Income Tax Appeal v. Neha Proteins Limited

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR INCOME TAX APPEAL No. 85 of 2005 C I T JODHPUR V/S NEHA PROTEINS LIMITED Mr. KK BISSA, for the appellant / petitioner Mr. D.MEHTA, for the respondent Date of Order : 29.4.2008 HON'BLE SHRI N P GUPTA,J.HON'BLE SHRI KISHAN SWAROOP CHAUDHARI,J. JUDGMENT REPORTABLE BY THE COURT (Per Hon'ble Gupta, J.) This appeal has been filed by the Revenue,against the judgment of the learned Tribunal dt.18.3.2004, partly allowing the appeal of the assessee,and holding, that the assessee is entitled to set offinterest earned by it on the deposits of the publicissue money, against the expenses incurred for thepublic issue, and for this finding, the learnedTribunal has relied upon the judgment of Hon'ble theSupreme Court, in CIT Vs. Bokaro Steel Ltd., reportedin 236 ITR-315. The appeal was admitted vide order dt.10.8.2005, by framing the following substantialquestion of law:- “Whether in the facts and circumstances of thecase, the Tribunal was right in law in holdingthat interest earned by the assessee from shortterm deposits of the share application amountreceived is not taxable as income from othersources, but is income from profit and gains ofbusiness and was liable to be set off against theother liability of the assessee to pay interest onborrowed money?” The necessary facts are, that the assesseefiled a return which was processed under Section 143(1)(a). Thereafter the case was selected for scrutiny,and notices were issued under Section 143(2) and 142(1), from time to time, and query letters were alsoissued. In response whereto, the assessee appearedthrough authorised representative, and produced therelevant books of accounts, and fresh assessment orderwas passed under Section 143(3). By this assessment,fresh computation of income was made. However, sincethe controversy relates only to one item, being anamount of Rs. 1210286/-, being the amount which hadbeen set off by the assessee, against the public issueexpenses, which are to be amortized in future, andthis amount represented the interest earned by theassessee on the share application money, we need notgo into the other part of this fresh assessment order.The learned Assessing Officer relying upon thedecision of Hon'ble the Supreme Court, in TuticorinAlkali Chemicals and Fertilizers Ltd. Vs. Commissionerof Income-Tax, reported in 227 ITR-172, held that thisset off is not allowable, and thus the amount wasadded to the income of the assessee. This finding wasrecorded by the learned Assessing Officer in para-15of the assessment order. Aggrieved of this, the assessee filed an appealbefore the learned Commissioner, and the learnedCommissioner, in para-18 and 19 dealt with thiscontroversy, and held, that the Assessing Officer wasjustified in taxing the interest received by theassessee on deposits of share application money inBank, as income under the head other sources, and theappellant was not entitled to set off, in respect ofthis income against expenses, and for that purpose thelearned Commissioner relied upon the judgment ofHon'ble the Supreme Court in Commissioner of Income-Tax Vs. Coromandal Cements Ltd., reported in 234 ITR-412. Aggrieved of this, the assessee filed furtherappeal before the learned Tribunal, and the learnedTribunal by the impugned order, in para-6 and varioussub-paras thereof, held that the assess is entitled toset off, interest earned out of public issue money,against the expenses incurred for public issue. Forarriving at this conclusion the learned Tribunalrelied upon the judgment of Hon'ble the Supreme Court,in Bokaro Steel Ltd.'s case. Thus, the appeal waspartly allowed. The matter was heard by us for quite a longtime, inasmuch as the hearing commenced yesterday, andconcluded at 10 A.M. today. The arguments of both thelearned counsel, i.e. for the Revenue, and for theassessee, centered around the judgments of Hon'ble the Aggrieved of this, the assessee filed furtherappeal before the learned Tribunal, and the learnedTribunal by the impugned order, in para-6 and varioussub-paras thereof, held that the assess is entitled toset off, interest earned out of public issue money,against the expenses incurred for public issue. Forarriving at this conclusion the learned Tribunalrelied upon the judgment of Hon'ble the Supreme Court,in Bokaro Steel Ltd.'s case. Thus, the appeal waspartly allowed. The matter was heard by us for quite a longtime, inasmuch as the hearing commenced yesterday, andconcluded at 10 A.M. today. The arguments of both thelearned counsel, i.e. for the Revenue, and for theassessee, centered around the judgments of Hon'ble the Supreme Court, inasmuch as the Revenue placed relianceon the judgments in Tuticorin's case and Coromandal'scase, while the assessee places strong reliance onBokaro Steel Ltd.'s case. According to the learned counsel for the appellant, it is not in dispute, that the amount ofthe share application money was lying