Whether "Premium" collected on Subscribed Share Capital is “Capital Employed in the Business of the Company" within the meaning of Section 35D? - Held No
If the intention of the Legislature were to treat the amount of "premium" collected by the Company from its shareholders while issuing the shares to be the part of "capital employed in the business of the company", then it would have been specifically said so in the Explanation(b) of sub-section(3) of Section 35D of the Act. It was, however, not said.
Non-mentioning of the words does indicate the legislative intent that the Legislature did not intend to extend the benefit of Section 35D to such sum.
1. The appellant is a Limited Company engaged in the business of manufacture and sale of various kinds of paints. For the Assessment Year 1996-97, the appellant (assessee) filed their income tax return and declared the total income at Rs.3,64,64,527/-
2. It was, however, revised to Rs.3,58,92,771/- and then again revised to Rs. 3,57,26,644/-
3. The return was then processed by the Assessing Officer(in short “A.O.”) under Section 143 (1B) of the Income Tax Act (hereinafter referred to as “the Act”) at an amount of Rs.3,63,03,128/-
4. A notice was issued by the A.O. to the appellant (assessee) under Section 143(2) of the Act which called upon the appellant to explain as to on what basis the appellant had claimed in the return a deduction under the head “preliminary expenses” amounting to Rs.7,03,306/- being 2.5% of the "capital employed in the business of the company" under Section 35D of the Act
5. The appellant (assessee) contended therein that it had issued shares on a premium which, according to them, was a part of the capital employed in their business. The appellant, therefore, contended that it was on this basis, it claimed the said deduction and was, therefore, entitled to claim the same under Section 35D of the Act
6. The A.O. did not agree with the explanation given by the appellant. He was of the view that the expression "capital employed in the business of the company" did not include the "premium amount" received by the appellant on share capital. The A.O. accordingly calculated the allowable deduction under Section 35D of the Act at Rs.1,95,049/- and disallowed the remaining one by adding back to the total income of the appellant for taxation purpose
7. The appellant, felt aggrieved, filed appeals before the Commissioner of Income Tax (appeals)
8. The Commissioner was of the view that since the "capital employed" consists of subscribed capital, debentures and long term borrowings, any "premium" collected by the appellant-Company on the shares issued by it should also be included in the said expression and be treated as the capital contributed by the shareholders
9. The Commissioner also was of the view that the share premium account, which is shown as reserve in the balance sheet of the Company, was in the nature of the capital base of the Company and hence deduction under Section 35D of the Act was admissible with reference to the said amount also. Accordingly, the Commissioner allowed the appeals, set aside the order of A.O and disallowance of Rs.5,08,257/- made by the A.O. and, therefore, deleted the said sum. In other words, the Commissioner allowed the deduction claimed by the appellant of the entire amount under Section 35D of the Act
10. The Revenue, felt aggrieved, filed appeals before the Tribunal
11. The Tribunal allowed the appeals and reversed the view taken by the Commissioner of Income Tax (Appeals). The Tribunal held that the premium collected by the appellant-Company on the share capital did not tantamount to "capital employed in the business of the Company" within the meaning of Section 35D(3) of the Act
12. It is against these orders, the Company-assessee felt aggrieved and filed two separate appeals under Section 260A of the Act before the High Court
13. By impugned judgment/orders, the High Court dismissed the appeals and affirmed the orders of the Tribunal
14. Felt aggrieved, the Assessee-Company has filed these appeals before Supreme Court
15. The short question that falls for consideration in these appeals is whether "premium" collected by the appellant-Company on its subscribed share capital is “capital employed in the business of the Company" within the meaning of Section 35D of the Act so as to enable the Company to claim deduction of the said amount as prescribed under Section 35D of the Act?
We are in complete agreement with the view taken by the High Court quoted supra as, in our considered opinion, the well-reasoned judgment/order of the High Court correctly explains the true meaning of the expression employed in sub-section3(b) of Section 35D read with Explanation (b) quoted above, calling no interference in the appeals.
In our considered opinion also, the "premium amount" collected by the Company on its subscribed issued share capital is not and cannot be said to be the part of "capital employed in the business of the Company" for the purpose of Section 35D(3)(b) of the Act and hence the appellant-Company was rightly held not entitled to claim any deduction in relation to the amount received towards premium from its various shareholders on the issued shares of the Company.
This we say for more than one reason. First, if the intention of the Legislature were to treat the amount of "premium" collected by the Company from its shareholders while issuing the shares to be the part of "capital employed in the business of the company", then it would have been specifically said so in the Explanation(b) of sub-section(3) of Section 35D of the Act. It was, however, not said. Second, on the other hand, non-mentioning of the words does indicate the legislative intent that the Legislature did not intend to extend the benefit of Section 35D to such sum. Third, these two reasons are in conformity with the view taken by this Court in the case of Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd., (1969) 2 SCC 143. wherein the question arose as to whether an amount of Rs.45,50,000/- received by the assessee (Bank) in cash as "premium" from its various shareholders on issuing share on premium is liable to be included in their paid up capital for the purpose of allowing the assessee to claim rebate under Paragraph D of Part II of the first Schedule to the Indian Finance Act 1956.
This Court speaking through the learned Judge J.C. Shah, J. (as His Lordship then was and later became CJI) after examining the issue in the context of Para D read with its Explanation held that “share premium account” was liable to be included in the paid up capital for the purposes of computing rebate. One of the reasons to allow such inclusion with the paid up capital was that such inclusion was permitted by the specific words in the Explanation. Such was, however, not the case here.
As rightly pointed out by the learned Attorney General appearing for the Revenue, the Companies Act provides in its Schedule V- Part II (Section 159) a Form of Annual Return, which is required to be furnished by the Company having share capital every year. Column III of this Form, which deals with capital structure of the company, provides the break up of "issued shares capital break up". This column does not include in it the "premium amount collected by the company from its shareholders on its issued share capital". This is indicative of the fact that such amount is not considered a part of the capital unless it is specifically provided in the relevant section.
Similarly, as rightly pointed out, Section 78 of the Companies Act which deals with the "issue of shares at premium and discount" requires a Company to transfer the amount so collected as premium from the shareholders and keep the same in a separate account called "securities premium account". It does not anywhere says that such amount be treated as part of capital of the company employed in the business for one or other purpose, as the case may be, even under the Companies Act.
In the light of foregoing discussion, we find no merit in these appeals. The appeals thus fail and are accordingly dismissed.
Cases Referred to
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