Tags Income Tax

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 9611 of 2016, Judgment Date: Sep 16, 2016


                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                      CIVIL APPEAL  NO(S).9611 OF 2016
                  (Arising out of SLP(C)No. 31962 of 2011)


M/S. SHASUN CHEMICALS  AND DRUGS LTD.                      APPELLANT(S)

                                      VERSUS


COMMISSIONER OF INCOME TAX-II, CHENNAI                    RESPONDENT(S)

                                    WITH

                        CIVIL APPEAL NO.9612 OF 2016
                   (Arising out of SLP(C)No.33503 of 2011)


                               J U D G M E N T

A.K.SIKRI, J.

      Leave granted.
2.    Matter heard finally.
3.    Two issues are raised in  these  appeals  by  the  appellant/assessee,
which is a public limited company engaged in  the  business  of  manufacture
and sale of bulk drugs and intermediates. The first issue is  regarding  the
amortization of expenditure under Section 35D of the Income  Tax  Act,  1961
(hereinafter referred to as the 'Act’).  The second issue  pertains  to  the
deduction for payment of  bonus  by  the  assessee  to  its  employees.  The
Assessment Years in question are 1999-2000  and  2001-02.  The  brief  facts
which are relevant for deciding the aforesaid issues are as under:

4.    The  assessee went in for public issue of shares  in  order  to  raise
funds to meet the capital expenditure  and  other  expenditure  relating  to
expansion of its existing  units  of  production  both  at  Pondicherry  and
Cuddalore and for expansion of its Research and Development  Activity.   The
assessee issued to public 15,10,000 equity shares of Rs.10/- each  for  cash
at a premium of Rs.30/- per share aggregating to Rs.6,04,00,000/-.

5.    The aforesaid issue was opened  for  public  subscription  during  the
financial year ending 31.03.1995 relevant to the  Assessment  Year  1995-96.
The assessee has, in the prospectus issued, clearly stated under the  column
projects that  the  production  capacity  of  its  existing  products,  more
particularly Ibuprofen and Ranitidine, is as follows:

“The Company is undertaking the following expansion projects:

(1) Ibuprofen: The installed capacity of the ibuprofen plant at  Pondicherry
is proposed to be increased from the present level  840  tpa  to  1200  tpa.
The increase in capacity would be  primarily  due  to  improvements  in  the
process sdeveloped inhouse, resulting in  a  significant  reduction  in  the
batch processing time.  The  additional  plant  and  machinery  required  to
support the increase in  capacity  would  include  additional  raw  material
storage facilities, chilling plant and laboratory facilities aggregating  to
Rs.95 lakhs.

(2) Ranitidine Expansion: The installed capacity of the Ranitidine plant  at
Cuddalore is proposed to  be increased  from  60  tpa  to  180  tpa  in  two
phases.  In the first phase, the capacity is proposed  to  be  increased  to
120 tpa by installation of additional plant  and  machinery.   The  cost  of
this phase, including construction  of  a  modern  administration  block  at
Cuddalore, is estimated at Rs.286 lakhs.”

6.    The assessee incurred a sum of Rs.45,51,890/-  towards  the  aforesaid
share issue expenses  and  claimed  1/10th  of  the  aforesaid  share  issue
expenses each year under Section 35D of the Act from  the  Assessment  Years
1995-96 to 2004-05.  The Assessing Officer on the same set of facts  allowed
the claim of the assessee (1/10th of the share issue expenses under  Section
35D of the Act) for the initial Assessment Year being  the  Assessment  Year
1995-96 after examining  the  materials  produced.  However,  the  Assessing
Officer disallowed the expenses for  the  Assessment  Year  1996-97  on  the
ground that the share issue expenses are not eligible for deduction in  view
of the decision of this Court in the case  of  Brook  Bond  India  Ltd.  vs.
Commissioner of Income Tax W.B(III) (1997) 10 SCC 362  =  225  ITR  798  SC,
stating that the expenditure incurred is capital in  nature  and  hence  not
allowable for computing the business profits.

