1976 (8) TMI 51 - HC - Income Tax

Summary

Issues Involved:
1. Whether the borrowed money from Madras Industrial Investment Corporation Ltd. should be included as capital for assessment under the Companies (Profits) Surtax Act, 1964.
2. Interpretation of the term "capital asset" under the Companies (Profits) Surtax Act, 1964.
3. Applicability of the proviso to item (v) of para. 1 of the Second Schedule to the Act.

Issue-wise Detailed Analysis:

1. Inclusion of Borrowed Money as Capital:
The primary issue was whether the sum of Rs. 5,71,747 borrowed by the assessee from Madras Industrial Investment Corporation Ltd. and outstanding on the first day of the previous year should be included as capital computed for the purpose of assessment under the Companies (Profits) Surtax Act, 1964. The Tribunal had held that this sum was not liable to be included as capital. The Commissioner of Income-tax revised the initial order of the Income-tax Officer and directed exclusion of Rs. 5,89,607 from the computation of capital, which was slightly modified by the Tribunal to Rs. 5,71,747.

2. Definition and Application of "Capital Asset":
The court examined whether the borrowed money was used for the creation of a capital asset in India. The Tribunal's interpretation that the definition of "capital asset" in section 2(14) of the Income-tax Act, 1961, did not apply was contested. The court clarified that section 2(9) of the Companies (Profits) Surtax Act, 1964, mandates that terms not defined in the Act but defined in the Income-tax Act, 1961, should carry the same meanings. Hence, "capital asset" as defined in section 2(14) of the Income-tax Act, 1961, which includes "property of any kind held by an assessee," is applicable.

3. Applicability of the Proviso to Item (v) of Para. 1 of the Second Schedule:
The court analyzed whether the proviso, which states that borrowed money must be "for the creation of a capital asset in India," was satisfied. The borrowed sum was used to discharge earlier debts incurred for acquiring machinery, not directly for creating a new capital asset. The court held that the borrowing must be directly for creating a capital asset, and since the assets were already created before the borrowing, this criterion was not met. The argument that the proviso should apply only to borrowings from "any person in a country outside India" was rejected, as the proviso applies to all lenders mentioned in item (v).

Conclusion:
The court concluded that the borrowed sum did not qualify as capital under the Companies (Profits) Surtax Act, 1964, because it was not used directly for the creation of a capital asset in India. The Tribunal's decision was upheld, and the question referred to the court was answered in the affirmative and against the assessee. The Commissioner was entitled to costs of the reference, with a counsel's fee of Rs. 500.