1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR 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 off interest earned by it on the deposits of the public issue money, against the expenses incurred for the public issue, and for this finding, the learned Tribunal has relied upon the judgment of Hon'ble the Supreme Court, in CIT Vs. Bokaro Steel Ltd., reported in 236 ITR-315. The appeal was admitted vide order dt. 10.8.2005, by framing the following substantial question of law:- 2 “Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that interest earned by the assessee from short term deposits of the share application amount received is not taxable as income from other sources, but is income from profit and gains of business and was liable to be set off against the other liability of the assessee to pay interest on borrowed money?” The necessary facts are, that the assessee filed 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 also issued. In response whereto, the assessee appeared through authorised representative, and produced the relevant books of accounts, and fresh assessment order was passed under Section 143(3). By this assessment, fresh computation of income was made. However, since the controversy relates only to one item, being an amount of Rs. 1210286/-, being the amount which had been set off by the assessee, against the public issue expenses, which are to be amortized in future, and this amount represented the interest earned by the assessee on the share application money, we need not go into the other part of this fresh assessment order. The learned Assessing Officer relying upon the decision of Hon'ble the Supreme Court, in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. Commissioner of Income-Tax, reported in 227 ITR-172, held that this set off is not allowable, and thus the amount was added to the income of the assessee. This finding was recorded by the learned Assessing Officer in para-15 of the assessment order. 3 Aggrieved of this, the assessee filed an appeal before the learned Commissioner, and the learned Commissioner, in para-18 and 19 dealt with this controversy, and held, that the Assessing Officer was justified in taxing the interest received by the assessee on deposits of share application money in Bank, as income under the head other sources, and the appellant was not entitled to set off, in respect of this income against expenses, and for that purpose the learned Commissioner relied upon the judgment of Hon'ble the Supreme Court in Commissioner of Income- Tax Vs. Coromandal Cements Ltd., reported in 234 ITR- 412. Aggrieved of this, the assessee filed further appeal before the learned Tribunal, and the learned Tribunal by the impugned order, in para-6 and various sub-paras thereof, held that the assess is entitled to set off, interest earned out of public issue money, against the expenses incurred for public issue. For arriving at this conclusion the learned Tribunal relied upon the judgment of Hon'ble the Supreme Court, in Bokaro Steel Ltd.'s case. Thus, the appeal was partly allowed. The matter was heard by us for quite a long time, inasmuch as the hearing commenced yesterday, and concluded at 10 A.M. today. The arguments of both the learned counsel, i.e. for the Revenue, and for the assessee, centered around the judgments of Hon'ble the 4 Supreme Court, inasmuch as the Revenue placed reliance on the judgments in Tuticorin's case and Coromandal's case, while the assessee places strong reliance on Bokaro Steel Ltd.'s case. According to the learned counsel for the appellant, it is not in dispute, that the amount of the share application money was lying deposit with the bank, and it earned interest in the sum of Rs. 1210286/-, and as held in Tuticorin's case, that interest is always a revenue receipt, unless ofcourse, it is by way of damage or compensation. It was also contended, that the assessee is entitled to amortize expenses of public issue under Section 35D of the Act, which clearly specifies the various heads under which the expenses incurred is permitted to be amortized, in terms of that section, and that section does not provide, for any setting off, of the amount received by way of interest. It is contended, that the matter is required to be examined, as if there were two channels for flow of funds; one being entry channel, and the other being exit channel, the money coming from entry channel is liable to be taxed, and money flowing out from exit channel is required to be considered for amortized under Section 35D, and then, there is no provision for setting off. With this it was contended, that in Tuticorin's case it was held by Hon'ble the Supreme Court, that the application, or destination, of the money received has no relevance for the purpose of taxing the amount received, inasmuch as the liability to tax accrues immediately 5 on receipt of the money, and is not deferred, to be dependent, on the application or destination of the money received by the assessee. Then, distinguishing the judgment in Bokaro Steel's case it was contended, that the judgment in Tuticorin's is a judgment rendered 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 in Bokaro Steel's case the logic employed in Challapalli's case, for arriving at the capital expenditure, has been extended, and the amount of interest earned on the advances made to the contractor, which advances were made pursuant to supplementary agreement, and to enable the contractor to execute the large scale construction work smoothly, was held that the arrangements which were made between the assessee company and the contractors pertaining to these arrangements were intrinsically connected with the construction of its steel plant, and since they were adjusted against the charges payable to the contractors, and had gone to reduce the cost of construction, were held to be capital receipts, and not income of the assessee from any independent source, which in substance is at variance with the judgment in Tuticorin’s case, and that the conclusions arrived at by Hon'ble the Supreme Court in Tuticorin's case have been re-affirmed in subsequent judgments, in Commissioner of Income-Tax Vs. Autokast Ltd., reported in 248 ITR-110, and Coromandal Cements Ltd.'s case, and that the judgment in Autokast Ltd.'s case is a judgment rendered by a bench headed by three Hon'ble 6 Judges. On the other hand, learned counsel for the assessee distinguished the judgment in Tuticorin's case, and Autokast Ltd.'s case, by contending, that in those cases the surplus funds available with the assessee were put in short term deposit by them, and thereby interest