Itta/138/2004 Of Everest Organics Ltd v. The Commissioner Of Income Tax

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABADWEDNESDAY,THE TWENTY FIRST DAY OF SEPTEMBERTWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 138 OF 2004 AND I OF 2005 r.T-T.4. NO. 138 0F 2004 Appeal under Section 260 A of the lncome Tax Act, 1961 against orderdated 09-04-2003 in ITA No. 1261 lH 197 (Asst Year 1995-96 )on the file ofthe lncometax Appellate Tribunal ["B" ]Bench at Hyderabad preferred against thegrder dated 26-06-1997 in ITA No O / ITO 4 (2) / CIT (A) lll / 97 -98 on the fileof the Commissioner of lncome Tax ( Appeals ) lll, Hyderabad [preferred ]againstthe order of the lncome Tax Officer, Comp Ward. 4 (2). Hyderabad dated 12-02-1997 in PAN / GIR No. E-23 Between: Everest Organics Ltd, rep. by its Managing Director, Hyderabad. ...APPELLANT AND The Commissioner of lncome Tax, Hyderabad The Commissioner of lncome TaxA.P. - l, Hyderabad. ...RESPONDENT Counsel for the Appellant: Ms. K. Neeraja Counsel for the Respondent: Sri B. Narasimha Sarma, representingMs. K. Mamata Chowdary (SC for l.T.Department)Ms. K. Mamata Chowdary (SC for l.T.Department) INCC'/lE TAX TRIBUNAL APPEAL NO: I C)t :2005 Appeal under :iection 260 A of the lncome Tax l\(1 196' against orderdated 09-04-2003 ir ITA No 1262 ll197 [(Asst. ]Year 1?'15-96 ) on the file ofthe lncometax Appe late Tribunal ["8" ]Bench at Hyderaba,l ;rreferred against theorder dated 25-06-1J97 in ITA No. 148 I fiO 4 [(2) ]/ Cli= :l\) lll / 96- 97 on thefile of the Commiss cner of lncome Tax [( ]Appeals ) lll, Hyderabad [preferred]against the order of he lncome Tax Officer, Company Wa.cl '- 4 ,2), Hyderabad.dated ['t7-01-1997 ]in PAN / GIR No. E-23 tW. 4 [(2) ]/ 95-96 Between:EVEREST ORGANI( [;S ]LTD. Managing Director, Hyderabaci .AND ...APPELLANT The Commissioner r ['' ]lncometax A P.-l Hyderabad ...RESPONDENT Counsel for the Ap pellant: Ms. K. NEERAJA Counsel for the Rr spondent: SRI B. NARASIMHA SARM, REPRESENTINGMS. K. MAMATA CHOWDARY ( SC FCR t.T. DEPARTMENT)The Court delive red the following: Common JudgrnentMS. K. MAMATA CHOWDARY ( SC FCR t.T. DEPARTMENT)The Court delive red the following: Common Judgrnent THE HON'BLE THE CHIEF JUSTICE UJJAI BHIIYANAND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY I.T.T.A.Nos.l38 of 2OO4 and 9 of 2OO5 COMMON JUDGMENT:(Per the Hon'bLe the ChlefJustice UijaL BhuAan) This order will dispose of both I.T.T.A.Nos. 138 of2OO4 and 9 of 2005. 2. We have heard Ms. K.Neeraja, learned counsel for theappellant/ assessee and Mr. B.Narasimha Sarma, learnedStanding Counsel for Income Tax Department appea-ringfor Ms. K.Mamata Chowdary, learned counsel for therespondent/ revenue. 3. I.T.T.A.No.138 of 2OO4 arises out ofI.T.A.No. 1261 lHydl9T for the assessment year [1995-96,]whereas LT.T.A.No.9 of 2005 arises out [of]I.T.A.No. 1262lHydl97 lor the same [assessment ][year ][1995-]96, both disposed of by the lncome [Tax ][Appellate ][Tribunal,]fiyderabad [Bench ]['B', ][Hyderabad ][(Tribunal), ][vide ][the]common order dated 09.04.2003. \ \ 4. I.T.l .No.1261 lHydl97 arises out of :he rectificationorder pas;ed by the assessing officer unde' Sectjon i54 ofthe Incor re Tax Act, 1961 (briefly, the Fct' hereinafter),whereas LT.A.No.1262lHydl97 arises c,ut of theassessme rt order passed under Section -..lii(.3) cf the Act.However, ssue raised in the appea-ls is one and ttLe same 5. l.T.' .A.No. i38 of 2004 was admitted lrv this Court on20.12.2O( 4 on question No.1 as proposed t,y the appellant.The said r uestion is extracted hereunder: "Whether on the facts ; lri in theCITCimstances of the case Tribunal was correct inlawin holding that expenditure incrr::red by theapp'llant in connection with the pu blic issue ofshae application was not to be dedur:ted frcm theinte'est received on the share applica-ion :aoniesfro nthe banks?" 6. I.T.' .A.No.9 of 2005 was admitted b,r this Court on06.o6.20( 5 5. l.T.' .A.No. i38 of 2004 was admitted lrv this Court on20.12.2O( 4 on question No.1 as proposed t,y the appellant.The said r uestion is extracted hereunder: "Whether on the facts ; lri in theCITCimstances of the case Tribunal was correct inlawin holding that expenditure incrr::red by theapp'llant in connection with the pu blic issue ofshae application was not to be dedur:ted frcm theinte'est received on the share applica-ion :aoniesfro nthe banks?" 