JUDGMENT Seth, J.
1. The assessee in these three references is M/s. U.P. State Industrial Development Corporation Ltd., Kanpur, a State undertaking, whose object is to develop industries in the State. With this object in view it arranges finance for various industrial projects whether owned or run by the Government, statutory body, private companies, firm or individual, etc., and also works as an underwriter. One of the conditions on which the assessee undertakes to finance the companies is that on the shares of such companies subscribed by the public it would get underwriting commission and brokerage at the rate of 2% and 1% respectively. In the various years, the assessee is shown to have received the following amounts by way of underwriting commission and brokerage :
Assessment years Amount Rs.
1965-66 1,23,806 1966-67 2,20,059 ITR No.37 of 1976 1967-68 4,26,683 1969-70 1,77,065 1970-71 4,26,685 ITR No.31 of 1976 1971-72 1,15,000 ITR No.37 of 1976.
2. The assessee did not include the aforementioned amounts of commission and brokerage in the profit and loss accounts of the relevant years, but showed these amounts as going to reduce the cost of the shares acquired by the corporation as an underwriter. While dealing with the assessment for the years 1965-66, the ITO did not find the technique of underwriting commission and brokerage in order. Accordingly, after giving opportunity to the corporation to explain the basis of the considerations on which the shares of the company underwritten by it had been purchased, he held that in relation to the underwritten shares purchased by the assessee, its position was not that of a dealer in shares, but it merely was that of an investor in shares which investment was of a capital nature. These shares, accordingly, did not form part of assessee's stock-in-trade. He, therefore, held that the underwriting commission and brokerage was liable to be added back to the profits earned by the assessee. In the result, he added a sum of Rs. 1,23,806 in the assessee's taxable profits for the year 1965-66. He followed his order for the assessment year 1965-66, while making assessment for the years 1966-67, 1967-68, 1969-70, 1970-71 and 1971-72 as well.
3. The AAC took up the appeal for the assessment years 1965-66, 1966-67, 1967-68 and 1969-70, together and disposed of them by a consolidated order dated October 25, 1972. He held that the underwriting commission was includible in the assessee's income in the year in which it accrued and that it accrued in the years in which the underwriting agreement was completed. He also held that the brokerage on shares was not includible in the income of the assessee and that it had to be adjusted against the cost of shares. The profit and loss on sale of shares in a particular year was to be arrived at by deducting from the sale proceeds of the shares, the appropriate cost price, which was includible in the income of the relevant year. He, accordingly, after allowing partial relief to the assessee, confirmed the addition of the underwriting commission. The AAC followed his decision in the appeal for the assessment years 1970-71 and 1971-72 as well.
4. When at the instance of the assessee the matter went up before the Income-tax Appellate Tribunal, the Tribunal disposed of the appeals for the assessment years 1965-66, 1966-67, 1967-68 and 1969-70 by a common order dated May 29, 1974, and it followed its decision in respect of the appeals for the years 1970-71 and 1971-72 also, which appeals were disposed of by it on August 26, 1974, and October 1, 1974. The Tribunal pointed out that the decision of the AAC that the amount of brokerage charged by the assessee in respect of shares underwritten by it merely went to reduce their cost and that the same could not be treated as income, has not been questioned by the revenue. The only controversy with regard to underwriting commission before the Tribunal was, as to whether or not such commission which the assessee was entitled to receive from various companies, formed part of the assessee's income and if so when such income accrued. The Tribunal, after considering the circumstances in which the assessee-company had undertaken to underwrite the shares; held that the underwriting commission charged by the assessee on the shares subscribed by the public alone was taxable as the income of the assessee. The commission referable to the shares underwritten by the assessee and purchased by it, did not represent the assessee's taxable income. Further, the commission income in respect of the shares subscribed by the public accrued not on the date when the underwriting agreement was made but it accrued between the period during which the offer for public subscription of shares indicated in the prospectus remained open. Such period commenced with the start of banking hours on the date on which subscription for the shares opened and according to the period stated in the prospectus, ended with the end of the banking hour on the date on which such subscription was closed. The Tribunal further opined that so far as the underwriting commission referable to the underwritten shares purchased by the assessee was concerned it went to reduce the cost of those shares in the hands of the assessee. In the result, the Tribunal allowed the appeal and directed the ITO to modify the assessment of the assessee accordingly. The Tribunal followed its decision in the appeals disposed of by it in respect of the assessment years 1970-71 and 1971-72.
5. Subsequently, at the instance of the revenue as also that of the assessee, the Tribunal stated the case and referred the following two questions, which in its opinion arose out of its appellate order dated May 29, 1974, in respect of the assessment years 1965-66, 1966-67, 1967-68 and 1969-70, for the opinion of this court :
" 1. Whether, on the facts and in the circumstances of the ease, the underwriting commission accrued with opening of banking hours and ceased to accrue on the close of the banking hours during the period when the subscription list is open ?
