LEARNING FROM CASE OF BERGER PAINTS: ALL POSSIBLE CONTENTIONS MUST BE RAISED

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Section 35D of Income-tax Act, 1961 – for meaning of expression “capital employed”

Paragraph D of Part II of the first Schedule to the Indian Finance Act 1956- a provision allowing rebate from tax payable for meaning of expression 'paid-up capital '

M/s Berger Paints India Ltd. Versus C.I.T., Delhi 2017 (3) TMI 1531 - SUPREME COURT  CIVIL APPEAL No.2162 -2163 OF 2007 Dated: - 28 March 2017

Commissioner of Income-Tax, West Bengal I And Another Versus Allahabad Bank Limited - 1969 (2) TMI 5 - SUPREME Court

Berger Paints India Limited Versus Commissioner of Income-Tax. - 2006 (5) TMI 80 - DELHI High Court

The case of Berger Paints Ltd relating to S.35D

On reading of the judgment of the Supreme Court, High Court and the summary of decision of Tribunal as found in reported judgments under reference it seems that on behalf of assessee limited issue and contention was raised that share capital would include share premium also for the purpose of deduction u/s 35D.

The AO did not accept this and reduced allowable amount by ignoring ‘share premium’  by holding that this does not constitute  issued share capital of company.

On appeal of assessee, CIT(A), decided in favour of assessee and allowed deduction as claimed by assessee.

On appeal of revenue the Tribunal reversed order of CIT(A) on this issue and confirmed order of AO.

On further appeal by assessee the High Court confirmed order of Tribunal and view taken by the AO. On further appeal, the Supreme Court also upheld the same.

Thus the assessee lost its case on the issue from initial stage of assessment and ultimately also before the Supreme Court.

Authors view:

On the basis of claim as made and explained by assessee, author is of view that the AO was correct in his view and the same stand confirmed by the Supreme Court.

Congratulations to concerned officers.

Incidentally author also recall that view taken by AO in case of same assessee (earlier known as British Paints India Ltd**) on issue of stock valuation was confirmed by the Supreme Court - Commissioner of Income-Tax Versus British Paints India Limited 1990 (12) TMI 2 - SUPREME Court Other Citation: [1991] 188 ITR 44 (SC).

** From https://www.bergerpaints.com/about-us/company-profile.html

….. By the close of 1947, Hadfield's was acquired by British Paints (Holdings) Limited, UK and came to be known as British Paints (India) Limited. In 1983, the name of the Company was changed to Berger Paints India Limited.

Earlier tax authorities used to refer to case of British Paints, with much pride that an important issue, as understood by an ITO was affirmed by the Supreme Court, lower appellate authorities  and High Court had disapproved  it. Now they will be able to say with more pride that the view taken by AO/ ITO was approved by Tribunal to the Supreme Court.

Lacking in case of assessee:

As stated earlier, based on limited stand or contentions which the assessee took , the matter has been decided against assessee. However, author, with due respect to the concerned teams of assessee who looked after the matter from stage of filing of the return to appeal before  Tribunal (after that it is limited to facts found by Tribunal), and as far as can be observed from the reported judgments, author feels that many vital factual and legal aspects must have been pressed. For example:

a. A statement of capital employed in business must have been submitted to show that share premium was also employed in business. This is an important aspect, because if facts shows that share premium was in deed invested in business, that could go a long way in looking at issue from a different, practical and purpose seeking approach.

b. A working of allowable claim based on

c. “the capital employed in the business of the company” must have been worked out.

d. Other meanings of‘capital employed’ must have been pointed out.

e. The contention that scope of expression “capital employed in the business of the company” must not be restricted, because capital employed can be of any type and nature. When the same provision also has other basis of   ‘cost of project’ , a restrictive meaning is not desirable. The specific entries or enumeration, though after word means , can be considered as illustrative and not exhaustive.

f. The law provides two basisone of which is‘cost of project’, which will definitely include all sources of funds by which cost of project has been met.

g. The option to determine claim based on specified percentage is a privilege. Therefore,a purpose seeking approach should be applied.

h. Firstly without going into aspect of definition, factual aspect of ‘capital employed’ should have been pressed into, then only, what are to be excluded n\should have been examined.

i. The purpose of the provision is to allow certain expenditure incurred to raise capital for specified purposes.

j. The contention that various items included in definition are illustrative and not exhaustive. The entries mentioned in the meaning or definition cannot restrict the general and popular meaning.

k. Though the word ‘means’ is used, still the meaning cannot be called exhaustive and items specifically included can be considered as illustrative, in context of expression “ capital employed for the business’.

