REPORTABLE IN 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) JUDGMENT Abhay Manohar Sapre, J. 1) These appeals are filed against final judgment and orders dated 15.05.2006 passed by High Court of Delhi at New Delhi in Appeal Nos. ITA No. 799 of 1 Page 1 2004 and 797 of 2004 whereby High Court dismissed appeals filed by appellant herein arising out of order dated 26.04.2004 and 25.08.2004 passed by 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 issue involved in these appeals, it is necessary to state few relevant facts infra. 3) appellant is Limited Company engaged in business of manufacture and sale of various kinds of paints. For Assessment Year 1996-97, appellant (assessee) filed their income tax return and declared 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/-. return was then processed by Assessing Officer(in short A.O. ) 2 Page 2 under Section 143 (1B) of Income Tax Act (hereinafter referred to as Act ) at amount of Rs.3,63,03,128/-. 4) notice was issued by A.O. to appellant (assessee) under Section 143(2) of Act which called upon appellant to explain as to on what basis appellant had claimed in return deduction under head preliminary expenses amounting to Rs.7,03,306/- being 2.5% of "capital employed in business of company" under Section 35D of Act. 5) appellant (assessee) replied to notice. appellant (assessee) contended therein that it had issued shares on premium which, according to them, was part of capital employed in their business. appellant, therefore, contended that it was on this basis, it claimed said deduction and was, therefore, entitled to claim same under Section 35D of 3 Page 3 Act. 6) A.O. did not agree with explanation given by appellant. He was of view that expression "capital employed in business of company" did not include "premium amount" received by appellant on share capital. A.O. accordingly calculated allowable deduction under Section 35D of Act at Rs.1,95,049/- and disallowed remaining one by adding back to total income of appellant for taxation purpose. 7) appellant, felt aggrieved, filed appeals before Commissioner of Income Tax (appeals). Commissioner was of view that since "capital employed" consists of subscribed capital, debentures and long term borrowings, any "premium" collected by appellant-Company on shares issued by it should also be included in said expression and be treated as capital contributed by shareholders. 4 Page 4 Commissioner also was of view that share premium account, which is shown as reserve in balance sheet of Company, was in nature of capital base of Company and hence deduction under Section 35D of Act was admissible with reference to said amount also. Accordingly, Commissioner allowed appeals, set aside order of A.O and disallowance of Rs.5,08,257/- made by A.O. and, therefore, deleted said sum. In other words, Commissioner allowed deduction claimed by appellant of entire amount under Section 35D of Act. 8) Revenue, felt aggrieved, filed appeals before Tribunal. Tribunal allowed appeals and reversed view taken by Commissioner of Income Tax (Appeals). Tribunal held that premium collected by appellant-Company on share capital did not tantamount to "capital employed 5 Page 5 in business of Company" within meaning of Section 35D(3) of Act. 9) It is against these orders, Company-assessee felt aggrieved and filed two separate appeals under Section 260A of Act before High Court. By impugned judgment/orders, High Court dismissed appeals and affirmed orders of Tribunal. 10) Felt aggrieved, Assessee-Company has filed these appeals before this Court. 11) short question that falls for consideration in these appeals is whether "premium" collected by appellant-Company on its subscribed share capital is capital employed in business of Company" within meaning of Section 35D of Act so as to enable Company to claim deduction of said amount as prescribed under Section 35D of Act? 12) Heard Mr. Radha Shyam Jena, learned counsel for appellant-Company and Mr. Mukul Rohtagi, 6 Page 6 learned Attorney General for respondent. 13) Having heard learned counsel for parties and on perusal of record of case, we find no merit in appeals. 14) Section 35D(3) of Act with which we are concerned in these appeals reads as under: Where aggregate amount of expenditure referred to in sub-section(2) exceeds amount calculated at two and one-half percent- (a) of cost of project, or (b) where assessee is Indian company, at option of company, of capital employed in business of company, excess shall be ignored for purpose of computing deduction allowable under sub-section(1); [Provided that where aggregate amount of expenditure referred to in sub-section(2) is incurred after 31st day of March, 1998, provisions of this sub-section shall have effect as if for words two and one-half per cent , words five percent had been substituted.]* *Ins. by Finance(No.2) Act, 1998(2) of 1998), sec,14(b)(w.e.f. 1-4-1999) 15) expression "capital employed in business of company" is defined in Explanation appended to Section in clause (b) which reads as 7 Page 7 under: (b) capital employed in business of company means- (i) in case referred to in clause(i) of sub-section(1), aggregate of issued share capital, debentures and long term borrowings as on last day of previous year in which business of company commences; (ii) in case referred to in clause(ii) of sub-section(1), aggregate of issued share capital, debentures and long term borrowings as on last day of previous year in which extension of industrial undertaking is completed or, as case may be, 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 extension of industrial undertaking or setting up of new industrial unit of company; 16) Division Bench of High Court in impugned order examined question lucidly. learned Judge T.S. Thakur, J. (as His Lordship then was and later became CJI) speaking for Bench held as under: 6. careful reading of above would show that in case of Indian company like appellant, aggregate amount of expenditure cannot exceed 2.5% of capital employed in business of 8 Page 8 Company. crucial question, therefore, is as to what is meant by capital employed in business of Company for it is amount that represents such capital that would determined upper limit to which amount of allowable deduction can