was earned, which obviously was a revenue receipt, while in the present case it was not a voluntary act on the part of the assessee, in putting the amount in short term deposits, rather it was an act of compulsion against the assessee, that the amount was required to be deposited by the applicants in the bank, as required under the Companies Act, in an account which is popularly known as escrow account, and that by virtue of provisions of Section 73(3) and (3-A) the amount cannot be utilised for any purpose, other than the purpose mentioned in sub-section 3-A, at the pain of the penalty provisions. In that view of the matter, since the interest accrued on this amount was not a result of any voluntary act of the assessee, the principle propounded in Tuticorin's case cannot apply. On the basis of this reasoning, it was contended, that the nearest case applicable to the controversy is, Bokaro Steel's case, as it is not in dispute, that the assessee is entitled to amortize public issue expenses, and since the interest accrued was in the nature of “essential bye-product” of the exercise of public issue, and therefore was, within the meaning of principle propounded in Bokaro Steel's case, 7 intrinsically connected with the public issue expenses, and had gone to reduce the public issue expenses, of which the assessee would claim amortization, and therefore, it has rightly been ordered by the learned Tribunal, to be adjusted against the public issue expenses, which is to be amortized at an appropriate time, in accordance with the provisions of Section 35D of the Income Tax Act. We have considered the submissions, and have gone through the judgments cited on either side. First of all, we take up the judgment in Tuticorin's case. In Tuticorin's case, the facts were, that the assessee company was incorporated for the purpose of manufacturing heavy chemicals, like Ammonia Chloride and Soda Ash. The company was incorporated in the year 1971, and its trial production commenced in 1982. For the purpose of setting up of factories, the company had taken term loans from various banks and financial institutions. The part of the borrowed fund, which was not immediately required, was kept invested in short term deposits with the banks. Such investments were permitted in the memorandum and articles 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 of Rs.3,21,802, and claimed the benefit of carry forward of a net loss of Rs.29,360. However, then the company filed a revised return, showing business loss of Rs.3,21,802, and claimed, that the interest and 8 finance charges alongwith other pre-production expenses are required to be capitalized, and therefore, the interest income of Rs.2,92,440 should reduce the pre-production expenses, which would ultimately be capitalized, and pointed out, that in the previous year the company had incurred a sum of Rs.1,13,06,068/- by way of interest and finance charges, which had to be capitalized alongwith other pre-production expenses, and thus it was claimed, that the interest earned amounting to Rs.2,92,440/- was not exigible to tax. It is on these facts, that Hon'ble Supreme Court noticed the difference of opinions of various High Courts. Hon'ble Supreme Court also considered its previous judgment, in Challapalli Sugar Ltd Vs. CIT, reported in 98 ITR 167, and held, that the amount would be chargeable to tax, and such income has to be computed in accordance with the provisions of the Income-tax Act, Section 14 whereof lays down, that for the purpose of computation, income of an assessee has to be classified under the six heads, and then it was found, that such income falls under head 'F', being “Income from other sources”. The argument about accountancy methods, not only of the company, but of the association of Chartered Accountants, was also considered. Challapally Sugars Ltd's case was explained, and was found to be different. It has been observed, that the phrase “actual cost” has not been defined in the Act, therefore, it has to be explained in the common parlance, and to find that out, the normal rules of accountancy, prevalent in the commercial and industrial circles were noted, but then 9 the Hon'ble Supreme Court found, in Tuticorin's case, that it (Challapally Sugars Ltd's case) is clearly a different case, inasmuch as the question required to be decided is, as to whether a particular receipt is of the nature of the income, which is a question of law, required to be decided by the Court, on the basis of the provisions of the Act, and the interpretation of the term “income”, given in large number of decisions of the High Courts, and the Privy Council, and also of the Supreme Court. Then it was held, that it is well settled, that the income attracts tax as soon as it accrues, and the application, or destination of the income, has nothing to do with its accrual or taxability. It is also well settled, that interest income is always of a revenue nature, unless it is received by damages or compensation. Thus, a reference made to the Hon'ble Supreme Court, by High Court, was decided. Since the judgment in Autokast Ltd.'s case and Coromandal Cement's case simply follow this judgment, therefore, we need not repeat them. On the other hand in Bokaro Steel's case; the facts regarding the relevant assessment order, involving the questions of law, viz. whether on the facts and circumstances of the case the Tribunal was justified in holding that the interest received by the assessee company on the amount of Rs.7,50,502/-, advanced to the contractors, was not taxable? Likewise, in next assessment year 1971-72 this question involved was as to whether the learned Tribunal was justified in holding that the interest 10 received by the assessee company on the amount of Rs. 14,98,993/-, advanced to the Contractor was liable to tax? The facts were, that the assessee was a corporation, wholly owned by the Government of India, and was assessed in the status of a company. It was incorporated in January 1964, with the object to construct and own integrated iron and steel works. During the assessment years under consideration, the work of the construction of the company's factory and installation of plant was in the process of completion, and the company had not started any business during the assessment years in question. During this period, the assessee entered in the supplementary agreement with its contractors, under which assessee had made certain advances to the contractors, to enable them to execute large scale construction work smoothly, which advances were on payment of interest, with the result, that the contractors did not