July 2008
S. 2(22)(e) : Balance in share premium account cannot be considered as part of accumulated profit.
By Ashok Dhere, Jagdish D. Shah, Chartered Accountants
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(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)
17 DCIT v. MAIPO India Limited
ITAT ‘A’ Bench, New Delhi
Before R. V. Easwar (VP) and
K. D. Ranjan (AM)
ITA No. 2266/Del./2005.
A.Y. : 1996-97. Decided on : 7-3-2008
Counsels for revenue/assessee : A. K. Singh/
Rano Jain
S. 2(22)(e) of the Income-tax Act, 1961 — Deemed dividend —
Whether balance in share premium account can be considered as part of
accumulated profit — Held, No.
Per R. V. Easwar :
Facts :
The assessee had received an advance of Rs.25.43 lacs from
another company ‘G’, wherein it held 40% of the shares. Before the year end, the
assessee had repaid the sum of Rs.14.31 lacs. The AO assessed the balanced sum
of Rs.11.12 lacs u/s.2(22)(e) of the Act. In the books of G, the aggregate sum
of reserves and surplus of Rs.1.95 crore included the sum of Rs. 1.9 crore of
share premium. The issue was whether the balance in share premium account could
be considered as accumulated profit.
According to the Revenue, Explanation 2 to S. 2(22)(e) did
not provide for exclusion of capital profit expressly, and secondly, unlike
other clauses of S. 2(22) which contained the expression ‘whether capitalised or
not’, clause (e) did not contain the said expression. Therefore, it was
contended by it that the balance in share premium account was part of
accumulated profit.
Held :
The Tribunal noted that as per the provision in the Companies
Act, 1956, application of the proceeds of the share premium account, for
purposes other than those given in S. 78 of the Companies Act, was treated as a
reduction of the company’s share capital. The said purposes were :
- To pay up fully paid-up bonus shares;
- To write off preliminary expenses;
- To write off share issue expenses;
- To pay premium on redemption of redeemable shares/debentures;
- To purchase its own shares/securities.
The above position was also confirmed by the Apex Court in
the case of Allahabad Bank Ltd. Thus, according to the Tribunal, not only was
there a prohibition on the distribution of the share premium account as dividend
under the Companies Act, but the same was treated as part of the share capital
of the company. Further, relying on another decision of the Apex Court in the
case of Urmila Ramesh, it observed that the expression ‘whether capitalised or
not’ (as referred to by the Revenue in its submission), could have an
application only where the profits are capable of being capitalised. The same
were not applicable where the receipts in question formed part of the share
capital.
Based on the above and also relying on the ratio of the
decision of the Apex Court in the case of P. K. Badiani, the Tribunal upheld the
decision of the CIT(A) and dismissed the appeal filed by the Revenue.
Cases referred to :
(1) CIT v. Allahabad Bank Ltd., AIR 1969 SC 1058
(SC)
(2) CIT v. Urmila Ramesh, (1998) 230 ITR 422 (SC)
(3) P. K. Badiani v. CIT, (1976) 105 ITR 642 (SC)