l. To take a very important provision we find that in section 55 meaning of ‘cost of acquisition’ has been provided in exhaustive manner and language used is peremptory. As per exhaustive list, purchase price of any capital asset, purchased by assessee/ transferor, is not covered. For computing ‘capital gains’, method of accounting has also not been extended as is case of income form business and profession. The meaning of ‘actual cost’ is also not relevant for S. 55 read with S. 48 and 49. Therefore, on a restricted scope, a view can be taken that when ‘purchase price’ or actual cost are not mentioned , in section 55 as one of item of‘cost of acquisition’ it cannot be considered as ‘cost of acquisition’, within the restrictive and exhaustive list. However, in practice we find that the purchase price is generally considered ‘cost of acquisition’. Therefore, in case of S. 35D also the meaning could be considered as per broader meaning of ‘capital employed in business’ to include share premium.

However, it seems that any such contentions were not raised and the claim  was pressed by assessee in a very limited way and manner. Even in case of British Paints, we find that contentions pressed were very restrictive and many vital aspects were not raised and that perhaps caused assessee to lose its claim.

Definition – means and includes:

There are two forms of interpretation clause. In one, where the word defined is declared to “mean” so and so, the definition is explanatory and prima facie restrictive. In other, where the word defined is declared to “include” so and so, the definition is extensive, (Craise on Statute Law. (source Chaturvedi and Pithisaria’s  Income Tax Law , Sixth Edition , Volume 1 page 63

In India also it is well settled that when word ‘includes’ is used, the enumerations are illustrative and expansive. However, when word ‘means’ is used, it is considered to be explanatory and prima facie restrictive – that means not necessarily exhaustive.

Furthermore, one more thing and ground reality is that with changes in economy, business pattern, financing pattern and schemes, meaning and scope of expressions like ‘capital employed’ , ‘capital employed in business’ etc. changes. Therefore, a provision like meaning of ‘capital employed’  cannot be considered rigid.

In many provisions of tax laws we find that only some aspects are covered with word meaning or being. In all such situations, particularly when the subject matter is very wide and its scope widens with advancement of knowledge, business area, methods of doing work etc. the meaning has to be flexible and to accommodate all such things, which are important, and incidental to the words used and purpose of provision, a flexible approach is required.  

Share premium is raised along with share capital and is incidental to raising of share capital. Share premium is considered as a means to keep share capital low but total capital high. This serves many short-term and long-term purposes and is beneficial to company and shareholders, and other stake holders. In this regard readers may refer to another article by author, titled   “ Issue of shares at premium is at discretion of Issuer Company and applicant- involves capital receipt and is advantageous to company and shareholders both “  webhosted on October 21, 2014 on the following link:

https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5878&kw=Issue-of-shares-at-premium-is-at-discretion-of-Issuer-Company-and-applicant-involves-capital-receipt-and-is-advantageous-to-company-and-share-holders-both

An analysis of words and phrase considered:

Berger paints’s case	Allahabad Bank’s case	Observations and remarks of author
Section 35D of the Income Tax Act, relating to amortization of expenses incurred to raise capital	Paragraph D of Part II of the first Schedule to the Indian Finance Act 1956- a provision allowing rebate from tax payable.
“capital employed”	' paid-up capital’	As per general understating in  accounting, finance  and  commerce both  expressions have different meaning. Expression ‘capital employed’ is wider than ‘paid up capital’, and will include paid-up capital of any type.
“(b) “capital employed in the business of the company” means-	the expression 'paid-up capital ' means	In both provisions word means has been used. Generally this means that the provision is exhaustive and language used is peremptory. However, in context of the subject matter sometimes entries enumerated after use of word means can be considered as illustrative.
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 paid-up capital (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 the 31st day of March, 1957, increased by any premiums received in cash by the company on the issue of its shares, standing to the credit of the share premium account as on the first day of the previous year . . . "	In first column all type of share capital including those,  entitled to fixed dividend, say preference share capital is also included whereas in case of second column, such capital is expressly excluded. In first column debentures and long term borrowings are also included, whereas in second column not. This is as pointed out earlier that the expression  ‘capital employed’ is wider.

Learning from the case of Berger Paints:

All facts and circumstances which are relevant to the main aspect of claim must be borne out from claim made and explained before AO and all  possible and practical contentions, arguments, must be pressed. Relying on only  some aspect or relying on some judgment only without bringing on record all relevant facts and contentions can lead to non-consideration and non-adjudication of matter in totality.