Everest Organics Ltd vs. The Commissioner of Income Tax

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY,THE TWENTY FIRST DAY OF SEPTEMBER TWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE 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 order dated 09-04-2003 in ITA No. 1261 lH 197 (Asst Year 1995-96 )on the file of the lncometax Appellate Tribunal "B" Bench at Hyderabad preferred against the grder dated 26-06-1997 in ITA No O / ITO 4 (2) / CIT (A) lll / 97 -98 on the file of the Commissioner of lncome Tax ( Appeals ) lll, Hyderabad preferred against the 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 Tax A.P. - l, Hyderabad. ...RESPONDENT Counsel for the Appellant: Ms. K. Neeraja Counsel for the Respondent: Sri B. Narasimha Sarma, representing Ms. K. Mamata Chowdary (SC for l.T.Department)

Appeal under :iection 260 A of the lncome Tax l\(1 196' against order dated 09-04-2003 ir ITA No 1262 ll197 (Asst. Year 1?'15-96 ) on the file of the lncometax Appe late Tribunal "8" Bench at Hyderaba,l ;rreferred against the order dated 25-06-1J97 in ITA No. 148 I fiO 4 (2) / Cli= :l\) lll / 96- 97 on the file 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 ...APPELLANT .AND 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, REPRESENTING MS. K. MAMATA CHOWDARY ( SC FCR t.T. DEPARTMENT) The Court delive red the following: Common Judgrnent INCC'/lE TAX TRIBUNAL APPEAL NO: I C)t :2005

.) THE HON'BLE THE CHIEF JUSTICE UJJAI BHIIYAN AND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY COMMON JUDGMENT: (Per the Hon'bLe the ChlefJustice UijaL BhuAan) This order will dispose of both I.T.T.A.Nos. 138 of 2OO4 and 9 of 2005. 2. We have heard Ms. K.Neeraja, learned counsel for the appellant/ assessee and Mr. B.Narasimha Sarma, learned Standing Counsel for Income Tax Department appea-ring for Ms. K.Mamata Chowdary, learned counsel for the respondent/ revenue. 3. I.T.T.A.No.138 of 2OO4 arises out of I.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. \ \ I.T.T.A.Nos.l38 of 2OO4 and 9 of 2OO5

-) 4. I.T.l .No.1261 lHydl97 arises out of :he rectification order pas;ed by the assessing officer unde' Sectjon i54 of the Incor re Tax Act, 1961 (briefly, the Fct' hereinafter), whereas LT.A.No.1262lHydl97 arises c,ut of the assessme 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 on The said r uestion is extracted hereunder: CITC law app sha inte fro n "Whether on the facts ; lri in the imstances of the case Tribunal was correct in in holding that expenditure incrr::red by the 'llant in connection with the pu blic issue of e application was not to be dedur:ted frcm the 'est received on the share applica-ion :aonies the banks?" 6. I.T.' .A.No.9 of 2005 was admitted b,r this Court on 06.o6.20( 5 7 . The aloresaid question arises on the :bllowing factual backgrou ,d. Appellalt is an assesseer un de - the Act having tl e status of company. It is ,:ngagr.d in the I I 20.12.2O( 4 on question No.1 as proposed t,y the appellant.

4 business of manufacturing pharmaceutica,l drugs. Appellant did not commence commercial production during the previous year relevant to the assessment year under consideration. However, it went public during the said yea-r arrd the application money received lrom the public u,as held in deposit in various banks which resulted in accrual of substantial bank interest. In the assessment proceedings for the said assessment year, appellant contended that interest accrued on share application money was not taxable. However, assessing oflicer vide the assessment order dated 12.O2.1997 negatived such contention of the appellant and took the view that the appellant had incurred various expenses during the construction and pre-operation period to bring the business into existence. Expenses incurred on public issue rvas one such expenditure. Earning of interest on the money in deposit with the banks was independent of the expenses incurred on public issue. Therefore, setting off t the said interest against expenses on pubhc lssl.le was \ found to be not acceptable. In this regard, assessing officer \ relied upon the decision of the then composite Andhra

