The Hindu Business Line : Interest spills in the company till

WHEN a company comes into the capital market for mobilising share capital from the public, the issue is generally over subscribed as we have seen last month in respect of a spate of public issues absorbed in the market. Between the subscription and the allotment, there is a time gap. The subscribed capital is deposited in financial institutions or banks and it earns interest. It is only later on that the allotment is made and after making adjustments towards shares allotted to the successful applicants, refunds are ordered in respect of excess amounts received.

There was a raging controversy about the taxability or otherwise of the interest earned on such deposits, especially in cases when business of the company had not commenced. The controversy was resolved by the Supreme Court in the leading case of Tuticorin Alkali Chemicals and Fertilisers Ltd., 227 ITR 172 and it was held that such interest was assessable as income from "other sources".

The controversy however did not end there. A question that remained to be settled was when such interest income accrued as income to the company. There are provisions in the company law concerning the handling of share capital deposits. Section 73 of the Company Act, 1956 provides that every company intending to offer shares to the public should make an application to the stock exchange for permission. The monies received from the public will have to be kept in a separate bank account and shall not be utilised for any purpose other than adjustment against allotment of shares and repayment to the applicants in case of excess subscription. The Company is under an obligation to repay the money to the applicants in all cases where shares are not allotted. The application money is, thus, held by the company as a trustee for the benefit of those who had applied for shares. Interest is earned on bank deposits. The question is whether the interest is taxable and if so from what point of time.

The matter was considered by the Madras High Court in CIT Vs Henkel Spic India Ltd, 266 ITR 490. In this case, the deposit of monies received from the public earned interest between February and March 1992.

The Income-Tax Officer taxed such interest earned on deposit in the assessment year 1992-93. He rejected the company's contention that such interests could not have been treated as income accrued to the company even before the allotment process was completed. Approval from the stock exchange was received in April 1992. The ITO taxed the income under `other sources' in the Assessment year 1992-93.

The Madras High Court considered the matter in some detail. It held that only after the allotment process is completed and all moneys payable to those to whom moneys are refundable, are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company.

The application money as also interest earned thereon will remain with a trust in favour of the general body of applicants until the process outlined above is completed in all respects.

The Court ruled that the allotment process in this case was not completed by the end of the accounting year relevant to the assessment year 1992-93, but was completed only in the subsequent assessment year.

It is only after the completion of the allotment process in all respects, interest that had accrued on the application money kept in a separate bank account was capable of being regarded as belonging to the company.

This is the only judgment of any High Court in India on this issue. The judgment will come in handy for such of those companies that had gone to the share market for raising share capital in the months of February and March 2004 and completed the allotment process in April 2004.

The recent spate of public issues would have meant accrual of interest running to a few crores. Such income can be taxed only in the assessment year 2005-06.

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