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        REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.2162 OF 2007

M/s Berger Paints India Ltd.          ….Appellant(s)

VERSUS

C.I.T., Delhi-V      …Respondent(s)

WITH

CIVIL APPEAL No.2163 OF 2007

M/s Berger Paints India Ltd.          ….Appellant(s)

VERSUS

C.I.T., Delhi-V      …Respondent(s)

J U D G M E N T

Abhay Manohar Sapre, J.

1) These appeals are filed against the final judgment

and orders dated 15.05.2006 passed by the High Court

of Delhi at New Delhi in Appeal Nos. ITA No. 799 of

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2004  and  797  of  2004  whereby  the  High  Court

dismissed  the  appeals  filed  by  the  appellant  herein

arising  out  of  the  order  dated  26.04.2004  and

25.08.2004  passed  by  the  Income  Tax  Appellate

Tribunal,  New  Delhi(hereinafter  referred  to  as  "the

Tribunal) in I.T.A. No.2307/Del/2000(Assessment Year

1996-97)  and  I.T.A.  No.1434/Del/2001(Assessment

Year 1997-98) respectively.   

2) In order to appreciate the issue involved in these

appeals, it is necessary to state few relevant facts infra.

3) The appellant is a Limited Company engaged in

the business of manufacture and sale of various kinds

of  paints.  For  the  Assessment  Year  1996-97,  the

appellant (assessee) filed their income tax return and

declared the total income at Rs.3,64,64,527/-.  It was,

however,  revised to Rs.3,58,92,771/- and then again

revised  to  Rs.  3,57,26,644/-.  The  return  was  then

processed  by  the  Assessing  Officer(in  short  “A.O.”)

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under  Section  143  (1B)  of  the   Income  Tax  Act

(hereinafter referred to as “the Act”) at an amount of

Rs.3,63,03,128/-.  

4) A notice was issued by the A.O. to the appellant

(assessee) under Section 143(2) of the Act which called

upon the appellant to explain as to on what basis the

appellant had claimed in the return a deduction under

the  head  “preliminary  expenses”  amounting  to

Rs.7,03,306/- being 2.5% of the "capital employed in

the business of the company" under Section 35D of the

Act.

5) The appellant (assessee) replied to the notice. The

appellant  (assessee)  contended  therein  that  it  had

issued shares on a premium which, according to them,

was a part of the capital employed in their business.

The appellant, therefore, contended that it was on this

basis, it claimed the said deduction and was, therefore,

entitled to claim the same under Section 35D of the

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Act.      

6) The A.O. did not agree with the explanation given

by  the  appellant.  He  was  of  the  view  that  the

expression  "capital  employed  in  the  business  of  the

company"  did  not  include  the  "premium  amount"

received by the appellant  on share capital.  The A.O.

accordingly calculated the allowable deduction under

Section  35D  of  the  Act  at  Rs.1,95,049/-   and

disallowed the remaining one by adding back to the

total income of the appellant for taxation purpose.

7) The appellant, felt aggrieved, filed appeals before

the  Commissioner  of  Income  Tax  (appeals).  The

Commissioner was of the view that since the "capital

employed"  consists  of  subscribed capital,  debentures

and long term borrowings, any  "premium" collected by

the  appellant-Company  on  the  shares  issued  by  it

should also be included in the said expression and be

treated as the capital contributed by the shareholders.

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The Commissioner also was of the view that the share

premium account,  which is  shown as reserve in the

balance sheet of the Company, was in the nature of the

capital  base  of  the  Company  and  hence  deduction

under  Section  35D  of  the  Act  was  admissible  with

reference  to  the  said  amount  also.  Accordingly,  the

Commissioner allowed the appeals, set aside the order

of A.O and disallowance of Rs.5,08,257/- made by the

A.O.  and,  therefore,  deleted the said sum.  In other

words,  the  Commissioner  allowed  the  deduction

claimed by the appellant of the entire amount under

Section 35D of the Act.

8) The Revenue, felt aggrieved, filed appeals before

the  Tribunal.  The  Tribunal  allowed  the  appeals  and

reversed  the  view  taken  by  the  Commissioner  of

Income  Tax  (Appeals).  The  Tribunal  held  that  the

premium collected by the appellant-Company on the

share capital did not tantamount to "capital employed

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in the business of the Company" within the meaning of

Section 35D(3) of the Act.  

9) It is against these orders, the Company-assessee

felt  aggrieved  and  filed  two  separate  appeals  under

Section  260A  of  the  Act  before  the  High  Court.  By

impugned judgment/orders, the High Court dismissed

the appeals and affirmed the orders of the Tribunal.  

10) Felt  aggrieved,  the  Assessee-Company  has  filed

these appeals before this Court.  

11) The short question that falls for consideration in

these appeals is whether "premium" collected by the

appellant-Company on its subscribed share capital is

“capital  employed  in  the  business  of  the  Company"

within the meaning of Section 35D of the Act so as to

enable  the  Company  to  claim deduction  of  the  said

amount as prescribed under Section 35D of the Act?

12) Heard Mr. Radha Shyam Jena, learned counsel

for  the  appellant-Company  and  Mr.  Mukul  Rohtagi,

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learned Attorney General for the respondent.

13) Having heard the learned counsel for the parties

and on perusal of the record of the case, we find no

merit in the appeals.

