In a recent decision, the Supreme Court held that the share issue expenses are allowable under section 35D of the Income Tax Act, 1961.
The Supreme Court bench comprising of Justice A K Sikri and Justice N V Ramana further allowed the payments made to employees as bonus, by finding that they are duly covered under section 36(i)(ii) of the Income Tax Act.
The Apex Court, while quashing the assessment order in which the amount paid as bonus were disallowed by invoking section 43B of the Income Tax Act, held that the said section is not applicable in the instant case.
The factual settings of the case are that, for the year 1995-06,the Assessing officer disallowed assessee’sclaim on share issue expenses by relying upon the Supreme Court decision in Brook Bond India Ltd. vs. Commissioner of Income Tax W.B,in which it was held that such expenditures are capital in nature.On appeal, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee under section 35D of the Income Tax Act by finding that there was an expansion to the existing units of the industrial undertaking. Since the Revenue has not preferred an appeal challenging the said order, the assessment attained finality. However, for the subsequent years the Assessing Officer again disallowed the share issue expenses by relying on the above decision. The CIT(A) and the ITAT on appeal, allowed the claim, which was reversed by the High Court by upholding the assessment order.
The Court noted that the High Court erred in relying upon the decision in Brook Bond India Ltd, for the reason that the said decision was rendered when Section 35D of the Income Tax Act was not on the statute book. After the insertion of section 35D, the legal position has been changed. While reversing the order of High Court, the Court held that “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 Income Ta 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.”
The second question before the Court was that whether the assessee is entitled to deduction on account of payment of bonus to the employees.The Assessing Officer took a stand that the same is not allowable under Section 40A(9) of the Income Tax Act. The CIT(A) and the ITAT reversed the order. However, the High Court found the disallowance justifiable. The Apex Court rejected the findings of the High Court and opined that the payments in respect of bonus to the employees allowable as expenditure Section 36(1)(ii) of the Income Tax Act, 1961.
Section 43B, however, mandates that certain deductions would be allowed only on actual payment.
In this context, the Court opined that section 40A(9) of the Income Tax Act 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.regarding this, the Court added that “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 of the Income Tax Act, 1961. 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) of the Income Tax Act 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 isone 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 Income Ta 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.”
Read the full text of the Judgment below.