2. Whether, on the facts and in the circumstances of the case, the underwriting commission earned by the corporation on the shares subscribed by the public is taxable ? "
6. For the assessment years 1970-71 and 1971-72, the Tribunal stated the case and referred the following question which it thought arose out of its appellate orders dated August 26, 1971, and October 1, 1972, for the opinion of this court :
" 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 ? "
7. Normally understood, the business of an underwriter is that of guaranteeing to subscribe for an agreed number of shares (or amount of stock) usually being the difference between the shares (or stock) issued an'd those taken up by the public. In consideration of this guarantee, the company making the issue agrees to pay a commission termed as underwriting commission. An underwriter thus takes the risk of underwriting the shares of a substantial amount of an established company or a company which is not in a position to do its activity due to paucity of funds. The underwriter agrees to purchase the shares of the company floated by it provided it offers to the underwriter certain commission and brokerage on the shares to be purchased by it. In other words, they in such cases subscribe to the company's share capital by purchasing its shares at a discounted value and the value of the shares is reduced by giving to the underwriter such commission and brokerage. For example, if the shares of Rs. 100 is offered to others at its face value, the underwriter agrees to take them for a smaller price represented by the face value of the shares reduced by the amount of commission and brokerage. Accordingly, whatever the amount the underwriter earns by way of underwriting commission it does not automatically become its income. If the shares are fully subscribed the underwriter merely gets his commission and brokerage. In such a case, he is not called upon to contribute towards the company's capital by purchasing its shares. An underwriter is required to purchase shares only to the extent they were offered to the public but are not subscribed by the public so as to contribute towards the capital required by the company. The commission earned by the underwriter in respect of the shares offered by the company to and purchased by the public, would undoubtedly be the profits of the assessee which, has to be accounted for in its profit and loss account. 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. 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 submission made by the revenue that, in such a case, the assessee notionally purchases the shares at their face value and receives the commission as income, does not appeal to us. Normally, the commission is charged by a person in respect of the transaction entered into between two other persons. Whenever some commission is paid by a seller to the purchaser, payment of such commission, in substance, results in reducing the amount of consideration for which the seller agrees to sell the property. It makes no difference whether the sale consideration is reduced by directly saying that the company agrees to sell the shares to the underwriter at reduced amounts or the company says that it will sell the shares to the underwriter at the face value but will give them certain amount as commission and brokerage. The view expressed by us is fully in accordance with normal trade practice. Indeed, this is how the assessee itself had been dealing with the matter, as would be evident from the following observations made by the Tribunal in para. 21 of its order :
" The practice of the assessee, as stated by it, is that it first adjusts the brokerage and 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. The practice of the assessee may be illustrated. If the assessee underwrites 100 shares, out of which 50 shares are taken over by the public, the corporation only subscribes 50 shares. In the above circumstances, the commission and brokerage earned on 50 shares, which are subscribed by others are taken to the profit and loss account. But the commission and brokerage earned on 50 shares, which are taken by the corporation, are adjusted towards the cost of shares. "
8. In this view of the matter, it hardly lies in the mouth of the assessee now to contend that, in the circumstances, the underwriting commission, earned by the corporation on the shares subscribed by the public, should not be taxable. The view expressed by the Tribunal that the underwriting commission in the case of shares underwritten and purchased by the assessee, went to reduce the cost of shares in its hands and was as such not taxable as the assessee's income of that year seems to be correct.
9. Coming now to the question as to when the right to receive the underwriting commission accrues, the Tribunal found that before the company, entering into the underwriting agreement with the assessee, offered it to the public, it did enter into various agreements, namely, for underwriting of shares, obtaining consent of directors, creditors and bankers, etc., to act for the company, etc., and the details of such particulars had to be given in the prospectus or the statement in lieu of the prospectus to be issued by the company. Thus, the agreement for underwriting shares is before the concerned company offered its shares to the public. It is the first step towards the subscription of shares which the company has in its possession. The object of entering into such underwriting agreement is to ensure that if the shares are offered, the shares to the extent underwritten are taken to be subscribed. But then such an agreement has no meaning if the shares are not offered or offered at an interval of long period. Normally, the underwriting commission is related to the issue of shares. The issue of shares is made by the company by way of public offer. Generally, the period of public offer is indicated in the prospectus, which commences with the start of banking hours and, according to the period indicated in the prospectus, it closes with the closing of the banking hours. Sometimes a large period is kept open for subscription, but directors reserve their right to close the period earlier, if they think fit. In the above circumstances, even if the maximum period is mentioned in the prospectus, the subscription list is closed earlier to it by the decision of the directors. It can, therefore, be said that, in such cases, the underwriting commission accrues during the period in which the subscription list remains open. It is not denied that the subscription list remains open during the period beginning with or the day on which the subscription for shares is to commence and ends with the close of the banking hours of the last day of subscription. We, therefore, agree with the Tribunal that in the context, it cannot be said that the assessee became entitled to any particular amount of underwriting commission merely because it entered into an underwriting agreement, and that the right to receive the underwriting commission which depended on the number of shares which the company decided to float for public subscription, accrued when the company made an offer for the sale of those shares to the general public and that it continued to accrue till the offer remained open.
10. In the result, we answer the two questions referred to us in I.T.R. No. 37 of 1976, thus :
1. That on the facts and the circumstances of the case, the underwriting commission accrued with the opening of the banking hours and ceased to accrue on the close of the banking hours during the period when the subscription list was open, and
2. That on the facts and in the circumstances of the case, the underwriting commission earned by the corporation on the shares subscribed by the public is taxable.
11. The question referred to us in I.T.R. Nos. 31 and 137 of 1976 is answered thus :
" That, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the underwriting commission in the case of shares held by the assessee itself and not actually subscribed by others went to reduce the cost of the shares in the hands of the assessee and was not separately taxable as the assessee's income of that year. "
12. In view of the divided success of the parties, we direct them to bear their own costs.