Madras H.C : The expenditure incurred on issue of shares is eligible to be authorised under section 35D of the Income-tax Act

High Court Of Madras

CIT, Chennai vs. Shasun Chemicals & Drugs Ltd.

Assessment Years : 1999-2000 And 2001-02

Section : 35D

Elipe Dharma Rao And M. Venugopal, JJ.

Tax Case No. 1415 Of 2007 And TCA No. 48 Of 2008

April 25, 2011

JUDGMENT

Elipe Dharma Rao, J. – Both these appeals were preferred by the revenue against the two separate orders passed by the Income-tax Appellate Tribunal Madras ‘C’ Bench, dated 4-4-2007 in ITA. No. 954/Mds./2005 for the assessment year 1999-2000 and 15-6-2007 in ITA. No. 969/Mds./2006 for the assessment year 2001-02 respectively.

2. While admitting the TCA No. 1415 of 2007, the following substantial question of law has been formulated for consideration :—

“Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on issue of shares is eligible to be authorised under section 35D of the Income-tax Act ?”

3. Similarly, while admitting the TCA No. 48 of 2008, the following substantial questions of law were formulated :—

“1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on issue of shares is eligible to be authorised under section 35D of the Income-tax Act ?

2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the payment of bonus into an employees bonus trust is not hit by section 40A(1) sic., 40A(9) of the Income-tax Act ?

3. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the payment of bonus into an employees bonus trust within the due date for filing the return is sufficient compliance with the provisions of section 43B of the Income-tax Act ?”

4. The facts in brief are as follows :—

The assessee/respondent in both the appeals is Shasun Chemicals & Drugs Ltd., a company engaged in the manufacture and sale of bulk drugs. The assessee filed its return of income for the Assessment year 1999-2000 on 29-12-1999 admitting total income of Rs. 62,41,040. Though the assessment was completed under section 143(3) of the Income-tax Act, 1961 (in short “the Act”) on 18-3-2002, subsequently, it was reopened under section 147 and a notice under section 148 of the Act was issued on 26-9-2003. While computing the total income, the Assessing Officer has disallowed the claim made by the assessee towards share issue expenses and deduction made under section 35(2AB) i.e., towards scientific research expenditures. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) on the question of claim under section 35D regarding share issue expenses, reversed the order of the Assessing Officer and allowed the claim made by the assessee under section 35D. However, the finding with regard to the scientific research expenditure under section 35(2AB) was confirmed by the Commissioner of Income-tax (Appeals). Aggrieved by the aforesaid order, the revenue as well as the assessee filed appeals before the Income-tax Appellate Tribunal. The Tribunal by a common order allowed the appeal filed by the assessee against the finding under section 35(2AB) and dismissed the appeal filed by the revenue with regard to share issue expenses. Aggrieved by the aforesaid order of the Tribunal, the revenue has filed T.C.A. No. 1415 of 2007.

4.1 So far as the assessment year 2001-02 is concerned, which relates to TCA. No. 48 of 2008, the assessee filed its return of income on 31-10-2001 admitting total income of Rs. 1,00,75,050 and after processing the return under section 143(1), the case was taken up for scrutiny and after calling for various details and clarifications, the Assessing Officer completed his assessment under section 143(3) on a total income of Rs. 8,86,99,440. While computing the total income, the Assessing Officer has disallowed the claim made by the assessee under the heads Share issue expenses, bonus and partly allowed the claim made under section 80HHC. Against the aforesaid order, the assessee preferred appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) by order dated 22-12-2005, allowed the claim of the assessee made under section 35D towards share issue expenses as similar orders were passed in favour of the assessee and the claim made towards payment of bonus was allowed. However, the deduction claimed under section 80HHC was modified. Against the aforesaid order of the appellate authority, both the revenue and the assessee had preferred appeal and cross appeal before the Tribunal. The Tribunal confirmed the findings of the appellate authority with regard to the claim made under section 35D, and towards payment of bonus. However, on the issue relating to section 80HHC, the Tribunal remanded the matter to the Assessing Officer to decide the issue in the light of the recent amendment to section 80HHC. Ultimately, the Tribunal dismissed the appeal filed by the revenue and allowed the appeal filed by the assessee for statistical purposes. Aggrieved by the aforesaid order of the Tribunal, the revenue has come with TCA No. 48 of 2008.

