Punjab-Haryana High Court
Shivalik Fuels (P) Ltd. vs Commissioner Of Income Tax on 4 February, 2005
Equivalent citations: (2005)196CTR(P&H)72, [2005]276ITR638(P&H)
Author: N.K. Sud
Bench: N.K. Sud, Satish Kumar Mittal
JUDGMENT N.K. Sud, J.
1. In pursuance to the direction of this Court, the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short 'the Tribunal'), has referred the following question of law arising out of its order dt. 30th April, 1985, for the opinion of this Court:
"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the share application money of Rs. 3,05,000 received, but pending allotment on the first day of the computation period, i.e., 13th May, 1979, is not to be treated as part of the capital for purposes of computation of capital employed under Section 80J?"
2. The assessee is a limited company. It invited applications for raising its authorised capital in response to which certain persons made applications for allotment of shares and a sum of Rs. 3,05,000 was received towards the application money. However, the shares were not allotted to these persons before the end of the financial year relevant to the asst. yr. 1980-81, and the application money remained with the assessee-company as such. The assessee claimed that the share application money was neither a loan nor a borrowing by the company and hence it was not liable to be deducted from the total value of the assets in working out the capital employed in terms of Section 80J of the IT Act, 1961 (for short 'the Act'). Reliance was placed on the decision of the Kerala High Court in Travancore Titanium Products (P) Ltd. v. CIT (1978) 114 ITR 626 (Ker). The AO rejected this claim by holding that the share application money was in the nature of debt and was, therefore, liable to be reduced from the value of the total assets in working out the capital employed for deduction under Section 80J of the Act.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) [for short 'the CIT(A)'], who accepted the claim of the assessee that the share application money was neither a loan nor a borrowing by the company and as such could not be deducted from the total value of the assets in working out the capital employed in terms of Section 80J of the Act.
4. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Tribunal which was allowed and the findings of CIT(A) were reversed in the following terms :
"...... In our opinion, the order of the CIT(A) deserves to be reversed. Till the shares are allotted, the share application money is shown in the balance sheet as such. If shares are not allotted to the applicants, the same have to be refunded to the applicants in accordance with the provisions contained in the Companies Act, 1956. The money, therefore, till the shares are allotted, remained in trust with the assessee-company. It cannot be considered as its capital for purposes of Section 80J......."
5. Mr. D.S. Patwalia, learned counsel for the Revenue, pointed that the decision of the Kerala High Court in Travancore Titanium Products Ltd.'s case (supra) had been rendered in the context of Companies (Profits) Surtax Act, 1964, and was of no help to the assessee. He further pointed that although the High Court has held that the amount received towards allotment of shares cannot be treated as borrowed capital, but at the same time it has also been held that it cannot be considered as a paid-up capital of the company. He, on the other hand, placed reliance on the decision of the Madras High Court in CIT v. Henkel Spic India Ltd. (2004) 266 ITR 490 (Mad) to contend that till the issue of shares, the application money was in the nature of a debt due and was, therefore, liable to be deducted out of the value of the total assets of the company for the purposes of computation of capital employed under Section 80J.
6. We have gone through the judgment of the Madras High Court in Henkel Spic India Ltd.'s case (supra) and are of the view that the same is not applicable. In that case, the company had received application money between 29th Jan., 1992 and 3rd Feb., 1992. However, permission for issue of shares was granted from March to July, 1992. The AO held that the amount of interest on the application money which had accrued prior to 31st March, 1992 (the close of the financial year relevant to assessment year), was liable to be taxed under the head "Income from other sources," in asst. yr. 1992-93. The assessee, on the other hand, claimed that the said interest had accrued in the subsequent year when the allotment process had been completed in all respects. It was only then that the application money kept in the separate bank account was capable of being regarded as belonging to the assessee. Thus, the issue involved in the said case was totally different.
7. The issue raised in the question referred to in the present reference came up for consideration before the Karnataka High Court in Addl. CTT v. Bangalore Soft Drinks (P) Ltd. (1980) 126 TTR 38 (Kar) and it was held that the application money for allotment of shares was not a debt owed by the assessee-company for computation of capital employed for the purposes of Section 80J of the Act. At p. 41, the High Court has observed as under:
"...... Rule 19A(3) provides that the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owned by the assessee shall be deducted from the aggregate of the amount as ascertained under Sub-rule (2). The amounts having been paid for purposes of allotment of shares, it cannot at all be considered that the amount were paid by way of loan or that there was any kind of borrowing by the assessee. The amounts had been paid for a specific purpose and could be returned only if the shares were not allotted. In the instant case, the return of the amount would be only if the Reserve Bank had not approved the allotment of shares. That was a contingency which did not happen as on the first day of the computation period. Therefore, it cannot be said that there was any debt in existence owed by the assessee to any one as on the first day of the computation period....."
8. For the purpose of deduction under Section 80J of the Act, the capital is computed in accordance with the provisions of Sub-section (1A) of this section. As per Clause (II) of that Sub-section, first the total value of the assets is ascertained. There is no dispute in respect of the computation of value of the assets under this clause. From the value so determined, the amounts specified in clause (III) are to be excluded. This clause reads as under :
"(III) From the aggregate of the amounts as ascertained under Clause (II) shall be deducted, the aggregate of the amounts, as on the first day of the computation period, of borrowed money and debts owed by the assessee (including amounts due towards any liability in respect of tax).
It is, thus, clear that the amount of share application money can only be deducted out of the value of assets, if it were to be treated as "borrowed money" or "debt owed," by the assessee. The Karnataka High Court in Bangalore Soft Drinks (P) Ltd.'s case (supra), has rightly analysed the position and held that the share application money could not be considered to have been paid by way of loan nor did it involve any kind of borrowing by the company. The amount had been paid for specific purpose and was returnable only if the shares were not allotted. Thus, the question of liability to return the aforesaid amount was contingent upon the non-allotment of shares which eventuality could arise only after the process of allotment of shares was over. Since in the present case, the process of allotment of shares was still not over, there was no debt in existence owed by the assessee to any applicant on the first day of computation period.
9. We, therefore, answer the question in the negative, i.e., in favour of the assessee and against the Revenue. No costs.