EVEREST ORGANICS LTD V. THE COMMISSIONER OF I.T., HYDERABAD

ITTA/9/2005

AI Insights

The case involves Everest Organics Ltd, which appealed against the orders of the Income Tax Tribunal concerning the taxability of interest income accrued from share application money during the assessment year 1995-96. The company, engaged in manufacturing pharmaceutical drugs, had not commenced commercial production but went public, resulting in substantial bank interest from the deposited share application money. The Income Tax Officer added this interest to the company's income, which was upheld by the Commissioner of Income Tax (Appeals) and the Tribunal. However, the High Court, referencing a Supreme Court decision, ruled that such interest is not taxable and should be set off against the public issue expenses.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 692475 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 21-09-2022
• Assessment Year: misc
• Other Referred Cases: CIT v. Modi Rubber, CIT v. Derco Cooling Coils Ltd, DCIT (Asst) SR-4 v. Midwest Iron and Steel, CIT v. Shree Rama Multi Tech Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: B SARMA
• Assessee Lawyers: K NEERAJA
• Keywords: Deduction; Income Tax; Interest income; Public Issue; Share Application Money
• Section: 143(3); 154; 260A

Judgement Text

"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