Commissioner of Income-tax Vs. U.P. State Industrial Development Corporation. - Court Judgment

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head note: income tax income--chargeability--underwritting commission on shares purchased by assessee underwriter. ratio: the tribunal and high court was justified in holding that underwriting commission in the case of shares held by the assessee underwriter 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. held: in the present case, the tribunal, after referring to authoritative books on accountancy, has found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares which were not subscribed by the public and were purchased by the assessee could not be treated as profit earned by the assessee in the transaction and the said commission could only be treated as reducing the price of the shares purchased by the assessee. the revenue has not shown that the accountancy practice followed by the assessee is repugnant to any provision of the act. in the circumstances, it must be held that the tribunal has not committed any error in taking the view that the underwriting commission earned by the assessee in respect of the shares which were not subscribed by the public and were purchased by the assessee could not be treated as a part of its taxable income. case law analysis: judgment of the allahabad high court in cit v. u. p. state industrial development corporation affirmed. application: also to current assessment years. a. y.: 1965-66 to 1970-71 income tax act 1961 s.4 civil appeals nos. 1739-40 of 1981, appeals by certificate from the judgment and order dated june 30, 1980, of the allahabad high court in i.t.r. nos. 31 and 137 of 1976. the judgment of the high court is reported as u.p. state industrial development corporation ltd. v. cit [1981] 130 itr 835 (all) p.a. choudhary, senior advocate (dhruv mehta and b.k. prasad, advocates, with him), for the appellant. manoj swarup and mrs. lalitha kohli, advocates, for the respondent. - interpretation of statute - international conventions: [s.b. sinha & lokeshwar singh panta, jj] held, in interpreting the domestic/municipal laws, court has extensively made use of international law for various purposes -explained. -- interpretation: held, interpretation of a statute cannot remain static. different canons and principle are to be applied having regard to the purport and object of the act. if the ground realities changed, the interpretation should also change. ground realities would not only depend upon the new situations and changes in the societal conditions, but also the fact that the government have become a signatory to international conventions. -- international conventions: held, in interpreting the domestic/municipal laws, court has extensively made use of international law for various purposes -explained. copyright act, 1957 -- section 14; [s.b. sinha & lokeshwara singh panta, jj] licence -the underlying philosophy of the copyright act is that the owner of the copyright is free to enter into voluntary agreement or licenses on terms mutually acceptable to him and the licensee. the act confers on the copyright owner the exclusive right to do the various acts enumerated in section 14. an infringement of copyright occurs if one of those acts is done without the owner license. a licence passes no interest, but merely makes lawful that which would otherwise be unlawful. sections 16 &17; [s.b. sinha & lokeshwar singh panta, jj] copy right f.m. broadcasting channel radio mirchi sound recording of songs held, an artistic, literary or musical work is the brain-child of an author, the fruit of his labour and, so, considered to be his property. it creates a monopoly in favour of the author. what requires protection is unlawful reproduction of the authors work by others. it is the long period which encourages the authors to create works of literature, music and art. copyright can be enforced even though they are not registered unlike trade mark and passing off rights sections 16 & 17; [s.b.sinha & lokeshwar singh panta, jj] tenure of copyright -the term of a copyright in original literary, dramatic, musical and artistic works not only remains protected in the entire life time of the author but also until 60years from the beginning of the calendar year next following the year in which the author dies, the term of copyright in sound recording subsists only for 60 years, but, the same would not mean that the right of an owner of sound recording is in any way inferior to that of right of an owner of copyright on original literary work etc. section 31; [s.b. sinha & lokeshwar singh panta, jj] compulsory licence -board requirement are - (a)the subject work must be an indian work whose term of copyright is subsisting; (b)the indian work must be one that has been published or performed in public; (c) the owner of the copyright in the work must have (i) refused to republish or allow republication of the work or have refused to allow the performance of the work and by reason of such refusal the work is withheld from the public; or (ii) refused to allow communication to the public by broadcast, of such work or in the case of a sound recording the work recorded in such sound recording, on terms which the complainant considers reasonable; and (d) the copyright board is satisfied that the grounds for refusal are not reasonable. section 31; [s.b. sinha & lokeshwar singh panta, jj] compulsory licence -power of copy right board - unpublished work - extent, power and procedure explained. section 31; [s.b. sinha &lokeshwar singh panta, jj] meaning of public held, the word public must be read to mean public of all parts of india and not only a particular part thereof. if any other meaning is assigned, the terms on terms which the complaints considers reasonable would lose all significance. section 31; [s.b. sinha &lokeshwar singh panta, jj]compulsory license held, if a compulsory