REEPORTABLE IN 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) JUDGMENT A.K.SIKRI, J. Leave granted. 2. Matter heard finally. 3. Two issues are raised in these appeals by appellant/assessee, which is public limited company engaged in business of manufacture and sale of bulk drugs and intermediates. first issue is regarding Page 1 2 amortization of expenditure under Section 35D of Income Tax Act, 1961 (hereinafter referred to as 'Act ). second issue pertains to deduction for payment of bonus by assessee to its employees. Assessment Years in question are 1999-2000 and 2001-02. brief facts which are relevant for deciding aforesaid issues are as under: 4. assessee went in for public issue of shares in order to raise funds to meet 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. assessee issued to public 15,10,000 equity shares of Rs.10/- each for cash at premium of Rs.30/- per share aggregating to Rs.6,04,00,000/-. 5. aforesaid issue was opened for public subscription during financial year ending 31.03.1995 relevant to Assessment Year 1995-96. assessee has, in prospectus issued, clearly stated under column projects that production capacity of its existing products, more particularly Ibuprofen and Page 2 3 Ranitidine, is as follows: Company is undertaking following expansion projects: (1) Ibuprofen: installed capacity of ibuprofen plant at Pondicherry is proposed to be increased from present level 840 tpa to 1200 tpa. increase in capacity would be primarily due to improvements in process sdeveloped inhouse, resulting in significant reduction in batch processing time. additional plant and machinery required to support increase in capacity would include additional raw material storage facilities, chilling plant and laboratory facilities aggregating to Rs.95 lakhs. (2) Ranitidine Expansion: installed capacity of Ranitidine plant at Cuddalore is proposed to be increased from 60 tpa to 180 tpa in two phases. In first phase, capacity is proposed to be increased to 120 tpa by installation of additional plant and machinery. cost of this phase, including construction of modern administration block at Cuddalore, is estimated at Rs.286 lakhs. 6. assessee incurred sum of Rs.45,51,890/- towards aforesaid share issue expenses and claimed 1/10th of aforesaid share issue expenses each year under Section 35D of Act from Assessment Years 1995-96 to 2004-05. Assessing Officer on same set of Page 3 4 facts allowed claim of assessee (1/10th of share issue expenses under Section 35D of Act) for initial Assessment Year being Assessment Year 1995-96 after examining materials produced. However, Assessing Officer disallowed expenses for Assessment Year 1996-97 on ground that share issue expenses are not eligible for deduction in view of decision of this Court in case of Brook Bond India Ltd. vs. Commissioner of Income Tax W.B(III) (1997) 10 SCC 362 = 225 ITR 798 SC, stating that expenditure incurred is capital in nature and hence not allowable for computing business profits. 7. Aggrieved against aforesaid disallowance made by Assessing Officer for Assessment Year 1996-97, assessee filed appeal before Commissioner of Income Tax (Appeals), [herienafter referred to as CIT(A)] who vide his order directed Assessing Officer to verify physically factory premises of assesseee and find out , whether there were any additions to plant and machinery at factory and whether there were any additions to buildings at factory whereby any expansion has been made to existing industrial Page 4 5 undertaking to justify claim made by assessee. 8. In furtherance to aforesaid direction, Assessing Officer after making due physical verification of factory premises and on being satisfied with expansion of facilities to industrial undertaking duly allowed claim of share issue expenses. While doing so, Assessing Officer, for Assessment Year 1996-97, passed detailed and elaborate order after scrutinizing all materials made available to him and recorded positive finding of fact that there was expansion to existing units of industrial undertaking and after being satisfied of same duly allowed claim of share issue expenses under Section 35D of Act. It is relevant to point out at this stage that Department has not taken on appeal issue of allowance of share issue expenditure further for Assessment Year 1996-97 and, hence, finality has been reached with respect to issue of expansions of existing industrial undertaking and, consequently, eligibility of share issue expenditure in terms of Section 35D of Act. Page 5 6 9. Thereafter Assessing Officer has taken different stand for Assessment Years 1997-98 to 2004-05 with respect to claim of share issue expenditure under Section 35D of Act and has disallowed said expenditure on basis that expenditure is capital in nature relying on Brook Bond India Ltd. case (supra) 10. In aforesaid backdrop, assessee again claimed amortization of expenditure under Section 35D of Act for Assessment Year 2001-02 which was disallowed for same reason. However, assessee's appeal before CIT (A) succeeded as CIT(A) allowed that expenditure. order of CIT(A) was affirmed by Income Tax Appellate Tribunal (hereinafter referred to as ITAT )as well. However, High Court has reversed order of ITAT thereby reinstating view taken by Assessing Officer and disallowed amortization of expenditure under Section 35D of Act. 11. Insofar as claim of bonus is concerned, in return filed by assessee for Assessment Year 2001-02 it Page 6 7 was mentioned by assessee that it had paid bonus to its employees to tune of Rs.96,08,002/- in said Financial Year and, therefore, it claimed deduction under Section 35(2AB) of Act. However, invoking provisions of Section 40A(9) of Act said expenditure is disallowed on ground that it was not paid in cash to concerned employees. Herein again CIT(A) allowed expenditure and same view was taken by ITAT but High Court has reversed view of ITAT on this ground also. It is in aforesaid backdrop that two questions were formulated in judgment of 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 Act? As already noted above, Assessing Officer had allowed claim of assessee in this behalf for Assessment Years 1994-95 and 1996-97. Such expenses which are incurred and amortization whereof is sought under Section 35D of Act, it is allowed for period of 10 Page 7 8 years @ 1/10th each. This is so provided by Section 35D of Act as it is clear from reading of said Section which is reproduced hereunder: 35D. (1) Where assessee, being Indian company or person (other than company) who is resident in India, incurs, after 31st day of March, 1970, any expenditure specified in sub-section (2), (i) before commencement of his business, or (ii) after commencement of his business, in connection with extension of his undertaking or in connection with his setting up new industrial unit, assessee shall, in