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REPORTABLE

IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION  

CIVIL APPEAL  NO(S).9611 OF 2016 (Arising out of SLP(C)No. 31962 of 2011)

M/S. SHASUN CHEMICALS  AND DRUGS LTD. APPELLANT(S)

                               VERSUS

COMMISSIONER OF INCOME TAX-II, CHENNAI RESPONDENT(S)

WITH  CIVIL APPEAL NO.9612 OF 2016

(Arising out of SLP(C)No.33503 of 2011)

J U D G M E N T A.K.SIKRI, J.

Leave granted.  2. Matter heard finally.  3. Two  issues  are  raised  in  these  appeals  by  the appellant/assessee,  which  is  a  public  limited  company engaged in the business of manufacture and sale of bulk drugs and intermediates. The first issue is regarding the

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amortization  of  expenditure  under  Section  35D  of  the Income  Tax  Act,  1961  (hereinafter  referred  to  as  the 'Act’).  The second issue pertains to the deduction for payment of bonus by the assessee to its employees. The Assessment Years in question are 1999-2000 and 2001-02. The  brief  facts  which  are  relevant  for  deciding  the aforesaid issues are as under:  

4. The  assessee 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 both at Pondicherry and Cuddalore and for expansion of its Research and Development Activity. 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/-.  

5. The  aforesaid  issue  was  opened  for  public subscription during the financial year ending 31.03.1995 relevant  to  the  Assessment  Year  1995-96.  The  assessee has, in the prospectus issued, clearly stated under the column  projects  that  the  production  capacity  of  its existing  products,  more  particularly  Ibuprofen  and

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Ranitidine, is as follows:  

“The Company is undertaking the following expansion projects:  

(1)  Ibuprofen:  The  installed  capacity  of the  ibuprofen  plant  at  Pondicherry  is proposed to be increased from the present level 840 tpa to 1200 tpa.  The increase in capacity  would  be  primarily  due  to improvements  in  the  process  sdeveloped inhouse,  resulting  in  a  significant reduction  in  the  batch  processing  time. The additional plant and machinery required to support the increase in capacity would include  additional  raw  material  storage facilities,  chilling  plant  and  laboratory facilities aggregating to Rs.95 lakhs.  

(2)  Ranitidine  Expansion:  The  installed capacity  of  the  Ranitidine  plant  at Cuddalore is proposed to  be increased from 60 tpa to 180 tpa in two phases.  In the first phase, the capacity is proposed to be increased  to  120  tpa  by  installation  of additional plant and machinery.  The cost of this phase, including construction of a modern  administration  block  at  Cuddalore, is estimated at Rs.286 lakhs.”

6. The 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  under Section 35D of the Act from the Assessment Years 1995-96 to 2004-05.  The Assessing Officer on the same set of

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facts allowed the claim of the assessee (1/10th of the share issue expenses under Section 35D of the Act) for the  initial  Assessment  Year  being  the  Assessment  Year 1995-96 after examining the materials produced. However, the  Assessing  Officer  disallowed  the  expenses  for  the Assessment  Year  1996-97  on  the  ground  that  the  share issue expenses are not eligible for deduction in view of the decision of this Court in the case of  Brook Bond India Ltd. vs. Commissioner of Income Tax W.B(III) (1997) 10  SCC  362  =  225  ITR  798  SC,   stating  that  the expenditure incurred is capital in nature and hence not allowable for computing the business profits.  

7. Aggrieved against the aforesaid disallowance made by the Assessing Officer for the Assessment Year 1996-97, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), [herienafter referred to as CIT(A)] who  vide  his  order  directed  the  Assessing  Officer  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  has  been  made  to  the  existing  industrial

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undertaking to justify the claim made by the assessee.  

8. In  furtherance  to  the  aforesaid  direction,  the Assessing Officer 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.  While doing so, the Assessing Officer,  for the Assessment Year 1996-97,  passed  a  detailed  and  elaborate  order  after scrutinizing all the materials made available to him and recorded a positive finding of fact 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 under Section 35D of the Act.

It is relevant to point out at this stage that the Department has not taken on appeal the issue of allowance of  share  issue  expenditure  further  for  the  Assessment Year 1996-97 and, hence, finality has 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 of the Act.  

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9. Thereafter  the  Assessing  Officer  has  taken  a different  stand  for  the  Assessment  Years  1997-98  to 2004-05  with  respect  to  the  claim  of  share  issue expenditure  under  Section  35D  of  the  Act  and  has disallowed  the  said  expenditure  on  the  basis  that  the expenditure is capital in nature relying on  Brook Bond India Ltd. case (supra)

10.  In  the  aforesaid  backdrop,  the  assessee  again claimed amortization of expenditure under Section 35D of the  Act  for  the  Assessment  Year  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 the Income Tax Appellate Tribunal (hereinafter referred to  as  ‘ITAT’)as  well.   However,  the  High  Court  has reversed the order of the ITAT thereby reinstating the view taken by the Assessing Officer and disallowed the amortization of the expenditure under Section 35D of the Act.

