We parked public issue share application money in the statutory bank account and it earned interest before allotment. Is that interest taxable as income from other sources?
No. The Supreme Court dismissed the revenue's appeal and held that interest accrued on the deposit of share application money is not taxable income. The money was kept in a separate account because the law required it to be, not to earn a return, so the interest was incidental to the share issue and was rightly set off against share issue expenses rather than assessed under the residuary head.
Decided by the Supreme Court (Supreme Court of India — R.K. Agrawal and Abhay Manohar Sapre, JJ. (judgment delivered by R.K. Agrawal, J.)) on 2018-04-24, reported as (2018) 403 ITR 426 / (2018) 92 taxmann.com 363 / (2018) 255 Taxman 136 / (2018) 302 CTR 90 (SC) — Civil Appeal Nos. 6391 and 8336 of 2013; assessment years 1999-2000, 2000-01 and 2001-02. The further reference 165 DTR 137 does not appear on the report's citation line and is not corroborated.. It bears on section 4, section 56 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
The officer's instinct is that interest is interest — a credit in the bank account with no source in the business, therefore s.56. This case supplies the answer for the narrow but common situation where the deposit is compulsory and pending allotment: the receipt is inextricably linked to the raising of share capital, and it goes to reduce the cost of that exercise. It is also the case to reach for where the department argues that part of the money had to be refunded to unsuccessful applicants; the Court held that made no significant difference on these facts.
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The company collected share application money from the public on a public issue and, as the law required, kept it in a separate bank account until allotment was complete. The deposit was placed in fixed deposits and earned interest of Rs 1,71,30,202, which the company had itself returned as income from other sources before raising the point as an additional ground before the Tribunal. At the fresh assessment the claim was disallowed on the footing that the assessee had not broken the interest down into pre-allotment and post-allotment periods. The assessment years involved were 1999-2000 to 2001-02.
The revenue's appeals were dismissed (para 14) and the High Court's order was affirmed. Interest accrued on the deposit of share application money is not taxable; it is inextricably linked with the requirement to raise share capital and falls to be set off against the expenses of the public issue, the share issue relating to the capital structure of the company so that its expenses are to be capitalised. The Revenue's argument that part of the money had to be refunded to unsuccessful applicants was held to make no significant difference on these facts. The remand to the Tribunal on the other issues was left undisturbed.
The route is the purpose of the deposit. The company was statutorily required to keep the share application money in a separate account until allotment was complete, so the money was not surplus funds placed to earn a return, and the interest on it fell to be adjusted against the expenditure of raising the share capital (para 9). The Court took Bokaro Steel Ltd., on interest on advances to a contractor and rent and hire charges during construction, and Karnal Co-operative Sugar Mills Ltd., on interest on a deposit made to open a letter of credit for plant and machinery, as the governing line: in both, the receipt was directly connected with and incidental to the capital exercise and so was capital rather than income from an independent source (paras 10-11). Distilling them, the Court stated the test as one of purpose — surplus money lying idle and deposited to earn interest is taxable under the residuary head, but where the income is merely incidental and is not the prime purpose of the act that produced it, it is not assessable and is eligible to be claimed as a deduction (para 12).
the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court dismissed the revenue's appeal and held that interest accrued on the deposit of share application money is not taxable income. The money was kept in a separate account because the law required it to be, not to earn a return, so the interest was incidental to the share issue and was rightly set off against share issue expenses rather than assessed under the residuary head. This was decided by the Supreme Court (Supreme Court of India — R.K. Agrawal and Abhay Manohar Sapre, JJ. (judgment delivered by R.K. Agrawal, J.)) and bears on section 4, section 56 of the Income Tax Act 1961. It is reported as (2018) 403 ITR 426 / (2018) 92 taxmann.com 363 / (2018) 255 Taxman 136 / (2018) 302 CTR 90 (SC) — Civil Appeal Nos. 6391 and 8336 of 2013; assessment years 1999-2000, 2000-01 and 2001-02. The further reference 165 DTR 137 does not appear on the report's citation line and is not corroborated.. The officer's instinct is that interest is interest — a credit in the bank account with no source in the business, therefore s.56. This case supplies the answer for the narrow but common situation where the deposit is compulsory and pending allotment: the receipt is inextricably linked to the raising of share capital, and it goes to reduce the cost of that exercise. It is also the case to reach for where the department argues that part of the money had to be refunded to unsuccessful applicants; the Court held that made no significant difference on these facts. If it applies to you, the first step is this: Show the statutory basis on which the money had to sit in a separate account until allotment — that is the fact the reasoning turns on.
The company collected share application money from the public on a public issue and, as the law required, kept it in a separate bank account until allotment was complete. The deposit was placed in fixed deposits and earned interest of Rs 1,71,30,202, which the company had itself returned as income from other sources before raising the point as an additional ground before the Tribunal. At the fresh assessment the claim was disallowed on the footing that the assessee had not broken the interest down into pre-allotment and post-allotment periods. The assessment years involved were 1999-2000 to 2001-02. The matter was decided on 2018-04-24 by the Supreme Court (Supreme Court of India — R.K. Agrawal and Abhay Manohar Sapre, JJ. (judgment delivered by R.K. Agrawal, J.)). On those facts the Supreme Court held as follows. The revenue's appeals were dismissed (para 14) and the High Court's order was affirmed. Interest accrued on the deposit of share application money is not taxable; it is inextricably linked with the requirement to raise share capital and falls to be set off against the expenses of the public issue, the share issue relating to the capital structure of the company so that its expenses are to be capitalised. The Revenue's argument that part of the money had to be refunded to unsuccessful applicants was held to make no significant difference on these facts. The remand to the Tribunal on the other issues was left undisturbed.
