Whether underwriting commission of shares subscribed by the public it could be taxable as his income?

X is engaged in the business of underwriting shares of certain companies by earning specified commission and brokerage. Discuss whether underwriting commission of shares subscribed by the public is taxable as his income. Also discuss whether underwriting commission in the case of those shares which are not actually subscribed by other but are purchased by him can reduce the cost of the shares so purchased.

Held

The underwriter’s business is to guarantee the subscription for an agreed number of shares usually being the difference between the shares issued and those taken up by the public by charging a commission which is known as underwriting   commission.He also agrees to purchase the shares of a company by charging specified underwriting commission and brokerage on the shares to be purchased by him. Thus,an underwriter subscribes share capital by purchasing shares at a discounted value and the value of the share is reduced by giving him such commission and brokerage. Accordingly, the underwriting commission does not automatically become his income. If shares are fully subscribed, he does not contribute towards company’s capital by purchasing its shares and merely gets his brokerage and commission which have to be reflected in his profits. He is required to purchase the shares only to the extent the same are not subscribed by the public. Such purchase transaction results in his purchasing those shares for consideration equivalent to their face value less the amount of commission and brokerage. Thus, the same cannot be considered to be the underwriter’s commission.

Refer case: Commissioner Of Income Tax, vs U.P. State Industrial Development Corporation Ltd.