The expression “capital employed in the business of the company” did not include the “premium amount” [M/s Berger Paints India Ltd. V/s C.I.T., Delhi-V]

M/s Berger Paints India Ltd. V/s C.I.T., Delhi-V

Before The Supreme Court of India

Author of the judgement- Abhay Manohar Sapre, J.-

Counsel for the appellant-Company- Mr Radha Shyam Jena

Counsel for the respondent- Mr Mukul Rohtagi, learned Attorney General.

Bench: R.K. AGRAWAL, ABHAY MANOHAR SAPRE

Decided on: March 28, 2017

Sr. No. Title Relevant Sections
1. Income Tax Act, 1961 Section 143 (1B), Section 143(2), Section 35D, Section 35D(3), Section 260A
2. Companies Act, 2013 Schedule V- Part II (Section 159), Section 78

Brief Facts:

  • 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 filed their income tax return and declared the total income at Rs.3,64,64,527/-. It was, however, revised to Rs.3,58,92,771/- and then again revised to Rs. 3,57,26,644/-.
  • 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/-. A notice was issued by the A.O. to the appellant 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.
  • The appellant (assessee) replied to the notice. The appellant (assessee) contended therein that it had issued shares at 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 theAct.
  • 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.

Procedural History:

  • The appellant felt aggrieved, filed appeals before the Commissioner of Income Tax (appeals). 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.
  • In other words, the Commissioner allowed the deduction claimed by the appellant of the entire amount under Section 35D of the Act.
  • The Revenue, felt aggrieved, filed appeals before the Tribunal. 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.
  • 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.

Issue:

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 a deduction of the said amount as prescribed under Section 35D of the Act?

Ratio:

  • 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.
  • 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.
  • 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 the 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 is treated as part of the capital of the company employed in the business for one or other purpose, as the case may be, even under the Companies Act.

Held:

  • 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.

 

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