Berger Paints India Ltd. v. C.I.T., Delhi-V - (Supreme Court) (28 Mar 2017)

Premium collected by Company on its share capital cannot be claimed as deduction

MANU/SC/0319/2017

Direct Taxation

Appellant is a Limited Company engaged in business of manufacture and sale of various kinds of paints. For Assessment Year 1996-1997, Appellant (Assessee) filed income tax return and declared total income. Return was then processed by Assessing Officer("A.O."). A.O. was of view that, expression "capital employed in business of Company" did not include "premium amount" received by Appellant on share capital. A.O. accordingly calculated allowable deduction under Section 35D of Income Tax Act, 1961. Commissioner of Income Tax allowed deduction claimed by Appellant of entire amount under Section 35D of Act. Revenue, felt aggrieved, filed appeals before Tribunal. Tribunal held that, premium collected by Appellant-Company on share capital did not tantamount to "capital employed in business of Company" within meaning of Section 35D(3) of Act. Appellant-Company filed appeals before High Court. By impugned judgment/orders, High Court dismissed Appeals and affirmed orders of Tribunal.

High Court correctly explains true meaning of expression employed in Sub-Section 3(b) of Section 35D read with Explanation (b) of Act, calling no interference in appeals. Supreme Court while agreeing with view of High Court opined that, "premium amount" collected by Company on its subscribed issued share capital is not and cannot be said to be part of "capital employed in business of Company" for purpose of Section 35D(3)(b) of Act and hence, Appellant-Company was rightly held not entitled to claim any deduction in relation to amount received towards premium from its various shareholders on issued shares of Company.

Supreme Court observed that if intention of Legislature were to treat amount of "premium" collected by Company from its shareholders while issuing shares to be part of "capital employed in business of Company", then it would have been specifically said so in Explanation(b) of Sub-section(3) of Section 35D of Act. It was, however, not said. Further, non-mentioning of words does indicate legislative intent that, Legislature did not intend to extend benefit of Section 35D of Act to such sum.

Companies Act provides in its Schedule V-Part II (Section 159), a Form of Annual Return, which is required to be furnished by Company having share capital every year. Column III of this Form, which deals with capital structure of company, provides breakup of "issued shares capital breakup". This column does not include in it "premium amount collected by 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 the relevant section.

Section 78 of Companies Act, 2013 which deals with "issue of shares at premium and discount" requires a Company to transfer amount so collected as premium from shareholders and keep same in a separate account called "securities premium account". It does not anywhere says that, such amount be treated as part of capital of Company employed in business for one or other purpose, as case may be, even under Companies Act. Accordingly, Supreme Court dismissed the Appeals.

Relevant : Section 35D of Income Tax Act,1961, Section 78 of Companies Act, 2013

Tags : ASSESSMENT DEDUCTION ENTITLEMENT