5. Since the issues involved in these two appeals are inter-connected and one and the same, they were heard together and disposed of by this common judgment.

6. Substantial Question No. 1 in TCA No. 48 of 2008 and the only Substantial Question raised in TCA No. 1415 of 2007.

The assessee has claimed 1/10th of Public issue expenses under section 35D of the Income-tax Act, 1961 on the ground that the expenses had occurred in connection with the expansion of the company. Section 35D of the Act is as follows :—

“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 industrial undertaking or in connection with the 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.”

7. The assessee has made a claim under section 35D of the Act on the ground that the expenditure incurred was in respect of public issue expenses, which was in respect of expansion of his business. The Assessing Officer rejected the claim of the assessee on the ground that the company was incorporated on 19-4-1976, whereas the public issue was made in the financial year 31-3-1995 relating to the assessment year 1995-96 and the public issue expenses claimed is not as per section 35D, which deals only with preliminary expenses. For coming to such a conclusion, the assessing authority has placed reliance on the decision of the Supreme Court in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798. In appeal, the finding of the assessing authority was reversed by the Commissioner of Income-tax (Appeals) by holding that the issue has already been decided in favour of the assessee by the Commissioner of Income-tax (Appeals) in ITA. No. 14/99-2000, dated 30-9-1999 for the assessment year 1996-97. In further appeal by the Revenue, the Income-tax Appellate Tribunal confirmed the finding of the appellate authority by observing that the issue had already become final and no appeal has been preferred by the Revenue. The deduction claimed by the assessee under section 35D for the assessment year 2001-02, which is the subject-matter of TCA No. 48 of 2008, was allowed by the appellate authority as well as the Tribunal, though disallowed by the Assessing Officer.

8. The assessee’s company was started in 1976, whereas under the guise of expansion it has claimed deduction for the public shares issued in the financial year 1995, nearly after two decades. To claim deduction under section 35D, the expenditure incurred should be before the commencement of the business or after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with the setting up a new industrial unit. The assessee claims under clause (ii) that the shares had been issued for the expansion of the company. One of the reasons for rejecting the claim of the assessee by the Assessing Officer is that no material has been placed to show the expenditure incurred towards the issuance of shares. From the materials on record, it is seen that it is not the case of the assessee that relevant materials like vouchers, receipts, etc., have been produced before the Assessing Officer to show the actual expenditure incurred. On the other hand, the main defence of the assessee is that the Brook Bond India Ltd.’s case (supra) relied on by the Assessing Officer is not applicable to the present case as the expenditure is to be treated as revenue expenditure, since in the previous assessment years the deduction claimed under section 35D was allowed, the appeals have to be dismissed.

9. Whether the shares issued for the expansion of the company would be a capital expenditure or a revenue expenditure has already been decided by the Apex Court.

In Brooke Bond India Ltd.’s case (supra) the question relates to the assessment year 1969-70 and the relevant account year ended on 30-6-1968. The assessee is a public limited company. It issued ordinary shares of Rs. 16,75,000 of Rs. 10 each at a premium with a view to increase its share capital and, in that connection, it incurred an expenditure of Rs. 13,99,305 which amount was claimed by it as deductible expenses. The said deduction was disallowed by the Income-tax Officer on the view that the expenditure incurred by the assessee was on the capital account. The said view of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner and the Tribunal. The High Court, while upholding the view of the Tribunal, has held that the expenditure incurred by the assessee in issuing shares with a view to increase its capital could not amount to revenue expenditure and would fall under capital expenditure. The Apex Court by referring its earlier decisions has concluded that in any event, the observations of this Court in Punjab State Industrial Development Corpn. Ltd. v. CIT 225 ITR 792clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.

10. The assessee sought to distinguish the aforesaid decision by stating that in the said case the assessment year was 1969-70 and at that time section 35D was not in existence as it was introduced by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971 and, therefore, the said decision is not applicable to the facts of the present case.

