Sree Rama Multi Tech Ltd (SC): Incidental FD interest on share application proceeds, non-taxable ; Deductible against IPO expenses

ISSUE

Whether the interest income from share application money can the same be set-off against public issue expenses or is taxable under the head ‘Income from Other Sources’,

FACTS:

1. The assessee-company came out with an initial public issue of shares during the relevant assessment years and deposited the share application money received in banks.

2. The interest earned on the deposits was shown in the return of income originally filed under the head ‘Income from Other Sources’.

3. Subsequently, the assessee-company raised an additional ground before the Tribunal for allowing the set off of such interest against the public issue expenses.

PROVISION APPLICABLE

Sec. 37(1) provides that any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession"

ANALYSIS:

1) Interest earned on surplus application money deposited in bank was inextricably linked with requirement of company to raise share capital The Supreme Court observed that the assessee-company was statutorily required to keep share application money in a separate account till the allotment of shares

was completed. Therefore, the interest earned was inextricably linked with the requirement of raising share capital.

2) Surplus money deposited for earning interest vis-a-viz incidental accrual of income SC referred to its ruling in Bokaro Steel Ltd. and noted that common rationale that was followed in all these judgment was 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.” SC further added that “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”.

3) Share application money was deposited as statutory mandate and not for earning interest SC held that if the share application money that was received was deposited in the bank in light of the statutory mandatory requirement then the accrued interest was not liable to be taxed and was eligible for deduction against the public issue expenses. SC elaborated that the purpose of such deposit was not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit was merely incidental.

4) Share issue expenses are in capital field SC clarified that the issue of share related to capital structure of the company and hence expenses incurred in connection with the issue of shares were to be capitalized.

Any surplus money deposited in the bank for the purpose of earning interest is liable to be taxed as “Income from Other Sources”.

5) SC rejected the Revenue’s contention 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 on the ground that this factor would make any significant difference.

CONCLUSION: Interest accrued on deposit of share application money with bank is eligible for set off against the public issue expenses; such interest is, hence, not taxable as “Income from Other Sources”.

NOTE:

 Delhi HC in Jagatjit Industries Ltd had held that where entire money raised through issue of equity shares is to be treated as capital receipt, then gain on account of foreign fluctuation, in the event such share capital collected in foreign exchange, would be capital receipt, irrespective of end use of share capital.  SC in Brook Bond India Ltd had held that share issue expenses being capital in nature would not be allowed as deduction  Please note that SC ruling in Henkel Spic India Ltd is regarding when the timing of accrual of interest on application money deposited with a bank wherein it was held that interest on application money (on shares allotted) would accrue to the company only after allotment is completed.