1975 (1) TMI 6 - HC - Income Tax

Capital Of Company Computation Of Capital Law And Fact Mixed Question Not Less Than Seven Years Question Of Law

Summary

Issues Involved:
1. Whether the agreement dated December 1, 1961, was modified as urged by the assessee-company.
2. Whether the loan of Rs. 50,00,000 taken by the assessee-company from the Bank of Baroda Ltd. qualifies for inclusion in the computation of its capital for the purposes of surtax chargeable under the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

Issue 1: Modification of the Agreement
The Tribunal had to determine if the original agreement of December 1, 1961, was modified by mutual consent between the assessee-company and the Bank of Baroda. The Tribunal concluded that there was no modification due to the absence of a formal document setting out the terms of the modification. The High Court, however, found that this conclusion was based on an erroneous interpretation of the law. The Court noted that under section 92, proviso (4) of the Indian Evidence Act, even an oral agreement to modify the terms of the original agreement could be proved. The Court examined the letters exchanged between the assessee-company and the Bank of Baroda and concluded that there was indeed a mutual agreement to modify the terms of repayment. The letters from March 19, 1963, April 3, 1963, and April 24, 1963, demonstrated a clear proposal, counter-proposal, and acceptance, which constituted a valid modification of the original agreement. The subsequent conduct of the parties, including the repayment schedule followed by the assessee-company, further supported this conclusion. Therefore, the Court held that the Tribunal erred in its finding and that the agreement of December 1, 1961, was indeed modified.

Issue 2: Inclusion of Loan in Computation of Capital
The second issue was whether the loan of Rs. 50,00,000 qualified for inclusion in the computation of the company's capital for surtax purposes. According to rule 1, clause (v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, moneys borrowed must meet five conditions, including that the agreement provides for repayment during a period of not less than seven years. The High Court interpreted this to mean that the repayment schedule must be spread over a period of not less than seven years from the date of the first advance. In this case, the first advance was made in July 1961, and the modified repayment schedule extended to December 1, 1968, thus exceeding seven years. The Court rejected the revenue's contention that the proviso required the entire loan to be repaid within seven years or that instalments within seven years disqualified the loan. The Court concluded that the loan was to be repaid during a period of not less than seven years, qualifying it for inclusion in the computation of the company's capital for surtax purposes.

Conclusion:
- Question 1: The High Court answered in the negative, stating that the agreement dated December 1, 1961, was modified as urged by the assessee-company.
- Question 2: The High Court answered in the affirmative, stating that the loan of Rs. 50,00,000 taken by the assessee-company from the Bank of Baroda Ltd. qualifies for inclusion in the computation of its capital for the purposes of surtax under the Companies (Profits) Surtax Act, 1964.

The Commissioner was directed to pay the costs of the reference to the assessee.