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2005 (9) TMI 218 - AT - Income TaxAddition u/s 35D - amortization of certain preliminary expenses - According to the AO assessee could claim such expenditure under section 35D subject to upper limit of 1/10th of 21/2 per cent of capital employed or cost of project whatever is higher as per the provisions of section 35D(3) - CIT(A) deleted the addition - whether share premium has to be considered as "issued share capital"? - Whether other amounts stand credited under the head "Reserve and Surplus" i.e., Investment Allowance (utilized) Reserve, "General Reserve" and the sum "Transferred from Profit and Loss a/c" all other sums standing to the credit of 'Reserve and Surplus' a/c to be considered as "issued share capital"? - HELD THAT:- Section 78 of the Companies Act, 1956 as dealing with the subject "application of premiums received on issue of shares" will reveal that any share premium collected by a company shall be treated as if the same is paid-up share capital of the company and it is also required to be retained in a separate account. The said amount cannot be utilized for any purpose, other than the one specified in sub-section (2). If amount lying in separate premium account is used for any other purposes, it would tantamount to reduction in share capital which will attract the provisions of sections 100 to 105 of the Companies Act. Thus the effect of this section is to create a new class of capital of a company which is not distributable as income any more than any other capital asset. On a winding up the surplus monies in the share premium account will be returned to the shareholders as capital and so long as the company is a going concern, the same monies can never be returned to the shareholders except through the medium of reduction petition or, in other words, except under exactly the same conditions as those under which any other capital asset can reach the shareholder's hand. However, the same analogy will not apply to the other amounts stand credited under the head "Reserve and Surplus" i.e., (i) Investment Allowance (utilized) Reserve, (ii) "General Reserve" and the sum (iii) "Transferred from Profit and Loss a/c" (total = Rs. 7,97,46,150 all other sums standing to the credit of 'Reserve and Surplus' a/c). Therefore, we hold that CIT(A) was wrong in concluding that entire sum of Rs. 18,87,35,238 (Rs. 4,00,71,000 as share capital and amount of Rs. 14,86,64,238 as reserve and surplus) was "issued share capital" within the meaning of Explanation (b) to section 35D(3). Therefore, we modify his order and hold that a sum of Rs. 7,97,46,150 as computed above, was not "issued share capital" within the meaning of Explanation (b) to section 35D(3) of the Act. Therefore, 'issued share capital' of the assessee can only be considered to be a sum of amount outstanding as share premium account - 2.5 per cent of Rs. 10,88,97,000 is of Rs. 27,22,425 and thus the expenditure incurred by assessee have to be restricted to that sum and therefore, the assessee is entitled to maximum 10 per cent of the sum of Rs. 27,22,425 which comes to Rs. 2,72,242. Thus,we direct Assessing Officer to restrict the addition to the extent of Rs. 1,99,002. Appeal filed by the revenue is, therefore, partly allowed.
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