TMI Blog2005 (9) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7,97,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the issued share capital, debentures and long term borrowings as on the last date of previous year. From the balance sheet Assessing Officer found that issued share capital of the assessee was only Rs. 4,00,71,000 and the cost of project was Rs. 2,69,27,751. Therefore, he took the issued share capital being the higher amount and concluded that assessee is eligible for 2.5 per cent of such capital which he worked out at Rs. 1,00,177. Thus he restricted the claim of assessee from Rs. 4,71,244 to Rs. 1,00,177. In this way an addition of Rs. 3,71,067 was made to the income of assessee. An appeal was filed against the said order of Assessing Officer. From the balance-sheet ld. CIT(A) found that share capital, reserve and surplus of the assessee as on last date of the accounting year was Rs. 18,87,35,238. Therefore, he observed that 2.5 per cent thereof was Rs. 47,18,380 and thus the assessee was entitled to get 10 per cent of the expenditure incurred by the assessee at Rs. 47,12,438 which was within 10 per cent upper limit prescribed under section 35D of the Act. Thus he deleted addition as per para 2 of his order which is reproduced below for the sake of convenience:- "2. Regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the audit report which gives the following details to the "reserve and surplus" outstanding as at the end of the relevant previous year:- Schedule- 2 Reserve and Surplus Rs. INVESTMENT ALLOWANCE (UTILISED) RESERVE Balance as per last Balance Sheet 821849 GENERAL RESERVE Rs. Balance as per last Balance Sheet 64325301 Less: Transfer for issue of Bonus Shares - ---------- 64325301 Add: Transfer from Profit Loss a/c 14600000 ---------- 78925301 Share Premium Account 68826000 Profit and Loss Account Surplus 91088 ----------- TOTAL 148664238 Thus he pleaded that action of CIT(A) to the extent it relates to share premium should be upheld. 6. We have carefully considered the rival submissions in the light of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not being a financial institution referred to above), or (ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred "provide for the repayment thereof during the period of not less than seven years." 7. Since there is no amount outstanding on account of debentures and long-term borrowings as on the last day of the previous year, Explanation (c) to section 35D(3) is irrelevant. So is the case with Explanation (a) to section 35D(3) as cost of project is also much less than issued share capital. Therefore, we have to concentrate on the definition given to term "capital employed in the business of the company" in Explanation (b) to section 35D(3). There is no dispute to the extent that share capital of the assessee-company as standing under the head "sources of fund" as on the last day of the previous year is Rs. 4,00,71,000. The CIT(A) has considered the entire other sum of Rs. 14,86,64,238 (the amount outstanding under the head 'reserve and surplus' the details of which have already been reproduced above) as part of issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilized 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. 8. According to sub-section (2) the share premium account may be applied for the following purposes:- (1) The paying up of fully paid bonus shares to be issued by the company to its members; (2) The writing off of preliminary expenses of the company; (3) The writing off of the expenses of, or underwriting commission paid or discount allowed on, any issue of shares or debentures of the company; (4) The providing of a premium payable by the company on redemption of redeemable shares or redemption of debentures of the company. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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