Supreme Court in its ruling in M/s Berger Paints India Limited v. CIT held that premium collected by companies on its subscribed share capital does not come within the ambit of “capital employed in the business of the company” as given under section 35D of the Income Tax Act, 1961. Hence, a company cannot claim “premium” received on shares as deduction.
In this instant matter, Appellants issued shares on premium and claimed a deduction under section 35D under the head of “preliminary expenses” amounting to INR 7,03,306/- being 2.5% of the “capital employed in the business of the company”. This deduction was denied by the Assessing officer by holding that the expression “capital employed in the business of the company” does not include “premium amount” received by the company on the issued shares and disallowed the deduction.
Appellants were aggrieved by the order of the AO and appealed to CIT, in which deduction was allowed on the ground that “capital employed in the business of the company”, consists of subscribed capital, debentures, long term borrowings and thereby any premium collected by the company on the shares issued by it should also be included in the said expression.
On appeal, the Tribunal as well as the High Court upheld the view taken by AO and disallowed the deduction. Aggrieved by the order, appellant-company then preferred an appeal to the Apex Court. Aligning with the findings of the High Court, the bench held that the “premium amount” collected by the Company on its issued share capital is not a part of “capital employed in the business of the Company” for the purpose of Section 35D(3)(b).
The bench pointed out that the legislative intent for this section is crystal clear. As the expression, “capital employed in the business of the Company” categorically consists of only subscribed capital, debentures, long term borrowings. If the intent was to include “premium” the law would have specifically provided for it. Further, the bench also stated that Section 78 of the Companies Act, 2013 deals with “issue of shares as premium and discount” and requires the company to transfer the amount so collected as premium in a separate account, i.e. “securities premium account”. It does not anywhere say that such amount should be treated as capital of the company. Hence, “premium” collected on issued shares is not treated as “capital employed in the business” and therefore cannot be claimed as deduction under Section 35D.
Read the Judgment here.