1997 (4) TMI 2 - SC - Income Tax

Underwriting commission and brokerage on unissued shares reduce acquisition cost, not taxable income; appeals dismissed

SC affirmed HC: underwriting commission and brokerage received in respect of shares not subscribed by the public and purchased by the taxpayer were not ... Underwriting commission as reduction of cost of shares - Taxability of underwriting commission versus accountancy treatment - Application of commercial/mercantile accounting principles for ascertainment of income - Underwriting account and recognised accountancy practice - Statutory provisions not to be overridden by accountancy practice unless repugnantUnderwriting commission as reduction of cost of shares - Underwriting account and recognised accountancy practice - Application of commercial/mercantile accounting principles for ascertainment of income - Whether underwriting commission in respect of shares not subscribed by the public and purchased by the assessee is taxable as the assessee's income or reduces the cost of the shares. - HELD THAT: - The Tribunal found, on the basis of authoritative accountancy texts and the nature of underwriting accounts, that underwriting commission forms part of the underwriting account which includes both receipts by way of commission and the cost of shares the underwriter is called upon to take; accordingly, where the assessee as underwriter actually subscribes for shares not taken up by the public, the commission relating to those shares goes to reduce the cost of the shares and does not constitute assessable income. The Court applied the established proposition that ordinary principles of commercial accountancy should be followed for ascertaining profits and gains so long as they are not repugnant to any express statutory provision. The Revenue did not demonstrate any conflict between the accountancy treatment adopted by the assessee and any provision of the Income-tax Act. Decisions cited by the Revenue were examined and held not to displace the principle that recognised accountancy practice governs the incidence of income unless it conflicts with statute. On these grounds the Tribunal's view, affirmed by the High Court, that underwriting commission on shares actually subscribed by the assessee reduces their cost and is not separately taxable income, was upheld.The underwriting commission in respect of shares purchased by the assessee under underwriting obligations reduces the cost of those shares and is not taxable as the assessee's income for the years in question.Final Conclusion: Appeals dismissed; the Tribunal and High Court correctly held that underwriting commission relating to shares actually subscribed by the assessee reduces the cost of those shares and is not assessable as the assessee's income for assessment years 1970-71 and 1971-72. Issues Involved:1. Taxability of underwriting commission and brokerage as income.2. Accounting treatment of underwriting commission and brokerage.3. Applicability of general principles of accountancy versus statutory provisions.Detailed Analysis:1. Taxability of Underwriting Commission and Brokerage as Income:The primary issue was whether the underwriting commission and brokerage earned by the assessee, a State undertaking, should be treated as taxable income. The assessee had adopted a practice where the underwriting commission and brokerage were first adjusted towards the cost of the shares that were underwritten but not subscribed by the public. The Income-tax Officer had included the entire amount of underwriting commission and brokerage as taxable income. However, the Appellate Assistant Commissioner and the Tribunal held that the underwriting commission in respect of shares held by the assessee reduced the cost of the shares and was not separately taxable as income. The High Court affirmed this view, stating that the commission and brokerage merely go to reduce the value of the shares and cannot be considered as income.2. Accounting Treatment of Underwriting Commission and Brokerage:The Tribunal and the High Court both emphasized that the accounting practice followed by the assessee was in accordance with general principles of accountancy governing underwriting accounts. The Tribunal referred to authoritative books on accountancy, which supported the practice of adjusting underwriting commission and brokerage against the cost of shares. The High Court agreed, noting that the transaction resulted in the assessee purchasing shares for a consideration equal to the face value of the shares minus the commission and brokerage. Therefore, the underwriting commission and brokerage were not to be treated as income but as a reduction in the cost of shares.3. Applicability of General Principles of Accountancy versus Statutory Provisions:The Revenue argued that the entitlement to reduction should be governed by statutory provisions rather than accounting practices. They relied on several Supreme Court decisions to support this contention. However, the Supreme Court held that the accounting practice followed by the assessee was in consonance with general principles of accountancy and did not conflict with any express provision of the Income-tax Act. The Court cited previous judgments affirming that ordinary principles of commercial accounting should be applied for ascertaining profits and gains, provided they do not conflict with statutory provisions.The Court distinguished the present case from the cases cited by the Revenue, noting that those cases dealt with different issues such as the accrual of income and the treatment of interest on sticky advances. The Court concluded that the Tribunal had correctly applied the principles of accountancy and that there was no statutory provision contravening the practice followed by the assessee.Conclusion:The Supreme Court upheld the judgments of the Tribunal and the High Court, concluding that the underwriting commission and brokerage earned by the assessee in respect of shares not subscribed by the public and purchased by the assessee could not be treated as taxable income. The appeals filed by the Revenue were dismissed, and no order as to costs was made.