licence is granted only once covering every single part of the country, the same cannot be lead to a conclusion that no other person can approach the board section 31; [s.b. sinha & lokeshwar singh panta, jj] compulsory licence held, section 31(1)(b) in fact does not create an entitlement in favour of an individual broadcaster. the right is to approach the board when it considers that the terms of offer for grant of license are unreasonable. the mechanism to be adopted by the board for determining the right of a complainant has been provided under the act section 31; [s.b. sinha & lokeshwar singh panta, jj] royalty and compensation held, royalty and compensation are not synonymous. royalty means the remuneration paid to an author in respect of the exploitation of a work, usually referring to payment on a continuing basis (e.g. 10 per cent of the sale price) rather than a payment consisting of a lump sum in consideration of acquisition of rights. section 31; [s.b. sinha & lokeshwar singh panta, jj] compulsory licence held, if it is to be held that once the compulsory licence is granted in respect of a sound recording, the board loses its jurisdiction for all time to come, it will lead to an absurdity. section 31(1)(b); [s.b. sinha & lokeshwar singh panta, jj] jurisdiction of copy right board held, copy right board has the jurisdiction to direct the award of a copyright in any indian work on a registered copyright society to issue compulsory licence to broadcast such as works, where such work is available to the public through radio broad cast section 55; [s.b. sinha & lokeshwar singh pata, jj] exclusive licence held, it means a license which confers on the licensee, to the exclusion of all other persons (including the owner of the copyright) any right comprised in the copyright in a work. an exclusive licensee has specific rights under the act such as the right to have recourse to civil remedies under section 55 of the act. this scheme shows that a copyright owner has complete freedom to enjoy the fruits of his labour by earning an agreed fee or royalty through the issuance of licenses. but, this right, to repeat, is not absolute. it is subject to right of others to obtain compulsory licence as also the terms on which such licence can be granted. - one of the clauses for financing the companies by the assessee was that on the shares of such companies subscribed by the public the assessee was entitled to get commission as well as brokerage on the sale of shares of such companies and in case the shares of such companies were not subscribed by the public in toto the assessee was obliged to subscribe those shares at face value but was entitled to underwriting commission and brokerage in the same manner as if the shares of such companies were subscribed by the public. 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. it is a well accepted proposition that 'for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes. the learned judge has referred to standard text books on accountancy to show that in case of interest on sticky loans the practice of debiting the accounts of the concerned debtors with interest and carrying the same to an interest suspense account instead of the interest account or the profit and loss account is a well-recognised and accepted practice of commercial accountancy which is wholly consistent with the mercantile system of accounting. (as the learned chief justice then was), however, held that the interest on sticky advances had accrued according to the mercantile system of accounting because the assesses-bank had debited the respective parties with the interest and that after the close of the accounting year the assesses-bank without giving up the interest, which it could have, as a bad debt, did not offer it for taxation but carried it to the interest suspense account and that carrying certain amount which had accrued as interest without treating it as a bad debt or irrecoverable interest but keeping it in a suspense account was repugnant to section 36(1)(vii) read with section 36(2) of the act. this must be determined by well-settled legal principles and principles of accountancy which have been referred to hereinbefore. also postulate that for determining 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 the suspense amount was repugnant to section 36(1)(vii) read with section 36(2) of the act 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. as a result, the appeals fail and are accordingly dismissed.s.c. agrawal j. - these appeals, by certificate granted under section 261 of the income-tax act, 1961 (hereinafter referred to as 'the act'), have been filed by the revenue against the judgment of the allahabad high court (see : [1981]130itr835(all) : [1981]130itr835(all) ), dated june 30, 1980, in income-tax references 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 (hereinafter referred to as 'the assessee') (at page 839) :'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 assessees income of that year ?'the references relate to the assessment years 1970-71 and 1971-72.the assessee is a state undertaking. its shares are wholly subscribed 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 companies by the assessee was that on the shares of such companies subscribed by the public the assessee was entitled to get commission as well as brokerage on the sale of shares of such companies and in case the shares of such companies were not subscribed by the public in toto the assessee was obliged to subscribe those shares at face value but was entitled to underwriting commission and brokerage in the same manner as if the shares of such companies were subscribed by the public. the method adopted by the assessee was that instead of crediting the underwriting commission and brokerage to its profit and loss account in the case of such companies the shares of which had to be subscribed by the assessee itself, it