deposit with thebank, and it earned interest in the sum of Rs.1210286/-, and as held in Tuticorin's case, thatinterest is always a revenue receipt, unless ofcourse,it is by way of damage or compensation. It was alsocontended, that the assessee is entitled to amortizeexpenses of public issue under Section 35D of the Act,which clearly specifies the various heads under whichthe expenses incurred is permitted to be amortized, interms of that section, and that section does notprovide, for any setting off, of the amount receivedby way of interest. It is contended, that the matteris required to be examined, as if there were twochannels for flow of funds; one being entry channel,and the other being exit channel, the money comingfrom entry channel is liable to be taxed, and moneyflowing out from exit channel is required to beconsidered for amortized under Section 35D, and then,there is no provision for setting off. With this itwas contended, that in Tuticorin's case it was held byHon'ble the Supreme Court, that the application, ordestination, of the money received has no relevancefor the purpose of taxing the amount received, inasmuch as the liability to tax accrues immediately on receipt of the money, and is not deferred, to bedependent, on the application or destination of themoney received by the assessee. Then, distinguishingthe judgment in Bokaro Steel's case it was contended,that the judgment in Tuticorin's is a judgmentrendered by the Bench headed by three Hon'ble Judges,and in that judgment Challapalli Sugars Ltd. Vs. CIT,reported in 98 ITR1-67, was distinguished, while inBokaro Steel's case the logic employed inChallapalli's case, for arriving at the capitalexpenditure, has been extended, and the amount ofinterest earned on the advances made to thecontractor, which advances were made pursuant tosupplementary agreement, and to enable the contractorto execute the large scale construction work smoothly,was held that the arrangements which were made betweenthe assessee company and the contractors pertaining tothese arrangements were intrinsically connected withthe construction of its steel plant, and since theywere adjusted against the charges payable to thecontractors, and had gone to reduce the cost ofconstruction, were held to be capital receipts, andnot income of the assessee from any independentsource, which in substance is at variance with thejudgment in Tuticorin’s case, and that the conclusionsarrived at by Hon'ble the Supreme Court in Tuticorin'scase have been re-affirmed in subsequent judgments, inCommissioner of Income-Tax Vs. Autokast Ltd., reportedin 248 ITR-110, and Coromandal Cements Ltd.'s case,and that the judgment in Autokast Ltd.'s case is ajudgment rendered by a bench headed by three Hon'ble On the other hand, learned counsel for theassessee distinguished the judgment in Tuticorin'scase, and Autokast Ltd.'s case, by contending, that inthose cases the surplus funds available with theassessee were put in short term deposit by them, andthereby interest was earned, which obviously was arevenue receipt, while in the present case it was nota voluntary act on the part of the assessee, inputting the amount in short term deposits, rather itwas an act of compulsion against the assessee, thatthe amount was required to be deposited by theapplicants in the bank, as required under theCompanies Act, in an account which is popularly knownas escrow account, and that by virtue of provisions ofSection 73(3) and (3-A) the amount cannot be utilisedfor any purpose, other than the purpose mentioned insub-section 3-A, at the pain of the penaltyprovisions. In that view of the matter, since theinterest accrued on this amount was not a result ofany voluntary act of the assessee, the principlepropounded in Tuticorin's case cannot apply. On thebasis of this reasoning, it was contended, that thenearest case applicable to the controversy is, BokaroSteel's case, as it is not in dispute, that theassessee is entitled to amortize public issueexpenses, and since the interest accrued was in thenature of “essential bye-product” of the exercise ofpublic issue, and therefore was, within the meaning ofprinciple propounded in Bokaro Steel's case, intrinsically connected with the public issueexpenses, and had gone to reduce the public issueexpenses, of which the assessee would claimamortization, and therefore, it has rightly beenordered by the learned Tribunal, to be adjustedagainst the public issue expenses, which is to beamortized at an appropriate time, in accordance withthe provisions of Section 35D of the Income Tax Act. We have considered the submissions, and havegone through the judgments cited on either side. First of all, we take up the judgment inTuticorin's case. In Tuticorin's case, the facts were,that the assessee company was incorporated for thepurpose of manufacturing heavy chemicals, like AmmoniaChloride and Soda Ash. The company was incorporatedin the year 1971, and its trial production commencedin 1982. For the