11. It is true that in the Brooke Bond India Ltd.’s case (supra) the assessment year was prior to the coming into existence of section 35D and, therefore, the Supreme Court has no occasion to consider the veracity of section 35D of the Act. However, the decisions relied on in the aforesaid case relate to various assessment years after introduction of section 35D of the Act and, therefore, the assessee cannot state that the decision in Brook Bond India Ltd.’s case (supra) is not applicable to the facts of the present case. The decision in Brook Bond India Ltd.’s case (supra) was subsequently followed in CIT v. General Insurance Corpn.[2006] 286 ITR 232, wherein the Supreme Court citing various decisions had observed that the expenditure incurred for the purpose of increasing company’s share capital by the issue of fresh shares would certainly be a capital expenditure as has been held by this Court in the cases cited above.

12. In the commentary on the Companies Act by A. Ramaiya, 16th Edn., 2004, which occurs in the commentary on section 81 of the Companies Act, the capital expenditure is defined as follows :—

“When a company prospers and accumulates a large surplus it converts this surplus into capital and divides the capital among its members in proportion to their rights. This is done by issuing fully paid shares representing the increased capital. The shareholders to whom the shares are allotted have to pay nothing. The purpose is to capitalise the gains which may be available for division or utilise quasi-capital gains. Bonus shares go by the modern name ‘capitalisation of shares.'”

13. In CIT v. Sakthi Finance Ltd. [2002] 256 ITR 488 a Division Bench of this Court on a case where the assessee claimed the benefit under section 35D on the ground it has increased its paid up capital from Rs. 25 lakhs to 60.70 lakhs, by observing that the benefit under section 35D of the Act cannot be extended simply, has observed as follows :—

“The assessee here clearly was not entitled to the benefit of section 35D as that section itself was inapplicable having regard to the increase in the share capital being subsequent to the establishment of the business and the assessee had not established any new industrial unit nor had it expanded the existing industrial undertaking.”

14. In Agro Cargo Transport Ltd. v. CIT [1997] 224 ITR 90 (Mad.) the assessee-company increased the fleet of trucks by increasing its share capital and claimed 1/10th of the total expenditure as a deduction under section 35(D)(1)(ii) of the Act. That was disallowed by the Income-tax Officer on the ground that it was allowable only in connection with the extension of the industrial undertaking, which was confirmed by the Appellate Assistant Commissioner in appeal. On further appeal, the Appellate Tribunal confirmed the finding of the authorities. This Court on the further appeal confirmed the finding of the Tribunal by holding that there was no material on record to show that the assessee had furnished any particulars with regard to the expenditure incurred so as to enable the assessee to say that the expenditure would fall under sub-section (2) of section 35D. It was further observed that unless the assessee furnishes particulars to show that the expenditure would fall under sub-section (2) of section 35D, it would not be possible for the department to advert to that aspect.

15. By applying the principle laid down in the aforesaid decisions, particularly in Agro cargo Transport Ltd’s case (supra), one has to come to a conclusion that there is no particulars with regard to the expenditure incurred by the assessee to claim deduction and further the expenditure incurred by the assessee is to be treated as a capital expenditure and not as a revenue expenditure. The decision of the Assessing Officer is also liable to be confirmed for another reason. In the appeals before the Commissioner of Income-tax and the Tribunal, both the authorities have not gone into the merits of the case or perused the materials to show the expenditure incurred by the assessee. On the other hand, both the authorities by simply stating that the claim of the assessee for the previous assessment years had been allowed, allowed the claim of the assessee. If the appellate authority or the Tribunal would have gone into the merits of the case and perused the materials, they would have come to a reasonable conclusion. Since both the authorities have not decided the matter on merits and, in the light of the aforesaid decisions, the finding of the Assessing Officer has to be confirmed.

16. Learned counsel for the assessee has raised an allied contention that for the assessment years 1996-97 and 2002-03, the deduction claimed by the assessee under section 35D was allowed and, since the revenue has not preferred any appeal and such order has become final, it is not open to the revenue to disallow the deduction claimed in the assessment year in question.

17. Learned Standing Counsel for the Department contended that when the department has not preferred an appeal in one case would not operate as a bar to prefer an appeal in another case where there is just cause for doing so or it is in the public interest. In support of such contention, he has placed reliance upon a decision of the Apex Court in C.K. Gangadharan v. CI T [2008] 304 ITR 61.

