advocatemmmohan

My photo

ADVOCATEMMMOHAN -  Practicing both IN CIVIL, CRIMINAL AND FAMILY LAWS,Etc.,

WELCOME TO LEGAL WORLD

WELCOME TO MY LEGAL WORLD - FOR KNOWLEDGE IN LAW & FOR LEGAL OPINIONS - SHARE THIS

Wednesday, March 29, 2017

whether "premium" collected by the appellant-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 deduction of the said amount as prescribed under Section 35D of the Act? = Section 35D(3) of the Act with which we are concerned in these appeals reads as under: “Where the aggregate amount of the expenditure referred to in sub- section(2) exceeds an amount calculated at two and one-half percent- (a) of the cost of the project, or where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under sub- section(1); [Provided that where the aggregate amount of expenditure referred to in sub- section(2) is incurred after the 31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words “two and one-half per cent”, the words “five percent” had been substituted.]* *Ins. by the Finance(No.2) Act, 1998(2) of 1998), sec,14(b)(w.e.f. 1-4- 1999)” 15) The expression "capital employed in the business of the company" is defined in the Explanation appended to the Section in clause (b) which reads as under: “(b) “capital employed in the business of the company” means- (i) in a case referred to in clause(i) of sub-section(1), the aggregate of the issued share capital, debentures and long term borrowings as on the last day of the previous year in which the business of the company commences; (ii) in a case referred to in clause(ii) of sub-section(1), the aggregate of the issued share capital, debentures and long term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation, in so far as such capita, debentures and long term borrowings have been issued or obtained in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the company;”- 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. In the light of foregoing discussion, we find no merit in these appeals. The appeals thus fail and are accordingly dismissed.

                                  REPORTABLE
                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL No.2162 OF 2007


M/s Berger Paints India Ltd.          ….Appellant(s)

                                   VERSUS

C.I.T., Delhi-V                        …Respondent(s)

                                    WITH

                        CIVIL APPEAL No.2163 OF 2007


M/s Berger Paints India Ltd.          ….Appellant(s)

                                   VERSUS

C.I.T., Delhi-V                        …Respondent(s)


                               J U D G M E N T
Abhay Manohar Sapre, J.
1)    These appeals are 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  herein  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.
2)    In order to appreciate the issue involved  in  these  appeals,  it  is
necessary to state few relevant facts infra.
3)    The appellant  is  a  Limited  Company  engaged  in  the  business  of
manufacture and sale of various kinds of paints.  For  the  Assessment  Year
1996-97,  the  appellant  (assessee)  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(in short “A.O.”)  under  Section
143 (1B) of the  Income Tax Act (hereinafter referred to as  “the  Act”)  at
an amount of Rs.3,63,03,128/-.
4)    A notice was issued by the A.O.  to  the  appellant  (assessee)  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.
5)     The  appellant  (assessee)  replied  to  the  notice.  The  appellant
(assessee) 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.
6)    The A.O. 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 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  of  the  appellant  for  taxation
purpose.
7)    The appellant, felt aggrieved, filed appeals before  the  Commissioner
of Income Tax (appeals). 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-Company 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 is  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  and  disallowance  of
Rs.5,08,257/- made by the A.O. 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.
8)    The Revenue, felt aggrieved, filed appeals before  the  Tribunal.  The
Tribunal  allowed  the  appeals  and  reversed  the  view   taken   by   the
Commissioner of Income Tax (Appeals). The Tribunal  held  that  the  premium
collected by the appellant-Company 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.
9)    It is against these orders, the Company-assessee  felt  aggrieved  and
filed two separate appeals under Section 260A of the  Act  before  the  High
Court. By impugned judgment/orders, the High  Court  dismissed  the  appeals
and affirmed the orders of the Tribunal.
10)   Felt aggrieved, the Assessee-Company has filed  these  appeals  before
this Court.
11)   The short question that falls for consideration in  these  appeals  is
whether "premium" collected  by  the  appellant-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
deduction of the said amount as prescribed under Section 35D of the Act?
12)   Heard Mr. Radha Shyam Jena, learned counsel for the  appellant-Company
and Mr. Mukul Rohtagi, learned Attorney General for the respondent.
13)   Having heard the learned counsel for the parties  and  on  perusal  of
the record of the case, we find no merit in the appeals.
14)   Section 35D(3) of the  Act  with  which  we  are  concerned  in  these
appeals reads as under:
“Where  the  aggregate  amount  of  the  expenditure  referred  to  in  sub-
section(2) exceeds an amount calculated at two and one-half percent-
(a) of the cost of the project, or
where the assessee is an Indian company, at the option of  the  company,  of
the capital employed in the business of the company,  the  excess  shall  be
ignored for the purpose of computing  the  deduction  allowable  under  sub-
section(1);

[Provided that where the aggregate amount of expenditure referred to in sub-
section(2) is incurred after the 31st day of March, 1998, the provisions  of
this sub-section shall have effect as if for the  words  “two  and  one-half
per cent”, the words “five percent” had been substituted.]*
*Ins. by the Finance(No.2) Act,  1998(2)  of  1998),  sec,14(b)(w.e.f.  1-4-
1999)”