have to raise funds from outside agencies. Other items we need not go into. Then in Para-5, Hon'ble Supreme Court in this case has held as under:- “……………. We have to consider whether the amounts received by the assessee under these five heads can be treated as income of the assessee for the relevant assessment years. The Tribunal has held that all these amounts (under items Nos.1 to 4) received by the assessee have gone to reduce the cost of construction. These are in the nature of capital receipts which can be set off against the capital expenditure incurred by the assessee during the relevant assessment years.” Thus, with this finding, the Hon'ble Supreme 11 Court concluded, with respect to the amounts, which had been borrowed by the assessee for construction of work, which were not immediately required, were put in short term deposits, and earned interest, which was held to be taxable, and that, the question is concluded by the decision in Tuticorin's case. However, while proceeding further, the Hon'ble Supreme Court at page 323, after recapitulating again the conclusions in Tuticorin's case, held as under:- “However, while interest earned by investing borrowed capital in short term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction” For this purpose reference was made to Challapalli Sugar Mill's case, and it was held, that the receipts of interest being inextricably linked with its plant and machinery, such receipts would go to reduce the cost of its assets. The receipts, therefore, were held to be of capital nature, and not liable to be taxed. In our view Tuticorin's case would have no application to the controversy involved in the present case, and that the principles propounded in Bokaro Steel's case would be correctly guiding judgment. 12 Though the reasons which we detail out hereinafter have not been considered in either of the two judgments, but then in our view, they are the decisive factors. In Tuticorin's case as noticed above, the amount was put in short term deposit with the bank. It was a voluntary act on the part of the assessee to earn best usufruct of the surplus funds available with the assessee, and Hon'ble the Supreme Court laid down, that income has to be computed in accordance with the provisions of the Income Tax Act, Section 14 whereof lays down that, for the purpose of computation, income has to be classified under six heads, and then it was found, that such income falls in head (VI) being “Income from other sources”. For understanding this reasoning we may revert back to the relevant provisions of the Income Tax Act, and we may gainfully quote the provisions of Section 14, which read as under:- Heads of income. 14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income- tax and computation of total income, be classified under 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 13 given in Section 14, but then the subsequent sections comprised in certain parts, or groups, deal with the details of the different heads of the income, and in that process, the head “Income from other sources” is dealt with by the provisions of Section 56 onwards. Section 56(1) and (2) are relevant provisions in this regard, which may be reproduced for convenience, and they read as under:- Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be 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 income is not chargeable to income-tax under the head “Profits and gains of business or profession” ; (id) income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession” ; (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”; (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or 14 profession”; (iv) income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head “Profits and gains of business or profession” or under the head “Salaries”; (v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or 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, that it provides for chargeability of income, which is not excluded from the total income from other sources, if it is not chargeable under the Income Tax Act, in any of 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 the provisions of sub-section (1), the list of incomes given therein is chargeable to income tax, under the head “Income from other sources”, and then, reading the list, the income from interest is covered by Clause (id), and as reproduced above, it shows, that this comprehends income by way of interest on “securities”, if the income is not chargeable to income tax under the head “Profits and gains of business or profession”. Thus on combined reading of Section 14 and 56, it is clear, that the present income in question, in our view, in order to fall within the expression “Income from other sources”, it has to be income by way of interest on “security”. The term “security” has again been defined in Explanation 2, appended to Section 2(42A), which deals with “Short term capital asset”, and provides, that the expression 15 “security” shall have the meaning assigned to it in clause (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 other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities'.” With quoting the above provision we would not be blamed to be hastening, in coming to the conclusion, that the amount of application money, lying in the separate account with the bank, as provided in Section 73(3) and (3A) of the Companies Act, does not fall within the expression “securities”, even though the definition is inclusive one. That being the position, this amount of interest, accruing on the share application money, lying in deposit with the bank, under the mandate of Section 73(3) and (3A) cannot be said to be falling 16 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 was lying in short term deposit, which clearly fell within the definition of “securities”, as given in Section 2 (h) of the Act of 1956, though this was not the logic given by Hon'ble the Supreme Court, but then, it necessarily flows, that it is on this line of reasoning, that the interest income was treated to be a revenue receipt, liable to be taxed as “Income from other sources”, as provided in Section 14(F). Consequently, we have to come to the conclusion, that this interest accruing on the share application money, is not covered by the provisions of Section 14 (F), read with Section 56. Thus, the judgment in Tuticorin's case, cannot be said to be applicable to the controversy involved in the present case. This being the position we are left to deal with the judgment in Bokaro Steel's case only. We have already recapitulated Bokaro Steel's case above, and find, that therein