TMI Blog1997 (4) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 ('the Act'), have been filed by the revenue against the judgment of the Allahabad High Court dated 30-6-1980 in IT Reference Nos. 31 and 137 of 1976. By the said judgment the High Court has answered the following question against the revenue and in favour of the U.P. State Industrial Development Corporation ('the assessee'): Whether, on the facts and in the circumstances of the 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 ? 2. The references relate to the assessment years 1970-71 and 1971-72. 3. The assessee is a State Undertaking. Its shares are wholly sub scribed 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the capital of the company. As such whatever amount the underwriter earns as underwriting commission, it does not automatically become its income. It is postponed unless the risk of taking or not taking the shares is over. If the shares are fully subscribed, the institution 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 profit and loss account of the assessee. But, if the assessee subscribes some share out of the underwritten shares, the commission relating to those shares goes towards the cost and, therefore, no income is earned by the underwriter. 4. After referring to various books on accountancy, namely, Accoun- tancy by William Ribbles, 3rd Edn., page 1144 (Chapter XXVI); Book Keeping and Accounts by Earnest Evan Spicer and Ernest C. Pagler, 10th Edn., page 650 ; Dicksee's Auditing, 17th Edn., page 279 ; and Auditing Theory and Practice by R.K. Montogomri, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, when shares are offered to the public for subscription, it is usual to make certain of obtaining the necessary capital by having the shares underwritten. The word 'underwriting' means that a person agrees to take up shares specified in the underwriting agreement if the 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. 7. The question that falls for consideration is whether the underwrit- ing 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the revenue do not depart from this principle. 11. In Kedarnath Jute Mfg. Co. Ltd's case ( supra ) , this Court was considering the question whether the amount of sales tax paid or payable by the assessee is an expenditure within the meaning of section 10(2)( xv ) of the Indian Income-tax Act, 1922. The said claim of the assessee was disallowed by the ITO on the ground that the assessee was following the mercantile system of accounting and had made no provision in its books with regard to payment of that amount. Uphold- ing 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. 12. The decision in Morvi Industries Ltd's case ( supra ) also does not deal with this question. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 36(2), of the Act. The learned Judge, after taking note of the recognised books on accountancy to which reference had been made by Tulzapurkar, J., observed : Even if in a given circumstance, the amounts may be treated as interest suspense account for accountancy purpose, that would not affect the question of taxability as such. This must be determined by well-settled legal principles and principles of accountancy which have been referred to hereinbefore. 14. Ranganath Misra, J. (as the learned Chief Justice then was) concurred with reasonings and conclusions of Mukharji, J. The afore-mentioned observations of Mukharji, J. also postulate that for deter- mining 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 suspense account was repugnant to section 36(l)( vii ), read with section 36(2) 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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