By TIOL News Service

NEW DELHI, SEPT 28, 2016: THE issue is - Whether if it has been recorded to the satisfaction of Tribunal that certain expenses were amortized legitimately, once this position was accepted, the deduction cannot be denied in the subsequent years. YES is the answer.

Facts of the case

The assessee is a public limited company engaged in the business of manufacture and sale of bulk drugs and intermediates. It 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 units. 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/-. The aforesaid issue was opened for public subscription during the FY ending 31.03.1995 relevant to the AY 1995-96. The assessee had, in the prospectus issued, clearly stated under the column projects that the production capacity of its existing products, more particularly Ibuprofen and Ranitidine. 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 u/s 35D from the AYs 1995-96 to 2004-05. The AO on the same set of facts allowed the claim of the assessee (1/10th of the share issue expenses u/s 35D) for the initial AY being the AY 1995-96 after examining the materials produced. However, AO disallowed the expenses for AY 1996-97 on the ground that the share issue expenses were not eligible for deduction in view of the decision of SC in the case of Brook Bond India Ltd. vs. CIT W.B-(III) 2002-TIOL-244-SC-IT, stating that the expenditure incurred was capital in nature and hence not allowable for computing the business profits.

On appeal, CIT(A) directed AO 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 had been made to the existing industrial undertaking to justify the claim made by the assessee. AO 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. AO also recorded 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 u/s 35D. Department had not taken on appeal the issue of allowance of share issue expenditure further for the AY 1996-97 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.

Thereafter AO had taken a different stand for AYs 1997-98 to 2004-05 with respect to the claim of share issue expenditure u/s 35D and had disallowed the said expenditure on the basis that the expenditure was capital in nature relying on Brook Bond India Ltd. case. Thus, assessee again claimed amortization of expenditure u/s 35D for AY 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 Tribunal as well. However, HC had reversed the order of the ITAT thereby reinstating the view taken by AO and disallowed the amortization of the expenditure u/s 35D.

Bonus claim

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.

Having heard the matter, the Apex Court held that,

++ in the Income Tax Return which was filed for the AY 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 u/s 35D from the AYs 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 u/s 35D. When it was again claimed for the Assessment Year 1996-97, though it was disallowed and on directions of the Appellate Authority, the AO 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 AY 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 AY 1995-96 to AY 2004-05. HC, however, disallowed the same following the judgment of this Court in the case of Brook Bond India Ltd. 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 HC went wrong as the instant case is to be decided keeping in view the provisions of Section 35D. In any case, it warrants repetition that in the instant case under the very same provisions benefit is allowed for the first two AYs 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 AYs in question;

Bonus claim

++ 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 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 u/s 36. However, since the payment was made from the Trust, AO 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). As pointed out above, though this view was not accepted by the CIT(A) as well as ITAT, HC has found justification in the stand taken by AO. Here also we feel that the High Court has gone wrong in relying upon the provisions of Section 40A(9). 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 u/s 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. On both counts the order of the High Court is set aside and the appeals are allowed.

(See 2016-TIOL-163-SC-IT)