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2016 (9) TMI 1199 - SC - Income TaxAmortization of expenditure under Section 35D - Whether expenditure incurred on issue of shares is eligible to be amortized? - Held that - AO 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 (1997 (2) TMI 11 - SUPREME Court). 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. Deduction for payment of bonus by the assessee to its employees - 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? - Held that - 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.
Issues Involved:
1. Amortization of expenditure under Section 35D of the Income Tax Act, 1961. 2. Deduction for payment of bonus to employees under Section 36 of the Income Tax Act, 1961, and its interaction with Section 40A(9). Detailed Analysis: Issue 1: Amortization of Expenditure under Section 35D of the Income Tax Act, 1961 The appellant, a public limited company, claimed amortization of share issue expenses under Section 35D of the Income Tax Act, 1961, for the Assessment Years 1999-2000 and 2001-02. The company had incurred ?45,51,890 towards share issue expenses for raising funds for capital expenditure and expansion of its production units and R&D activities. It claimed 1/10th of these expenses each year from Assessment Years 1995-96 to 2004-05. Initially, the Assessing Officer allowed this claim for the Assessment Year 1995-96 but disallowed it for the subsequent years, citing the Supreme Court's decision in Brook Bond India Ltd. vs. Commissioner of Income Tax, which categorized such expenses as capital in nature. However, upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Assessing Officer, after physical verification, confirmed the expansion of the industrial undertaking and allowed the expenses for the Assessment Year 1996-97. This decision was not contested further by the Department, thus reaching finality. Despite this, the Assessing Officer disallowed the expenses for Assessment Years 1997-98 to 2004-05, again citing the Brook Bond India Ltd. case. The assessee's appeal to CIT(A) for the Assessment Year 2001-02 succeeded, and the Income Tax Appellate Tribunal (ITAT) affirmed this decision. However, the High Court reversed the ITAT's order, disallowing the amortization of the expenditure under Section 35D. The Supreme Court noted that once the benefit under Section 35D was allowed for the initial years, it should continue for the entire block period of 10 years. The High Court erred in relying on the Brook Bond India Ltd. judgment, as Section 35D specifically allows such expenses to be amortized. Therefore, the Supreme Court held in favor of the assessee, allowing the benefit of Section 35D for the relevant Assessment Years. Issue 2: Deduction for Payment of Bonus to Employees under Section 36 and Interaction with Section 40A(9) of the Income Tax Act, 1961 The assessee claimed a deduction of ?96,08,002 paid as bonus to its employees for the Assessment Year 2001-02 under Section 36(1)(ii) of the Act. The Assessing Officer disallowed this deduction under Section 40A(9), stating that the payment was not made directly in cash to the employees but through a Trust. The CIT(A) and ITAT allowed the deduction, but the High Court reversed this decision. The Supreme Court observed that Section 36(1)(ii) allows deductions for bonuses paid to employees, and Section 43B mandates that such deductions are allowed only on actual payment. The assessee had deposited the bonus amount in a Trust due to a labor dispute and paid the employees the next day, before the due date, thus complying with Section 43B. Section 40A(9) pertains to contributions to funds or trusts and does not apply to bonus payments under Section 36(1)(ii). The Supreme Court concluded that the High Court erred in disallowing the deduction based on Section 40A(9), as the payment of bonus was made within the stipulated time and in compliance with Section 43B. Conclusion: The Supreme Court set aside the High Court's order on both issues, allowing the appeals and granting the assessee the benefits of Section 35D for amortization of share issue expenses and the deduction for bonus payments under Section 36(1)(ii). No costs were awarded.
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