M/S. BERGER PAINTS INDIA LTD.versusC. I. T. DELHI-V

                         [2017) 4 S.C.R. 735


                M/S. BERGER PAINTS INDIA LTD.                             A
                                  v.
                          C. I. T. DELHI-V
                    (Civil Appeal No. 2162 of2007)
                          MARCH 28, 2017                                  B
    (R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]
        Income Tax Act, 1961 - s.35D and ss.(l), 143(JB), 143(2) -
  Whether "premium" collected on subscribed share capital of a
  company is "capital employed in the business of the Company" C
  within the meaning of s.35D for claiming deduction of the said
· amount u/s.35D - Held: The "premium amount" collected by
  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 s.35D(3)(b) - If the intention of the
  Legislature were to treat the amount of "premium" collecte:l by D
  Company from its shareholders while issuing shares to be part of
  "capital employed in the business of the company", then it would
  have been specifically said so in the Explanation (b) of sub-sec. (3)
  of s.35D - However, it was not said - Appellant-Company not
  entitled to claim any deduction in relation to amount received towards E
  premium from its shareholders on the issued shares of the Company.
       Dismissing the appeals, the Court
        HELD: 1.1. 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       F
 Company" for the purpose of Section 35D(3)(b), Income Tax Act,
 1961 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. (Para 18] (741-E]
                                                                          G
         1.2. This is 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)
                                                                          H
                                735
736             SUPREME COURT REPORTS                          [2017] 4 S.C.R.


                                   •
A of sub-section(3) of Section 35D of the Act. It was, however, not
  said. [Para 19) (741-F-G]
             1.3. Second, 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. [Para 20) [741-G-H]
B           Commissioner of Income Tax, West Bengal v. Allahabad
            Bank Ltd. (1969) 2 sec 143 : [1969) 3 SCR 722 '--
            relied on.
                               Case Law Reference
c     [1969) 3 SCR 722                  relied on                 Para 20
            CNIL APPELLATE JURISDICTION: Civil Appeal No. 2162
      of2007.
            From the Judgment and Order dated 15.05.2006 of the High Court
      of Delhi at New Delhi, in Appeal No. ITA/799/2004
D
                                       WITH
            C.A. No. 2163 of2007.
            Radha Shyam Jena, Adv. for the Appellant.
       Mukul Rohatgi, Ld. AG., Pritish Kapoor, Ms. Niranjana Singh,
E Ms. Sadhana Sandhu, Mrs. Anil Katiyar, Ad vs. for the Respondent.
            The Judgment of the Court was delivered by
            ABHAY MANOHAR SAPRE, J.
            1. These appeals are filed against the final judgment and orders
 Fdated 15.05.2006 passed by the High Court of Delhi at New Delhi in
  Appeal Nos. ITA No. 799 of 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)
G in LT.A. No.2307/Del/2000(Assessment Year 1996-97) and I.T.A.
  No.1434/Del/200 l (Assessment Year 1997-98) respectively.
             2. In order to appreciate the issue involved in these appeals, it is
      nec~_ss.ary to state few relevant facts infra.

       3. The appellant is a Limited Company engaged in the business of
H manufacture and sale of various kinds of paints. For the Assessment
       M/S. BERGER PAINTS INDIA LTD. v. C. I. T. DELHI-V                       737
                [ABHAY MANOHAR SAPRE, J.]

Year 1996-97, the appellant (assessee) filed their income tax return and A
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.") under
Section 143 (lB) of the Income Tax Act (hereinafter referred to as "the
Act") at an amount ofRs.3,63,03,128/-.
                                                                               B
       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.                                                        C
        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 ~anie    D
 under Section 35D of the 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             E
  calculated the allowable deduction under Section 35D of the Act at
· Rs.1,95,049/- and disallowed the remaining one by adding back t.:> the
  total income of the appellant for taxation purpose.
       7. The appellant, felt aggrieved, filed appeals before the
 Commissioner oflncome Tax (appeals). The Commissioner was of the F
 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. The Commissioner also was of the view that the share G
 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 orderofA.0 and disallowance ofRs.5,08,257/-
                                                                          H
738            SUPREME COURT REPORTS                          [2017] 4 S.C.R.


