Friday, October 28, 2011

Income tax - Sec 36(1)(iii) - Share application money - Is it debt for assessee

Income tax - Sec 36(1)(iii) - Share application money - Is it debt for assessee till share allotment is done? - Can assessee claim deduction for interest paid on such debt? - YES, says ITAT

BANGALORE, AUG 26, 2010: THE issue is - Whether share application money is debt for the assessee company till the time the share allotment is done. Whether interest paid on such debt is allowable.

Facts of the case

Assessee received share application money (SAM) from subscribers. However, it failed to allot shares within the stipulated time and paid interest to the subscribers on their money. AO disallowed the same on the premise that the amount in question related to share capital and hence not allowable as deduction under section 36(1)(iii). CIT(A) allowed the appeal of the assessee observing that unless and until the shares are allotted, SAM is a debt and the relation of the company and of the subscriber is of debtor and creditor and hence the interest paid is allowable. Before the ITAT Revenue reiterated the stand of the AO.

After hearing the parties the ITAT held that,

++ the first appellate authority had analyzed the issue in depth and also with the reference to the various judicial pronouncements on which the respective parties have placed reliance. The Letter of offer clearly indicated that "Interest at 8% per annum (subject to TDS at the rate prevailing from time to time under the provisions of the Income-tax Act 1961) or under any other statutory modification or re-enactment thereof) will be paid on the application money from the date of realization of Cheques/demand drafts/ telegraphic transfer up-to the date of allotment. However, no interest shall be payable on applications withdrawn by the applicants." On the basis of the share applications for subscription of preference shares floated by the assessee, the assessee had received application money from GMR Investments to the extent of Rs.81.60 crores, out of which, the assessee made allotment of 10% Cumulative Redeemable Preference shares aggregating to Rs.27.50 crores on 23.3.2003 to GMR Investments and, however, no allotment with respect to the remaining Rs.54.10 crores during the year to GMR investments;

++ as the assessee had not allotted the preference shares within the specified period from the date of receipt of share application and as per the conditions laid down in the Letter of Offer, interest at the rate of 8% from the date of receipt of SAM till the date of allotment of preference shares was paid for the balance amount of Rs.54.10 crores to GMR Investments to the extent of Rs.395.87 lakhs after effecting TDS as per the provisions of the Act;

++ the bone of contention of the Revenue is that the "share application money is under capital field and is treated as share capital as per the provisions of Companies Act and, thus, the interest on share application money enters into capital field and, thus, could not be allowed as revenue expenditure."

++ when the assessee took up its grievance with the first appellate authority, the Ld.CIT (A), as highlighted earlier, analyzed the pros and cons of the issue elaborately backed with the legal precedents in favour and also against and finally came to a conclusion that the AO was not justified both in facts and law to deny the claim of interest on SAM as a deduction in computation of profits and gains of the business of the assessee. He drew strength - to come to such a conclusion - on the finding of the I.T.A.T., Bangalore Bench reported in (1997) 61 ITD 49.

++ in an overconsideration of the facts and circumstances of the issue deliberated upon in the fore-going paragraphs and also in conformity with the findings of (i) Delhi Tribunal's in the case of Winner Estates (P) Ltd. vs. DCIT, (ii) the Apex Court's in the case of Kerala Road Lines vs. CIT & (iii) the jurisdictional Tribunal's in the case of DCIT vs. Manipal Industries Ltd., the stand of the first appellate authority is justified.

Revenue's appeal dismissed.

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