The period of repayment for a loan under the Companies (Profits) Surtax Act, 1964 can be extended by a bank through letters, and this extension should be taken into account in determining whether the loan is eligible for inclusion in the assessee's capital base.

N. V. Balasubramanian, J.-In pursuance of the direction of this court in T. C. P. No. 583 of 1982, dated April 11, 1983, the Income-tax Appellate Tribunal has stated a case and referred the following questions of law :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 15 lakhs due by the assessee to the Tamil Nadu Industrial Investment Corporation Limited as on July 1, 1971, was includible in the capital base as provided in clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the mortgage loans of Rs. 60 lakhs and Rs. 2, 58, 981 respectively from the Syndicate Bank and the Punjab National Bank were includible in the capital base in terms of clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"

The tax case arises under the provisions of the Companies (Profits) Surtax Act, 1964:

"any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India :

Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years."

The assessee-company had approached the Madras Industrial Investment Corporation Limited, later known as Tamil Nadu Industrial Investment Corporation Limited for the grant of certain financial assistance. The Tamil Nadu Industrial Investment Corporation was not able to provide and was not able to extend the credit facilities to the extent needed by the assessee. Therefore, the assessee approached the Punjab National Bank for the grant of the loan of Rs. 70 lakhs. The Punjab National Bank agreed to lend a sum of Rs. 70 lakhs to the assessee on the collateral security of the guarantee to be furnished by the Madras Industrial Investment Corporation Limited. The terms of the repayment of the loan were that the assessee should repay to the bank by December, 1969, a sum of Rs. 45 lakhs in six instalments and the balance amount of loan outstanding on Decembear 31, 1969, should be taken over from the bank by the Madras Industrial Investment Corporation Limited (hereinafter referred to as "the Corporation"). The Punjab National Bank advanced money on these terms and the terms of repayment were also duly adhered to'. The assessee has paid to the bank a sum of Rs.45 lakhs by December, 1969, and the balance of Rs. .25 lakhs was paid by the Corporation to the bank and by that payment the loan to the bank was discharged and the loan was taken over by the Corporation from the bank. But, in so far as the assessee is concerned, it was due to pay to the Corporation on January 1, 1971, a sum of Rs. 15 lakhs. Since the amount was outstanding in the beginning of the financial year, the assessee claimed that this amount should be included in its capital base. The Income-tax Officer rejected the claim on the ground that the loan due to the Corporation was a separate loan and hence, since the period of repayment was less than five years, it was not liable to be included in the capital computation of the company.

The Commissioner of Income-tax (Appeals), on appeal preferred by the assessee, held that the two loans form part of a same transaction and since the period of repayment was for a period of more than seven years, the outstanding loan amount to the Corporation was liable to be included in the capital base of the company.

Aggrieved by the order of the Commissioner (Appeals), the Revenue carried the matter in appeal b