1977 (2) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of the provision for taxation in computing capital for super profits tax.
2. Classification of amounts advanced by a bank against bills drawn by the assessee as "moneys borrowed" for the computation of capital under the Super Profits Tax Act, 1963.

Issue-Wise Detailed Analysis:

1. Inclusion of the Provision for Taxation in Computing Capital for Super Profits Tax:
The first issue pertains to whether the sum of Rs. 15,50,168, being the provision for taxation as on April 1, 1962, should be included in computing the capital for the assessment year 1963-64 for the purposes of levying super profits tax. The court noted that this question was common to I.T.R.C. Nos. 15, 16, and 17 of 1974. Both parties agreed that this issue was already settled by the court's decision in Mysore Electrical Industries Ltd. v. Commissioner of Super Profits Tax (I.T.R.C. No. 11 of 1967). Consequently, the court answered this question in favor of the revenue and against the assessee.

2. Classification of Amounts Advanced by a Bank Against Bills Drawn by the Assessee:
The second issue involves whether the sum of Rs. 4,91,761 advanced by National & Grindlays Bank Ltd. against bills drawn by the assessee should be considered "moneys borrowed" for the computation of capital under the Super Profits Tax Act, 1963. This issue also appeared in I.T.R.C. Nos. 7, 8, 9, 16, and 17 of 1974 under analogous provisions of the Companies (Profits) Surtax Act, 1964.

The court examined the nature of the transactions between the assessee and the bank. The Income-tax Officer initially held that the amount represented a contingent liability rather than moneys borrowed. The Appellate Assistant Commissioner, after further investigation, upheld this view, stating that the transactions were purchases of bills by the bank, not loans.

The Income-tax Appellate Tribunal also supported this view, noting that the bank purchased the bills and credited the assessee's account with the value of the consideration, not as loans. The Tribunal emphasized that the bank's right of recourse to the assessee if the drawees defaulted did not alter the nature of the transaction.

However, the court found that the transactions were essentially financial arrangements between the bank and the assessee, where the bank credited the full value of the bills to the assessee's account and charged interest until the bills were realized. The court determined that these transactions did not constitute a discount of the bills but were instead a form of short-term advance.

The court referenced several legal sources and precedents, including Corpus Juris Secundus and American Jurisprudence, to clarify the distinction between discounting bills and advancing money against bills. It concluded that the amounts advanced by the bank were indeed "moneys borrowed" and should be included in the computation of the assessee's capital.

Conclusion:
The court answered the first question in I.T.R.C. Nos. 15, 16, and 17 of 1974 in favor of the revenue, concluding that the provision for taxation should not be included in computing the capital for super profits tax. The second question in I.T.R.C. Nos. 15, 7, 8, 9, 16, and 17 of 1974 was answered in favor of the assessee, determining that the amounts advanced by the bank against bills drawn by the assessee were "moneys borrowed" and should be included in the computation of capital. The assessee was entitled to its costs, with an advocate's fee of Rs. 250 for one set.