6. I.T.' .A.No.9 of 2005 was admitted b,r this Court on06.o6.20( 5 7 . The aloresaid question arises on the :bllowing factualbackgrou ,d. Appellalt is an assesseer un de [- ]the Acthaving tl e status of company. It is ,:ngagr.d in the business of manufacturing pharmaceutica,l drugs.Appellant did not commence commercial production duringthe previous year relevant to the assessment year underconsideration. However, it went public during the saidyea-r arrd the application money received lrom the publicu,as held in deposit in various banks which resulted inaccrual of substantial bank interest. In the assessmentproceedings for the said assessment year, appellantcontended that interest accrued on share applicationmoney was not taxable. However, assessing oflicer vide theassessment order dated 12.O2.1997 negatived suchcontention of the appellant and took the view that theappellant had incurred various expenses during theconstruction and pre-operation period to bring thebusiness into existence. Expenses incurred on publicissue rvas one such expenditure. Earning of interest on themoney in deposit with the banks was independent of theexpenses incurred on public issue. Therefore, setting off the said interest against expenses on pubhc lssl.le was\ found to be not acceptable. In this regard, assessing officerrelied upon the decision of the then composite Andhra t\ Pradesh H.3h Court in CIT v. Derco Coolirrl3 Coils Ltd.l, and that o the Delhi High Court in CIT v. lVtodi Rubber2.In the abo'e two decisions it was held that.:rrtr,'rer;t earnedon share capital money prior to oor-l r crlc€ment ofbusiness v as liable to income tax. Therefor,), the aforesaidinterest in.:ome earned was added to thr: in<:on,e of theappellant. 8. Aggri ,:ved by the aforesaid order appeal ri as preferredby the ap1 [,ellant ]before the Commissioner- cl In< ome Tax(Appeals). [i'irst ]appellate authority confirnrr:rl the order ofthe assess ng officer holding that expenditrrr-e clrrimed bythe appellz nt was not for the purpose of m.e < nq o" earninginterest inr cme. As such that was not allos,'rrl 9. Therr after matter calne beforr. t he lribunaiup Tribunal a peed with the view expressed tx tl're rrssessingi officer as affirmed by the Commissioner :)' [ncr)nle Tax(Appeals) I urther noting that the issu€' st(x)i cr,r,erecl inIfavour of t r.e revenue by a decision of the ['fr ]i':r-rnal itself inthe case o DCIT (Asstsf SR-4 v. Midwr:st .lrorr and Steel'(1ee2) 198 r! rr 375 (Ap)' lt994l 2o8 r! lt 379 (DELHT) Co. Ltd (ITA No.175alHyd/95, dated 16.12.19961.Therefore, upholding the order of the Commissioner ofIncome Tax (Appeals), the two appeals of the appellantwere dismissed. 10. In the hearing today, learned counsel for theappellant submits that issue raised in the two appeals hasbeen answered by the Supreme Court in the recentdecision in CIT v. Shree Rama Multi Tech Ltd.s. 1 1. However, learned counsel for the respondent submitsthat the facts in Shree Rama Multi Tech Ltd., (supra) andin the present appeals are distinguishable. 12. We have heard learned counsel for the parties aldperused the materials on record as well as the decision ofthe Supreme Court in Shree Rama Multi Tech Ltd.,(supra). I 3. The question before the Supreme Court [for]consideration was whether interest [accrued ][on ][account ][of] deposit of :;hare application money is taxalt.e irtcome at thehands of t re assessee? 10. In the hearing today, learned counsel for theappellant submits that issue raised in the two appeals hasbeen answered by the Supreme Court in the recentdecision in CIT v. Shree Rama Multi Tech Ltd.s. 1 1. However, learned counsel for the respondent submitsthat the facts in Shree Rama Multi Tech Ltd., (supra) andin the present appeals are distinguishable. 12. We have heard learned counsel for the parties aldperused the materials on record as well as the decision ofthe Supreme Court in Shree Rama Multi Tech Ltd.,(supra). I 3. The question before the Supreme Court [for]consideration was whether interest [accrued ][on ][account ][of] deposit of :;hare application money is taxalt.e irtcome at thehands of t re assessee? 