used to reduce the cost of the shares held by it as stock-in-trade. during the previous year relevant to the assessment year 1970-71, the assessee had earned by way of underwriting commission a sum of rs. 1,01,250 and brokerage to the extent of rs. 33,719 while the assessee offered a sum of rs. 12,535 out of the aforesaid receipts as its taxable income. in the previous year relevant to the assessment year 1971-72, the assessee earned by way of underwriting commission and brokerage a sum of rs. 1,15,000 and no part of it was included in its taxable income. while making the assessment, the income-tax officer added the entire amount received by the assessee by way of underwriting commission and brokerage as part of taxable income for both the assessment years. the appellate assistant commissioner, however, held that the underwriting commission was assessable as the assessees income in the year in which it accrues, i.e., in the year in which the underwriting agreement was made. but as regards brokerage he held that brokerage on the shares held by the assessee was not includible in the income of the assessee and that it had to be adjusted against the cost of the shares taken. the assessee filed appeals against the orders of the appellate assistant commissioner before the income-tax appellate tribunal (hereinafter referred to as 'the tribunal'). the revenue did not question the order of the appellate assistant commissioner regarding brokerage. the tribunal held that the underwriting commission in respect of the shares held by the assessee would reduce the cost of the shares and would not be separately assessable as the assessees income. the tribunal has observed :'and this difference by way of commission and brokerage is charged by the underwriter because it agrees to subscribe for a large amount 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. it 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 the profit and loss account of the assessee. but, if the assessee subscribes some shares out of the underwritten shares, the commission relating to those shares goes towards the cost and, therefore, no income is earned by the underwriter.'after referring to various books on accountancy, namely, accountancy by william pickles, 3rd edn. page 1144 (chapter xxvi); book keeping and accounts by ernest even spicer and ernest c. pegler, 10th edn. page 650; dicksees auditing, 17th edn. page 279; and auditing theory and practice by r.k montgomery, 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 same is debited by the expenses and the cost of shares, which the underwriter is called upon to take and as such the underwriting commission could not be taken into consideration leaving aside the other items of this account. according to the tribunal, if the nature of the underwriting account is taken into consideration, the practice followed by the assessee to first adjust the brokerage and underwriting commission towards the cost of the shares, which are underwritten by it, but the commission and brokerage earned on shares not subscribed by it are taken to the profit and loss account, was absolutely correct and was in accordance with accountancy principles and, since there is no contrary provision in the act, the system followed by the assessee must be respected. at the instance of the revenue, the tribunal has referred the question abovementioned for the opinion of the high court.the references were considered by the high court along with income-tax reference no. 37 of 1976 relating to the assessment years 1965-66, 1966-67, 1967-68, 1969-70 wherein also a similar question had been referred for the opinion of the high court. the high court agreed with the view of the tribunal and has held that the commission earned by the assessee as underwriter in respect of the shares offered by the company and purchased by the public, would undoubtedly be the profit of the assessee which has to be accounted for in its profit and loss account, but so far as the shares agreed by the assessee to be underwritten and purchased by it are concerned, the transaction in substance results in the assessee purchasing those shares for a consideration which is equal to the face value of the shares as reduced by the amount of commission and brokerage and in such a case, the amount of underwriting commission and brokerage merely goes to reduce the value of the shares and it cannot be considered to be the income of the assessee. the high court, however, felt that the question whether the underwriting commission in relation to shares which the assessee itself subscribed as underwriter went to reduce the cost of those shares or whether such underwriting commission could be taxed as income is a substantial question of law of general importance and, therefore, it granted a certificate of fitness for appeal to this court under section 261 of the act. hence, these appeals.in the case of public companies, 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.the question that falls for consideration is whether the underwriting 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 profit and loss account. the tribunal has found that the said practice followed by the assessee was in consonance with principles of accountancy governing underwriting account. the tribunal, after referring to the authoritative books on accountancy, has held that the underwriting commission is a part of the profit and loss account which includes not only the income from underwriting commission and brokerage but the same is debited by the expenses and the cost of shares, which the underwriter is called upon to take and as such, underwriting commission could not be taken into consideration leaving aside the other items of this account and, therefore, the underwriting commission in respect of the shares purchased by the assessee could not be treated as taxable income in the hands of the assessee. the high court has agreed with