IMPORTANT POINT
“Premium amount" on subscribed issued share capital is not part of "capital employed in the business of the Company".

JUDGMENT

Abhay Manohar Sapre, J.

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 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.") 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 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. 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 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 dismis