assessee is entitled to set it off against expenses relating to public issue. YES is the verdict.

Facts of the case

The assessee is engaged in manufacture of multi­layer tubes and plastic products. The assessee made initial public issue during the relevant year and the amount of share application money was deposited with the banks on which interest was earned which was shown in the return filed as income from other sources. The assessment for relevant year was completed. The assessee had raised an additional ground before the Tribunal to allow the set off of interest against the public issue expenses. The Tribunal set aside the issue for fresh adjudication by the AO. 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 assessee was not allowed and added to the total income under the head income from the other sources.

On appeal, CIT(A) directed the AO to grant relief  to assessee by re­computing the income and modifying the tax calculation without applying the proviso to Section 240 of the Act. In the meanwhile, re­assessment proceedings were initiated on the ground that income of assessee had  escaped assessment. In reassessment order, AO did not allow set off of the interest income against the public issue expenses. On appeal, CIT(A)  partly gave relief to assessee but affirmed the findings of the AO in not allowing set off of interest income from share application money. Both the Assessee and the Revenue filed cross­appeals before the Tribunal. The Tribunal, passed order in favour of assessee and allowed the deduction on account of interest income. The Revenue's appeal before the High Court was dismissed.

Having heard the parties, the Apex Court held that,

++ assessee 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. 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. Hence the High Court was right in allowing such deduction;

++ 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 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 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 capital and was thus adjustable towards the expenditure involved for the share issue.

(See 2018-TIOL-153-SC-IT)