Expenses on issue of shares eligible deduction us 35D. Deduction for payment of bonus to employees eligible u/s 36 and section 43B or 40A(9) does not come into play-Supreme Court
ABCAUS Case Law Citation:
1029 (2016) (10) SC
Assessment Year: 2001-02
Questions of Law framed:
- Whether expenditure incurred on issue of shares is eligible to be amortized under Section 35D of the Act?
- 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?
Brief Facts of the Case:
The appellant assessee was a public limited company engaged in the business of manufacture and sale of bulk drugs and intermediates. The company came up with a 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 and for expansion of its Research and Development Activity.
The company in the prospectus issued, clearly stated that the company was undertaking the expansion projects.
The company 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 from the Assessment Years 1995-96 to 2004-05.
The Assessing Officer (AO) allowed the claim of 1/10th of the share issue expenses under Section 35D for the initial Assessment Year ( 1995-96) However, the AO disallowed the expenses for the AY 1996-97 on the ground that the share issue expenses were not eligible for deduction in view of the decision of the Supreme Court in the case of Brook Bond India Ltd. vs. Commissioner of Income Tax W.B (III) (1997) stating that the expenditure incurred is capital in nature and hence not allowable for computing the business profits.
Aggrieved with the said disallowance made by the AO for the Assessment Year 1996-97, the compay filed an appeal before the Commissioner of Income Tax (Appeals) (CIT-A) who directed the AO to physically verify if any expansion to the factory premises has taken place.
The AO after making due physical verification and on being satisfied with the expansion of the facilities to the industrial undertaking duly allowed the claim of share issue expenses.
For the AY 1996-97, the Income Tax Department did not contested the issue of allowance of share issue expenditure further and, hence, finality had 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.
However, the AO took a different stand for the Assessment Years 1997-98 to 2004-05 with respect to the claim of share issue expenditure u/s 35D and disallowed the said expenditure relying on Brook Bond India Ltd. Case.
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 he allowed that expenditure. The said order of CIT(A) was also upheld by the Income Tax Appellate Tribunal. 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.
The Court noted that in the AY in question the workers of the assessee had raised a dispute of quantum of bonus which had led to the labour unrest. Because of this the workers had finally refused to accept the bonus offered to them. Under this situation, the assessee had made the payment to the Trust to comply with the requirement of Section 43B, as deduction in respect of bonus to be allowed only if actual payment was made.
The dispute was settled and the payment of bonus was made to the workers on the very next day of deposit of the said amount in the Trust and that was also before the expiry of due date by which such payment is supposed to be made in order to claim deduction under Section 36.
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.
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.
Observations made by the Apex Court:
Allowability us/ 35D
The Supreme Court observed that once the AO had allowed the claim for the Assessment Year 1996-97 after physical verification being fully satisfied 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 Supreme Court noted that the High Court had disallowed the claim following its judgment in the case of Brook Bond India Ltd. where it was held that the expenditure incurred on public issue for the purpose of expansion of the company is a capital expenditure.
However the aforesaid judgment was rendered when Section 35D was not on the statute book and with the insertion of section 35D, the legal position has been altered.
Payment of Bonus
The Supreme Court noted that the section 40A(9) 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.
The Court observed that the payment of bonus 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.
The Court also observed that section 43B is not applicable to the case as this provision does not mention about bonus. On the other hand Section 36 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 was 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.
Both the questions of Law framed were answered in favour of the assessee