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1980 Supreme(Cal) 411
High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
COMMISSIONER OF INCOME-TAX - Appellant
Versus
INDIAN OXYGEN LTD. - Respondent
Income-Tax Reference 183 Of 1974
Decided On : 11/24/1980
B.K.NAHA, B.L.PAL, Debi Pal, M.SEAL, S.SEN
The requirement of Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, that moneys be borrowed from a person in a country outside India, is fulfilled if the lender is a person of any country outside India.
Headnote:
COMPANIES (PROFITS) SURTAX ACT, 1964 - RULE 1(V) - BORROWINGS FROM PERSON IN COUNTRY OUTSIDE INDIA - INTERPRETATION - LOAN FROM BRITISH COMPANY - UTILIZATION FOR CREATION OF CAPITAL ASSET - AGREEMENT FOR REPAYMENT - FINDING OF TRIBUNAL - JUDICIAL REVIEW.
Fact of the Case:
The assessee-company, an Indian company, obtained a loan of Rs. 75 lakhs from the British Oxygen Co. Ltd., a company incorporated in the United Kingdom. The loan was for a period of 7 years and was to be utilized for the creation of capital assets in India. The assessee-company claimed that the loan should be included in the computation of its capital base for surtax purposes under Clause (1)(v) of the Second Schedule of the Companies (Profits) Surtax Act, 1964.
Finding of the Court:
The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that the loan was not eligible for inclusion in the capital base as it was not borrowed outside India and there was no evidence that it was utilized for the creation of capital assets. The Tribunal, however, held that the loan was eligible for inclusion in the capital base as it was borrowed from a person in a country outside India and was utilized for the creation of capital assets.
Issues: 1. Whether the loan was borrowed from a person in a country outside India within the meaning of Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964? 2. Whether the loan was utilized for the creation of capital assets in India? 3. Whether the agreement for repayment of the loan provided for a period of not less than 7 years?
Ratio Decidendi: 1. The court held that the requirement of Rule 1(v) of the Second Schedule would be fulfilled if the lender was a person of any country outside India. The court reasoned that the emphasis in the rule is on the sources from which the amounts are drawn to form the capital, not on the situs of the transaction. 2. The court held that the Tribunal's finding that the loan was utilized for the creation of capital assets was not perverse, as there was evidence to support the finding. 3. The court held that there was no categorical finding of the Tribunal on the question of whether the loan was actually borrowed for the purpose of creation of capital asset. The court held that this issue required adjudication and decision by the Tribunal.
Final Decision: The court answered the question referred to it in the affirmative and in favor of the assessee. The court also answered question No. 2 in the negative and in favor of the assessee. The court held that question No. 1, for its full determination, requires adjudication by the Tribunal as to whether the moneys were borrowed for the purpose of creation of a capital asset in India. The court sent the matter back to the Tribunal to decide this question in accordance with law.
( 1 ) THIS reference relates to the assessment year 1964-65. The question arises as to the treatment of Rs. 75 lakhs representing a loan from the British Oxygen Co. Ltd. , a company incorporated in the United Kingdom. The assessee-company is an Indian company, which was a 100% subsidiary of the British Oxygen Co. Ltd. till 1958. In 1958, the company was converted into a public limited company, as a result of which 30% of the shareholdings of the assessee-company had to be given up by the British Oxygen Co. Ltd. in favour of the public. The result was that the British company, viz. , the British Oxygen Co. Ltd. , sold 6,00,000 shares of Rs. 10 each with a premium of Rs. 35 for each share. The sale proceeds as reduced by any tax liabilities, if any, were agreed to be left with the assessee-company as a loan at a rate of interest, tentatively arrived at, of 6%, but which was variable. In November, 1957, the British Oxygen Co. Ltd. wrote a letter to the assessee in which it was made clear that the sale proceeds would be kept with the assessee for a period of 7 years at a rate of 6% which was variable. Unfortunately, the letters negotiating the loans and the letter granting this loan had not been set out in extenso in any of the orders or annexures to the statement of case. Here we are setting out the gist of the letters as summarised in para. 2 of the statement of case. It is further stated that the permission of the Reserve Bank was also obtained, as a result of which the sale proceeds of 6,00,000 ordinary shares in question hold by the British Oxygen Co. Ltd. less certain deductions for tax liabilities, etc:, were allowed to be kept as a loan with the assessee for a period of seven years on certain terms. The sum was actually returned to the British Oxygen Co. Ltd. in two instalments of Rs. 55,58,166 and Rs. 19,41,834 on the 10th March, 1966, and 23rd May, 1966, respectively. The sum had actually been kept in June, 1958, and were returned on the above two dates which fell beyond the period of 7 years.
( 2 ) IN these circumstances, the assessee-company requested the ITO to treat the amount of Rs. 75,00,000 as part of the capital base of the company for surtax purposes under Clause (1) (v) of the Second Schedule of the Companies (Profits) Surtax Act, 1964. In this connection, it would be appropriate, in the view we have taken, to set out the relevant portion of the order of the ITO"as regards, the loan from M/s. British Oxygen Co. Ltd. the loans were given by the company from the sale proceeds of its shares in India. It is not a loan advanced from sources in a country outside India. Clause V and the proviso thereto clearly stipulate that the borrowing should take place outside the country and that funds should be utilised for creation of capital assets in India. Since the borrowings has been made in India this will not form part of the capital base of the company. The proviso to Rule 1 (v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, states that the money borrowed should be by an agreement under which there should be a provision for repayment during a period of not less than seven years. In its letter dated 20th May, 1969, the company has intimated that there was no formal agreement with M/s. British Oxygen Co. Ltd. for the loan of Rs. 75,00,000. The company has, however, enclosed copies of letters exchanged with British Oxygen Co. Ltd. , regarding the loan. The letters exchanged do not have the character of a firm agreement between the two contracting companies. The terms and conditions are kept in a fluid state. In the letter dated 7th November, 1957, the rate of interest has not been decided upon. Subsequently, in its letter dated 25th November, 1957, the British company has stipulated interest at 6% but here again the interest rate will be subject to adjustment in the light of prevailing conditions. The mode of repayment of loan after 7 years is also not stipulated. The letters