purpose of setting up of factories,the company had taken term loans from various banksand financial institutions. The part of the borrowedfund, which was not immediately required, was keptinvested in short term deposits with the banks. Suchinvestments were permitted in the memorandum andarticles of association. On these short term deposits,the assessee earned income to the tune of Rs.2,92,440.The company disclosed business losses to the extent ofRs.3,21,802, and claimed the benefit of carry forwardof a net loss of Rs.29,360. However, then the companyfiled a revised return, showing business loss ofRs.3,21,802, and claimed, that the interest and finance charges alongwith other pre-productionexpenses are required to be capitalized, andtherefore, the interest income of Rs.2,92,440 shouldreduce the pre-production expenses, which wouldultimately be capitalized, and pointed out, that inthe previous year the company had incurred a sum ofRs.1,13,06,068/- by way of interest and financecharges, which had to be capitalized alongwith otherpre-production expenses, and thus it was claimed, thatthe interest earned amounting to Rs.2,92,440/- was notexigible to tax. It is on these facts, that Hon'bleSupreme Court noticed the difference of opinions ofvarious High Courts. Hon'ble Supreme Court alsoconsidered its previous judgment, in Challapalli SugarLtd Vs. CIT, reported in 98 ITR 167, and held, thatthe amount would be chargeable to tax, and such incomehas to be computed in accordance with the provisionsof the Income-tax Act, Section 14 whereof lays down,that for the purpose of computation, income of anassessee has to be classified under the six heads, andthen it was found, that such income falls under head'F', being “Income from other sources”. The argumentabout accountancy methods, not only of the company,but of the association of Chartered Accountants, wasalso considered. Challapally Sugars Ltd's case wasexplained, and was found to be different. It has beenobserved, that the phrase “actual cost” has not beendefined in the Act, therefore, it has to be explainedin the common parlance, and to find that out, thenormal rules of accountancy, prevalent in thecommercial and industrial circles were noted, but then the Hon'ble Supreme Court found, in Tuticorin's case,that it (Challapally Sugars Ltd's case) is clearly adifferent case, inasmuch as the question required tobe decided is, as to whether a particular receipt isof the nature of the income, which is a question oflaw, required to be decided by the Court, on the basisof the provisions of the Act, and the interpretationof the term “income”, given in large number ofdecisions of the High Courts, and the Privy Council,and also of the Supreme Court. Then it was held, thatit is well settled, that the income attracts tax assoon as it accrues, and the application, ordestination of the income, has nothing to do with itsaccrual or taxability. It is also well settled, thatinterest income is always of a revenue nature, unlessit is received by damages or compensation. Thus, areference made to the Hon'ble Supreme Court, by HighCourt, was decided. Since the judgment in AutokastLtd.'s case and Coromandal Cement's case simply followthis judgment, therefore, we need not repeat them. On the other hand in Bokaro Steel's case; thefacts regarding the relevant assessment order,involving the questions of law, viz. whether on thefacts and circumstances of the case the Tribunal wasjustified in holding that the interest received by theassessee company on the amount of Rs.7,50,502/-,advanced to the contractors, was not taxable?Likewise, in next assessment year 1971-72 thisquestion involved was as to whether the learnedTribunal was justified in holding that the interest On the other hand in Bokaro Steel's case; thefacts regarding the relevant assessment order,involving the questions of law, viz. whether on thefacts and circumstances of the case the Tribunal wasjustified in holding that the interest received by theassessee company on the amount of Rs.7,50,502/-,advanced to the contractors, was not taxable?Likewise, in next assessment year 1971-72 thisquestion involved was as to whether the learnedTribunal was justified in holding that the interest received by the assessee company on the amount of Rs.14,98,993/-, advanced to the Contractor was liable totax? The facts were, that the assessee was acorporation, wholly owned by the Government of India,and was assessed in the status of a company. It wasincorporated in January 1964, with the object toconstruct and own integrated iron and steel works.During the assessment years under consideration, thework of the construction of the company's factory andinstallation of plant was in the process ofcompletion, and the company had not started anybusiness during the assessment years in question.During this period, the assessee entered in thesupplementary agreement with its contractors, underwhich assessee had made certain advances to thecontractors, to enable