go. expression has been given clear and exhaustive definition in explanation to sub-section 3. It reads as: (b) 7. above clearly shows that capital employed in business of company is aggregate of three distinct components, namely, share capital, debentures and long term borrowings as on dates relevant under sub-clauses(i) and (ii) of Clause(b) of explanation extracted above. term long term borrowing has been defined in clause (c) to explanation. It is nobody s else that premium collected by Company on issue of shares was long term borrowing either in fact or by fiction of law. It is also nobody s case that premium collected by Company was anywhere near or akin to debenture. What was all same argued by counsel for appellant was that premium was part of share capital and had therefore to be reckoned as capital employed in business of company . There is, in our view, no merit in that contention. Tribunal has pointed out that share capital of Company as borne out by its audited accounts is limited to Rs.7,88,19679/-. company s accounts do not show reserve and surplus of Rs.19,66,36,734/- as part of its issued, subscribed and paid up capital. It is true that surplus amount of Rs.19,66,36,734/- is 9 Page 9 taken as part of share holders fund but same was not part of issued, subscribed and paid up capital of Company. Explanation to Section 35D(3) of Act does not include reserve and surplus of Company as part of capital employed in business of Company. If intention was that any amount other than share capital, debentures and long term borrowings of Company ought to be treated as part of capital employed in business of company, Parliament would have suitably provided for same. So long as that has not been done and so long as capital employed in business of Company is restricted to issued share capital, debentures and long term borrowings, there is no room for holding that premium, if any, collected by Company on issue of its share capital would also constitute part of capital employed in business of Company for purposes of deduction under Section 35D. Tribunal was, in that view of matter, perfectly justified in allowing appeal filed by Revenue and restoring order passed by Assessing Officer. 17) We are in complete agreement with view taken by High Court quoted supra as, in our considered opinion, well-reasoned judgment/order of High Court correctly explains true meaning of expression employed in sub-section3(b) of Section 35D read with Explanation (b) quoted above, 10 Page 10 calling no interference in appeals. 18) In our considered opinion also, "premium amount" collected by Company on its subscribed issued share capital is not and cannot be said to be part of "capital employed in business of Company" for purpose of Section 35D(3)(b) of Act and hence appellant-Company was rightly held not entitled to claim any deduction in relation to amount received towards premium from its various shareholders on issued shares of Company. 19) This we say for more than one reason. First, if intention of Legislature were to treat amount of "premium" collected by Company from its shareholders while issuing shares to be part of "capital employed in business of company", then it would have been specifically said so in Explanation(b) of sub-section(3) of Section 35D of Act. It was, however, not said. 11 Page 11 20) Second, on other hand, non-mentioning of words does indicate legislative intent that Legislature did not intend to extend benefit of Section 35D to such sum. Third, these two reasons are in conformity with view taken by this Court in case of Commissioner of Income Tax, West Bengal vs. Allahabad Bank Ltd., (1969) 2 SCC 143. wherein question arose as to whether amount of Rs.45,50,000/- received by 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 purpose of allowing assessee to claim rebate under Paragraph D of Part II of first Schedule to Indian Finance Act 1956. 21) It was noticed therein that Part II - paragraph D while specifying rates of super tax had added Explanation, which reads as under: Explanation. For purposes of para D of this part 12 Page 12 (i) expression paid-up capital means paid-up capital (other than capital entitled to dividend at fixed rate) of Company as on first day of previous year relevant to assessment for year ending on 31st day of March, 1957, increased by any premiums received in cash by company on issue of its shares, standing to credit of share premium account as on first day of previous year . (Emphasis supplied) 22) This Court speaking through learned Judge J.C. Shah, J. (as His Lordship then was and later became CJI) after examining issue in context of Para D read with its Explanation held that share premium account was liable to be included in paid up capital for purposes of computing rebate. One of reasons to allow such inclusion with paid up capital was that such inclusion was permitted by specific words in Explanation. Such was, however, not case here. 23) As rightly pointed out by learned Attorney General appearing for Revenue, Companies Act provides in its Schedule V- Part II (Section 159) Form 13 Page 13 of Annual Return, which is required to be furnished by Company having share capital every year. Column III of this Form, which deals with capital structure of company, provides break up of "issued shares capital break up". This column does not include in it "premium amount collected by company from its shareholders on its issued share capital". This is indicative of fact that such amount is not considered part of capital unless it is specifically provided in relevant section. 24) Similarly, as rightly pointed out, Section 78 of Companies Act which deals with "issue of shares at premium and discount" requires Company to transfer amount so collected as premium from shareholders and keep same in separate account called "securities premium account". It does not anywhere says that such amount be treated as part of capital of company employed in business for 14 Page 14 one or other purpose, as case may be, even under Companies Act. 25) In light of foregoing discussion, we find no merit in these appeals. appeals thus fail and are accordingly dismissed. J. [R.K. AGRAWAL] .J. [ABHAY MANOHAR SAPRE] New Delhi; March 28, 2017 15 Page 15 Berger Paints India Ltd. v. C.I.T., Delhi-V