accordance with and subject to provisions of this section, be allowed deduction of amount equal to one-tenth of such expenditure for each of ten successive previous years beginning with previous year in which business commences or, as case may be, previous year in which extension of industrial undertaking is completed or new industrial unit commences production or operation: 13. In Income Tax Return which was filed for Assessment Year 1995-96 assessee had claimed that it had incurred sum of Rs.45,51,890/- towards share issue expenses and had claimed 1/10th of aforesaid share issue expenses under Section 35D of Act from Page 8 9 Assessment Years 1995-96 to 2004-05. This claim of assessee was found to be justified and allowable under aforesaid provisions and on that basis 1/10th share issue expenses was allowed under Section 35D of Act. When it was again claimed for Assessment Year 1996-97, though it was disallowed and on directions of Appellate Authority, Assessing Officer made physical verification of factory premises. He was satisfied that there was expansion of facilities to industrial undertaking of assesseee. It is on this satisfaction that for Assessment Year 1996-97 also expenses were allowed. Once, this position is accepted and clock had started running in favour of assessee, it had to complete entire period of 10 years and benefit granted in first two years could not have been denied in subsequent years as block period was 10 years starting from Assessment Year 1995-96 to Assessment Year 2004-05. High Court, however, disallowed same following judgment of this Court in case of Brook Bond India Ltd (supra). In said case it was held that expenditure incurred on public issue for purpose of expansion of company is capital expenditure. However, in spite Page 9 10 of argument raised to effect that aforesaid judgment was rendered when Section 35D was not on statute book and this provision had altered legal position, High Court still chose to follow said judgment. It is here where High Court went wrong as instant case is to be decided keeping in view provisions of Section 35D of Act. In any case, it warrants repetition that in instant case under very same provisions benefit is allowed for first two Assessment Years and, therefore, it could not have been denied in subsequent block period. We, thus, answer question No. 1 in favour of assessee holding that assessee was entitled to benefit of Section 35D for Assessments Years in question. 14. Question No. 2: Whether deduction on account of payment of bonus to employees of assessee is not eligible under Section 36 of Act, as it is hit by Section 40A(9) of Act? As fact it needs to be noted that in Assessment Years in question workers of assessee had raised dispute of quantum of bonus which had led to labour Page 10 11 unrest as well. Because of this workers had finally refused to accept bonus offered to them. Faced with this situation, assessee had made payment to Trust to comply with requirement of Section 43B of Act, as said provision makes it clear that deduction in respect of bonus would be allowed only if actual payment is made. Pertinently, dispute could be settled with workers well in time and for that reason payment of bonus was made to workers on very next day of deposit of said amount in Trust by assessee. This happened before expiry of due date by which such payment is supposed to be made in order to claim deduction under Section 36 of Act. However, since payment was made from Trust, Assessing Officer took view that as payment is not made by assessee to employees directly in cash, it is not allowable in view of provisions of Section 40A(9) of Act. As pointed out above, though this view was not accepted by CIT(A) as well as ITAT, High Court has found justification in stand taken by Assessing Officer. Here also we feel that High Court has gone wrong in relying upon provisions of Section 40A(9) of Act. Page 11 12 15. It is not in dispute that as per Section 36(1)(ii) of Act expenditure incurred on account of payment in form of bonus to employees is allowable as business expenditure. This provision reads as under: 36. (1) deductions provided for in following clauses shall be allowed in respect of matters dealt with therein, in computing income referred to in section 28- (i) .... (ii) any sum paid to 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, deduction other- wise allowable under this Act in respect of- (a) any sum payable by assessee by way of tax, duty, cess or fee, by whatever name called, under any law for time being in force, or] Page 12 13 (b) any sum payable by assessee as employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for 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 assessee as interest on any loan or borrowing from any public financial institution or State financial corporation or State industrial investment corporation], in accordance with terms and conditions of agreement governing such loan or borrowing,] shall be allowed (irrespective of previous year in which liability to pay such sum was incurred by assessee according to method of accounting regularly employed by him) only in computing 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 assessee as employer towards setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for purposes and to 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 time being in force. Page 13 14 This Section deals with deductions in respect of amount paid by assessee as employer towards setting up or formation of, or as contribution to, any fund, trust, company etc. condition is that such sum has to be paid for purpose and to 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 payment of bonus which is not covered by any of 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 provisions of Section 43B are concerned, they are also not applicable inasmuch as clause (b) of Section 43B refers to sum payable by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for welfare of employees. Thus, this provision also does not mention about bonus. With this we come to provisions of Section 36 which enumerate various kinds of expenses which are allowable as deduction while computing business income under Section 28 of Act. amount paid by way of bonus is Page 14 15 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 assessee to its employees within stipulated time. Embargo specified under Section 43B or 40A(9) of Act does not come in way of assessee. Therefore, High Court was wrong in disallowing this expenditure as deduction while computing business income of assessee and decision of ITAT was correct. 18. On both counts order of High Court is set aside and appeals are allowed. No costs......J. (A.K. SIKRI] ......J. [N.V. RAMANA] NEW DELHI; SEPTEMBER 16, 2016. Page 15 M/s. Shasun Chemicals and Drugs Ltd. v. Commissioner of Income-tax-II, Chennai