.5 I 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 earned on share capital money prior to oor-l r crlc€ment of business v as liable to income tax. Therefor,), the aforesaid interest in.:ome earned was added to thr: in<:on,e of the appellant. 8. Aggri ,:ved by the aforesaid order appeal ri as preferred by the ap1 ,ellant before the Commissioner- cl In< ome Tax (Appeals). i'irst appellate authority confirnrr:rl the order of the assess ng officer holding that expenditrrr-e clrrimed by the appellz nt was not for the purpose of m.e < nq o" earning interest inr cme. As such that was not allos,'rrl 9. Therr after matter calne up beforr. t he lribunai Tribunal a peed with the view expressed tx tl're rrssessing i officer as affirmed by the Commissioner :)' [ncr)nle Tax (Appeals) I urther noting that the issu€' st(x)i cr,r,erecl in favour of t r.e revenue by a decision of the 'fr i':r-rnal itself in the case o DCIT (Asstsf SR-4 v. Midwr:st .lrorr and Steel '(1ee2) 198 r! rr 375 (Ap) ' lt994l 2o8 r! lt 379 (DELHT) Pradesh H.3h Court in CIT v. Derco Coolirrl3 Coils Ltd.l,

6 Co. Ltd (ITA No.175alHyd/95, dated 16.12.19961. Therefore, upholding the order of the Commissioner of Income Tax (Appeals), the two appeals of the appellant were dismissed. 10. In the hearing today, learned counsel for the appellant submits that issue raised in the two appeals has been answered by the Supreme Court in the recent decision in CIT v. Shree Rama Multi Tech Ltd.s. 1 1. However, learned counsel for the respondent submits that the facts in Shree Rama Multi Tech Ltd., (supra) and in the present appeals are distinguishable. 12. We have heard learned counsel for the parties ald perused the materials on record as well as the decision of the 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 '(2O18) 403 ITR 426 (SC)

1 deposit of :;hare application money is taxalt.e irtcome at the 14 . The above question was framed <>r. t he following factual be::kground. Respor-rdent/ assesso( is errgaged in the manu acture ol multi-layer tubes an<l c,ther specialty packaging and plastic products. For the e-ss3ssment years under cor sideration, respondent/ assesseo claimr:d set off under the head of interest on share appiir:ation money. This was 1 artly allowed by the assessing c,fli,:t:r u'hereafter responden /assessee u,ent in appezLl bef:re the Commissir ner of Income Tax (Appeals), whi:r was allowed by the firs t- appellate authoritv by diret:tin11 the rssessing officer to grant certain reliefs. In tlrt: m:arwhile, reassessm :nt proceedings \\'ere initiated un<ler Se:tion 147 of the Act rn the ground that assessing offic:r he-d reason to believe that income ch argeable to tiui f,tr the said assessmer l. year had escaped assessntr:nt. On re- assessmen:., assessing officer passed an order on 21.O3.2OO( determining the total irr< cme of the responden /assessee at a much higher figurr:. T.-ris order hands of t re assessee? \

8 dated 21 .03.2006 came to be cha-llenged before the Commissioner of Income Tax (Appeals). Qne of the grounds urged was that in the order dated 21.03.2006, the interest accrued on public issue of share applications was not 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 allowing set off of interest income from share application money. It was thereafter that appeals and cross appeals were filed before the Tribunal. Tribunal agreed with the contention of the respondent/ assessee ald allowed its claim with respect to deduction on account ol interest income 15. It was in the above factual backdrop that. the question as framed above came up for consideration before the Supreme Court. After referring to the material facts ald 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 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 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