18. In the aforesaid decision, the Apex Court answered the Reference whether the revenue can be precluded from defending itself by relying upon the contrary decisions, in the following words :—

“12. If the assessee takes the stand that the revenue acted mala fide in not preferring appeal in one case and filing the appeal in other case, it has to establish mala fides. As a matter of fact, as rightly contended by the learned counsel for the Revenue, there may be certain cases where because of the small amount of revenue involved, no appeal is filed. Policy decisions have been taken not to prefer appeal where the revenue involved is below a certain amount. Similarly, where the effect of decision is revenue neutral, there may not be any need for preferring the appeal. All these certainly provide the foundation for making a departure.

13. In answering the reference, we hold that merely because in some cases the revenue has not preferred appeal that does not operate as a bar for the revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher court when divergent views are expressed by the Tribunals or the High Courts.”

19. The aforesaid decision is the answer to the contention raised on behalf of the assessee and the contention raised by the assessee is therefore liable to be rejected.

20. For the reasons stated above, the substantial question of law raised in TCA No. 1415 of 2008 and the first substantial question of law raised in TCA No. 48 of 2008, whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on issue of shares is eligible to be authorised under section 35D of the Income-tax Act? is answered in affirmative and against the assessee.

21. Since the 2nd and 3rd substantial question of law raised in TCA No. 48 of 2008 are being inter-connected, they are discussed together.

The case of the assessee is that the payment of bonus is not in violation of section 40A(9) as it permits payment to the extent provided by or under section 36(1)(iv) & (v). In support of such contention, the decision of the ITAT, Chennai “A” Bench in Dy. CIT v. Sri Venkatesa Mills Ltd., Udumalpet has been relied on. It is their further case that as per section 43B of the Act, the assessee-company was bound to make the payment of bonus or before filing of the return of income as the workers had raised dispute on quantum of bonus and it was forced to make the payment to the trust to comply with section 43B and since the payment in question was to comply with the provisions of section 40A(9), the payment of bonus to the specific trust should not be disallowed.

22. It is the case of the Assessing Officer that only payment for the purposes of recognised provident fund, approved superannuation fund or approved gratuity fund are exempted from disallowance and payment of bonus purposes is not exempted under section 40A(9). It is his further case that the fact that section 43B was introduced later than section 40A(9), does not make the latter inoperative and in fact is an overriding provision. According to the Department, the decision relied on by the assessee is distinguishable inasmuch as in the relied on case the amount was paid to an irrevocable trust and the applicability of section 40A(9) has not been gone into. In appeal, the Commissioner of Income-tax by holding that there was constructive payment of bonus to the employees on or before the due date specified under section 43B i.e., 31-10-2001 and the payment to trust can be construed as payment to the employees, allowed the deduction claimed by the assessee. On further appeal, the Tribunal held that there was no violation of section 40A(9) of the Act and confirmed the decision of the Appellate Authority.

23. As per section 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 or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 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 (v) of sub-section (1) of section 36. Section 36 deals with the other deductions to be dealt with while computing the income referred to in section 28 and clause (iv) of section 36 provides for deduction towards the sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund. Clause (v) provides for deduction towards the sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust.

24. In the present case, the assessee has claimed deduction under clause (v) of section 36 of the Act by stating that as the workers had raised dispute on quantum of bonus and consequent labour unrest, the assessee was forced to make the payment to the trust to comply with the requirements of section 43B. Section 43B relates to certain deductions to be only on actual payment. Section 43B(b) provides that 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 is allowable as deduction on actual payment. In the above context, it is the contention of the assessee that as per section 43B(b), the payment towards bonus has actually been made to the employees through an irrevocable trust as contemplated under sub-clause (v) of section 36. Learned Standing Counsel appearing for the Department resisted the aforesaid contention by stating that the exemptions provided under section 40A(9) are specific and it does not exempt payment of bonus, the assessee had not paid the sum before he had filed the returns for the relevant assessment year and that the amount paid to a trust cannot be treated as a deduction.

25. The appellate authority as well as the Tribunal have reversed the finding of the Assessing Officer mainly by relying upon the decision of the Income-tax Appellate Tribunal, Chennai in the case of Sri Venkatesa Mills Ltd., (supra). The aforesaid decision was challenged by way of appeal by the revenue before this Court and a Division Bench of this Court by judgment dated 16-3-2009, rejected the appeal filed by the revenue confirming the decision of the Tribunal.

