Share premium not part of capital employed for claim of deduction u/s 35D -SC

Share premium not part of capital employed in the business of the company for claim of deduction u/s 35D as it is not specifically said so in Explanation -Supreme Court 

ABCAUS Case Law Citation:
ABCAUS 1189 (2017) (03) SC

The Question of Law:
Whether “premium” collected by the appellant-Company on its subscribed share capital was “capital employed in the business of the Company” within the meaning of Section 35D of the Income tax Act, 1961 (‘the Act’) so as to enable the Company to claim deduction of the said amount as prescribed under Section 35D of the Act?

Assessment Year : 1996-97
Date/Month of Pronouncement: March, 2017

Important Case Laws Cited/relied upon:
Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd., (1969) 2 SCC 143

Brief Facts of the Case:
The appellant assessee company had claimed deduction u/s 35D of the Act being 2.5% of the “capital employed in the business of the company. During the course of the scrutiny u/s 143(2), the A.O. asked the company to explain the basis of the deduction claimed. The company explained that it had issued shares on a premium which, according to them, was a part of the capital employed in their business. Therefore, the company was entitled to claim the same under Section 35D.

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 appellant on share capital. Accordingly he disallowed the deduction attributable to share premium.

However, the First Appellate Authority (FAA) being CIT(A) allowed the deduction claimed of the entire amount under Section 35D of the Act.  

However, the Tribunal (ITAT) allowed the appeal of the Revenue and reversed the order of 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”.

The assessee company feeling aggrieved by the order of the ITAT filed appeals under Section 260A of the Act before the High Court. However, the High Court dismissed the appeals and affirmed the orders of the Tribunal.

Felt aggrieved, the Assessee-Company was in appeal before the Supreme Court.

Observations made by the Apex Court:
The Hon’ble Supreme Court observed that the “premium amount” collected by the Company on its subscribed issued share capital 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-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.

The Hon’ble Court opined that had 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.

The Hon’ble Supreme Court opined that in the case in hand, non-mentioning of such words specifically did indicate that the Legislature did not intend to extend the benefit of Section 35D to share premium.

The Hon’ble Court referred to its earlier judgment in the case of Allahabad Bannk (supra)wherein on the question of allowing the assessee bank claim of rebate under Paragraph D of Part II of the first Schedule to the Indian Finance Act 1956, it was 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.

The Hon’ble Court observed that in the case of Allahabad Bank (supra), it was rightly pointed out that the form of Annual Return provided under the Companies Act, 1956 which deals with capital structure of the company does not include the share premium amount as 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. In the same case of Allahabad Bank it was again rightly pointed out that section 78 of the Companies Act, 1956 dealing 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.

Held:
The Appeal was dismissed holding that share premium was not part of capital employed u/s 35D.