14 . The above question was framed <>r. t he followingfactual be::kground. Respor-rdent/ assesso( is errgaged inthe manu acture ol multi-layer tubes an<l c,ther specialtypackaging and plastic products. For the e-ss3ssment yearsunder cor sideration, respondent/ assesseo claimr:d set offunder the head of interest on share appiir:ation money.This was 1 artly allowed by the assessing c,fli,:t:r u'hereafterresponden /assessee u,ent in appezLl bef:re theCommissir ner of Income Tax (Appeals), whi:r was allowedby the firs t- appellate authoritv by diret:tin11 the rssessingofficer to grant certain reliefs. In tlrt: m:arwhile,reassessm :nt proceedings \\'ere initiated un<ler Se:tion 147of the Act rn the ground that assessing offic:r he-d reasonto believe that income ch argeable to tiui f,tr the saidassessmer l. year had escaped assessntr:nt. On re-assessmen:., assessing officer passed an order on21.O3.2OO( determining the total irr< cme of theresponden /assessee at a much higher figurr:. T.-ris order dated 21 .03.2006 came to be cha-llenged before theCommissioner of Income Tax (Appeals). Qne of thegrounds urged was that in the order dated 21.03.2006, theinterest accrued on public issue of share applications wasnot allowed to be set off. Commissioner of Income Tax(Appeals) though had partly allowed the appeal, however,affirmed the finding of the assessing officer in not allowingset off of interest income from share application money. Itwas thereafter that appeals and cross appeals were filedbefore the Tribunal. Tribunal agreed with the contention ofthe respondent/ assessee ald allowed its claim with respectto deduction on account ol interest income 15. It was in the above factual backdrop that. thequestion as framed above came up for consideration beforethe Supreme Court. After referring to the material factsald relevant case lau,s, Supreme Court held as [follows:] "72. The common rationale that [is ][followed ][in ][all ][these]judgment is that if there is any surplus money which islying 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 [bul ][if ][lhc ][income accrued]is merely incidcntal and not [the ][prime ][purpose of doing]the act in question [which resulted ][into ][accrual of ][some] 15. It was in the above factual backdrop that. thequestion as framed above came up for consideration beforethe Supreme Court. After referring to the material factsald relevant case lau,s, Supreme Court held as [follows:] "72. The common rationale that [is ][followed ][in ][all ][these]judgment is that if there is any surplus money which islying 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 [bul ][if ][lhc ][income accrued]is merely incidcntal and not [the ][prime ][purpose of doing]the act in question [which resulted ][into ][accrual of ][some] additi,nal income then the income is not l:able t( beASSCS,ed and is eligible to be claimed ar; deduction.Pu ttirg the above rationale in terms of the prr:r;ent crse,if thrshare application money that is receivec isdeposted in the bank in light of t}te statu:orymand1tory requirement then the accrued intr)rest is notliableto be taxed and is eligible for deduction againstthe prblic issue expenses. The issue of share relates tocapitrI stmcture of the company and henc: experrsesincured in connection with the issue of sharr:s are t ) becapitrrized because t1.e purpose of such deposit is nrrt tomakesome additional income but to comply u"ith thestaturrrv requirement, and interest accrued on suchdeposrt is merely incidental. In the present case, therespordent was statutorily required to keetr Lhe shareappli,;1t ion money in the bank till the a krtmen t ofshare,r ',vas complete. In that sense, we are o[ the 'ziewthathc tligh Court was right in holdinq that theintert:;t accrued to such deposit of money in the bar k isliableto be set-off against the public issue exx(:nses thatthe cr,mpanv has incurred as the interest r:erred wasinexticably linked with requirement of the company torAlSCil.rare capital ald was thus adjustable towards theL'\per,lirure rnrolved for the share issue. 