|CORAM:||Abhay Manohar Sapre J, R. K. Agrawal J|
|CATCH WORDS:||35D deduction, capital employed, share capital|
|COUNSEL:||Radha Shyam Jena|
|DATE:||March 28, 2017 (Date of pronouncement)|
|DATE:||March 30, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 35D: Premium collected by a company on subscribed share capital is not “capital employed in the business of the Company" within the meaning of s. 35D so as to enable the claim of deduction of the said amount as prescribed u/s 35D|
The Supreme Court had to consider 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? HELD by the Supreme Court:
(i) The expression “capital employed in the business of the company” is defined in the Explanation appended to the Section in clause (b).
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) 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.
(vii) 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.
(viii) 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.
In advancing the arguments, counsel for the Revenue has cherry-picked and heavily relied upon, – eventually with success – certain provisions / features of the Companies Act, dealing with the concepts of ‘share capital’ and ‘paid-up capital’. However, the term used in sec 35D is “ISSUED share capital” (FONT supplied); not either of the other two mentioned/ any other wording. It is this one crucial aspect which does not seem to have been forcefully addressed to enable the court (s) to pointedly go into .
The fine point of distinction will be better perceived and incisively appreciated if the Companies Act provisions are closely gone through; with the necessary emphasis due, on the prefix ‘ISSUED’. Even on a casual perusal of the 1956 Act, so also the successor –enactment of 2013, it will be readily seen that the word ‘shares’ /’share capital’, and its other derivatives, have been suitably used, respectively, depending upon the requirement of each context. Admittedly, -and there has been no dispute whatsoever- that in the given case the shares have been issued at a premium. As such, the expression ‘ISSUED share capital’ , used by the legislature in its wisdom, in one’s humble view,- rather deserving to be urged as a better view by any logic, -according to a plain, simple and straight forward reading, has to be taken to mean, and only mean, inclusive of the ‘premium’.
It is observed that, as per the Experts’ commentary in Kanga & Palkhivala’s Text Book (Tenth Edition, Volume I, pg. 883), the view the HC had taken has been opined to be “incorrect as it failed to note that share premium is treated on par with capital under the Companies Act, 1956”.
To buttress the foregoing line of thoughts / reasoning, it may be added: It does not seem to be logically sound to imagine / construe that, having specifically provided that debentures and long term borrowings are to be taken as parts of the ‘capital employed’ , the legislative intent was to take it as exclusive of the ‘premium’, being very much part of the issued share capital.
For any further insightful study, intelligent debate and independent deliberation, in eminent legal circles, the above input, by way of sharing own sincere thoughts, may be found additionally useful.
For a dilation of the propositions,to be urged: