Supreme Court affirms set off of interest income earned on deposit of share application money against share issue expenses

This Tax Alert summarizes a recent ruling of the Supreme Court (SC), dated 24 April 2018, in the case of CIT v. Shree Rama Multi Tech(Taxpayer) on the issueof taxability of interest earned on the share application money, under the Indian Tax Laws (ITL), wherein the money is statutorily kept in a separate account till the allotment of shares.

In the facts of the case, the share application money collected on issue of shares to the public was deposited in a separate bank account, under the mandate of a statutory provision, until the shares were allotted to the public. The Taxpayer adjusted interest earned on such deposit against the share issue expenses incurred, whereas the Tax Authority assessed such interest earned as income from other sources.

The SC held that the purpose of deposit of the share application money received on the share issue was not to earn additional income, but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental. Hence, the interest accrued on such deposit is to be set off against the share issue expenses, as the interest earned is inextricably linked to the share issue.