· The appellant is a Limited Company engaged in the business of manufacture and sale of various kinds of paints.
· A notice was issued by the AO calling 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. The appellant contended 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, claimed the said deduction and claimed that it was entitled to claim the same under Section 35D of the Act.
· The AO was of the view that the expression "capital employed in the business of the company" did not include the "premium amount", and accordingly calculated the allowable deduction u/s 35D at Rs.1,95,049/- and disallowed the remaining.
· 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.
· The Revenue, felt aggrieved, filed appeals before the Tribunal. 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.
· The Company-assessee felt aggrieved and filed appeal before the High Court, who dismissed the appeal and affirmed the order of the Tribunal.
· The Apex Court held that in their considered opinion also, the "premium amount" collected by the Company on its subscribed share capital is not and cannot be said to be the part of "capital employed in the business of the Company", 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.
For further reading, refer the attachment.
Further Reading