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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 31

st

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.