them to execute large scaleconstruction work smoothly, which advances were onpayment of interest, with the result, that thecontractors did not have to raise funds from outsideagencies. Other items we need not go into. Then in Para-5, Hon'ble Supreme Court in this case has held asunder:- “……………. We have to consider whether the amountsreceived by the assessee under these five headscan be treated as income of the assessee for therelevant assessment years. The Tribunal has heldthat all these amounts (under items Nos.1 to 4)received by the assessee have gone to reduce thecost of construction. These are in the nature ofcapital receipts which can be set off against thecapital expenditure incurred by the assesseeduring the relevant assessment years.” Thus, with this finding, the Hon'ble Supreme Court concluded, with respect to the amounts, whichhad been borrowed by the assessee for construction ofwork, which were not immediately required, were put inshort term deposits, and earned interest, which washeld to be taxable, and that, the question isconcluded by the decision in Tuticorin's case.However, while proceeding further, the Hon'ble SupremeCourt at page 323, after recapitulating again theconclusions in Tuticorin's case, held as under:- “However, while interest earned by investingborrowed capital in short term deposits is anindependent source of income not connected withthe construction activities or business activitiesof the assessee, the same cannot be said in thepresent case where the utilisation of variousassets of the company and the payments receivedfor such utilisation are directly linked with theactivity of setting up the steel plant of theassessee. These receipts are inextricably linkedwith the setting up of the capital structure ofthe assessee company. They must, therefore, beviewed as capital receipts going to reduce thecost of construction” For this purpose reference was made toChallapalli Sugar Mill's case, and it was held, thatthe receipts of interest being inextricably linkedwith its plant and machinery, such receipts would goto reduce the cost of its assets. The receipts,therefore, were held to be of capital nature, and notliable to be taxed. In our view Tuticorin's case would have noapplication to the controversy involved in the presentcase, and that the principles propounded in BokaroSteel's case would be correctly guiding judgment. Though the reasons which we detail outhereinafter have not been considered in either of thetwo judgments, but then in our view, they are thedecisive factors. For this purpose reference was made toChallapalli Sugar Mill's case, and it was held, thatthe receipts of interest being inextricably linkedwith its plant and machinery, such receipts would goto reduce the cost of its assets. The receipts,therefore, were held to be of capital nature, and notliable to be taxed. In our view Tuticorin's case would have noapplication to the controversy involved in the presentcase, and that the principles propounded in BokaroSteel's case would be correctly guiding judgment. Though the reasons which we detail outhereinafter have not been considered in either of thetwo judgments, but then in our view, they are thedecisive factors. In Tuticorin's case as noticed above, theamount was put in short term deposit with the bank. Itwas a voluntary act on the part of the assessee toearn best usufruct of the surplus funds available withthe assessee, and Hon'ble the Supreme Court laid down,that income has to be computed in accordance with theprovisions of the Income Tax Act, Section 14 whereoflays down that, for the purpose of computation, incomehas to be classified under six heads, and then it wasfound, that such income falls in head (VI) being“Income from other sources”. For understanding thisreasoning we may revert back to the relevantprovisions of the Income Tax Act, and we may gainfullyquote the provisions of Section 14, which read asunder:- Heads of income. 14. Save as otherwise provided by this Act, allincome shall, for the purposes of charge of income-tax and computation of total income, be classifiedunder the following heads of income : A.-Salaries.[***]C.-Income from house property.D.-Profits and gains of business or profession.E.-Capital gains.F.-Income from other sources. Since the different heads are brief heads given in Section 14, but then the subsequent sectionscomprised in certain parts, or groups, deal with thedetails of the different heads of the income, and inthat process, the head “Income from other sources” isdealt with by the provisions of Section 56 onwards.Section 56(1) and (2) are relevant provisions in thisregard, which may be reproduced for convenience, andthey read as under:- Income from other sources. 