Pathak, C.J. -
(1.) IN this reference under Section 256(1) of the INcome-tax Act, 1961, the following question of law has been referred :
" Whether, on the facts and in the circumstances of the case, the interest received by the assessee on the deposit made with the bank was income exempt from tax under Section 10(3) of the INcome-tax Act, 1961?"
(2.) THE facts, which appear from the statement of the case, are as follows:
THE assessee, India Carbon Ltd., Gauhati, is a public limited company incorporated under the Companies Act, 1956, on February 12, 1961. THE company issued a prospectus dated November 16, 1961, offering for public subscription 1,18,100 equity shares of Rs. 10 each at par (out of the present issue of 3,50,000 equity shares) together with 10,000--9.3% (taxable) redeemable cumulative preference shares of Rs. 100 each. An application money of Rs. 2.50 per share was to be paid for each equity share. THE subscription list was to open on the 4th day of December, 1961, and to close on the 9th December, 1961, but could be closed earlier at the discretion of the directors but not before the 6th day of December, 1961. An underwriters' commission was to be paid at 2.5% in respect of these shares. As it happened, the issue was over-subscribed and the list was closed on the 6th day of December, 1961 itself. THE total application money received was Rs. 3,42,97,937.50 as against Rs. 2,95,000, due on the shares. In other words, the application money received was about 116 times of that called for. In the prospectus the following condition was mentioned with respect to such surplus money received ;
" Where an application is rejected or not accepted in full, the whole or any balance of the application money will, subject to provisions of Section 73 of the Companies Act, 1956, be refunded within eight weeks from the closure of the subscription list."
Section 69 of the Companies Act requires that all moneys received from applicants for shares shall be deposited and kept deposited in a scheduled bank. The company accordingly placed the amount of Rs. 3,42,97,937 50 in call deposit account with the bank and earned an interest of Rs. 2,45,672.65 on the deposit. The amount received in excess of the said sum of Rs. 2,95,000 was in due course refunded to the applicants in terms of the conditions of the prospectus and the provisions of Section 73 of the Companies Act, 1956, within the stipulated period, namely, during the first half of the month of February, 1962.
The relevant assessment year is 1963-64 for which the accounting year is the year ended June 30, 1962. In the assessment for the year 1963-64, a question arose whether the interest of Rs. 2,45,672.65 received, as stated above, and also duly credited to the profit and loss account of the company for the said accounting year was income liable to tax.
(3.) THE assessee's contention before the Income-tax Officer was that the receipt being of casual and non-recurring nature arising in the special circumstances of the case, namely, the issue of shares being over-subscribed beyond even the wildest expectation of the company, it was exempt from tax under Section 10(3) of the Act. THE Income-tax Officer rejected the contention of the assessee observing that the interest income earned by the issue of shares was not casual receipt but was clearly income which was taxable. Thus holding, the Income-tax Officer allowed on estimate an expenditure of Rs. 7,000, having been incurred for the purpose of earning such income, and brought to tax a net sum of Rs. 2,41,180 (wrongly calculated) as income liable to be assessed under the head " Other sources ".
The assessee then filed an appeal before the Appellate Assistant Commissioner who held that the interest amounting to Rs. 2,45,672.65 was a receipt of a casual and non-recurring nature in the hands of the assessee and should not be taxed in its hands. The over-subscription was unanticipated and non-recurring and the interest earned on the deposit of this amount was, therefore, receipt of a casual and non-recurring nature and, although income otherwise, it was exempt from tax as being of such casual and non-recurring nature. The receipt of interest was a windfall and such a windfall was not likely to recur in the life of the company again because the first issue of shares could never be repeated. The Appellate Assistant Commissioner also held that since the income from interest on the over-subscribed money had been excluded from the assessment holding it to be of casual and non-recurring nature, the expenses claimed in connection with this affair were not allowable in the assessment.;