11. Insofar as claim of bonus is concerned, in the return filed by the assessee for the Assessment Year 2001-02 it

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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. It is in the aforesaid backdrop  that  two  questions  were  formulated  in  the judgment of the High Court which need to be addressed and answered by us.   

12. Question No. 1:     Whether  expenditure  incurred  on issue of shares is eligible to be amortized under Section 35D of the Act?

As  already  noted  above,  the  Assessing  Officer  had allowed the claim of the assessee in this behalf for the Assessment Years 1994-95 and 1996-97. Such expenses which are  incurred  and  amortization  whereof  is  sought  under Section 35D of the Act, it is allowed for a period of 10

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years @ 1/10th each.  This is so provided by Section 35D of the Act as it is clear from the reading of the said Section which is reproduced hereunder:  

”35D.  (1)  Where  an  assessee,  being  an Indian company or a person (other than a company) who is resident in India, incurs, after  the  31st day  of  March,  1970,  any expenditure specified in sub-section (2),— (i) before the commencement of his  business, or

(ii)  after  the  commencement  of  his business, in connection with the extension of  his  undertaking  or  in  connection  with his setting up a new industrial unit, the assessee  shall,  in  accordance  with  and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of  the  ten  successive  previous  years beginning with the previous year in which the business commences or, as the case may be,  the  previous  year  in  which  the extension of the industrial undertaking is completed  or  the  new  industrial  unit commences production or operation:”

13.  In the Income Tax Return  which was filed for the Assessment Year 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 under Section 35D of the Act from

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the Assessment Years 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 under Section 35D of the Act. When it was again claimed for the Assessment Year 1996-97, though it was disallowed and on directions of the  Appellate  Authority,  the  Assessing  Officer  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 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 (supra). 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

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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.  

14. Question  No.  2:  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?

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

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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 of the  Act,  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 under Section 36 of the Act. However, since the payment was made from the Trust, the Assessing Officer 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) of the Act. As pointed out above, though this view was not accepted by the CIT(A) as well as ITAT, the High Court has found justification in the stand taken by the Assessing Officer. Here also we feel that the High Court has gone wrong in relying upon the provisions of Section 40A(9) of the Act.

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15. It is not in dispute that as per Section 36(1)(ii) of the Act expenditure incurred on account of payment in the form of bonus to the employees is allowable as business expenditure. This provision reads as under:

“36. (1) The deductions provided for in the following  clauses  shall  be  allowed  in respect of the matters dealt with therein, in  computing  the  income  referred  to  in section 28- (i) .... (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.”

16. Section  43B,  however,  mandates  that  certain deductions would be allowed only on actual payment. This provisions, which is relevant for our purpose reads as under:

“43B.  Certain  deductions  to  be  only  on actual  payment  4  Notwithstanding  anything contained  in  any  other  provision  of  this Act,  a  deduction  other-  wise  allowable under this Act in respect of- (a)  any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or]

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(b) any sum payable by the assessee as an employer  by  way  of  contribution  to  any provident  fund  or  superannuation  fund  or gratuity  fund  or  any  other  fund  for  the welfare of employees,  or] (c)  any sum referred to in clause (ii) of sub- section (1) of section 36,]  or] (d)  any  sum  payable  by  the  assessee  as interest on any loan or borrowing from any public  financial  institution  or  a  State financial corporation or a State industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing,] shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:”

17. Section 40A(9) also needs to be noted at this stage, which is reproduced herein below:

“40A(9). No deduction shall be allowed in respect of any sum paid by the assessee as an  employer  towards  the  setting  up  or formation  of,  or  as  contribution  to,  any fund,  trust,  company,  association  of persons,  body  of  individuals,  society registered under the Societies Registration Act,  1860  (21  of  1860),  or  other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv)[or  clause  (iva)]  or  clause  (v)  of sub-section  (1)  of  section  36,  or  as required by or under any other law for the time being in force.”

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 This Section deals with deductions in respect of the amount  paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company etc. The condition is that such sum has to be paid for the purpose and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of Sub-section(1)  of  Section  36.  However,  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

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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.   18. On both counts the order of the High Court is set aside and the appeals are allowed.  

No costs.  

......................J. (A.K. SIKRI]

......................J.    [N.V. RAMANA]

NEW DELHI; SEPTEMBER 16, 2016.