1997 (4) TMI 2 - SC - Income Tax

Tribunal was justified in holding that underwriting commission in the case of shares held by the assessee itself and not actually subscribed by others was reducing the cost of the shares in the hands of the assessee and was not separately taxable as the assessee s income of that year

Issues Involved:
1. Taxability of underwriting commission and brokerage as income.
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 and Brokerage as Income:

The primary issue was whether the underwriting commission and brokerage earned by the assessee, a State undertaking, should be treated as taxable income. The assessee had adopted a practice where the underwriting commission and brokerage were first adjusted towards the cost of the shares that were underwritten but not subscribed by the public. The Income-tax Officer had included the entire amount of underwriting commission and brokerage as taxable income. However, the Appellate Assistant Commissioner and the Tribunal held that the underwriting commission in respect of shares held by the assessee reduced the cost of the shares and was not separately taxable as income. The High Court affirmed this view, stating that the commission and brokerage merely go to reduce the value of the shares and cannot be considered as income.

2. Accounting Treatment of Underwriting Commission and Brokerage:

The Tribunal and the High Court both emphasized that the accounting practice followed by the assessee was in accordance with general principles of accountancy governing underwriting accounts. The Tribunal referred to authoritative books on accountancy, which supported the practice of adjusting underwriting commission and brokerage against the cost of shares. The High Court agreed, noting that the transaction resulted in the assessee purchasing shares for a consideration equal to the face value of the shares minus the commission and brokerage. Therefore, the underwriting commission and brokerage were not to be treated as income but as a reduction in the cost of shares.

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

The Revenue argued that the entitlement to reduction should be governed by statutory provisions rather than accounting practices. They relied on several Supreme Court decisions to support this contention. However, the Supreme Court held that the accounting practice followed by the assessee was in consonance with general principles of accountancy and did not conflict with any express provision of the Income-tax Act. The Court cited previous judgments affirming that ordinary principles of commercial accounting should be applied for ascertaining profits and gains, provided they do not conflict with statutory provisions.

The Court distinguished the present case from the cases cited by the Revenue, noting that those cases dealt with different issues such as the accrual of income and the treatment of interest on sticky advances. The Court concluded that the Tribunal had correctly applied the principles of accountancy and that there was no statutory provision contravening the practice followed by the assessee.

Conclusion:

The Supreme Court upheld the judgments of the Tribunal and the High Court, concluding that the underwriting commission and brokerage earned by the assessee in respect of shares not subscribed by the public and purchased by the assessee could not be treated as taxable income. The appeals filed by the Revenue were dismissed, and no order as to costs was made.

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