1997 (4) TMI 388 - SC - Income Tax

Whether the underwriting commission in respect of shares which could not be subscribed by the public and had to be purchased by the assessee has to be regarded as the income of the assessee or it goes towards reducing the cost of the shares so purchased? Held that - Appeal dismissed. The Tribunal has not committed any error in taking the view that the underwriting commission earned by the assessee in respect of the shares which were not subscribed by the public and were purchased by the assessee could not be treated as a part of its taxable income. The question referred was, therefore, rightly answered by the High Court against the revenue and in favour of the assessee.

Issues Involved:
1. Taxability of underwriting commission.
2. Accounting treatment of underwriting commission and brokerage.
3. Applicability of general principles of accountancy versus statutory provisions.

Detailed Analysis:

1. Taxability of Underwriting Commission:

The primary issue was whether the underwriting commission earned by the assessee in respect of shares that were not subscribed by the public and had to be purchased by the assessee should be considered as taxable income. The Income Tax Officer (ITO) had included the entire amount of underwriting commission and brokerage as part of the taxable income for the assessment years 1970-71 and 1971-72. However, the Appellate Assistant Commissioner (AAC) and the Tribunal held that the underwriting commission in respect of shares held by the assessee should reduce the cost of the shares and not be separately taxable as income. The High Court agreed with the Tribunal's view, stating that the commission merely reduces the value of the shares and cannot be considered as income.

2. Accounting Treatment of Underwriting Commission and Brokerage:

The Tribunal observed that the practice followed by the assessee, where the underwriting commission and brokerage on shares subscribed by the assessee were adjusted against the cost of the shares, was in accordance with the principles of accountancy. The Tribunal referred to various authoritative books on accountancy to support this view. It was noted that the underwriting account is part of the profit and loss account, which includes not only the income from underwriting commission and brokerage but also the expenses and the cost of shares. The Tribunal concluded that the underwriting commission in respect of shares purchased by the assessee could not be treated as taxable income. The High Court affirmed this view, emphasizing that the commission earned on shares purchased by the assessee reduces the value of the shares and does not constitute income.

3. Applicability of General Principles of Accountancy versus Statutory Provisions:

The revenue argued that the entitlement to reduction should be governed by the provisions of law and not by the accounting practice adopted by the assessee. The revenue cited decisions such as Kedarnath Jute Mfg. Co. Ltd. v. CIT, Morvi Industries Ltd. v. CIT, and State Bank of Travancore v. CIT to support their contention. However, the Supreme Court found this argument devoid of force, stating that the accounting practice followed by the assessee was in consonance with general principles of accountancy governing underwriting accounts. The Court emphasized that for ascertaining profits and gains, ordinary principles of commercial accounting should be applied, provided they do not conflict with any express provision of the relevant statute. The Court noted that the decisions cited by the revenue did not depart from this principle and affirmed the Tribunal's view that the underwriting commission on shares purchased by the assessee could not be treated as taxable income.

Conclusion:

The Supreme Court upheld the High Court's judgment, agreeing with the Tribunal's view that the underwriting commission earned by the assessee in respect of shares that were not subscribed by the public and were purchased by the assessee could not be treated as taxable income. The Court emphasized that the accounting practice followed by the assessee was in accordance with general principles of accountancy and was not repugnant to any provision of the Income-tax Act. Consequently, the appeals filed by the revenue were dismissed, and the question referred was rightly answered against the revenue and in favour of the assessee.

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