Interest earned out of share application is adjustable towards share issue expenditure

The issue with respect to tax treatment of interest earned out of the share application money deposited with a bank due to a statutory requirement has been a matter of debate before the Courts. Being a subject matter of discussion for a number of years, closure for the same has been achieved after the Ruling of the Apex Court of India. Laid before is the case scenario wherein the Honorable Court has given its verdict to help bring resolution for such type of cases prospectively,

Case Scenario

Whether interest accrued on account of deposit of share application money is not taxable income and whether the same is liable to be set off against public issue expenses.

Issue I: Interest accrued on account of deposit of share application money is not taxable income

Relevant Provision

As per Section 42 (Offer or Invitation for Subscription of Securities on Private Placement) of the Companies Act, 2013 a company may, subject to the provisions of this section, make a private placement of securities. Further, the company shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days.

The monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than (inter-alia)-

• For adjustment against allotment of securities
• For the repayment of monies where the company is unable to allot securities

As per the requirement of the statute, there may arise a situation wherein interest shall arise on the monies deposited in a separate bank account. The interest component is to be viewed as completely incidental to the compliance of the provisions and not in connection with the income earned by the company. As many would refute the fact that it is the other way around, the same is supported by judicial precedents, namely –

• CIT (Ahmedabad) v/s Shree Rama Multi Tech Ltd (2018) (Supreme Court)
• CIT v. Bokaro Steel Ltd. (1999) (Supreme Court)

From the above stated matter, it can be said that the money/(ies) so received shall be treated as exempt income in the hands of the assessee company and not liable to income tax.

Issue II: Interest accrued on account of deposit of share application money is liable to be set off against public issue expenses

Relevant Provision

While there is no relevant provision to substantiate the correct treatment in such a case, reliance on judicial precedents as referred to in above can be made.

In the case of ‘CIT (Ahmedabad) v/s Shree Rama Multi Tech Ltd’, interest earned from share application money statutorily required to be kept in separate account was being adjusted towards the cost of raising share capital. The rationale followed in this 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 but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed.

Moreover, the issue of shares relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalize, hence, the companies who wanted to go public had an option of not capitalizing the expenses & treating it as an asset but rather setting it off from the incidental bank interest earned on account of complying with the Law because the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental.

Hence, as per the article above it can be adjudged that the interest accrued on account of deposit of share application money is not taxable income and the same is liable to be set off against public issue expenses.