TMI Blog2008 (4) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... ays that the premium received shall be transferred to a separate account styled the share premium account and further says that the provisions of the Companies Act relating to the reduction of the share capital of the company shall apply as if the share premium account were paid up share capital of the company. Sub-s. (2) mentions five purposes for which alone the share premium account may be applied without attracting the provisions of the Companies Act relating to the reduction of the share capital. Except in the five cases, any other application of proceeds of the share premium account will be treated as a reduction of the company's share capital and the provisions of the Companies Act dealing with this subject stand attracted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the only ground raised is as under: 'The learned CIT(A) erred in law and on facts in reducing addition on account of deemed dividend under s. 2(22)(e) from Rs. 25,42,772 to Rs. 1,85,821 by holding that reserve on account of share premium should be excluded from the accumulated profits of the assessee, and that the accumulated profits are to be taken as the opening balance and not on the dates when the loan was advanced. 2. The brief facts giving rise to the appeal are these. The assessee respondent is a company engaged in the consultancy business. We are concerned with the asst. yr. 1996-97. While completing the assessment under s. 143(3) of the IT Ad the AO included an amount of Rs. 11, 11,772 as deemed dividend under s. 2(22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us on behalf of the Revenue. The assessee is not in appeal against the addition of Rs. 1,85,821 sustained by the CIT(A). 6. We have heard the rival contentions. The contention of the Revenue is that accumulated profits includes all profits, including capital profits and is not restricted to commercial or revenue profits. Attention was drawn to Expln. 2 to s. 2(22)(e). It was submitted that no exclusion was provided for capital profits expressly. The line of reasoning adopted by the AO that in cl. (e) the expression whether capitalised or not did not find place in contrast with the earlier clauses was also pressed into service. It was contended that the section provided for deemed dividend and such a provision should be given it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,00,000 out of the reserves and surplus account of Gorgeous Chemical (P) Ltd. as on31st March, 1996represented share premium collected by the said company. Sec. 78(1) of the Companies Act deals with the application of premium received on issue of shares. It says that the premium received shall be transferred to a separate account styled the share premium account and further says that the provisions of the Companies Act relating to the reduction of the share capital of the company shall apply as if the share premium account were paid up share capital of the company. Sub-s. (2) mentions five purposes for which alone the share premium account may be applied without attracting the provisions of the Companies Act relating to the reduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as dividends, and the misuse of the funds collected as premiums was not lacking. The object of the present section is to lay down specifically how the premiums collected on the issue of shares should be utilised. At p. 990 of the above treatise, the nature of share premium account has been described as follows: The effect of this section is to create a new class of capital of a company which is not share capital but not distributable as income any more than any other capital asset. On a winding up the surplus monies in the shares (now securities) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count as dividend under the Companies Act, the same is obliged to be treated as part of the share capital of the company and this is made clear in s. 78(1) of the Companies Act which says that any payment out of the share premium account, except for purposes authorised by sub-s. (2), will be treated as reduction of share capital attracting the provisions of the Companies Act in relation thereto. This provision of the Companies Act takes care of the argument of the Revenue that s. 2(22)(e) of the IT Act does not use the expression whether capitalized or not . These words can have application only where the profits are capable of being capitalized. They are not applicable where the receipt in question forms part of the share capital of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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