56. (1) Income of every kind which is notto be excluded from the total income underthis Act shall be chargeable to income-taxunder the head Income from other sources,if it is not chargeable to income-tax underany of the heads specified in section 14,items A to E. (2) In particular, and without prejudice tothe generality of the provisions of sub-section (1), the following incomes, shallbe chargeable to income-tax under the head“Income from other sources”, namely :- (i) dividends ; (ia) income referred to in sub-clause(viii) of clause (24) of section 2 ;(ib) income referred to in sub-clause (ix)of clause (24) of section 2 ; (ic) income referred to in sub-clause (x)of clause (24) of section 2, if such incomeis not chargeable to income-tax under thehead “Profits and gains of business orprofession” ; (id) income by way of interest onsecurities, if the income is not chargeableto income-tax under the head “Profits andgains of business or profession” ; (ii) income from machinery, plant orfurniture belonging to the assessee and leton hire, if the income is not chargeable toincome-tax under the head “Profits andgains of business or profession”; (iii) where an assessee lets on hiremachinery, plant or furniture belonging tohim and also buildings, and the letting ofthe buildings is inseparable from theletting of the said machinery, plant orfurniture, the income from such letting, ifit is not chargeable to income-tax underthe head “Profits and gains of business or profession”; (id) income by way of interest onsecurities, if the income is not chargeableto income-tax under the head “Profits andgains of business or profession” ; (ii) income from machinery, plant orfurniture belonging to the assessee and leton hire, if the income is not chargeable toincome-tax under the head “Profits andgains of business or profession”; (iii) where an assessee lets on hiremachinery, plant or furniture belonging tohim and also buildings, and the letting ofthe buildings is inseparable from theletting of the said machinery, plant orfurniture, the income from such letting, ifit is not chargeable to income-tax underthe head “Profits and gains of business or profession”; (iv) income referred to in sub-clause (xi)of clause (24) of section 2, if such incomeis not chargeable to income-tax under thehead “Profits and gains of business orprofession” or under the head “Salaries”;(v) where any sum of money exceedingtwenty-five thousand rupees is receivedwithout consideration by an individual or aHindu undivided family from any person onor after the 1st day of September, 2004[but before the 1st day of April, 2006],the whole of such sum : Thus, a look at sub-section (1) shows, thatit provides for chargeability of income, which is notexcluded from the total income from other sources, ifit is not chargeable under the Income Tax Act, in anyof the heads specified in section 14, items A to E,and then sub-section (2) provides, that in particular,and without prejudice to the generality of theprovisions of sub-section (1), the list of incomesgiven therein is chargeable to income tax, under thehead “Income from other sources”, and then, readingthe list, the income from interest is covered byClause (id), and as reproduced above, it shows, thatthis comprehends income by way of interest on “securities”, if the income is not chargeable toincome tax under the head “Profits and gains ofbusiness or profession”. Thus on combined reading ofSection 14 and 56, it is clear, that the presentincome in question, in our view, in order to fallwithin the expression “Income from other sources”, ithas to be income by way of interest on “security”. Theterm “security” has again been defined in Explanation2, appended to Section 2(42A), which deals with “Shortterm capital asset”, and provides, that the expression “security” shall have the meaning assigned to it inclause (h) of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956). This Section 2(h)of the Securities Contracts (Regulation) Act, 1956,hereafter referred to as the Act of 1956, defines “securities” as under:- “(h)”securities” include- (i)shares, scripts, stocks, bonds,debentures, debenture stock or othermarketable securities of a like nature inor of any incorporated company or otherbody corporate;(ia) derivative;(ib) units or any other instrument issuedby any collective investment scheme to theinvestors in such schemes;(ic) security receipt as defined in clause(zg) of section 2 of the Securitisation andReconstruction of Financial Assets andEnforcement of Security Interest Act, 2002;(id) units or any other such instrumentissued to the investors under any mutualfund scheme;(ii) Government securities;(iia) such other instruments as may bedeclared by the Central Government to besecurities; and(iii) rights or interest in securities'.” With quoting the above provision we would notbe blamed to be hastening, in coming to theconclusion, that the amount of application money,lying in the separate account with the bank, asprovided in Section 73(3) and (3A) of the CompaniesAct, does not fall within the expression “securities”,even though the definition is inclusive one. That being the position, this amount ofinterest, accruing on the share application money,lying in deposit with the