TaxTMI 
TaxTMI 
2006 (5) TMI 80
X X X X Extracts X X X X
X X X X Extracts X X X X
....year 1996-97, the assessee-company declared an income of Rs. 3,64,64,527/- which was subsequently revised to Rs. 3,58,92,771/- and then to Rs. 3,57,26,644/-. The return was eventually processed under section 143(1B) of the Act at an amount of Rs. 3,63,03,128/-. A notice under section 143(2) was then issued to the assessee in response to which the assessee appeared to justify its claim for a preliminary expense of Rs. 7,03,306/- under section 350 of the Act being 2.5 per cent. of the "capital employed in the business of the company". It was, inter alia, argued by the assessee that it had issued shares on a premium which premium was according to the assessee, a part of the capital employed in the business of the company. The Assessing Officer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt appeal, as already mentioned earlier, assails the correctness of the said view. 5. We have heard learned counsel for the parties and perused the record. Section 35D of the Income-tax Act regulates amortisation of certain preliminary expenses. The provision, inter alia, says that if an assessee being an Indian company or a person incurs after March 31, 1970, any expenditure specified in sub-section (2) after the commencement of his business in connection with the extension of his industrial undertaking or in connection with the setting up of a new industrial unit, the assessee shall be allowed a deduction of an amount equal to 1/10 th of such expenditure for each of the ten successive previous years beginning with the previous year in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 determine 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). It reads: "(b) 'capital employed in the business of the company' means- (i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences; (ii) in a case referred to in clause (ii) of sub-section (1), the aggre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9/-. 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 ....