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1.The Hon'ble Supreme Court in Berger Paints India Ltd. v. CIT  79 taxmann.com 450, in the context of section 35D of the Income Tax Act, 1961 ['The Act'] held that the "premium amount" collected by the company on its subscribed issued share capital cannot be said to be the part of "capital employed in the business of the Company" to determine the upper limit to which the amount of allowable deduction u/s 35D can go.
2. The reasoning given by the court
2.1 Legislative framework:
Section 35D: Amortisation of certain preliminary expenses:
As per extant provisions of Section 35D of the Act, an Indian company or a person resident in India is allowed a deduction of an amount equal to one-fifth of preliminary expenditure [as defined in sub-section (2)] incurred before or after the commencement of his business for each of the five successive previous years starting from the year in which the business commences or, as the case may be, extension of existing unit is completed/new unit commences production or operation.
Sub-section (3) of section 35D provides an upper cap to the total deduction allowable: Where the aggregate amount of the preliminary expenditure exceeds an amount calculated at five per cent—
the excess shall be ignored for the purpose of computing the deduction allowable as above.
"capital employed in the business of the Company" is specifically defined in the Explanation (b) to section 35D of the Act as follows:
Issue for consideration
Whether "premium" collected by the 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 higher deduction towards preliminary expenses as prescribed under Section 35D of the Act?
3.1 Firstly, there is no scope in argument that the premium collected by the Company on the issue of shares is a long-term borrowing either in fact or by a fiction of law. Especially, when the term "Long term borrowings" is separately defined in the Explanation (c) to section 35D. Similarly, the premium collected by the Company is nowhere near or akin to a debenture. The only question that remains is whether premium is a part of the share capital and, therefore, to be reckoned as 'capital employed in the business of the company'.
With this background, the Hon'ble Supreme Court in case of Berger Paints India Ltd. (supra) held as follows:
4. Though company's reserve and surplus which include premium collected from shareholders' on issued shares, appears as shareholder's fund, the same is not a part of the issued, subscribed and paid-up capital of the Company. Accordingly it was rightly held by the Hon'ble Supreme Court that 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 deciding upper limit of allowable deduction on account of preliminary expenses under section 35D of the Act.