bank, under the mandate ofSection 73(3) and (3A) cannot be said to be falling within the definition of “Income from other sources”,as provided in Section 14 (F) read with Section 56(2)(id) of the Act. With quoting the above provision we would notbe blamed to be hastening, in coming to theconclusion, that the amount of application money,lying in the separate account with the bank, asprovided in Section 73(3) and (3A) of the CompaniesAct, does not fall within the expression “securities”,even though the definition is inclusive one. That being the position, this amount ofinterest, accruing on the share application money,lying in deposit with the bank, under the mandate ofSection 73(3) and (3A) cannot be said to be falling within the definition of “Income from other sources”,as provided in Section 14 (F) read with Section 56(2)(id) of the Act. Since in Tuticorin's case, the amount waslying in short term deposit, which clearly fell withinthe definition of “securities”, as given in Section 2(h) of the Act of 1956, though this was not the logicgiven by Hon'ble the Supreme Court, but then, itnecessarily flows, that it is on this line ofreasoning, that the interest income was treated to bea revenue receipt, liable to be taxed as “Income fromother sources”, as provided in Section 14(F).Consequently, we have to come to the conclusion, thatthis interest accruing on the share application money,is not covered by the provisions of Section 14 (F),read with Section 56. Thus, the judgment inTuticorin's case, cannot be said to be applicable tothe controversy involved in the present case. This being the position we are left to dealwith the judgment in Bokaro Steel's case only. We havealready recapitulated Bokaro Steel's case above, andfind, that therein Hon'ble the Supreme Courtconsidered the aspect, that the activities of theassessee in connection with the receipts, weredirectly connected with, or incidental to, the work ofthe plant, undertaken by the assessee, the advances,which the assessee made to the contractor, was tofacilitate the construction activities, of puttingtogether a very large project, so as to ensure, that the work of the construction proceeds without anyfinancial hitch, as to help the contractor. It wasalso found, that the arrangements made with thecontractor were inextricably connected with its plantand machinery, and they would go to reduce the cost ofconstruction. Thus, they were found to be of capitalreceipt. In the present case, on the same analogy, theamount of interest, accruing on the share applicationmoney, could not be used by the assessee, for anypurpose whatever, other than those mentioned inSection 73(3) and (3A), and obviously on the allotmentof the shares, the assessee was to take stock of thethings, about the expenditure incurred by it, beingthe public issue expenses, and the interest accrued,obviously did reduce that expenditure, and in ourview, it is rightly required to be adjusted againstthe expenditure, i.e. the assessee is entitled toclaim amortization of the public issue expenses only,on the figure so reduced, after setting off, oradjusting, the interest accrued on the shareapplication money lying with the bank, as mandated bySection 73 of the Companies Act. The net result of the aforesaid discussionis, that the question as framed is answered in themanner, that the Tribunal was right in law in holding,that interest accrued on the share application money,lying with the Bank, under the mandate of Section 73of the Companies Act, is not taxable as “Income from other source”, and was required to be set off oradjusted, against the public issue expenses, so as toreduce the amount of public issue expenses, for thepurpose of enabling the assessee to claimamortization, under and in accordance with theprovisions of Section 35D. We may clarify, that as comprehended by thequestion as framed, the assessee has not claimedadjustment on this interest, against other liabilityof the assessee to pay interest on the borrowed money,and it is nobody's case, that this is to be taxed asincome from “Profits and gains of business orprofession”. Likewise, as found above, it cannot besaid, to be a short term deposit, either. other source”, and was required to be set off oradjusted, against the public issue expenses, so as toreduce the amount of public issue expenses, for thepurpose of enabling the assessee to claimamortization, under and in accordance with theprovisions of Section 35D. We may clarify, that as comprehended by thequestion as framed, the assessee has not claimedadjustment on this interest, against other liabilityof the assessee to pay interest on the borrowed money,and it is nobody's case, that this is to be taxed asincome from “Profits and gains of business orprofession”. Likewise, as found above, it cannot besaid, to be a short term deposit, either. Accordingly though for different reasons, butthen, in the net result the appeal is dismissed. ( KISHAN SWAROOP CHAUDHARI ),J. ( N P GUPTA ),J. /Sushil/