7.    Aggrieved against the aforesaid disallowance  made  by  the  Assessing
Officer for the Assessment  Year  1996-97,  the  assessee  filed  an  appeal
before the Commissioner of Income Tax (Appeals),  [herienafter  referred  to
as CIT(A)] who vide his order  directed  the  Assessing  Officer  to  verify
physically the factory premises of the assesseee  and  find  out  ,  whether
there were any additions to the plant  and  machinery  at  the  factory  and
whether there were any additions to the buildings  at  the  factory  whereby
any expansion has been  made  to  the  existing  industrial  undertaking  to
justify the claim made by the assessee.

8.    In furtherance to  the  aforesaid  direction,  the  Assessing  Officer
after making due physical verification of the factory premises and on  being
satisfied  with  the  expansion  of  the  facilities   to   the   industrial
undertaking duly allowed the claim of share issue expenses. While doing  so,
the Assessing Officer,  for the Assessment Year 1996-97, passed  a  detailed
and elaborate order after scrutinizing all the materials made  available  to
him and recorded a positive finding of fact that there was an  expansion  to
the existing units of the industrial undertaking and after  being  satisfied
of the same duly allowed the claim of share  issue  expenses  under  Section
35D of the Act.
      It is relevant to point out at this stage that the Department has  not
taken on appeal the issue of allowance of share  issue  expenditure  further
for the Assessment Year 1996-97 and, hence, finality has been  reached  with
respect to the issue of expansions of the  existing  industrial  undertaking
and, consequently, the eligibility of the share issue expenditure  in  terms
of Section 35D of the Act.
9.    Thereafter the Assessing Officer has taken a different stand  for  the
Assessment Years 1997-98 to 2004-05 with  respect  to  the  claim  of  share
issue expenditure under Section 35D of the Act and has disallowed  the  said
expenditure on the basis that the expenditure is capital in  nature  relying
on Brook Bond India Ltd. case (supra)

10.    In the aforesaid backdrop, the assessee  again  claimed  amortization
of expenditure under Section 35D of the Act for the Assessment Year  2001-02
which was disallowed for the same reason.  However,  the  assessee's  appeal
before the CIT (A) succeeded as CIT(A) allowed that expenditure.  The  order
of CIT(A) was affirmed by the Income  Tax  Appellate  Tribunal  (hereinafter
referred to as ‘ITAT’)as well.  However, the High  Court  has  reversed  the
order of the ITAT thereby  reinstating  the  view  taken  by  the  Assessing
Officer and disallowed the amortization of  the  expenditure  under  Section
35D of the Act.

11.   Insofar as claim of bonus is concerned, in the  return  filed  by  the
assessee for the Assessment Year 2001-02 it was mentioned  by  the  assessee
that it had paid bonus to its employees to the  tune  of  Rs.96,08,002/-  in
the said Financial Year and, therefore, it claimed deduction  under  Section
35(2AB) of the Act. However, invoking the provisions of  Section  40A(9)  of
the Act the said expenditure is disallowed on the ground  that  it  was  not
paid in cash to the concerned employees. Herein  again  CIT(A)  allowed  the
expenditure and the same view was taken by the ITAT but the High  Court  has
reversed the view of ITAT on this  ground  also.  It  is  in  the  aforesaid
backdrop that two questions were formulated in  the  judgment  of  the  High
Court which need to be addressed and answered by us.

12.   Question No. 1:  Whether expenditure incurred on issue  of  shares  is
eligible to be amortized under Section 35D of the Act?

      As already noted above, the Assessing Officer had  allowed  the  claim
of the assessee in this behalf for the Assessment Years  1994-95  and  1996-
97. Such expenses which are incurred  and  amortization  whereof  is  sought
under Section 35D of the Act, it is allowed for  a  period  of  10  years  @
1/10th each.  This is so provided by Section 35D of the Act as it  is  clear
from the reading of the said Section which is reproduced hereunder:

”35D. (1) Where an assessee, being an Indian  company  or  a  person  (other
than a company) who is resident in India, incurs,  after  the  31st  day  of
March, 1970, any expenditure specified in sub-section (2),—

(i) before the commencement of his business, or


(ii) after  the  commencement  of  his  business,  in  connection  with  the
extension of his undertaking or in connection with  his  setting  up  a  new
industrial unit, the assessee shall, in accordance with and subject  to  the
provisions of this section, be allowed a deduction of  an  amount  equal  to
one-tenth of such expenditure for each of the ten successive previous  years
beginning with the previous year in which the business commences or, as  the
case may be, the previous year in which  the  extension  of  the  industrial
undertaking is completed or the new industrial unit commences production  or
operation:”