13.In view of the forgoing discussion, w( e oj thevierv.hat the High Court was right in upholding thedecisdecisintenst income earned out of t1le share applicetionmon€, is liable to be set off against tl.e public ir;sueexperscs. The judgment passed by the Divisiorr Bt nchof th' [lligh ][Court ][in ][remalding ][the ][mal ][t(:r ][to ][thc]Tribural on other issues requires no interferen:e [,,]of th' [lligh ][Court ][in ][remalding ][the ][mal ][t(:r ][to ][thc]Tribural on other issues requires no interferen:e [,,] 16. From a careful analysis of the decision of theSupreme Court as extracted above, what is deducible isthat according to the Supreme Court, if money is depositedin the bank for the purpose of earning interest andaccordingly interest is earned, then it is liable to be taxedas income from other sources. But, if the interest incomeaccrued is merely incidenta-l and not the prime purpose ofearning interest income which resulted into accrual ofsome additional income, then such income is not liable tobe assessed; eligible to be claimed as deduction. Applyingthe above ratio, Supreme Court held that if the shareapplication money received is deposited in the bank in thelight of statutory mandatory requirement then the accruedinterest is not liable to be taxed and would be eligible fordeduction against public issue expenses. On the abovebasis, Supreme Court held that interest income earned outof the share application money is liable to be set off againstthe public issue expenses. \ ll \ 17 . On .horough consideration of all rr;pect s of thematter, w( are of the view that the above dr:r:isi rn of theSupreme [( ]ourt in Shree Rama Multi Tech [,td., ['supra) ]issquarely a rplicabie to the facts of the presr:rrt case 18. Acco dingly, we answer the substantiirl qr:estion ofla.,v frame I in favour of the assessec arLcl agirinst therevenue( lonsequently, order of the Tritrun:J is se t aside. 19. Both the appeals are accordingly allon,:rl Misc,'llaneous applications pendrng, il arry, shallstand clost d. However, there shall be no orcler as to costs.stand clost d. However, there shall be no orcler as to costs. \ ll \ 17 . On .horough consideration of all rr;pect s of thematter, w( are of the view that the above dr:r:isi rn of theSupreme [( ]ourt in Shree Rama Multi Tech [,td., ['supra) ]issquarely a rplicabie to the facts of the presr:rrt case 18. Acco dingly, we answer the substantiirl qr:estion ofla.,v frame I in favour of the assessec arLcl agirinst therevenue( lonsequently, order of the Tritrun:J is se t aside. 19. Both the appeals are accordingly allon,:rl Misc,'llaneous applications pendrng, il arry, shallstand clost d. However, there shall be no orcler as to costs.stand clost d. However, there shall be no orcler as to costs. SD'. K, SFIINIVASA RAOJOINT REb]STRAR,-, l.\--r'! [/]SEC-'ION OFFICER //TRUE COPY// One Fair Copy to the lton,ble Chief Justice Ujjal Bhuyan(For H s Lordships Kind perusal) One Fair Copy to the I ron,ble Sri Justice C.V. Bhaskar Reddy(For Hi: Lordships Kind Perusal) To The lncometar Appellate Tribunal [,,B,,Bench ]at HvderatradThe Commissic 1er of lncome Tax (Appeals ) 1il, HyC,-.rabadJf [e_llcome ][Ta ][Officer, ][Company ][Waid ][_ ][4'(2), ][Hyder;rbad]The Commissic 1er of lncome Tax (Appeals ) 1il, HyC,-.rabadJf [e_llcome ][Ta ][Officer, ][Company ][Waid ][_ ][4'(2), ][Hyder;rbad] 1 2 3 4l0 [LR Copies]5The Under Secr rtary, Union of lndia Ministry of law, Jurst ce and Companyaffarrs. New Del ri6. The Secretary T :lanoana Advocates Association, Liorary, High (lourtBuitdings Hyderr badi6. The Secretary T :lanoana Advocates Association, Liorary, High (lourtBuitdings Hyderr badi Buitdings Hyderr badi7 One CC to Ms. t Neeraja, Advocate (OPUC)7 One CC to Ms. t Neeraja, Advocate (OPUC) 8. One [[th9 Stale ]]CC to Ms. (. 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I uo (-.D.(iopies-. ior I uo (-.D.(iopiesuo (-.D.(iopies(-.D.(iopiesI uo (-.D.(iopiesuo (-.D.(iopies(-.D.(iopiesuo (-.D.(iopies(-.D.(iopies(-.D.(iopies1 0. \FOnc Spare ( oir1. HIGH COURT DATED:21109 2022 .n-;,,:.'(-- -..|l|'i , n [-:r,,.]?r{L. B t,"COMMON JI IIDGMENT.,ITTA.Nos.13t of 2004 And 9 of 2005'ji [. ,, ]-. ALLOWING TIIE U(,I't.t Appt;:\t S \\'l I II()1.. f (.()S.l s €){",