Interest earned on share application money taxable only when allotment process completed - Supreme Court

Case Name:

Commissioner of Income Tax vs. Henkel Spic India Ltd.

Civil Appeal No. 5384 of 2006

Key Takeaways:

- Interest earned on application money for a public share issue belongs to the company only after the allotment process is completed and excess money is refunded to applicants.

- Until then, the interest income is held in trust for the applicants and cannot be treated as income available to the company.

- The court upheld the principle that income accrues to the company only when the trust terminates and the amount is no longer refundable to applicants.

Issue:

When should the interest earned on application money received for a public share issue be taxed as income for the company - in the year the money was received or in the year when the allotment process was completed and excess money was refunded?

Facts:

- The respondent company (Henkel Spic India Ltd.) opened a public issue of shares on 29.01.1992, which closed on 03.02.1992.

- As per legal requirements, the application money received from intending subscribers was deposited in a bank within 46 days.

- The shares were ultimately allotted in June 1992.

- The company earned interest of Rs. 1,83,31,363 on the application money kept in the bank.

- The Assessing Officer wanted to tax this interest income in the Assessment Year 1992-1993 (the year the money was received).

- The company argued that the interest income accrued only in the Assessment Year 1993-1994 when the allotment process was completed, as per Section 73 of the Companies Act.

Arguments:

- Assessing Officer's argument:

The interest income should be taxed in the year 1992-1993 as the application money was received in that financial year.

- Company's argument:

As per Section 73 of the Companies Act, the application money (including interest earned) was held in trust for the applicants until allotment. The interest income accrued to the company only in 1993-1994 when the allotment process was completed and excess money was refunded to applicants.

Key Legal Precedents:

- Section 73 of the Companies Act: This section deals with the handling of application money received for a public share issue. It requires the company to keep the money in a separate bank account and refund excess money (with interest) to applicants who were not allotted shares.

Judgement:

The Supreme Court upheld the High Court's decision and ruled in favor of the company. The key points of the judgement are:

1. "The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment is completed and moneys are returned to those to whom shares are not allotted."

2. "The application money as also interest earned thereon will remain within a trust in favour of the general body of applicants until the process outlined above is completed in all respects."

3. "As the amount of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income."

4. The court found no error in the High Court's order holding that the interest income accrued only in the Assessment Year 1993-1994 (when the allotment process was completed) and was taxable in that year, not 1992-1993.

FAQs:

Q1: What is the significance of this judgement?

A1: This judgement clarifies the tax treatment of interest earned on application money received for a public share issue. It establishes that such interest income belongs to the company only after the allotment process is completed and excess money is refunded to applicants, as per the Companies Act.

Q2: Why did the court rule in favor of the company?

A2: The court agreed with the company's argument that the application money (including interest earned) was held in trust for the applicants until allotment, as per Section 73 of the Companies Act. Therefore, the interest income accrued to the company only when the trust terminated after allotment.

Q3: What is the impact of this decision?

A3: This decision provides clarity on the taxability of interest earned on application money for public share issues. Companies can now confidently treat such interest income as taxable only in the year when the allotment process is completed and excess money is refunded to applicants.

Q4: Does this judgement apply to other types of interest income?

A4: No, this judgement is specific to the tax treatment of interest earned on application money received for a public share issue, as governed by Section 73 of the Companies Act. The principles may not apply to other types of interest income.

The respondent-assessee opened a public issue of shares on 29.01.1992. The date of closure of this issue was 03.02.1992. Proceeds which were received from the applicants to the share capital were deposited in the Bank in 46 days as per the requirement under law. The shares were ultimately allotted in June, 1992. Those who were not allotted the shares, their application money was refunded along with interest. As mentioned above, the proceeds which were collected from the intending subscribers were kept in Bank for 46 days and on this the assessee earned an interest of Rs.1,83,31,363/-.

The Assessing Officer wanted to tax the aforesaid interest income in the Assessment Year 1992-1993 as the money was received between 29.01.1992 and 03.02.1992 and the interest earned thereupon in the said Financial Year. On the other hand, the assessee maintained that since the shares were allotted only in June, 1992, i.e., during the Financial Year 1993-1994, and as per Section 73 of the Companies Act, the assessee was required to keep the money in Bank account, interest has accrued to the assessee only on the allotment of the shares as before that the amount was kept in trust by the assessee which belonged to the applicants who wanted to subscribe for the shares. It was further submitted that after certain amount was refunded, which included interest to those whose application money was returned, the actual amount which was left became the income and, therefore, this income accrued only in the year 1993-1994.

The aforesaid contention of the assessee has been accepted by the High Court in the following manner: -

“17. The company is not, under section 73 (of Income Tax Act, 1961), required to keep the money in a bank account which yields interest. There is, however, no prohibition in sub-section (3) or (3A) of section 73 (of Income Tax Act, 1961) against the money being kept in a bank account which yields interest. The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment is completed and moneys are returned to those to whom shares are not allotted. No part of this fund, either principal or interest accrued thereon, can be utilized by the company until the allotment process is completed and money repayable to those entitled to repayment has been repaid in full together with such interest as may be prescribed having regard to the length of period of delay in the return of money to them.

18. It is only after the allotment process if completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. The application money as also interest earned thereon will remain within a trust in favour of the general body of applicants until the process outlined above is completed in all respects.

The prohibition contained in sub-section (3A) of Section 73 (of Income Tax Act, 1961) against the moneys standing to credit in a separate bank account being utilized for purposes other than those mentioned in that sub-section, is absolute and the interest earned on the amounts in such separate bank account will remain a part of that separate bank account and cannot be transferred to any other account.

19. As the amount of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.” It is not in dispute that in the year 1993-1994, the assessee had shown the income on account of interest received in the income tax returns and paid the tax thereupon.

We, thus, do not find any error in the order passed by the High Court holding that the interest income has accrued only in the Assessment Year 1993-1994 and was taxable in that year only and not in the Assessment Year 1992-1993.

The appeal is, accordingly, dismissed.

[ A.K. SIKRI ]

[ ROHINTON FALI NARIMAN ]

New Delhi;

September 04, 2015.