2017 (3) TMI 1531 - SC - Income Tax

Deduction u/s 35D - whether premium collected by the appellant-Company on its subscribed share capital is capital employed in the business of the Company ? - Held that - 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. 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. 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. 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. - Decided against assessee.

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.

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