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'Collection of Share Premium cannot be claimed as Deduction'

April 14, 2017[2017] 80 190 (Article)

An appeal filed under Berger Paints India Ltd. v. CIT [2007] 292 ITR 658/[2006] 154 Taxman 293 (Delhi) case has been dismissed by the order of Delhi High Court stating that 'premium collected by company on its subscribed issued share capital is not and cannot be said to be part of 'capital employed in business of the company'.

The facts of 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 "capital employed in the business of the company". The sole grievance of appellant was that their claim for deduction under section 35D of Income Tax Act was disallowed by 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.

1.   Section 35D of the Income Tax Act,1961 provided for amortization of certain preliminary expenses stating that assesses being an Indian Company or a person, incurring after March 31, 1990, any expenditure specified in sub-section (2) after the commencement of his business in connection with extension of his industrial undertaking or in connection with setting up of a new industrial unit, shall be allowed a deduction of an amount equal to one-tenth of such expenditure for each of ten successive previous years beginning with previous year in which business commences or extension of industrial undertaking is completed or new industrial unit commences production or operation.
  Sub-section (2) of Section 35D enumerates the expenditure regarding which such amortization can be claimed while sub-section (3) limits the aggregate amount of expenditure for computing the deduction allowable under Sub-Section (1) to Section 35D.
  Sub-Section (3) of Section 35D says "aggregate amount of expenditure referred to in sub-section (2) exceeds an amount calculated at two-and-one-half of cost of project or where the assessee is an Indian Company, at the option of Company, of the capital employed in business of company, the excess shall be ignored for the purpose of computing the deduction allowable under Section (1).
  Explanation (b) of sub-section (3) of Section 35D of the Act provides that 'capital employed in business' means the aggregate of issued share capital, debentures and long-term borrowings as on last day of previous year in which business of the company commences. The explanation doesn't include reserves and surplus of company as part of capital employed in business of company. The legislature doesn't intend to provide for any amount other than share capital, debentures and long-term borrowings of company to be treated as part of capital employed in business of company. So long as this has not been done and so long as the capital employed is restricted to share capital, debentures and long-term borrowings, premium collected by company on issue of its share capital would not constitute a part of capital employed in business of company for the purpose of deduction under Section 35D.
2.   Further, if the intention of legislature were to treat the amount of 'premium collected' by company from its shareholding while issuing shares to be part of 'capital employed in the business of company' then it would have been specifically said so in the explanation (b) of Section 35D (3) of Act as happened in case of CIT v. Allahabad Bank Ltd. AIR 1969 SC 1058 wherein the question arose as to whether an amount of Rs. 45,50,000 received by assessee in cash as 'premium' from ts various shareholders on issuing shares on premium is liable to be included in their paid-up capital for the purpose of allowing the assessee to claim rebate under Para D of Part II of Ist Schedule to Indian Finance Act, 1956.
  Para D of Part II of Indian Finance Act explains:
  "the expression 'paid-up capital' means the paid-up capital (other than capital entitled to a dividend at a fixed rate) of company as on first day of previous year relevant to assessment for the year ending 31st day of March, 1957 increased by premiums received in cash by the company on issue of its shares, standing to the credit of share premium account as on first day of previous day".
  It was held that 'share premium account' was liable to be included in paid-up capital for purposes of computing rebate as was permitted by specific words in Explanation.
3.   Every Company having share capital is required to furnish a form of Annual Return under Section 159 wherein Column III, which deals with capital structure of company, provides the break-up of "issued shares capital breakup" but doesn't include in it "premium amount collected by the company from its shareholders on its issued share capital". This is indicative of fact that such amount is not considered a part of capital unless it is specifically provided in relevant section.
4.   Section 78 of Companies Act, 1956 for application of premiums received on issues of shares provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to aggregate amount or value of premiums on those shares shall be transferred to an account, to be called "the share premium account". It is nowhere mentioned under said section that such amount shall be treated as part of capital of company employed in business for one or other purpose, as the case may be, even under Companies Act.

As per the provisions of Companies Act and Income Tax Act, 1961, the appeal by assessee has been aptly dismissed by the Delhi High Court.


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