By TIOL News Service

NEW DELHI, MAR 29, 2017: THE issue before the Apex Court is - Whether for the purpose of sub-section 3(b) of Sec 35D, the premium amount collected by assessee on its subscribed issued share capital can be said to be a part of 'capital employed in the business of the company'. NO is the answer.

Facts of the case

The assessee is a Limited Company engaged in the business of manufacture and sale of various kinds of paints. For the Assessment Year 1996-97, the assessee filed and then revised its total income to Rs.3,58,92,771/- and then again revised to Rs. 3,57,26,644/-. The return was then processed at an amount of Rs.3,63,03,128/-. On questioned by the AO, the assessee contended 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 u/s 35D of the Act.

The AO was of the view that the expression "capital employed in the business of the company" did not include the "premium amount" received by the assessee 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. On appeal, the CIT(A) was of the view that the share premium account, which was 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. But the Tribunal reversed the stand. On appeal, even the High Court upheld the view of the Tribunal.

On appeal, the Apex Court held that,

++ we are in complete agreement with the view taken by the High Court 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 for 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 assessee 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;

++ 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. Tthese 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. - 2002-TIOL-1335-SC-IT-LB. 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 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, 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.

++ we find no merit in these appeals.

(See 2017-TIOL-136-SC-IT)