The route is the purpose of the deposit. The company was statutorily required to keep the share application money in a separate account until allotment was complete, so the money was not surplus funds placed to earn a return, and the interest on it fell to be adjusted against the expenditure of raising the share capital (para 9). The Court took Bokaro Steel Ltd., on interest on advances to a contractor and rent and hire charges during construction, and Karnal Co-operative Sugar Mills Ltd., on interest on a deposit made to open a letter of credit for plant and machinery, as the governing line: in both, the receipt was directly connected with and incidental to the capital exercise and so was capital rather than income from an independent source (paras 10-11). Distilling them, the Court stated the test as one of purpose — surplus money lying idle and deposited to earn interest is taxable under the residuary head, but where the income is merely incidental and is not the prime purpose of the act that produced it, it is not assessable and is eligible to be claimed as a deduction (para 12). In the words reproduced by the source cited on this page: "the purpose of such deposit is not to make some additional income but to comply with the statutory requirement, and interest accrued on such deposit is merely incidental" The decision followed or applied CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) — followed (para 12); CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) — followed (para 12); CIT v. Shree Rama Multi Tech Ltd. (2013) 214 Taxman 650 (Guj.) — affirmed (para 13).
It was decided by the Supreme Court on 2018-04-24 and is reported as (2018) 403 ITR 426 / (2018) 92 taxmann.com 363 / (2018) 255 Taxman 136 / (2018) 302 CTR 90 (SC) — Civil Appeal Nos. 6391 and 8336 of 2013; assessment years 1999-2000, 2000-01 and 2001-02. The further reference 165 DTR 137 does not appear on the report's citation line and is not corroborated.. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 4, section 56, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The revenue's appeals were dismissed (para 14) and the High Court's order was affirmed. Interest accrued on the deposit of share application money is not taxable; it is inextricably linked with the requirement to raise share capital and falls to be set off against the expenses of the public issue, the share issue relating to the capital structure of the company so that its expenses are to be capitalised. The Revenue's argument that part of the money had to be refunded to unsuccessful applicants was held to make no significant difference on these facts. The remand to the Tribunal on the other issues was left undisturbed. It arises in Assessment & Scrutiny matters, on section 4, section 56 of the Income Tax Act 1961, and was decided by Supreme Court of India — R.K. Agrawal and Abhay Manohar Sapre, JJ. (judgment delivered by R.K. Agrawal, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Identify the share issue expenses the interest is set off against, and keep the workings, because the relief is a set-off and not an exemption. Keep the money segregated in fact as well as in law; the reasoning assumes a separate account, not a general pool. Do not stretch this to interest on surplus funds or on money raised and then left idle after allotment — the link to the issue is what the case rests on.
Searched for later treatment; none was found. That is not the same as a source affirming it. The judgment has now been read in full. It carries no later-treatment banner and no entry showing any later decision applying, following or affirming it, and nothing adverse was found. Absence of contrary authority is not positive authority, so the status does not move. A digest search on the case name returns one entry, the decision itself. A search of the same digest for 'inextricably linked' returns later decisions on the same principle — ITO v. Nabinagar Power Generating Co. P. Ltd. (2021) 88 ITR 5 (SN) (Delhi)(Trib.), HLL Biotech Ltd. v. CIT (2024) 301 Taxman 604 (Ker.)(HC) and ACIT v. Chenani Nashri Tunnelway Ltd. (2025) 215 ITD 197 (Mum.)(Trib.) — but each reaches its result on the Bokaro Steel line without naming this decision, and a decision arriving at the same place by another route is not support for it. No source found records an application for special leave or any later bench confining the decision to a compulsory statutory deposit. That finding was checked against a published source, which is linked on this page, on 2026-08-24. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The quoted sentence is the Court's own, from para 12 of the judgment. Paras 10-12 expressly adopt Bokaro Steel and add Karnal Co-operative Sugar Mills, distilling both into a test of purpose — incidental receipt against prime purpose — so the reasoning may fairly be described as the Bokaro Steel line applied to a statutory share-application deposit. Bokaro Steel itself has not been read here. One digest gives a further citation, 165 DTR 137, which does not appear on the citation line of the report; it is neither confirmed nor contradicted. The two sections tagged on this entry, s.4 and s.56, are practice tags and not provisions the Supreme Court cited: the judgment does not name either of them anywhere, and where it speaks of interest on idle surplus being taxable it says 'as income from other sources' without giving a section number. They are kept because they are the heads a reader will search under. It does not tell you what happens if the issue is withdrawn or fails, how the set-off works where the share issue expenses are themselves capitalised or claimed under s.35D, whether the same reasoning covers interest on a rights issue or a private placement, or how the interest is to be treated where it exceeds the issue expenses. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The revenue's appeals were dismissed (para 14) and the High Court's order was affirmed. Interest accrued on the deposit of share application money is not taxable; it is inextricably linked with the requirement to raise share capital and falls to be set off against the expenses of the public issue, the share issue relating to the capital structure of the company so that its expenses are to be capitalised. The Revenue's argument that part of the money had to be refunded to unsuccessful applicants was held to make no significant difference on these facts. The remand to the Tribunal on the other issues was left undisturbed.
TaxSphere, “CIT v Shree Rama Multi Tech Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-shree-rama-multi-tech-share-application-interest/ (validity last checked 2026-08-24)
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