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TMI Blog1997 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the 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 ?" The references relate to the assessment years 1970-71 and 1971-72. The assessee is a State undertaking. Its shares are wholly subscribed by the State of Uttar Pradesh. It has been incorporated with the object of developing industries in the State of Uttar Pradesh and with that end in view it finances industrial projects or enterprises, whether owned or run by the Government, a statutory body, private company, firm or individuals, etc. One of the clauses for financing the companies by the assessee was that on the shares of such companies subscribed by the public the assessee was entitled to get commission as well as brokerage on the sale of shares of such companies and in case the shares of such companies were not subscribed by the public in toto the assessee was obliged to subscribe those shares at face value but was entitled to underwriting commission and brokerage in the same manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution gets commission, but it does not pay for the capital. In that event, the commission earned by the corporation is an income and it could be taken into the profit and loss account of the assessee. But, if the assessee subscribes some shares out of the underwritten shares, the commission relating to those shares goes towards the cost and, therefore, no income is earned by the underwriter. " After referring to various books on accountancy, namely, Accountancy by William Pickles, 3rd Edn. page 1144 (Chapter XXVI) ; Book Keeping and Accounts by Ernest Evan Spicer and Ernest C. Pegler, 10th Edn. page 650 ; Dicksee's Auditing, 17th Edn. page 279 ; and Auditing Theory and Practice by R. K. Montgomery, 2nd Edn. pages 215-216, the Tribunal has held that the underwriting account is a part of profit and loss account, which includes not only the income from underwriting commission and brokerage but the same is debited by the expenses and the cost of shares, which the underwriter is called upon to take and as such the underwriting commission could not be taken into consideration leaving aside the other items of this account. According to the Tribunal, if the nature of the underwriting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he public or other persons fail to subscribe for them. The consideration for this contract takes the form of payment of commission, called "underwriting commission". Underwriters are thus paid for the risk they expose themselves to in placing of shares before the public. The payment of underwriting commission is permissible under section 76 of the Companies Act, 1956. The question that falls for consideration is 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. In the accounts maintained by the assessee, the underwriting commission is first adjusted towards the cost of the shares that are underwritten and thereafter the commission on shares not subscribed by the assessee is taken to the profit and loss account. The Tribunal has found that the said practice followed by the assessee was in consonance with principles of accountancy governing underwriting account. The Tribunal, after referring to the authoritative books on accountancy, has held that the underwriting commission is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The said claim of the assessee was disallowed by the Income-tax Officer on the ground that the assessee was following the mercantile system of accounting and had made no provision in its books with regard to the payment of that amount. Upholding the claim of the assessee for deduction of the said amount, this court has held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In this case, the question whether the principles of accounting have to be taken into account for ascertainment of profit did not fall for consideration. The decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) also does not deal with this question. In that case this court has explained the meaning of the word "accrued" used in section 4(1)(b)(i) of the Indian Income-tax Act, 1922, and has observed that income can be said to have accrued when it becomes due and the postponement of the date of payment has a bearing only so far as time of payment is concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such. This must be determined by well-settled legal principles and principles of accountancy which have been referred to hereinbefore." Ranganath Misra J., (as the learned Chief Justice then was), concurred with the reasonings and conclusions of Mukharji J. The aforementioned observations of Mukharji J. also postulate that for determining the question of taxability well settled legal principles as well as principles of accountancy have to be taken into account. In that case the learned judge held that without treating the amount which had accrued as interest as a bad debt or irrecoverable interest but keeping it in the suspense amount was repugnant to section 36(1)(vii) read with section 36(2) of the Act and, therefore, even if the amount might be taken to the Interest Suspense Account for accounting purposes, that would not affect its taxability as such. In the present case, the Tribunal, after referring to authoritative books on accountancy, has found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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