2006 (5) TMI 80 - HC - Income Tax

Share Premium Excluded from 'Capital Employed' Definition under Income-Tax Act: Tribunal Dismisses Appeal Without Costs.

Berger Paints India Limited Versus Commissioner of Income-Tax.

The Tribunal upheld the decision that the premium on share capital does not constitute 'capital employed in the business of the company' under section 350 ... Deduction u/s 35D - Amortisation of certain preliminary expenses - Whether premium collected by the appellant assessee on its subscribed share capital is 'capital employed in the business of the company'? - HELD THAT:- The Tribunal has pointed out that the share capital of the company as borne out by its audited accounts is limited to Rs. 7,88,19,679. 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 shareholders' fund but the same was not a part of the issued, subscribed and paid up capital of the company. The 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, 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 u/s 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. This appeal accordingly fails and is hereby dismissed but in the circumstances without any order as to costs. Issues:Interpretation of 'capital employed in the business of the company' under section 350 of the Income-tax Act for determining allowable deduction for preliminary expenses.Analysis:The judgment revolves around the interpretation of the term 'capital employed in the business of the company' under section 350 of the Income-tax Act to ascertain the deductible amount for preliminary expenses. The appellant argued that the premium collected on subscribed share capital should be considered part of the capital employed, while the Assessing Officer disagreed, leading to a dispute. The Commissioner of Income-tax initially supported the appellant's view, stating that the share premium account should be included in the capital base of the company. Consequently, the disallowed amount was deleted, and the appeal was allowed. However, the Tribunal later reversed this decision, ruling that the premium on share capital does not constitute capital employed in the business of the company as per section 350(3) of the Act.The court delved into the relevant provisions of the Income-tax Act, particularly section 35D, which governs the amortization of certain preliminary expenses. It highlighted that for an Indian company like the appellant, the aggregate expenditure cannot exceed 2.5% of the capital employed in the business of the company. The Explanation to sub-section (3) of section 35D provides a detailed definition of 'capital employed in the business of the company,' encompassing issued share capital, debentures, and long-term borrowings as key components. The court emphasized that the term 'capital employed' is explicitly defined and does not encompass the premium collected on share capital.The court rejected the appellant's argument that the premium should be considered part of the capital employed, emphasizing that the share capital, debentures, and long-term borrowings are the only components included in the definition. It clarified that the reserve and surplus of the company, including the premium collected on share capital, do not fall within the ambit of capital employed for the purpose of deduction under section 35D. Consequently, the Tribunal's decision to disallow the premium as part of the capital employed was upheld, and the appeal was dismissed without costs.