1993 (3) TMI 90 - SC - Income Tax

Whether the repayment under the agreement was during a period of not less than seven years within the proviso to rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act 1964? Held that - Set aside the judgment of the High Court and answer the question in the manner that the entire term loan of Rs. 50, 00, 000 taken from the bank does not qualify for inclusion in the capital base under rule 1(v) of the Second Schedule to the Act but in view of the fact that the order of the Tribunal granting relief to the respondent-company to the extent of Rs. 16 lakhs has not been challenged by the Department the Revenue shall be entitled to relief to the extent of Rs. 34 lakhs only as not qualified for inclusion in the capital base.

Summary

Issues:
Interpretation of the provision under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding repayment of borrowed money within a period of not less than seven years.

Analysis:
The case involved a respondent-company that obtained a term loan from a bank, with the repayment agreement spanning over several years. The dispute arose over whether the repayment terms satisfied the requirement of being "during a period of not less than seven years" under rule 1(v) of the Second Schedule to the Act. The Act imposed surtax on chargeable profits exceeding the statutory deduction, with specific rules for computing a company's capital. The loan agreement in question provided for repayment in five instalments over seven years, with the last instalment due on July 31, 1971.

The Income-tax Officer initially rejected the company's claim to include the loan in its capital base for calculating chargeable profits. However, the Appellate Assistant Commissioner reversed this decision, leading to further appeals. The Tribunal held that only the last instalment satisfied the seven-year repayment requirement, while the Department appealed against including the other instalments in the capital base. The High Court ruled in favor of the respondent-company, prompting an appeal by the Income-tax Department to the Supreme Court.

The Supreme Court interpreted the provision in rule 1(v) to require repayment within a period exceeding seven years to qualify for inclusion in the capital base. The Court emphasized that the phrase "during a period of not less than seven years" implied a period extending beyond seven years, not merely up to the seventh year. Drawing on precedents, the Court clarified that "not less than" signifies a minimum duration. Therefore, the entire term loan of Rs. 50,00,000 did not meet the seven-year repayment criterion, except for the last instalment of Rs. 16,00,000.

Consequently, the Supreme Court allowed the appeal, overturning the High Court's judgment. The Court held that the entire loan amount did not qualify for inclusion in the capital base under rule 1(v) of the Act. However, since the Tribunal's decision on the Rs. 16,00,000 instalment was final and unchallenged, the Revenue was entitled to relief only for the remaining Rs. 34,00,000. Each party was directed to bear its own costs in the case.

In conclusion, the Supreme Court's ruling clarified the interpretation of the repayment period requirement under the Act, emphasizing the need for repayment over and above seven years for inclusion in the capital base for surtax calculation purposes.