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Is share premium `capital employed'?
September, 09th 2006
Interpreting `capital employed' for purposes of deduction and amortisation -------------------------------------------------------------------------------- There is no room for holding the premium collected by the company on the issue of share capital as constituting a part of the capital employed -------------------------------------------------------------------------------- Section 35D of the Income-Tax Act, 1961 (Act) regulates amortisation of certain preliminary expenses. The provision, inter alia, says that if an assessee, being an Indian company or a person, incurs after March 31, 1990, any expenditure specified in sub-section (2) after the commencement of his business in connection with the extension of his industrial undertaking or in connection with the setting up of a new industrial unit, the assessee shall be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the 10 successive previous years beginning with the previous year in which the business commences or the extension of industrial undertaking is completed or the new industrial unit commences production or operation. Sub-section (2) enumerates the expenditure regarding which such amortisation can be claimed, while sub-section (3) limits the aggregate amount of expenditure for computing the deduction allowable under sub-section (1) to Section 35D. Sub-section (3) reads thus: "Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at two-and-one-half per cent, of the cost of the project, or 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)." From April 1, 1998, the rate of 2.5 per cent was increased to 5 per cent. Capital employed The meaning of the phrase `capital employed in the business' is important in the context of Section 35D. This expression has been defined in the Explanation to sub-section (3) to mean 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. The same definition applies where the existing undertaking is expanded or a new undertaking is set up. Share premium Can premium on shares issued be considered `capital employed'? The Delhi High Court answered in the negative in the Berger Paints India Ltd vs CIT (2006 154 Taxman 293 Delhi) case. According to the court, as per the definition in the Explanation to Section 35D(3), `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). The term `long-term borrowings' has been defined in clause (c) to the Explanation. It cannot be said that the premium collected by the company on the issue of shares was long-term borrowing either in fact or by a fiction of law. It cannot be said to be anywhere near or akin to a debenture. It cannot be a part of the share capital and had, therefore, to be reckoned as capital employed in the business of the company. The Explanation does not include the reserve and surplus of the company as 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 ought to be treated as part of the capital employed, Parliament would have provided for the same. So long as that has not been done and so long as the capital employed 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. Considering the provisions of the Act as explained by the High Court, the decision appears just and fair. T. N. Pandey (The author is a former Chairman of the CBDT.)
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