Income Tax Appellate Tribunal - Madras
Henkel Spic India Ltd. vs Deputy Commissioner Of Income-Tax on 21 January, 1997
Equivalent citations: [1997]62ITD66(MAD)
ORDER
Shri A. Satyanarayana, Vice President
1. This appeal filed by the assessee is against the order of the CIT (Appeals)-IV, Madras, dated 30-9-1996, for the assessment year 1992-93 for which the previous year ended on 31-3-1992 (wrongly written by the Assessing Officer in the assessment order as 31-3-1992).
2. According to the Assessing Officer (AO for short), who passed the assessment order on 10-1-1996 under section 143(3), read with section 147, the assessee-company was incorporated on 4-9-1987. However, it started it commercial production only from 1-3-1993, the plant and machinery having been installed from 1-6-1992. It filed its return of income for the first time for the assessment year 1993-94 enclosing a number of tax deduction certificates in respect of tax deducted at source from interest income from banks, etc. On a perusal of these certificates, it was seen that large number of certificates pertained to the interest earned for the periods falling between 1-4-1991 to 31-3-1992. In terms of sections 3 and 5 of the Income-tax Act, interest due and accrued during the financial year ending on 31-3-1992 is assessable for the assessment year 1992-93. However, the assessee had not filed any return for the assessment year 1992-93 and because of that, the interest income had escaped assessment. Hence action under section 147 was initiated and notice under section 148 was issued on 28-10-1994. In response to the said notice, the assessee-company filed a 'nil' return on 28-11-1994. According to the assessee-company, there is no income assessable for the assessment year 1992-93. It was stated that interest earned on the deposits of the share application money in the banks was not income at all to the assessee up to 31-3-1992. The assessee-company had come out with a public issue of shares on 29-1-1992 and the issue closed on 3-2-1992. The proceeds collected from the public issue were deposited with the collecting banks for 46 days. The assessee-company had earned interest on these deposits and the issue involved was regarding the assessability of interest on those deposits for the assessment year 1992-93. The assessee contended that as far as the public issue of shares is concerned, the money received from the public for allotment of shares is to be deposited in a separate bank account with a scheduled bank as per section 73(3) of the Companies Act. As per section 73(3A) of the Companies Act, moneys standing to the credit of the separate bank account shall not be utilised for any purpose other than -
(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus; or
(b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus, as the case may be, or where the company is for any other reason unable to make the allotment of shares.
It was also contended that application money credited in the separate bank account cannot be considered to be the asset of the company till such time shares are allotted and the accounts are finally settled by the Lead Bank to the issue of shares. Since the allotment of shares or settlement of accounts was completed only in the month of June 1992, the interest credited in the separate bank account be claimed by the company during the accounting year 1992-93 relevant for the assessment year 1993-94 only. However, the Assessing Officer rejected the contentions of the assessee and held that the interest was assessable in the assessment year 1992-93 by observing as under :
"It is true that as per Companies Act, there is some restriction regarding the utilisation of the monies receive from the public for allotment of shares till the shares are allotted. This does not however mean that the interest earned on the deposits does not belong to the assessee. Hence merely because there is some restriction of utilisation of funds, the assessee cannot contend that interest is not its income. If ultimately the application money is refunded to the applicant, then no interest is paid to the applicant except in case where the refund is not issued within the stipulated period of 90 days. This clearly shows that the interest on the short-term deposit belongs to assessee only. Apart from this in this particular case, shares have been allotted on 31-3-1992. This would mean that the assessee is the rightful owner of the monies including interest at least as on 31-3-1992, i.e., before the closing of the accounting year. Accordingly the interest earned on the deposits rightfully belonged to the assessee before the closing of the accounting year as on 31-3-1992 and assessable for this assessment year."
The Assessing Officer observed that during the year ended on 31-3-1992, there was no business activity and hence the interest earned was assessable under "Other sources". In that view of the matter, he brought to tax Rs. 1,83,31,363 being interest under the head "Other sources". Aggrieved by the said action of the Assessing Officer, the assessee preferred an appeal before the CIT(A).
