1997 (11) TMI 7 - HC - Income Tax

The tax case arises under the provisions of the Companies (Profits) Surtax Act, 1964, and it relates to the assessment year 1973-74. It involves interpretation of clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 - 1. Whether, 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, 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?

Summary

Issues Involved:
1. Inclusion of Rs. 15 lakhs due to Tamil Nadu Industrial Investment Corporation Limited in the capital base.
2. Inclusion of mortgage loans from Syndicate Bank and Punjab National Bank in the capital base.

Issue 1: Inclusion of Rs. 15 lakhs due to Tamil Nadu Industrial Investment Corporation Limited in the capital base

The first issue concerns whether 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.

The assessee initially approached the Tamil Nadu Industrial Investment Corporation Limited for financial assistance, but the Corporation could not extend the required credit facilities. Consequently, the assessee secured a loan of Rs. 70 lakhs from Punjab National Bank, with the Corporation providing a collateral guarantee. The terms stipulated that the assessee would repay Rs. 45 lakhs to the bank by December 1969, and the remaining Rs. 25 lakhs would be taken over by the Corporation. The assessee repaid Rs. 45 lakhs to the bank, and the Corporation paid the remaining Rs. 25 lakhs, effectively taking over the loan. The assessee claimed the outstanding Rs. 15 lakhs as part of its capital base, which the Income-tax Officer initially rejected, arguing that the loan from the Corporation was separate and had a repayment period of less than five years.

However, the Commissioner of Income-tax (Appeals) and subsequently the Income-tax Appellate Tribunal held that the loans should be treated as a single transaction, with a combined repayment period exceeding seven years. The Tribunal's decision was challenged by the Revenue, which contended that the loan to the Corporation was a separate transaction.

The court concluded that the entire loan arrangement should be viewed as a single transaction. The assessee had a period of more than seven years to repay the total loan of Rs. 70 lakhs. Therefore, the Tribunal was correct in including the outstanding amount in the capital base as stipulated under clause (v) of rule 1 of the Second Schedule to the Act. The court answered the first question of law in the affirmative and against the Department.

Issue 2: Inclusion of mortgage loans from Syndicate Bank and Punjab National Bank in the capital base

The second issue pertains to whether the mortgage loans of Rs. 60 lakhs and Rs. 25,18,981 from Syndicate Bank and Punjab National Bank, respectively, were includible in the capital base under clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

The Syndicate Bank advanced Rs. 50 lakhs to the assessee on September 10, 1969, with a repayment period of five years. The assessee later sought an extension, which the bank granted through letters dated April 14, 1976, and December 2, 1977, extending the repayment period to June 30, 1979. The Income-tax Officer argued that the original repayment terms should prevail, but the Commissioner of Income-tax (Appeals) and the Appellate Tribunal disagreed, recognizing the extended period.

Similarly, the Punjab National Bank advanced Rs. 30 lakhs, with Rs. 25,18,981 outstanding. The bank extended the repayment period through letters dated December 4, 1976, and December 16, 1977, to July 4, 1980. The Tribunal held that the extended periods for both loans qualified them for inclusion in the capital base.

The court noted that the extension of the repayment period through letters was valid and did not require a formal registered deed. The provisions of sections 91 and 92 of the Indian Evidence Act, 1872, were deemed inapplicable to income-tax proceedings. The court cited the Gujarat High Court's decision in New India Industries Ltd. v. CIT, confirmed by the Supreme Court, which supported the validity of extending loan repayment periods through correspondence.

Thus, the court found no infirmity in the Tribunal's decision and held that the extended repayment periods qualified the loans for inclusion in the capital base. The second question of law was answered in the affirmative and against the Revenue, with the correct figure of Rs. 25,18,981 substituted for Rs. 2,58,981.

Conclusion:

Both issues were resolved in favor of the assessee, affirming the inclusion of the respective loan amounts in the capital base as per the relevant provisions of the Companies (Profits) Surtax Act, 1964. The court's detailed analysis upheld the Tribunal's findings and rejected the Revenue's contentions.