The apex court has, upholding the view of the HC, handed down its opinion in Revenue's favour.
In advancing the arguments, counsel for the Revenue has cherry-picked and heavily relied upon, - eventually with success - certain provisions / features of the Companies Act, dealing with/ focusing on the concepts of "share capital' and "paid-up capital'. However, the term used in sec 35D is "ISSUED share capital" (FONT supplied); not either of the other two mentioned/ any other wording. It is this one crucial aspect which does not seem to have been forcefully addressed to enable the court (s) to pointedly go into, but glossed over, inadvertently or otherwise .
The fine point of distinction will be better perceived and incisively appreciated if the Companies Act provisions are closely gone through; with the necessary emphasis due, on the prefix "ISSUED'. Even on a casual perusal of the 1956 Act, so also the successor –enactment of 2013, it will be readily seen that the word "shares' /'share capital', and its other derivatives, have been suitably used, respectively, depending upon the requirement of each context. Admittedly, -and there has been no dispute whatsoever- that in the given case the shares have been issued at a premium. As such, the expression "ISSUED share capital' , used by the legislature in its wisdom, in one's humble view,- rather deserving to be urged as a better view by any logic, -according to a plain, simple and straight forward reading, has to be taken to mean, and only mean, inclusive of the "premium'.
It is observed that, as per the Experts' commentary in Kanga & Palkhivala's Text Book (Tenth Edition, Volume I, pg. 883), the view the HC had taken has been opined to be "incorrect as it failed to note that share premium is treated on par with capital under the Companies Act, 1956".
To buttress the foregoing line of thoughts / reasoning, it may be added: As per the Explanation, "capital employed in the business of the company" mean , and include, three components. The other two of those are debentures and long term borrowings; which are external funds, represented by a corresponding liability to be discharged to third parties. On the contrary, share capital is the internal funds of the company; that is, the contribution by the members of the company. As such, It does not seem to be logically sound to imagine , more so assert that the legislative intent was to construe the term "issued share capital" as not inclusive of the "premium'; which is not but very much part of the amount received from shareholders at the time of 'issuance' of the share capital, as 'capital' on a much stronger footing.
For any further insightful study, intelligent debate and independent deliberation, in eminent legal circles, the above input, by way of sharing own sincere thoughts, may be found additionally useful.
The propositions canvassed above, on the interpretation of the two crucial terms, - "Issue of share capital" and "capital employed", are twofold: -
1. The term "issue of share capital", with due focus on the point in time the word 'issue' has to be taken to connote, is not exclusive but is inclusive of 'premium' ; and
2. The premium amount received (along with face / nominal value), notwithstanding that as required by the Companies Act stands transferred to a special account, should not but be regarded to still constitute and form part of the "capital employed in the business of the company", as envisaged by sec 35 D.
In support, and in order to fortify, attention may be drawn, on a random selection, to sec 52 of the Companies Act 2013 (corresponding section 78 of the 1956 Act); reproduced below for ready reference:
Companies Act 2013, Sec 52 reads (with highlights supplied):
(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a "securities premium account" and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.
(2) Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company--
(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
(3) The securities premium account may, notwithstanding anything contained in sub-sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133,--
(a) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.
Similarly, attention may have to be invited to , among others, sec 63 of the 2013, which reads:
"63. Issue of bonus shares
(1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of -
(I) ITS FREE RESERVES;
(II) THE SECURITIES PREMIUM ACCOUNT; OR
(III) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets.
There is no corresponding section in the 1956 Act . However, the 'issue of bonus shares' has been provided for, elsewhere.
Regulations 96 & 97 of Table A to Schedule I of the Companies Act, 1956 contain provisions relating to capitalisation of profits and reserves of the company. According to these regulations only the share premium account and the capital redemption reserve account shall be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares.