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M/S. Shasun Chemicals and Drugs Ltd. v. Commissioner of Income Tax, Chennai

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 9611 of 2016)Decided 16 Sept 2016
Civil Appeal No. 9611 of 2016
Justice A.K. Sikri · Justice N.V. Ramana

Background

Shasun Chemicals, a pharmaceutical manufacturer, raised money through a public share issue to fund expansion of its Pondicherry and Cuddalore plants and claimed to amortize the share-issue expenses over 10 years under Section 35D of the Income Tax Act. The tax department allowed this deduction for the first two years (1995-96 and 1996-97) after verifying the expansion had actually happened, but disallowed it for later years (1997-98 to 2004-05), citing an older Supreme Court ruling (Brook Bond) that such expenses were "capital" in nature. The company also claimed a deduction for bonus paid to employees (routed through a trust to settle a labour dispute), which the tax officer disallowed on a technicality about cash payment. The High Court sided with the tax department on both points.

Decision Breakdown

The Supreme Court held that once the deduction under Section 35D was validly allowed for the opening years of the fixed 10-year amortization block, it could not be arbitrarily cut off in later years for the same expenditure: the "clock," once started, had to run its full course. It also held the High Court was wrong to apply the pre-1970s Brook Bond precedent, since Section 35D itself changed the legal position by specifically permitting such deductions. On the bonus issue, the Court held that payment of bonus is a distinct deductible item under Section 36(1)(ii) of the Act, and the technical bars in Sections 40A(9) and 43B (aimed at contributions to funds/trusts generally) did not apply to bonus payments. The High Court's order was set aside and both appeals were allowed.

Lesson Learnt

Once a tax authority allows a deduction for the opening years of a fixed statutory amortization period and the underlying facts (like a genuine business expansion) don't change, it cannot selectively deny the same deduction in subsequent years of that same block. Businesses are also entitled to deduct bonus payments to employees even if routed through an intermediary trust to resolve a wage dispute, so long as the payment is genuine and timely.

Official source (sci.gov.in)View Judgment (PDF)

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