Taxation Of Income From Excess Share Application Money

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: Let us consider a recent case which looks into the Taxation of Interest earned on Excess Share Application Money received consequent to a Public Issue of Shares by a Company net of Share Issue expenses. Companies commonly offer their equity shares to the public for subscription, also known as an initial public offering (IPO), at par or at premium. In some cases, the IPO is oversubscribed and the company receives excess funds. In this context, let us consider the case of Southern Herbals Ltd. v. Settlement Commission [2003] 129 Taxman 831 (Kar.). In the instant case, the assessee company, being engaged in the manufacturing of alkaloids-based medicine for curing cancer and hypertension, issued shares to the public to the tune of Rs.3.30 crores in November 1992. The public issue was oversubscribed and the company garnered Rs.109 crores. Consequently, the company earned interest of Rs.2,04,80,212 on the excess share application money. The company adjusted an expenditure of Rs.1,50,79,666 on issue of shares from the interest earned, and treated the net surplus of Rs.54,00,546 as Capital Reserve for assessment year 1993-1994.

The income tax authority initiated action against the assessee under section 132 of the Income Tax Act, 1961 (the Act). Thereafter, the assessee filed an application under section 245C of the Act before the Settlement Commission. The company offered Rs.54,00,546 being the excess of interest over expenses relatable to the excess share application money for taxation under the head of income of “Business Income”. In response thereto, the Settlement Commission observed that the interest earned on share application money has to assessed as “Income from Other Sources” and not as “Business Income” and that the share issue expenses could not be adjusted such interest income.