1991 (12) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Whether the debentures issued in favor of financial institutions represent borrowings under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
2. Whether the Income-tax Officer should be allowed to examine if the borrowings were made for the creation of a capital asset as required by rule 1(v).
3. Whether debentures qualify as loans under rule 1(v).

Issue-wise Detailed Analysis:

1. Whether the debentures issued in favor of financial institutions represent borrowings under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964:

The court examined whether the debentures issued by the assessee to various financial institutions could be considered borrowings under rule 1(v). The debentures were issued to the Industrial Credit and Investment Corporation of India Ltd., the Industrial Development Bank of India, the Industrial Finance Corporation of India, the Life Insurance Corporation of India, and the Unit Trust of India. The Commissioner of Income-tax (Appeals) found that the debentures represented borrowings from these institutions for the purpose of creating a capital asset in India and were to be repaid within a period of not less than seven years. The Tribunal upheld this finding, noting that the debentures were not issued to the public and thus did not fall under rule 1(iv) but were covered under rule 1(v). The court agreed, emphasizing that debentures are a type of borrowing and that the legislative intent was not to exclude debentures issued to financial institutions from rule 1(v).

2. Whether the Income-tax Officer should be allowed to examine if the borrowings were made for the creation of a capital asset as required by rule 1(v):

The Revenue argued that since the assessee initially claimed under rule 1(iv) before the Income-tax Officer, the Officer should be allowed to examine whether the borrowings met the requirements of rule 1(v). However, the court noted that the Commissioner had already found that the borrowings were for the creation of a capital asset in India and were to be repaid over a period of not less than seven years. The Tribunal had accepted this finding, and the court saw no reason to remand the matter back to the Income-tax Officer for further examination.

3. Whether debentures qualify as loans under rule 1(v):

The Revenue contended that debentures are not loans and thus do not fall within rule 1(v). They referred to the definition of "debentures" in section 2(12) of the Companies Act. The court, however, drew upon authoritative texts and previous judgments to establish that debentures are indeed a form of borrowing. The Supreme Court in Narendra Kumar Maheswari v. Union of India defined debentures as an acknowledgment of debt with a commitment to repay the principal with interest. The Kerala High Court in CIT v. Cochin Refineries Ltd. also treated debentures as loans for the purposes of granting relief under section 80J of the Income-tax Act, 1961. The court concluded that debentures issued to financial institutions could be considered borrowings under rule 1(v), provided they met the conditions specified in the rule.

Conclusion:

The court affirmed that the debentures issued by the assessee to financial institutions represented borrowings under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. It rejected the Revenue's contention that debentures are not loans and found no need to remand the matter to the Income-tax Officer for further examination. The question posed was answered in the affirmative and in favor of the assessee, with no order as to costs.