Wednesday, July 27, 2011

Legal nature of the bank account in public offerings- II

In an earlier post, I had analysed the legal nature of the bank account for collecting subscription money in public offerings. A decision of the Madras High Court in Commissioner of Income Tax v. Henkel SPIC India Limited, [2004] 120 Comp Cas 189 (Mad) offers further guidance on this issue. The facts of the case were that the assessee, a public limited company, had come out with a public issue of shares in January 1, 1992 and the issue was closed in February 3, 1992. The application money received by the company was deposited with collecting banks. The interest earned on such share application moneys was sought to be taxed by the assessing officer as income for the assessment year 1992-93. The court was asked to determine the assessment year in which the interest earned on short-term deposits of share application money by the assessee would be deemed to have accrued and formed part of income from other sources for taxation purposes.

Applying section 73 of the Companies Act, 1956, the Madras High Court held that a company which comes out with a public issue is not required to keep the money in a bank account which yields interest. There is, however, no prohibition against the money being kept in a bank account which yields interest. The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment process (viz. obtaining the listing and trading permission from the concerned stock exchange after making the allotment) is completed. No part of this fund, either principal or interest accrued thereon, can be utilised by the company until the allotment process is completed and money repayable to those entitled to repayment has been repaid in full together with such interest as may be prescribed having regard to the length of period of delay in the return of money to them. It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. Thus the interest money would form part of the income of the company at the time when the entire allotment process as envisaged by section 73 and as outlined above would be completed. Accordingly, the Madras High Court rejected the stance taken by the assessing officer that the interest money would form part of ‘income from other sources’ in the assessment year 1992-93 and upheld the position of the assessee that it should form part of the subsequent assessment year in which the entire allotment process was completed.

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