3. The CIT(A) observed in his appellate order that the assessee is a public limited company engaged in the business of manufacturing detergents. The assessee had entered into a collaboration agreement with M/s. Henkel KGA, Germany. The agreement for collaboration envisaged the participation by the collaborator in the equity shares to be issued by the assessee subject to the approval of the RBI. Besides, the assessee had also entered into an agreement with International Finance Corporation (IFC for short), Washington. The IFC agreed to subscribed for equity shares of the assessee subject to the approval of the RBI. The assessee came out with a public issue of 1,14,60,000 equity shares of Rs. 10 each at par. Out of this, 23,40,000 shares were to be subscribed by IFC. The rest of the issue was offered to resident Indian public. While issuing the prospectus, the assessee had announced that, in the event of the issue being over-subscribed, the assessee intended to retain the oversubscription to the extent of 15% of the issue amount for which the application was made with the Controller of Capital Issues after the closure of the issue. In the prospectus it was also made clear that application has been made to the RBI for allotment of equity shares to IFC, Washington, on repatriation basis. After closure of the issue, taking into account the 15% retention for over-subscription, the allotment of shares was as follows :-
IFC 26,91,000 shares Rs. 2,69,10,000 Resident Indian public 1,04,88,000 shares Rs. 10,48,80,000
The allotment was made by means of a Resolution of the Board of Directors dated 31-3-1992. During the period between the issue of shares and the allotment, the amount received from the applicants was deposited in a separate bank account with various banks to the issue in compliance with section 69(4) of the Companies Act as short-term deposits. Interest of Rs. 1,69,96,101 and Rs. 13,35,262 was credited by the banks on the deposits representing the monies received from the Indian public and the foreign participants respectively. The entire process and procedure of allotment of the issue was completed by 4-6-1992. The assessee argued that interest accrued only on 4-6-1992 and therefore assessable in the assessment year 1993-94. The Assessing Officer felt that the interest to this extent had already accrued on 31-3-1992 and hence assessable in the assessment year 1992-93 itself. The assessee's argument before the Assessing Officer was that the application monies credited in the separate bank accounts could not be considered to be the assets of the company till such time the share were allotted and the accounts were finally settled. As the monies were kept in the banks in a fiduciary capacity, the company being accountable to the public who applied for such shares, the interest income was accountable rightfully as its income only in the later assessment year 1993-94. The Assessing Officer negatived the contentions of the assessee. According to him, the shares were already allotted on 31-3-1992 and the assessee was the rightful owner of the money including the interest on 31-3-1992.
4. Before the CIT(A), the assessee's counsel gave the following sequence of events relevant to the allotment of shares to M/s. Henkel KGA, Germany and IFC, Washington :-
Date of receipt of approval of Government for 15% retention of oversubscription from Henkel 08-04-1992 Receipts of approval from RBI for allotment of shares of 15% retention of oversubscription for Henkel 15-04-1992 Regarding resolution for allotting shares to IFC (Washington) and Henkel for 15% oversubscription Receipt 17-04-1992 of approval from RBI for export of shares certificate to Henkel and IFCI 04-06-1992 The assessee also gave the sequence of events relevant to the public issue as under :-
Date of Opening Issue 29-01-1992 Date of Closing Issue 03-02-1992 Passing resolution for allotting shares to Public, Employees and Preferential shareholders of TPL 31-03-1992 Filing of Listing application with Madras Stock Exchange 09-04-1992 Date of completion of despatch of share certificate and refund orders 21-04-1992 Listing approval letter from : Madras Stock Exchange 27-04-1992 Delhi Stock Exchange 08-05-1992 Bombay Stock Exchange 06-07-1992 Ahmedabad Stock Exchange 21-05-1992.