26. We have carefully gone through the aforesaid decision. In the aforesaid decision, the assessee is a company engaged in the business of yarn and fabrics. For the assessment year 1994-95, the Assessing Officer, in the course of assessment proceedings, found that the assessee had provided in the accounts a sum of Rs. 73,42,496 as bonus and ex gratia payable to the employees. It was explained by the assessee that on account of strike by the workers from 6-11-1994 to 15-12-1994, the assessee was not able to pay the full bonus on or before the due date for filing the return of income. The assessee handed over a cheque for a sum of Rs. 59,77,503 on 25-11-1994 to the Trustees of Venkateswara Mills Limited Workers’ Bonus payment Trust. The Assessing Officer allowed a sum of Rs. 14,01,726 actually paid before the due date for filing the return and disallowed the balance of Rs. 59,40,770 under section 43B(c) of the Act. Against the said order, the assessee preferred appeal before the Commissioner of Income-tax (Appeals), who, held that the payment to the Trust being irrevocable and actually amounted to payment of bonus and therefore deleted the portion of the amount disallowed by the Assessing Officer. Aggrieved by that order, the revenue filed an appeal before the Income-tax Appellate Tribunal. The Tribunal dismissed the appeal filed by the revenue. Aggrieved by the order of the Tribunal, the revenue preferred appeal before this Court. This Court while admitting the appeal had formulated the following questions of law :

“1. Whether the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the transfer of the amount payable as bonus to the workers to a trust before the due date for filing of the return was sufficient compliance with section 43B(c) of the Income-tax Act, 1961 and therefore, the amount could not be disallowed ?

2. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the amount transferred to the trust was allowable as a deduction even though no such deduction was allowable as clearly laid down by section 40A(9)?”

27. The Division Bench of this Court by judgment dated 16-3-2009, dismissed the appeal. Since much reliance has been placed by the assessee on this decision, the entire judgment is quoted hereunder :—

“4. From the finding recorded by the Tribunal, it is clear that the amount of bonus, which has been disallowed by the Assessing Officer has been parted by the assessee-company well prior to the date prescribed for payment of such bonus and prior to 30-11-1994 and it is also an admitted case that payment to the Trust being irrevocable, it actually amounted to payment of bonus to the workers. What is the requirement of the provision is payment prior to the date prescribed. The second proviso to section 43B of the Income-tax Act as it stood prior to Finance Act, 1989 with effect from 1-4-1989 reads as follows :

“No deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date.”

The assessee is entitled to the deduction made towards bonus. The assessee had made the payment prior to the date of omission of the proviso, the payment made to the Trust being irrevocable would tantamount to payment of bonus to the workers. When that being so, we do not find any error in the order passed by the Tribunal and as such, the questions of law are answered in favour of the assessee and as against the Revenue. Accordingly, the Tax Case Appeal is dismissed.”

28. From a reading of the aforesaid judgment it is seen that though a specific substantial question of law has been framed as to whether the amount transferred to the trust was allowable as a deduction even though no such deduction was allowable under section 40A(9), the said question was not dealt with and no answer was given to the question by the Division Bench. Further, in the said decision, there was no discussion about the applicability of section 40A(9). Section 40A(9) is an overriding section to section 43B. A reading of the question framed itself makes it clear that except the cases referred, no such deduction was allowable under section 40A(9). When no such deduction was allowable under section 40A(9), how the assessee could claim the deduction under section 43B(c) ? No answer was given in the relied on decision. Therefore, the aforesaid decision relied on by the assessee is clearly distinguishable to the facts of the present case. The Division Bench was carried on by considering the fact that actually the payment was made by the assessee through an irrevocable trust. The question which to be seen is whether the deduction was allowable as laid down in section 40A(9). In fact, section 40A reads as “the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”. Therefore, it cannot be said that section 40A(9) has no relevance after the insertion of section 43B with effect from 1-4-1984.

29. In view of our discussion above, we answer the substantial questions of law Nos. 2 and 3 in TCA No. 48 of 2008 in affirmative and against the assessee.

30. In the result, the appeals are allowed. There would be no order as to costs.

[Citation : 347 ITR 532]

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