13.    In the Income Tax Return  which was filed  for  the  Assessment  Year
1995-96  the  assessee  had  claimed  that  it  had  incurred   a   sum   of
Rs.45,51,890/- towards the share issue expenses and had  claimed  1/10th  of
the aforesaid share issue expenses under Section 35D of  the  Act  from  the
Assessment Years 1995-96 to 2004-05.  This claim of the assessee  was  found
to be justified and allowable under the aforesaid  provisions  and  on  that
basis 1/10th share issue expenses was allowed under Section 35D of the  Act.
When it was again claimed for the Assessment Year  1996-97,  though  it  was
disallowed and on directions  of  the  Appellate  Authority,  the  Assessing
Officer  made  physical  verification  of  the  factory  premises.  He   was
satisfied that there was expansion  of  the  facilities  to  the  industrial
undertaking of the assesseee. It  is  on  this  satisfaction  that  for  the
Assessment Year 1996-97 also the expenses were allowed. Once, this  position
is accepted and the clock had started running in favour of the assessee,  it
had to complete the entire period of 10 years and benefit granted  in  first
two years could not have been denied in the subsequent years  as  the  block
period was 10 years starting from the Assessment Year 1995-96 to  Assessment
Year 2004-05.  The High Court, however, disallowed the  same  following  the
judgment of this Court in the case of Brook Bond India Ltd (supra).  In  the
said case it was held that the expenditure incurred on public issue for  the
purpose of expansion of the company is a capital  expenditure.  However,  in
spite of the argument raised to the effect that the aforesaid  judgment  was
rendered when Section 35D was not on the statute  book  and  this  provision
had altered the legal position, the High Court still  chose  to  follow  the
said judgment. It is here where the High Court went  wrong  as  the  instant
case is to be decided keeping in view the provisions of Section 35D  of  the
Act. In any case, it warrants repetition that in the instant case under  the
very same provisions benefit is allowed for the first two  Assessment  Years
and, therefore, it could not  have  been  denied  in  the  subsequent  block
period. We, thus, answer question No. 1 in favour of  the  assessee  holding
that the assessee was entitled  to  the  benefit  of  Section  35D  for  the
Assessments Years in question.

14.   Question No. 2: Whether deduction on account of payment  of  bonus  to
the employees of the assessee is not eligible under Section 36 of  the  Act,
as it is hit by Section 40A(9) of the Act?

      As a fact it needs to  be  noted  that  in  the  Assessment  Years  in
question the workers of the assessee had raised  a  dispute  of  quantum  of
bonus which had led to the labour unrest  as  well.   Because  of  this  the
workers had finally refused to accept the bonus offered to them. Faced  with
this situation, the assessee had made the payment to  the  Trust  to  comply
with the requirement of Section 43B of the Act, as the said provision  makes
it clear that deduction in respect of bonus would be allowed only if  actual
payment is made.   Pertinently,  the  dispute  could  be  settled  with  the
workers well in time and for that reason payment of bonus was made        to
the workers on the very next day of deposit of the said amount in the  Trust
by the assessee.  This happened before the expiry of due date by which  such
payment is supposed to be made in order to claim deduction under Section  36
of the Act. However,  since  the  payment  was  made  from  the  Trust,  the
Assessing Officer took the view that as the  payment  is  not  made  by  the
assessee to the employees directly in cash, it is not allowable in  view  of
the provisions of Section 40A(9) of the Act. As pointed  out  above,  though
this view was not accepted by the CIT(A) as well as  ITAT,  the  High  Court
has found justification in the stand taken by the  Assessing  Officer.  Here
also we feel that the  High  Court  has  gone  wrong  in  relying  upon  the
provisions of Section 40A(9) of the Act.

15.   It is not in  dispute  that  as  per  Section  36(1)(ii)  of  the  Act
expenditure incurred on account of payment in  the  form  of  bonus  to  the
employees is allowable as business  expenditure.  This  provision  reads  as
under:

“36. (1) The deductions provided for  in  the  following  clauses  shall  be
allowed in respect of the matters  dealt  with  therein,  in  computing  the
income referred to in section 28-

(i)   ....