The assessee's counsel contended that the entire process and procedure of allotment of shares to Henkel and IFC was completed only by 4-6-1992 and that the entire process and procedure of allotment of shares to public was completed only by 6-7-1992. The assessee contended that any allotment made on an application would be void if the permission for listing by each of the stock exchange mentioned in the prospectus is not granted. The assessee submitted that as per section 69(4) of the Companies Act, all money received from the applicants for shares should be kept deposited in a Scheduled Bank, that till the allotment formalities were completed the company was holding the money received from the public in trust only, that the resulting trust which was in existence on 31-3-1992 continued to subsist till the listing process was completed on 6-7-1992. According to section 88 of the Indian Trusts Act, 1882, where a trustee bound to protect the interest of another person gained for himself a pecuniary advantage, he must hold the same for the benefit of such other person. On 31-3-1992, the obligation in the nature of trust having not got ceased, the interest was not separable from the principal.
5. The CIT(A) observed that the assessee's counsel's arguments, in summary, were as follows :
"1. The interest assessed by the Assessing Officer had not accrued to the appellant since the appellant was having the money only as a trustee, as per the Contract Act called resulting trust.
2. As per sections 69(4) and 73 of the Companies Act, there was an impediment for use of the money till listing took place in the stock exchange. What was applicable to principal was applicable to interest also.
3. The words 'accrue' and 'due' were interconnected. The accrual of income was not complete till the right to receive and appropriate had emerged.
4. A binding contract took place between 1-4-1992 to 31-8-1992 and, hence, till then the appellant held the money, both the principal and the interest, only in trust."
The CIT(A), after referring to sub-section (2) and (2A) of section 73 of the Companies Act, hold it was clear from them that the assessee was under obligation, in case of non-allotment or any other contingency, to repay the principal amounts only and not the interest. He noted that these provisions make it explicit that interest need not be paid of the money is repaid within 8 days after the company becomes liable to repay it. He further observed that the argument that the subscription money is in the nature of trust money perhaps emanated from the judicial decisions which have held that the money received by a company's banker to the issue for issue of shares cannot be used by the bank for the purpose of its lien and it does not become a part of the winding up of the bank. In those decisions is has been held that the money is in the nature of a trust fund. "But that is far as the bank is concerned and not as respects the company". With respect to the application money, the restrictions placed by the Companies Act are only that -
(i) that money should be kept in a separate bank account;
(ii) it could be used only for the purposes specified in section 73(3A); and
(iii) in cases of non-allotment or similar contingency it should be repaid without interest if repaid promptly and with interest if paid after 8 days after the company becomes liable to repay it.
There is no other restrictions or prohibition with respect to the money. He further observed that he was not aware of any case where interest accrued on the application money having been taken away by the company by some overriding provision of the Contractor Act or the Trust Act. He also stated that in the assessee's case there was no bar on the company either statutory or contractual from using the interest on or before 31-3-1992. In that view of the matter, he held that the interest accrual to the assessee took place from time to time and that the interest accrued up to 31-3-1992 was rightly assessable as the assessee's income for the assessment year 1992-93. Dissatisfied with the order of the CIT(A), the assessee preferred the present appeal before the Tribunal.