A 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
B 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 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
c     and filed two separate appeals under Section 260Aofthe Act before the
      High Court. By impugned judgment/orders, the High Court dismissed
      the appeals and affirmed the orders of the Tribunal.
            I 0. Felt aggrieved, the Assessee-Company has filed these appeals
      before this Court.
D           11. The short question that falls for consideration in these appeals
      is whether "premium" collected by the appellant-Company oiJ. 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
E     Section 35D of the Act?
             12. Heard Mr. Radha Shyam Jena, learned counsel fur the
      appel:ant-Company and Mr. Mukul Rohtagi, learned Attorney General
      for the respondent.
             13. Having heard the learned counsel for the parties and on perusal
·F    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
 G          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
H
      M/S. BERGER PAINTS INDIA LTD. v. C. I. T. DELHI-V                    739
               [ABHAY MANOHAR SAPRE, J.]

          of the company, the excess shall be ignored for the A
          purpose of computing the deduction allowable under
          sub-section(!);
      [Provided that where the aggregate amount of expenditure
      referred to in sub-section(2) is incurred after the 31 '' day
      of March, 1998, the provisions of this sub-section shall have        B
      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          C
company" is defined in the Explanation appended to the Section in clause
(b) which reads as under:
      "(b) "capital employed in the business of the company"··
      means-
                                                                           D
      (i) in a case referred to in clause(i) of sub-section(!), 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(!), the E
     . aggregate of the issued share capital, debentures and !ong
       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 F'
       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   G
Lordship then was and later became CJI) speaking for the Bench held
asunder:
       "6. A careful reading of the above would show that in the
       case of an Indian company like the appellant, the aggregate
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740     SUPREME COURT REPORTS                               [2017] 4 S.C.R.


A     amount of expenditure cannot exceed 2.5% of the capital
      employed in the business of the 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
B     go. The expression has been given a clear and exhaustive
      definition in the explanation to sub-section 3. It reads as:
               "(b) ............................................... .
                                                                   ,,
c     "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 Jong
      term borrowings as on the dates relevant under sub-
      clauses(i) and (ii) of Clause(b) of the explanation extracted
D     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.
E     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
F     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 taken as part of share holders fund
G     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
H     amount other than the share capital, debentures and long
       MIS. BERGER PAINTS INDIA LTD. v. C. I. T. DELHI-V                       741
                [ABHAY MANOHAR SAPRE, J.]

        term borrowings of the Company ought to be treatd as                   A
        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                     B
        borrowings, there is no room for holding that the premium,
        if any, collected byAhe Company on the issue of its sliare
        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        C
        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 D
the expression employed in sub-section3(b) of Section 35D read with
Explanation (b) quoted above, 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           E
  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 mme than one reason. First, ifthe intention of       F.
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.
                                                                               G
       20. Second, on the"other hand, non-mentioning of the words does
 indicate the legislative intent thaHhe Legislature did not intend to extend
"the benefit of Section 3SD 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 !' ngal vs. Allahabad Bank ·
                                                                               H
742            SUPREME COURT REPORTS                           [2017] 4 S.C.R.


A 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.
 B
             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-
             (1) the expression 'paid-up capital' means the paid-up capital
 c           (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
 D           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
 E issue in the context of Para Dread 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 ptrmitted
   by the specific words in the Explanation. Such was, however, not the
   case here.
 F
          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 ofAnnual 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
 G 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 capitaT'. 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.
·H
      MIS. BERGER PAINTS INDIA LTD. v. C. I. T. DELHI-V                       743
               [ABHAY MANOHAR SAPRE, J.]

      24. Similarly, as rightly pointed out, Section 78 of the Companies A
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 B
business for one or other purpose, as the case may be, even under the
Companies Act.
      25. In the light of foregoing discussion, weiind no merit in these
appeals. The appeals thus fail and are accordingly dismissed.
                                                                              c
Divya Pandey                                             Appeals dismissed.