2017 (3) TMI 1531 - SC - Income Tax

Share Premium Excluded from 'Capital Employed' for Tax Deductions, Says SC; Appeals Dismissed.

The SC dismissed the appeals, affirming the decisions of the Tribunal and HC. It held that the premium collected on the subscribed share capital is not ... Capital employed in the business of the company - deduction under Section 35D - Explanation to Section 35D(3)(b) - share premium - securities premium accountCapital employed in the business of the company - share premium - deduction under Section 35D - Explanation to Section 35D(3)(b) - securities premium account - Premium received on issue of shares is part of 'capital employed in the business of the company' for the purpose of computing the limit under Section 35D(3)(b). - HELD THAT: - The Explanation to Section 35D(3)(b) expressly defines 'capital employed in the business of the company' as the aggregate of issued share capital, debentures and long term borrowings in the relevant year. The premium collected on issue of shares is neither issued, subscribed and paid-up share capital nor a debenture nor a long-term borrowing, and the statute does not include reserves or share premium within that definition. The Companies Act and its forms (Schedule V Part II, Form of Annual Return and Section 78 regarding transfer to a 'securities premium account') treat premium as a separate account and do not treat it as part of issued share capital. Where Parliament intended inclusion of premium it has said so explicitly in other provisions (as noted by reference to Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd. ) and no similar provision appears in Explanation (b) to Section 35D(3). In view of the clear textual definition and legislative scheme, the premium cannot be treated as 'capital employed in the business of the company' for computing the allowable deduction under Section 35D, and the Tribunal and High Court were rightly held to be justified in denying the claim. [Paras 20, 21, 23, 24, 25]The premium on issue of shares is not part of 'capital employed in the business of the company' within the meaning of Section 35D(3)(b) and therefore the assessee is not entitled to claim deduction in respect of such premium under Section 35D.Final Conclusion: Appeals dismissed; the High Court and the Tribunal correctly held that share premium is not includible in 'capital employed in the business of the company' for the purposes of Section 35D(3)(b), and the assessee's claim for deduction in respect of share premium was rightly rejected. Issues Involved:1. Whether the premium collected by the appellant-Company on its subscribed share capital constitutes 'capital employed in the business of the Company' under Section 35D of the Income Tax Act.2. Whether the appellant-Company is entitled to claim a deduction for the premium amount under Section 35D of the Income Tax Act.Issue-Wise Detailed Analysis:1. Definition of 'Capital Employed in the Business of the Company':The core issue was whether the premium collected on share capital could be considered as 'capital employed in the business of the Company' under Section 35D of the Income Tax Act. The appellant-Company argued that the premium should be included in the capital employed, thus allowing them to claim a deduction under Section 35D. The Assessing Officer (A.O.), however, disagreed, stating that the definition of 'capital employed' did not encompass the premium amount received on share capital.2. Tribunal and High Court's Interpretation:The Tribunal reversed the decision of the Commissioner of Income Tax (Appeals), who had initially allowed the deduction. The Tribunal held that the premium collected did not qualify as 'capital employed' under Section 35D(3) of the Act. This view was upheld by the High Court, which emphasized that the term 'capital employed' is explicitly defined in the Explanation to Section 35D(3) as the aggregate of issued share capital, debentures, and long-term borrowings, and does not include share premium.3. Supreme Court's Analysis:The Supreme Court examined the statutory language and legislative intent behind Section 35D. The Court agreed with the High Court's interpretation, stating that the term 'capital employed' is clearly defined and does not include share premium. The Court noted that if the legislature intended to include share premium in the definition of 'capital employed,' it would have explicitly stated so in the Act.4. Legislative Intent and Precedents:The Supreme Court referenced the case of Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd., where it was held that share premium could be included in the paid-up capital for computing rebate, but only because it was explicitly mentioned in the relevant provision. The absence of similar language in Section 35D indicated that the legislature did not intend to include share premium in the capital employed.5. Companies Act Provisions:The Court also considered the Companies Act, which requires companies to transfer the premium amount to a separate 'securities premium account' and does not treat it as part of the capital employed in the business. This further supported the view that share premium is not considered part of the capital employed for the purposes of Section 35D.Conclusion:The Supreme Court found no merit in the appeals and dismissed them, affirming the Tribunal and High Court's decisions. The Court held that the premium amount collected by the Company on its subscribed share capital is not part of the 'capital employed in the business of the Company' for the purposes of Section 35D(3)(b) of the Income Tax Act, and thus, the appellant-Company is not entitled to claim a deduction for the premium amount under this section.