14) Section  35D(3)  of  the  Act  with  which  we  are

concerned in these appeals reads as under:  

“Where  the  aggregate  amount  of  the expenditure  referred  to  in  sub-section(2) exceeds  an  amount  calculated  at  two  and one-half percent- (a) of the cost of the project, or (b) where the assessee is an Indian company,

at  the  option  of  the  company,  of  the capital  employed  in  the  business  of  the company, the excess shall be ignored for the  purpose  of  computing  the  deduction allowable under sub-section(1);

[Provided that where the aggregate amount of expenditure  referred  to  in  sub-section(2)  is incurred after the 31st day of  March,  1998, the provisions of this sub-section shall have effect as if  for the words “two and one-half per cent”, the words “five percent” had been substituted.]* *Ins.  by  the  Finance(No.2)  Act,  1998(2)  of 1998), sec,14(b)(w.e.f. 1-4-1999)”

15) The expression "capital employed in the business

of  the  company"  is  defined  in  the  Explanation

appended to the Section in clause (b) which reads as

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under:

“(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  aggregate  of  the  issued share  capital,  debentures  and  long  term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be,  the  new  industrial  unit  commences production  or  operation,  in  so  far  as  such capita, debentures and long term borrowings have been issued or obtained in connection with  the  extension  of  the  industrial undertaking  or  the  setting  up  of  the  new industrial unit of the company;”

16) The  Division  Bench  of  the  High  Court  in  the

impugned  order  examined  the  question  lucidly.  The

learned Judge T.S. Thakur, J. (as His Lordship then

was and later became CJI) speaking for the Bench held

as under:

“6. A  careful  reading  of  the  above  would show that in the case of an Indian company like the appellant,  the aggregate amount of expenditure  cannot  exceed  2.5%  of  the capital  employed  in  the  business  of  the

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Company.  The 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 determined 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 as:

“(b) ……………………………………………… ………………………………………”

“7.   The  above  clearly  shows  that  capital employed in the business of the company is the aggregate of three distinct components, namely,  share  capital,  debentures  and  long term  borrowings  as  on  the  dates  relevant under sub-clauses(i) and (ii) of Clause(b) of the explanation extracted above.  The term ‘long term borrowing’ has been defined in clause (c) to the explanation.  It is nobody’s else that the  premium collected  by the  Company on the issue of shares was a long term borrowing either in fact or by a fiction of law.  It is also nobody’s case that the premium collected by the Company was anywhere near or akin to a debenture.  What was all the same argued by the  counsel  for  the  appellant  was  that premium was a part of the share capital and had  therefore  to  be  reckoned  as  ‘capital employed in  the  business  of  the  company’. There  is,  in  our  view,  no  merit  in  that contention.   The  Tribunal  has  pointed  out that  the  share  capital  of  the  Company  as borne out by its audited accounts is limited to Rs.7,88,19679/-.  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

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taken as part of share holders fund but the same was not a part of the issued, subscribed and  paid  up  capital  of  the  Company. 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,  the  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 under Section 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.”

17) We  are  in  complete  agreement  with  the  view

taken  by  the  High  Court  quoted  supra  as,  in  our

considered opinion, the well-reasoned judgment/order

of the High Court correctly explains the true meaning

of  the  expression  employed  in  sub-section3(b)  of

Section 35D read with Explanation (b) quoted above,

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calling no interference in the appeals.

18) In  our  considered  opinion  also,  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.

19) 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.  

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20) 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. Third, these two reasons are

in conformity with the view taken by this Court in the

case of  Commissioner of Income Tax, West Bengal

vs. Allahabad Bank Ltd., (1969) 2 SCC 143.  wherein

the  question  arose  as  to  whether  an  amount  of

Rs.45,50,000/-   received  by  the  assessee  (Bank)  in

cash as  "premium"  from its  various  shareholders  on

issuing share on premium is liable to be included in

their paid up capital for the purpose of  allowing the

assessee to claim rebate under Paragraph D of Part II

of the first Schedule to the Indian Finance Act 1956.  

21) It was noticed therein that Part II - paragraph D

while specifying the rates of super tax had added an

Explanation, which reads as under:  

Explanation.—For the purposes of para D of this part—

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(i) the expression ‘paid-up capital’ means the paid-up capital (other than capital entitled to a dividend at a fixed rate) of the Company as on the first day of the previous year relevant to the assessment for the year ending on 31st day  of  March,  1957,  increased  by  any premiums received in cash by the company on  the  issue  of  its  shares,  standing  to  the credit  of  the share premium account as on the first day of the previous year ….”

     (Emphasis supplied)

22) This Court speaking through the learned Judge

J.C.  Shah,  J.  (as  His  Lordship  then  was  and  later

became CJI) after examining the issue in the context of

Para  D  read  with  its  Explanation  held  that  “share

premium account” was liable to be included in the paid

up capital for the purposes of computing rebate. One

of the reasons to allow such inclusion with the paid up

capital was that such inclusion was permitted by the

specific words in the Explanation. Such was, however,

not the case here.

23) As  rightly  pointed  out  by  the  learned  Attorney

General appearing for the Revenue, the Companies Act

provides in its Schedule V- Part II (Section 159) a Form

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of Annual Return, which is required to be furnished by

the Company having share capital every year. Column

III of this Form, which deals with capital structure of

the company, provides the break up of "issued shares

capital break up". This column does not include in it

the "premium amount collected by the company from its

shareholders  on  its  issued  share  capital".  This  is

indicative  of  the  fact  that  such  amount  is  not

considered a part of the capital unless it is specifically

provided in the relevant section.

24) Similarly, 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

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one or other purpose, as the case may be, even under

the Companies Act.  

25) In the light  of  foregoing  discussion,  we find no

merit in these appeals. The appeals thus fail and are

accordingly dismissed.  

………...................................J. [R.K. AGRAWAL]

                                               …...……..................................J.

        [ABHAY MANOHAR SAPRE] New Delhi; March 28, 2017                                        

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