SOUTHERN HERBALS LTD Vs. SETTLEMENT COMMISSION IT AND WT

JUDGEMENT

(1.) THESE petitions are directed against the order of the Settlement Commission, dated November 30, 1998.

(2.) THE petitioner was incorporated on October 30, 1984, as a private limited company for manufacturing alkaloids based medicines for curing cancer and hypertension. THE petitioner-company was converted into a public limited company on November 22, 1988. Out of the authorised capital of Rs. 15 crores, the petitioner issued shares to the tune of Rs. 3.30 crores to resident and nonresident Indians in November, 1992. THE petitioner is the third largest producer of anti-cancer drugs in the world. THE public issue was over subscribed by about 30 times and the petitioner garnered about Rs. 109 crores from the investors in the primary market. Consequently, the petitioner earned interest on the excess share application money in respect of public issue of Rs. 2,04,80,212. THE petitioner claimed expenditure to the tune of Rs. 1,50,79,666. THE net surplus of Rs. 54,00,546 was treated as capital reserve by the petitioner-company. THE respondents initiated action against the petitioner under Section 132 of the Income-tax Act. THE petitioner thereafter filed an application under Section 245C of the Act before the first respondent. THE petitioner offered Rs. 54,00,546 being the excess of interest over expenses relatable to the excess share application money. THE first respondent directed that interest earned on the excess share application money relating to the public issue of Rs. 2,04,80,212 has to be brought to tax as income from other sources for the assessment year 1993-94 and the expenses to the tune of Rs. 1,50,79,666 is to be amortised over a period of ten years under Section 35D of the Act. In so far as the assessment year 1994-95 is concerned, it was held that the gross interest income of Rs. 19,44,425 should be assessed as under the head "Income from other sources'' and the same was amortised in accordance with Section 35D of the Act. Annexure A is the order. THE petitioner has challenged the same on various grounds.

(3.) AFTER hearing learned counsel, I have carefully perused the material on record. From the material on record, what is clear to this court is that the petitioner did show a sum of Rs. 40,36,698.89 as excess of income over expenses in respect of public issue. Interest earned on share application money in respect of public issue is Rs. 2,04,80,212.37 and the public issue expenses are Rs. 1,64,43,513.48. The excess of income over issue expenses, i.e., Rs. 40,36,698.89 is to be treated as capital reserve and the same is shown in Schedule 2. At the time of hearing, the petitioner's representative worked out that interest earned on the share application money has to be taken to the profit and loss account and the public issue expenses should be written off over a period of ten years. Thus, the net profit of the applicant would increase by Rs. 1,88,35,861.02 and the income-tax on the interest income amounting to Rs. 1,64,86,570 has to be provided. The Assessing Officer for the assessment year 1993-94 observed that the share issue expenses could not be adjusted against the interest earned on share application money, which should be assessed only as income from other sources and not as business income. He opined that the share issue expenses could not be written off over a period of ten years or in the alternative, the share issue expenses could be adjusted against the income admitted by the applicant and the balance alone could be exempt under Section 108. According to the petitioner, the interest on the share application money resulting from public issue is capital in nature as the share application money has the character of money held on trust by the bankers on behalf of the share applicants. This argument was repelled by the Settlement Commission by holding that in terms of the judgment of the Supreme Court in Tuticorin Alkali Chemicals and Fertilisers Ltd. v. CIT [1997] 227 ITR 172, the Supreme Court has approved the decision of the Madras High Court in CIT v. Seshasayee Paper and Boards Ltd. which in turn has ruled that the interest earned on investment of share capital in call deposits even before the commencement of production should be assessed separately as income from other sources. The Settlement Commissioner however, ruled that the interest of Rs. 2,04,80,212 earned on the share application money relating to the public issue shall be assessed as the applicant's income from other sources for the assessment year 1993-94. The public issue expenses of Rs. 1,64,43,513 shall be amortised over a period of ten years as per Section 35D of the Income-tax Act. For the assessment year 1994-95, as per note 15 of the notes to the accounts in Schedule 14, the applicant had received interest of Rs. 15 lakhs from Citibank and Rs. 4,44,425 from the Bank of Baroda totalling Rs. 19,44,425. AFTER deducting the public issue expenses of Rs. 87,599 it had taken the excess income at Rs. 18,56,826 to capital reserves. According to the Settlement Commission, Rs. 19,44,425 is to be taxed as income from other sources and the public issue expenses are to be amortised as per Section 35D of the Act. The assessee contends that the order is bad in law and the Revenue supports the same.