1982 (2) TMI 61 - HC - Income Tax

Summary

Issues:
1. Inclusion of debentures in the computation of a company's capital for surtax assessment.
2. Interpretation of rule I of Schedule II to the Companies (Profits) Surtax Act, 1964 regarding debentures and loans.
3. Whether debentures issued as collateral securities for loans can be included in capital.
4. Impact of subsequent amendments on the interpretation of the law.

Analysis:
The case involved a company engaged in pharmaceutical business, which issued debentures to a bank as collateral security without receiving any payment. The dispute centered around whether these debentures should be included in the company's capital for surtax assessment. The relevant provisions under rule I of Schedule II to the Companies (Profits) Surtax Act, 1964 were crucial in determining the inclusion of debentures in the computation of capital.

The Income Tax Officer (ITO) initially rejected the company's claim under both clause (iv) and clause (v) of rule I of Schedule II. The Appellate Authority Commissioner (AAC) upheld this decision. The Tribunal, however, held that all types of debentures, irrespective of the manner of issuance, could be included in capital under clause (iv) of the rule. The Tribunal also emphasized that if the actual amount of debentures utilized was less than the specified value, the inclusion amount should be adjusted accordingly.

The High Court concurred with the Tribunal's decision, emphasizing that the debentures in question were entitled to be included in the computation of capital under clause (iv) of the rule. The Court referenced a Bombay High Court decision to distinguish the scenario where bonus shares did not augment capital. The subsequent amendment in 1974, requiring debentures to be issued to the public for inclusion in capital, was deemed clarificatory and not applicable retroactively.

The Court highlighted accounting definitions to support the Tribunal's decision, emphasizing that debentures issued as collateral securities need to be shown in the balance sheet as security, not as additional liabilities. Ultimately, the Court answered the referred question in favor of the assessee, affirming the inclusion of the debentures in the company's capital for surtax assessment. Each party was directed to bear their own costs in the case.