(ii)  any sum paid to an  employee  as  bonus  or  commission  for  services
rendered, where such sum would not have been payable to him  as  profits  or
dividend if it had not been paid as bonus or commission.”

16.   Section 43B,  however,  mandates  that  certain  deductions  would  be
allowed only on actual payment. This provisions, which is relevant  for  our
purpose reads as under:
“43B. Certain deductions to be only  on  actual  payment  4  Notwithstanding
anything contained in any other provision of this Act,  a  deduction  other-
wise allowable under this Act in respect of-

(a)  any sum payable by the assessee by way of tax, duty, cess  or  fee,  by
whatever name called, under any law for the time being in force, or]

(b) any sum payable by the assessee as an employer by  way  of  contribution
to any provident fund or superannuation fund or gratuity fund or  any  other
fund for the welfare of employees,  or]

(c)  any sum referred to in clause (ii) of sub- section (1) of section  36,]
 or]

(d)  any sum payable by the assessee as interest on any  loan  or  borrowing
from any public financial institution  or a State financial  corporation  or
a State industrial investment corporation], in  accordance  with  the  terms
and conditions of the agreement governing such loan or borrowing,] shall  be
allowed (irrespective of the previous year in which  the  liability  to  pay
such sum was incurred by the assessee according to the method of  accounting
regularly employed by him) only in  computing  the  income  referred  to  in
section 28 of that previous year in which  such  sum  is  actually  paid  by
him:”

17.   Section 40A(9) also  needs  to  be  noted  at  this  stage,  which  is
reproduced herein below:
“40A(9). No deduction shall be allowed in respect of any  sum  paid  by  the
assessee as an employer towards the  setting  up  or  formation  of,  or  as
contribution to, any fund, trust, company, association of persons,  body  of
individuals, society registered under the Societies Registration  Act,  1860
(21 of 1860), or other institution for any purpose, except  where  such  sum
is so paid, for the purposes and to the extent provided by or  under  clause
(iv)[or clause (iva)] or clause (v) of sub-section (1) of section 36, or  as
required by or under any other law for the time being in force.”

       This Section deals with deductions in respect of the amount  paid  by
the assessee as an employer towards the setting up or formation  of,  or  as
contribution to, any fund, trust, company etc. The condition  is  that  such
sum has to be paid for the purpose and to the extent provided  by  or  under
clause (iv) or clause (iva) or clause (v) of Sub-section(1) of  Section  36.
However, we are here concerned with  the  payment  of  bonus  which  is  not
covered by any of the aforesaid clauses of sub-section  (1)  of  Section  36
but is allowable as deduction  under  clause  (ii)  of  sub-section  (1)  of
Section 36.  Therefore, Section 40A(9) has no application.  Insofar  as  the
provisions of Section 43B  are  concerned,  they  are  also  not  applicable
inasmuch as clause (b) of Section 43B refers to the sum payable  by  way  of
contribution to any provident fund or superannuation fund or  gratuity  fund
or any other fund for the welfare of employees. Thus,  this  provision  also
does not mention about bonus.  With  this  we  come  to  the  provisions  of
Section 36 which enumerate various kinds of expenses which are allowable  as
deduction while computing the business income under Section 28 of  the  Act.
The amount paid by way of bonus is one such expenditure which  is  allowable
under clause (ii) of sub-section (1) of Section 36.   There  is  no  dispute
that this amount was paid by  the  assessee  to  its  employees  within  the
stipulated time. Embargo specified under Section 43B or 40A(9)  of  the  Act
does not come in the way of the assessee.  Therefore,  the  High  Court  was
wrong in disallowing this  expenditure  as  deduction  while  computing  the
business income of the assessee and the decision of the ITAT was correct.

18.   On both counts the order of the  High  Court  is  set  aside  and  the
appeals are allowed.
      No costs.

                                                    ......................J.
                                                         (A.K. SIKRI]

                                                    ......................J.
                                                        [N.V. RAMANA]

NEW DELHI;
SEPTEMBER 16, 2016.