6. The assessee's counsel has filed 2 paper books. One paper book contained 10 items consisting of the Prospectus, Board's Resolutions dated 31-3-1992 and 17-4-1992, Approvals from the Stock Exchanges at Madras, Bombay, Delhi and Ahmedabad, and Approval Letters from the Reserve Bank of India for allotment of shares to Henkel and IFCI. Another paper book contained the photostat copies of the judgments in the cases of CIT v. Eastern Investments Ltd., Mears v. Western Canada Pulp & Paper Co. Ltd. [1905] 2 CH 353 (CA), Re Nanwa Gold Mines Ltd. [1955] 3 All. ER 219 and Reserve bank of India v. Bank of Credit & Commerce International (Overseas) Ltd. 78 Comp. Cas. 230 (Bom.). The arguments of the assessee's counsel were to the following effect :- The Prospectus dated 16-12-1991 issued by the assessee-company is given in the paper book. In the Prospectus it has been clearly mentioned that applications have been made to the Stock Exchanges at Madras, Ahmedabad, Delhi and Bombay for permission to deal in and for official quotations for equity shares of the company. This can be seen at page 2 of the Prospectus. The issue was opened on 29-1-1992. The issue was closed on 3-2-1992. The allotment of shares to Henkel, IFC and resident Indian public was done by the Resolution dated 31-3-1992 of the Board of Directors. The allotment of equity shares being 15% retainable over-subscription as permitted by the Controller of Capital Issue was made by the Resolution of the Board on 17-4-1992 to Henkel and IFC. These Resolutions are filed in the paper book. As mentioned in page 6 of the Prospectus, the member of the public who applied for the shares have to deposit the cash, cheque/draft with the Bankers to the Issue, namely, State Bank of India, Indian Bank, Standard Chartered Bank, Bank of Baroda, American Express Bank Ltd., etc., as mentioned in page 13 of the Prospectus. The payment shall be made for example as "SBI-A/c SFCL Public Issue". The application money is not paid to the assessee-company by the public. According to section 73(3) of the Companies Act, 1956, all money received for the shares to be dealt on Stock Exchange have to be kept in a separate bank account maintained with a Scheduled bank until the permission has been granted. The banks credited interest on such application money kept as for example "SBI-A/c SFCL Public Issue". This interest is credited by the banks not only in India but abroad also up to 31-3-1992. Permission to do business in the assessee-company's share was given by the Stock Exchanges at Madras, Delhi Ahmedabad and Bombay with effect from 27-4-1992, 8-5-1992, 21-5-1992 and 6-7-1992 respectively and the relevant letters are included in the paper book. As per section 73(1A) of the Companies Act, 1956, allotment of shares without the permission from the Stock Exchanges, as mentioned in the Prospectus, becomes void. Though the Board of Directors of the assessee-company allotted the shares on 31-3-1992 and 17-4-1992 they are not valid till the permission from the Stock Exchange is sanctioned. The last of the date of such sanctions by the Stock Exchanges is 6-7-1992. The Reserve Bank of India gave permission on 4-6-1992 for the issue of shares to Henkel and IFC and the said permission was under section 19(1)(d) of the Foreign Exchange Regulations Act, 1973. Allotment of shares to non-resident public was validated only on 4-6-1992 when the RBI has given its permission. The share application money received by the Company's Bankers is in the nature of trust money. It cannot be used by the bank for the purposes of its lien. It also does not become a part of the bank's general assets for the purposes of winding up of the bank. The money is in the nature of trust fund - Reserve Bank of India's case (supra). The application money does not form part of the assets of the company also - Re Nanwa Gold Mines Ltd.'s case (supra). The Bombay High Court in the case of CIT v. Tanubai D. Desai [1972] 84 ITR 713 held that in view of the provisions of the rules of the Bombay High Court on its original side, the position of a solicitor vis-a-vis the moneys received by him from or on behalf of his clients is that of a quasi-trust and he holds such moneys in a fiduciary capacity, and the income or interest derived from such moneys is equally held by him subject to such fiduciary relationship existing between the solicitor and his client. The Bombay High Court also held that if the solicitor unauthorisedly converts the income from the client's moneys, the taxation must proceed on the basis that the income did not in fact belong to him and the income is not liable to be taken into computation in his personal assessment. The assessee-company voluntarily filed its return on 29-12-1993 for the assessment year 1993-94 wherein it had admitted the impugned amount of Rs. 1,83,31,363. However, the said amount was assessed for the assessment year 1993-94 in the assessment order dated 19-2-1996 passed under section 143(3) on a protective basis. In these circumstances it is prayed that the inclusion of interest of Rs. 1,83,31,363 in the total income of the assessee under the head "Other sources" for the assessment year 1992-93 should be deleted.