9 additi ASSCS Pu ttir if thr depos mand liable the p capitr incur capitr make statu depos respo appli, share that intert liable the c inext rAlSC L'\per ,nal income then the income is not l:able t( be ,ed and is eligible to be claimed ar; deduction. g the above rationale in terms of the prr:r;ent crse, share application money that is receivec is ted in the bank in light of t}te statu:ory 1tory requirement then the accrued intr)rest is not to be taxed and is eligible for deduction against rblic issue expenses. The issue of share relates to I stmcture of the company and henc: experrses ed in connection with the issue of sharr:s are t ) be rized because t1.e purpose of such deposit is nrrt to some additional income but to comply u"ith the rrrv requirement, and interest accrued on such rt is merely incidental. In the present case, the rdent was statutorily required to keetr Lhe share ;1t ion money in the bank till the a krtmen t of ,r ',vas complete. In that sense, we are o[ the 'ziew hc tligh Court was right in holdinq that the :;t accrued to such deposit of money in the bar k is to be set-off against the public issue exx(:nses that r,mpanv has incurred as the interest r:erred was icably linked with requirement of the company to il.rare capital ald was thus adjustable towards the ,lirure rnrolved for the share issue. In view of the forgoing discussion, w( e oj the .hat the High Court was right in upholding the st income earned out of t1le share applicetion , is liable to be set off against tl.e public ir;sue scs. The judgment passed by the Divisiorr Bt nch ' lligh Court in remalding the mal t(:r to thc ral on other issues requires no interferen:e ,, 13. vierv decis inten mon€ exper of th Tribu

/ 10 16. From a careful analysis of the decision of the Supreme Court as extracted above, what is deducible is that according to the Supreme Court, if money is deposited in the bank for the purpose of earning interest and accordingly interest is earned, then it is liable to be taxed as income from other sources. But, if the interest income accrued is merely incidenta-l and not the prime purpose of earning interest income which resulted into accrual of some additional income, then such income is not liable to be assessed; eligible to be claimed as deduction. Applying the above ratio, Supreme Court held that if the share application money received is deposited in the bank in the light of statutory mandatory requirement then the accrued interest is not liable to be taxed and would be eligible for deduction against public issue expenses. On the above basis, Supreme Court held that interest income earned out of the share application money is liable to be set off against the public issue expenses. I /

ll 17 . On .horough consideration of all rr;pect s of the matter, w( are of the view that the above dr:r:isi rn of the Supreme ( ourt in Shree Rama Multi Tech [,td., 'supra) is squarely a rplicabie to the facts of the presr:rrt case 18. Acco dingly, we answer the substantiirl qr:estion of la.,v frame I in favour of the assessec arLcl agirinst the revenue ( lonsequently, order of the Tritrun:J is se t aside. 19. Both the appeals are accordingly allon,:rl Misc,'llaneous applications pendrng, il arry, shall stand clost d. However, there shall be no orcler as to costs. //TRUE COPY// SD'. K, SFIINIVASA RAO JOINT REb]STRAR ,-, l. \--r'! / SEC-'ION OFFICER 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) The lncometar Appellate Tribunal ,,B,,Bench at Hvderatrad The Commissic 1er of lncome Tax (Appeals ) 1il, HyC,-.rabad Jf e_llcome Ta Officer, Company Waid _ 4'(2), Hyder;rbad l0 LR Copies The Under Secr rtary, Union of lndia Ministry of law, Jurst ce and Company affarrs. New Del ri 6. The Secretary T :lanoana Advocates Association, Liorary, High (lourt Buitdings Hyderr badi 7 One CC to Ms. t Neeraja, Advocate (OPUC) 8. One CC to Ms. (. Mamita CtrowOary, SCfil t f Oupu.t"ent , _iigh Courl -. ior th9 Stale of J _.tangana at Hyderabad. 9. I uo (-.D.(iopies 1 0. Onc Spare ( oir1. o T 1 2 3 4 5 \F \ \

HIGH COURT DATED:21109 2022 .n-;, ,:.' ( ?r{L -..|l| -- , n -:r,,. . 'i B t," 'ji . ,, -. COMMON JI IIDGMENT ITTA.Nos.13t of 2004 And 9 of 2005 ALLOWING TIIE U(,I't.t Appt;:\t S \\'l I II()1.. f (.()S.l s ., I I €){",