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TMI Blog1991 (12) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... for surtax purposes. The debentures were issued on October 1, 1973. They were issued to the Industrial Credit and Investment Corporation of India Ltd., the Industrial Development Bank of India, the Industrial Finance Corporation of India, the Life Insurance Corporation of India and the Unit Trust of India. They were repayable in 14 half-yearly instalments commencing from December 1, 1975. Before the Income-tax Officer, the assessee relied upon rule 1(iv) of the Second Schedule to the Act. The Income-tax Officer held that the requirements of rule 1(iv) were not satisfied and disallowed the assessee's claim. The assessee preferred an appeal. The Commissioner of Income-tax (Appeals) arrived at the finding that the assessee's claim under rule 1(iv) of the Second Schedule to the Act could not be allowed. Before the Commissioner, the assessee advanced an alternative contention. It made a claim also under rule 1(v) of the Second Schedule to the Act. The Commissioner found that the debentures represented the assessee's borrowings from various financial institutions, that the borrowings had been made for the purpose of creation of a capital asset in India, that the debenture loans were to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public, excluding debentures issued to the financial institutions, would be included in the capital base. It is also possible to interpret that rule 1(v) covers all borrowals from financial institutions including those covered by debentures but excluded under rule 1(iv). In this view of the matter, we agree with the Commissioner of Income-tax (Appeals) and reject the ground raised by the Revenue. " It is convenient to set out the provisions of clauses (iv) and (v) of rule I of the Second Schedule to the Act. They read thus : "1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of-. (iv) the debentures, if any, issued by it to the public : Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof ; and (v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowledging the indebtedness in, a specified sum at a fixed date, with interest thereon. It usually provides a charge by way of security and is often expressed to be one of a series of like debentures. Mr. Kumar also drew our attention to Pennington's Treatise on Company Law, Fourth Edition, where much to the same effect has been stated. The Supreme Court in Narendra Kumar Maheswari v. Union of India, AIR 1989 SC 2138, considered what a debenture was and held, after quoting Palmer's Company Law, that it had been defined to mean, essentially, an acknowledgment of debt with a commitment to repay the principal with interest. It also pointed out that an instrument which was compulsorily convertible into shares had to be regarded as equity and not as a loan or a debt. Mr. Kumar also drew our attention to the judgment of the Kerala High Court in CIT v. Cochin Refineries Ltd. [1983] 142 ITR 441. This was a case in which the assessee claimed relief under section 80J of the Income-tax Act, 1961, by asserting that certain dollar loans were debentures. The loans had been advanced against the issuance and sale of what were called " notes ". The Kerala High Court noted that the questions tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rat High Court repelled the contention, in our view, rightly, by holding thus (at page 205) : In the first place, by use of the words 'during a period of not less than seven years', the Legislature has indicated that the repayment of the loan under which the moneys are borrowed is spread over particular period and the use of the word 'during' brings in this spreading over of the amount of repayment over a period. Secondly, by using the words 'not less than seven years' what is contemplated is that the spread-over must be in such a manner that the final completion of the repayment goes beyond the period of seven years. The Bombay High Court in CIT v. Zenith Steel Pipes Ltd. [1990] 181 ITR 291, found that it was not in dispute before it that the assessee had borrowed moneys from financial institutions specified in clause (v) of rule 1 and that the moneys were borrowed under an agreement under which they were to be repaid during the period of not less than seven years. To its mind, the fact that the assessee was able to pay back the moneys before the expiry of the period of seven years was not relevant for the purposes of rule 1(v). In our view, for the reasons aforestated, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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