7. The Departmental Representative supported the orders of the lower authorities and relied on the judgment of the Madras High Court in the case of CIT v. Arasan Aluminium Industries (P.) Ltd. [1996] 220 ITR 476/88 Taxman 515 wherein it was held that interest on advances made from paid up capital before commencement of business was assessable as income.
8. We have considered the rival submissions, case law cited, and perused the papers filed before us. The Assessing Officer in para 4 of his assessment order for the assessment year 1992-93 observed that "the proceeds collected from the public issue were deposited with the collecting banks for 46 days". The Assessing Officer has not brought on record in his assessment order the material on the basis of which he has observed to the said effect. What had happened factually is otherwise. In pursuance of the Prospectus dated 16-2-1991 issued by the assessee-company, the resident Indian public and foreign participants (Henkel and IFC) have paid monies to the Bankers to the Issue mentioned in page 13 of the Prospectus. The monies were paid into the "A/c - SFCL Public Issue". This is in a accordance with section 73(3) of the Companies Act, 1956. Even before the Issue opened on 29-1-1992, the assessee gave instructions to the Bankers to the Issue on 3-1-1992 that the money deposited by the applicants for shares shall be transferred into Fixed Deposits daily for a minimum period of 46 days. The counsel in the assessee filed copy of the said instructions issued to the Bankers to the Issue. The assessee's counsel also filed a photocopy of the letter dated 15-7-1992 of Indian Bank, Harbour Branch, Madras, showing the details of the Fixed Deposits made for 46 days, 47 days, 49 days and 51 days. The narration in the assessment order as extracted above gives an impression that the assessee-company collected the funds and then deposited the same with the banks for 46 days. This is distortion of facts. The share application money itself was kept by the Bankers to the Issue in short-term Fixed Deposits. At page 2 of the Prospectus, it was explicitly stated that applications have been made to the Stock Exchanges at Madras, Ahmedabad, Delhi and Bombay for permission to deal in and for official quotations for equity shares of the Company. According to section 73(1A) of the Companies Act, 1956, allotment of shares shall be void if the permission has not been granted by each of the Stock Exchanges before expiry of 10 weeks from the date of closing of the subscription list. From this it is very clear that any allotment of shares will be valid only after the permission has been granted by each of the Stock Exchanges mentioned in the Prospectus. In this particular case, the 4 Stock Exchanges have granted permission. The last of such permission is from the Bombay Stock Exchange effective from 6-7-1992. In fact, all the permissions from the 4 Stock Exchanges are on or after 27-4-1992, i.e., well beyond the accounting year ending on 31-3-1993. The share application monies do not form part of the general assets of the Company - Re Nanwa Gold Mines Ltd.'s case (supra). In the case of Reserve Bank of Indian (supra), it was held that the statutory provisions contained in section 73(3) and section 73(3A) of the Companies Act, 1956 created a statutory trust so as to impress the share application monies with trust whether in the hands of the company or in the hands of the bank. It was also held that the share application money does not form part of the general assets of the company or bank and that the money deposited is merely in the custody of the bank and that the capacity in which the company or the bank received the said amount is fiduciary capacity. In the case of Rai Bahadur Seth Jessa Ram Fatechand v. Om Narain Tankha [1967] 37 Comp. Cas. 204 (SC), it was held that the character of the amount in question as trust money is not destroyed merely because the amount is kept in a Fixed Deposit. So it has to be held that the character of the trust fund applies not only to the share application money but also to the interest earned on share application money kept in Short-term Fixed Deposits by the Bankers to the Issue. The share application money along with the interest earned thereon becomes the assets of the Company only after the statutory requirements are complied with.
In this case the approval by the RBI for allotment of shares to foreign participants and the permission by the Stock Exchanges etc. were all made after 31-3-1992 only. Therefore, we hold that the Assessing Officer was not at all justified in bringing Rs. 1,83,31,363 as taxable under the head "Other sources" in the assessment year 1992-93. Accordingly, we set aside the assessment order dated 10-1-1996.
9. In the result, the appeal is allowed.