1992 (11) TMI 47 - HC - Income Tax

Summary

Issues:
1. Character change of foreign exchange loan amount adjusted by Indian company as 'calls received in advance.
2. Tax exemption under section 10(15)(iv)(c) of the Income-tax Act for interest accrued on the amount adjusted by the Indian company as 'calls received in advance.'

Analysis:
The case involved a non-resident company for the assessment years 1968-69, 1969-70, and 1970-71, where the Indian company adjusted Rs. 1,80,000 out of a foreign exchange loan as 'calls received in advance.' The first issue revolved around whether this adjustment changed the character of the foreign loan. The second issue concerned the tax exemption under section 10(15)(iv)(c) for the interest accrued on this adjusted amount.

The Income-tax Officer initially rejected the assessee's claim that the interest income was exempt under section 10(15)(iv)(c). However, the Appellate Assistant Commissioner ruled in favor of the assessee, leading to an appeal by the Revenue before the Tribunal. The Tribunal sided with the Revenue, stating that once the amount was adjusted as 'calls in advance,' it lost its original character and was not eligible for the exemption.

The High Court analyzed the provisions of section 10(15)(iv)(c) of the Act, emphasizing that for interest to be exempt, it must be on money borrowed or debt incurred by an industrial undertaking in a foreign country for the purchase of raw materials or capital plant and machinery. Both conditions must be met. The Court noted that the controversy arose when a portion of the amount was adjusted as 'calls in advance,' leading to a change in its character and rendering it ineligible for the exemption.

The Court rejected the assessee's argument that the adjusted amount should still be considered a debt due, emphasizing that the relationship between the companies changed with the adjustment. The Court concluded that the original nature of the debt, incurred for the purchase of machinery, changed with the adjustment, making it ineligible for the exemption under section 10(15)(iv)(c). Consequently, both questions were answered in the negative and in favor of the Revenue.

In summary, the High Court ruled that the adjustment of the amount by the Indian company as 'calls in advance' changed the character of the foreign loan, making the interest accrued on it ineligible for tax exemption under section 10(15)(iv)(c) of the Income-tax Act.