1980 (11) TMI 17 - HC - Income Tax

Summary

Issues Involved:

1. Whether the loan of Rs. 75 lakhs taken from British Oxygen Ltd. represented monies borrowed from a person in a country outside India within the meaning of rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
2. Whether the entire sum of Rs. 75 lakhs was borrowed for the creation of capital assets in India.
3. Whether the finding of the Tribunal that the sum of Rs. 75 lakhs borrowed from British Oxygen Ltd. was utilized for the creation of capital assets in India was based on no evidence or was otherwise unreasonable or perverse.

Detailed Analysis:

1. Borrowing from a Person in a Country Outside India:

The primary issue was whether the loan of Rs. 75 lakhs from British Oxygen Ltd. could be considered as borrowed from a person in a country outside India under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal interpreted that the borrowing should be from a person in a country outside India, and the actual act of borrowing need not occur outside India. The Tribunal emphasized that the source of the capital, rather than the situs of the transaction, was crucial. The Tribunal concluded that the British Oxygen Co. Ltd., being a company incorporated in the United Kingdom, satisfied the requirement of being a person in a country outside India. The High Court upheld this interpretation, agreeing that the emphasis is on the lender being a person outside India, not where the borrowing transaction took place.

2. Borrowing for the Creation of Capital Assets in India:

The second issue was whether the loan was borrowed specifically for the creation of capital assets in India. The Tribunal found that the borrowed money was utilized for capital expenses, as evidenced by the balance-sheets and the directors' report. The Tribunal noted substantial capital expenses incurred by the company during the relevant years, which supported the conclusion that the loan was used for creating capital assets. However, the High Court pointed out that there was no clear finding from the Tribunal on whether the borrowing itself was made for the creation of capital assets. The High Court emphasized that the statute requires both the utilization of the borrowed money for capital assets and the borrowing to be for the purpose of creating such assets. The High Court remanded this issue back to the Tribunal for further adjudication.

3. Utilization of Borrowed Sum for Creation of Capital Assets:

The third issue was whether the Tribunal's finding that the sum of Rs. 75 lakhs was utilized for creating capital assets in India was based on evidence or was perverse. The Tribunal referred to the balance-sheets and the directors' report, which indicated that the loan was used for capital expenses. The High Court upheld the Tribunal's finding, stating that there were materials on record to support the conclusion that the borrowed money was used for capital assets. The High Court found no reason to interfere with the Tribunal's finding on this aspect, as it was based on evidence and was not perverse.

Conclusion:

The High Court answered the first question in the affirmative, agreeing with the Tribunal that the loan was from a person in a country outside India. The second question was answered in the negative, favoring the assessee, as the Tribunal's finding on the utilization of the borrowed sum was based on evidence. However, the High Court remanded the matter to the Tribunal to determine whether the borrowing was specifically for the creation of capital assets in India, as there was no clear finding on this aspect. The parties were directed to bear their own costs.