15)   The expression "capital employed in the business of  the  company"  is
defined in the Explanation appended to  the  Section  in  clause  (b)  which
reads as under:
“(b) “capital employed in the business of the company” means-
(i) in a case referred to in clause(i) of sub-section(1), the  aggregate  of
the issued share capital, debentures and long  term  borrowings  as  on  the
last day of  the  previous  year  in  which  the  business  of  the  company
commences;
(ii)  in a case referred to in clause(ii) of sub-section(1),  the  aggregate
of the issued share capital, debentures and long term borrowings as  on  the
last day of the previous year in  which  the  extension  of  the  industrial
undertaking is completed or, as the case may be,  the  new  industrial  unit
commences production or operation, in so far as such capita, debentures  and
long term borrowings have been issued or obtained  in  connection  with  the
extension of the industrial  undertaking  or  the  setting  up  of  the  new
industrial unit of the company;”

16)   The Division Bench of the High Court in the  impugned  order  examined
the question lucidly. The learned Judge T.S. Thakur,  J.  (as  His  Lordship
then was and later became CJI) speaking for the Bench held as under:
“6.   A careful reading of the above would show  that  in  the  case  of  an
Indian company like the  appellant,  the  aggregate  amount  of  expenditure
cannot exceed 2.5% of the capital employed in the business of  the  Company.
The crucial question, therefore, is as to what is meant by capital  employed
in the business of the Company for it is the  amount  that  represents  such
capital that would determined  the  upper  limit  to  which  the  amount  of
allowable deduction can go.  The expression  has  been  given  a  clear  and
exhaustive definition in the explanation to sub-section 3.  It reads as:

“(b)………………………………………………………………………………………”

“7.  The above clearly shows that capital employed in the  business  of  the
company is  the  aggregate  of  three  distinct  components,  namely,  share
capital, debentures and long term borrowings as on the dates relevant  under
sub-clauses(i) and (ii) of Clause(b) of  the  explanation  extracted  above.
The term ‘long term borrowing’  has  been  defined  in  clause  (c)  to  the
explanation.  It is nobody’s else that the premium collected by the  Company
on the issue of shares was a long term borrowing either  in  fact  or  by  a
fiction of law.  It is also nobody’s case that the premium collected by  the
Company was anywhere near or akin to a debenture.  What  was  all  the  same
argued by the counsel for the appellant was that premium was a part  of  the
share capital and had therefore to be reckoned as ‘capital employed  in  the
business of the  company’.   There  is,  in  our  view,  no  merit  in  that
contention.  The Tribunal has pointed out that  the  share  capital  of  the
Company as borne out by its audited accounts is limited to  Rs.7,88,19679/-.
  The  company’s  accounts  do  not  show  the  reserve   and   surplus   of
Rs.19,66,36,734/- as a part of its issued, subscribed and paid  up  capital.
It is true that the surplus amount of Rs.19,66,36,734/- is taken as part  of
share holders fund but the same was not a part  of  the  issued,  subscribed
and paid up capital of the Company.  Explanation to Section  35D(3)  of  the
Act does not include the reserve and surplus of the Company  as  a  part  of
the capital employed in the business of the Company.  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 Tribunal was, in that  view  of  the  matter,  perfectly  justified  in
allowing the appeal filed by the Revenue and restoring the order  passed  by
the Assessing Officer.”

17)   We are in complete agreement with the view taken  by  the  High  Court
quoted  supra   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 no interference in the appeals.
18)   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 appellant-Company  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.
19)   This we say for more than one reason. First, 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.
20)   Second, on the other hand, 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.  Third,  these  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., (1969) 2 SCC 143.   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.
21)   It was noticed therein that Part II -  paragraph  D  while  specifying
the rates of super tax had added an Explanation, which reads as under:

Explanation.—For the purposes of para D of this part—
(i) the expression ‘paid-up capital’ means the paid-up capital  (other  than
capital entitled to a dividend at a fixed rate) of the  Company  as  on  the
first day of the previous year relevant  to  the  assessment  for  the  year
ending on 31st day of March, 1957, increased by  any  premiums  received  in
cash by the company on the issue of its shares, standing to  the  credit  of
the share premium account as on the first day of the previous year ….”
                             (Emphasis supplied)

22)   This Court speaking through the learned Judge J.C. Shah,  J.  (as  His
Lordship then was and later became CJI) after examining  the  issue  in  the
context of Para D  read  with  its  Explanation  held  that  “share  premium
account” was liable to be included in the paid up capital for  the  purposes
of computing rebate. One of the reasons to allow  such  inclusion  with  the
paid up capital was that such inclusion was permitted by the specific  words
in the Explanation. Such was, however, not the case here.
23)   As rightly pointed out by the learned Attorney General  appearing  for
the Revenue, 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.
24)   Similarly, as rightly pointed out, 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.
25)   In the light of foregoing  discussion,  we  find  no  merit  in  these
appeals. The appeals thus fail and are accordingly dismissed.

………...................................J.
                                  [R.K. AGRAWAL]


…...……..................................J.
                                [ABHAY MANOHAR SAPRE]
      New Delhi;
March 28, 2017
-----------------------
15


No comments:

Post a Comment

Note: Only a member of this blog may post a comment.