TMI Blog1980 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------ 1965-66 1,23,806 1966-67 2,20,059 ITR No. 37 of 1976 1967-68 4,26,683 1969-70 1,77,065 1970-71 4,26,685 ITR No. 31 of 1976 1971-72 1,15,000 ITR No. 37 of 1976. --------------------------------------- The assessee did not include the aforementioned amounts of commission and brokerage in the profit and loss accounts of the relevant years, but showed these amounts as going to reduce the cost of the shares acquired by the corporation as an underwriter. While dealing with the assessment for the years 1965-66, the ITO did not find the technique of underwriting commission and brokerage in order. Accordingly, after giving opportunity to the corporation to explain the basis of the considerations on which the shares of the company underwritten by it had been purchased, he held that in relation to the underwritten shares purchased by the assessee, its position was not that of a dealer in shares, but it merely was that of an investor in shares which investment was of a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances in which the assessee-company had undertaken to underwrite the shares, held that the underwriting commission charged by the assessee on the shares subscribed by the public alone was taxable as the income of the assessee. The commission referable to the shares underwritten by the assessee and purchased by it, did not represent the assessee's taxable income. Further, the commission income in respect of the shares subscribed by the public accrued not on the date when the underwriting agreement was made but it accrued between the period during which the offer for public subscription of shares indicated in the prospectus remained open. Such period commenced with the start of banking hours on the date on which subscription for the shares opened and according to the period stated in the prospectus, ended with the end of the banking hour on the date on which such subscription was closed. The Tribunal further opined that so far as the underwriting commission referable to the underwritten shares purchased by the assessee was concerned it went to reduce the cost of those shares in the hands of the assessee. In the result, the Tribunal allowed the appeal and directed the ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the shares is reduced by giving to the underwriter such commission and brokerage. For example, if the shares of Rs. 100 is offered to others at its face value, the underwriter agrees to take them for a smaller price represented by the face value of the shares reduced by the amount of commission and brokerage. Accordingly, whatever the amount the underwriter earns by way of underwriting commission it does not automatically become its income. If the shares are fully subscribed the underwriter merely gets his commission and brokerage. In such a case, he is not called upon to contribute towards the company's capital by purchasing its shares. An underwriter is required to purchase shares only to the extent they were offered to the public but are not subscribed by the public so as to contribute towards the capital required by the company. The commission earned by the underwriter in respect of the shares offered by the company to and purchased by the public, would undoubtedly be the profits of the assessee which has to be accounted for in its profit and loss account. So far as the shares agreed by the assessee to be underwritten and purchased by it are concerned, the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be taxable. The view expressed by the Tribunal that the underwriting commission in the case of shares underwritten and purchased by the assessee, went to reduce the cost of shares in its hands and was as such not taxable as the assessee's income of that year seems to be correct. Coming now to the question as to when the right to receive the underwriting commission accrues, the Tribunal found that before the company, entering into the underwriting agreement with the assessee, offered it to the public, it did enter into various agreements, namely, for underwriting of shares, obtaining consent of directors, creditors and bankers, etc., to act for the company, etc., and the details of such particulars had to be given in the prospectus or the statement in lieu of the prospectus to be issued by the company. Thus, the agreement for underwriting shares is before the concerned company offered its shares to the public. It is the first step towards the subscription of shares which the company has in its possession. The object of entering into such underwriting agreement is to ensure that if the shares are offered, the shares to the extent underwritten are taken to be subscribed. But th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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