the said view of the tribunal.the main contention urged by learned counsel appearing for the revenue in support of the appeals was that the entitlement to reduction is to be governed by the provisions of law and not by the accounting practice adopted by the assessee and in support of his submission learned counsel has placed reliance on the decisions of this court in kedarnath jute . v. cit : [1971]82itr363(sc) ; morvi industries ltd. v. cit : [1971]82itr835(sc) , and state bank of travancore v. cit : [1986]158itr102(sc) .in our opinion, this contention is devoid of force. the accounting practice followed by the assessee in the instant case was in consonance with the general principles of accountancy governing underwriting accounts. it is a well accepted proposition that 'for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes. [see whimster and co. v. commissioner of inland revenue [1925] 12 tc 813 (c. sess); commissioner of inland revenue v. cock rusell and co. ltd. [1949] 29 tc 387 (kb)]. this proposition has been affirmed by this court in p.m. mohammed meerakhan v. cit : [1969]73itr735(sc) . in the said case it has been observed (at page 743) :'for that purpose it was the duty of the income-tax officer to find out what profit the business has made according to the true accountancy practice.'the decisions on which reliance has been placed by learned counsel for the revenue do not depart from this principle.in kedarnath jute . v. cit : [1971]82itr363(sc) , 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 income-tax officer on the ground that the assessee was following the mercantile system of accounting and had made no provision in its books with regard to the payment of that amount. upholding 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.the decision in morvi industries ltd. v. cit : [1971]82itr835(sc) also does not deal with this question. in that case this court has explained the meaning of the word 'accrued' used in section 4(1)(b)(i) of the indian income-tax act, 1922, and has observed that income can be said to have accrued when it becomes due and the postponement of the date of payment has a bearing only so far as time of payment is concerned but it does not affect the accrual of income.state bank of travancore v. cit : [1986]158itr102(sc) was a case where the assesses-bank, instead of carrying the interest on sticky advances, i.e., advances which had become extremely doubtful of recovery, to the profit and loss account, had credited it to a separate account called 'the interest suspense account'. the question was whether the said interest was taxable. tulzapurkar j., in his dissenting judgment, held that the said income was not an income and was not taxable and observed that even in the mercantile system of accounting it is only the accrual of real income which is chargeable to tax and accrual is a matter of substance to be decided on commercial principles having regard to the business character of the transactions and the realities and specialities of the situation and cannot be determined by adopting a purely theoretical or doctrinaire or legalistic approach. the learned judge has referred to standard text books on accountancy to show that in case of interest on sticky loans the practice of debiting the accounts of the concerned debtors with interest and carrying the same to an interest suspense account instead of the interest account or the profit and loss account is a well-recognised and accepted practice of commercial accountancy which is wholly consistent with the mercantile system of accounting. sabyasachi mukharji j. (as the learned chief justice then was), however, held that the interest on sticky advances had accrued according to the mercantile system of accounting because the assesses-bank had debited the respective parties with the interest and that after the close of the accounting year the assesses-bank without giving up the interest, which it could have, as a bad debt, did not offer it for taxation but carried it to the interest suspense account and that carrying certain amount which had accrued as interest without treating it as a bad debt or irrecoverable interest but keeping it in a suspense account was repugnant to section 36(1)(vii) read with section 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 (at page 151) :'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.'ranganath misra j., (as the learned chief justice then was), concurred with the reasonings and conclusions of mukharji j. the aforementioned observations of mukharji j. also postulate that for determining 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 the suspense amount was repugnant to section 36(1)(vii) read with section 36(2) of the act 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.in the present case, the tribunal, after referring to authoritative books on accountancy, has found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares which were not subscribed by the public and were purchased by the assessee could not be treated as profit earned by the assessee in the transaction and the said commission could only be treated as reducing the price of the shares purchased by the assessee. the tribunal has also stated that there is no contrary provision in the act. learned counsel for the revenue has not shown that the accountancy practice followed by the assessee is repugnant to any provision of the act. in the circumstances, it must be held that the tribunal has not committed any error in taking the view that the underwriting commission earned by the assessee in respect of the shares which were not subscribed by the public and were purchased by the assessee could not be treated as a part of its taxable income. the question referred was, therefore, rightly answered by the high court against the revenue and in favour of the assessee.as a result, the appeals fail and are accordingly dismissed. no order as to costs.