A two-judge bench of the Supreme Court of India today ruled that “premium” collected by a Company on its subscribed share capital is not “capital employed in the business of the Company” within the meaning of Section 35D of the Income Tax Act and therefore, no deduction can be claimed by the Company on such amount.
The bench comprising Justice R.K Agarwal and Justice Abhay Manohar Sapre was hearing an appeal filed by M/s Berger Paints India Ltd against the order of the Delhi High Court wherein it was held that the appellant-Company was 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.
The factual settings of the case are that the appellant issued shares on a premium which, according to them, was a part of the capital employed in their business. While filing IT return, they claimed deduction under section 35D under the head “preliminary expenses” amounting to Rs.7,03,306/- being 2.5% of the “capital employed inthe business of the company”.The sole grievance of the appellants was that their claim for deduction under section 35D of the Income Tax Act was disallowed by the AO by holding that the expression “capital employed in the business of the company” did not include the “premium amount” received by the appellant on share capital.
On appeal, the Tribunal as well as the High Court upheld the above view. The High Court was of the view that Explanation to Section 35D(3) of the Income Tax Act does not include the reserve and surplus of the Company as a part of the capital employed in the business of the Company. it further stated that if the intention was that any amount other than the share capital, debentures and long term borrowings of the Company ought to be treated as part of the capital employed in the business of the company, the Parliament would have suitably provided for the same. “So long as that has not been done and so long as the capital employed in the business of the Company is restricted to the issued share capital, debentures and long term borrowings, there is no room for holding that the premium, if any, collected by the Company on the issue of its share capital would also constitute a part of the capital employed in the business of the Company for purposes of deduction under Section 35D.” the High Court said.
Concurring with the findings of the High Court, the bench said that the “premium amount” collected by the Company on its subscribed issued share capital is not a part of “capital employed in the business of the Company” for the purpose of Section 35D(3)(b) of the Income Tax Act.
The bench stated that the legislative intention was very much clear in the impugned section. “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. In the opinion of the Court, 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.
The bench further relied upon the decision in the case of Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd., 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.
The bench further concurred with the contention of the Revenue that section 78 of the Companies Act also 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.
Read the full text of the Judgment below.
