Premium collected by a company issuing shares cannot be treated “capital employed in the business of the Company” for the purposes of Section 35D(3)
Section 35D of the Income Tax Act, 1961 (‘the Act’ for short) deals with amortisation of certain preliminary expenses. In Berger Paints India Ltd. vs. CIT [Civil Appeal No.2162 Of 2007 with Civil Appeal No.2163 Of 2007, decided on 28.03.2017], briefly, these appeals were filed against the final judgment and orders dated 15.05.2006 passed by the High Court of Delhi at New Delhi in Appeal Nos. ITA No. 799 of 2004 and 797 of 2004 whereby the High Court dismissed the appeals filed by the appellant arising out of the order dated 26.04.2004 and 25.08.2004 passed by the Income Tax Appellate Tribunal, New Delhi (hereinafter referred to as “the Tribunal) in I.T.A. No.2307/Del/2000(Assessment Year 1996-97) and I.T.A. No.1434/Del/2001(Assessment Year 1997-98), respectively.
The appellant-assessee company being a Public 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(AO) under Section 143 (1B) of the Act at an amount of Rs.3,63,03,128/-.
A notice was issued by the AO 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 replied to the notice. The appellant 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.
The AO 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 AO 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.
The appellant, thereafter, filed appeals before the CIT (A). 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 on the shares issued by it should also be included in the said expression and be treated as the capital contributed by the shareholders. The Commissioner also was of the view that the share premium account, which was shown as reserve in the balance sheet of the appellant, 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 AO and disallowance of Rs.5,08,257/- made by the AO 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.
The Revenue, thereupon, filed appeals before the Tribunal. The Tribunal allowed the appeals and reversed the view taken by the CIT (A). The Tribunal held that the premium collected by the appellant 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. Against these orders, the appellant filed two separate appeals under Section 260A of the Act before the Delhi High Court. The High Court dismissed the appeals and affirmed the orders of the Tribunal.
Being aggrieved, the Assessee filed the above-mentioned appeals before Hon’ble Supreme Court for the captioned Assessment Years.
The short question that was for consideration in the above appeals was whether “premium” collected by the appellant on its subscribed share capital was “capital employed in the business of the Company” within the meaning of section 35D of the Act so as to enable the appellant to claim deduction of the said amount as prescribed under section 35D of the Act.
The Hon’ble Supreme Court held that the “premium amount” collected by the Company on its subscribed issued share capital was not and could not 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 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.