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TMI Blog1985 (3) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ey but had merely agreed to pay the consideration for the purchase of machinery in instalments to the foreign seller and such amounts could not be included in the capital base. To hold so, the ITO relied upon the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52. Thereupon, the assessee preferred appeals before the AAC of Income-tax, Madras, contending that r. 1(v) of the Second Schedule to the Surtax Act will be applicable and, therefore, the amount of Rs. 7,43,750 representing the outstanding amount due to M/s. Unitechna towards the purchase of machinery ought to be treated as forming part of the capital base for purposes of surtax. The AAC rejected this claim of the assessee. On further appeals by the assessee to the Tribunal, it took the view that the guarantee given by an established bank in India to the foreign seller for the repayment of the unpaid purchase consideration would render what was originally unpaid purchase money into a loan as well as borrowed money within the meaning of r. 1(v) of the Second Schedule and that that rule was not limited in its operation to capital borrowed for purposes of business and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding to consider these submissions, it is necessary to refer to the relevant terms of the agreement between the assessee and the foreign seller, M/s. Unitechna. Article V of the agreement deals with the terms of payment and dues as under : " In principle, the payment will be effected within the frame of the existing commercial and payments agreement between the GDR and India. 2. The total price of the machines, equipments and materials according to art. IV-1, amounting to Rs. 10,00,000, has to be paid by the purchaser to the seller. (a) 7.5% of the total price, i.e., Rs. 75,000 as advance payment on or before September 30, 1967, by transfer to the Deutsche Aubenhandels Bank AG, 108, Berlin, Behrenstr. 22 in favour of M/s. Unitechna, Aubenhandelsgeselleschaft MbH, 108, Berlin Behrenstr. 53154. (b) 7.5% of the total price, i.e., Rs. 75,000 by opening of an irrevocable and indivisible documentary letter of credit with the Deutsche Aubenhandels Bank AG. 108, Berlin, Behrenstr. 22, in favour of the seller, on or before September 30, 1967. (c) 85% of the total price, i.e., Rs. 8,50,000 become due in 16 (sixteen) equal half-yearly instalments, i.e., Rs. 53,125 each. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged to open an irrevocable banker's guarantee in favour of Unitechna on or before September 30, 1967, in respect of 85% of the total value of the machinery. Clause (4) obliges the assessee to pay interest at the rate of 4.5% per annum on the outstanding balance and though this amount is not included in the value of the contract, it is stipulated that interest should be paid together with the instalment. Clause (5) provides for the payment by the assessee to Unitechna of a penalty amounting to 0.5% for the delay in respect of any of the payments. There is no dispute that the assessee had purchased the machinery in accordance with the aforesaid terms and conditions and that it owed a sum of Rs. 7,43,750 which had also been guaranteed by a bank in India. The question is whether what was essentially unpaid purchase money even under the terms of the agreement got transformed into a borrowing and assumed the character of loan as a result of a guarantee in respect of this amount given by a bank in India in favour of the seller as the Tribunal was inclined to view it. Viewed in the light of the terms of the agreement referred to already, the arrangement between the assessee and Unitechn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itechna, though entitled to receive a debt from the assessee, cannot be termed as lender. The guarantee given by the bank and the addition of interest to the outstanding instalments would not, in our view, alter the relationship of purchaser and unpaid vendor between the assessee and M/s. Unitechna. We are also unable to appreciate the reasoning of the Tribunal to the effect that the outstanding amount can be regarded as moneys temporarily used by the assessee and to be returned to the foreigner according to specified scheme. Even assuming that the assessee had purchased the capital asset from the foreign supplier and the property in the capital asset has passed to the assessee, we are unable to appreciate how moneys payable by the assessee to the foreign seller can be treated as moneys used by the assessee as to treat it as money having been made available by the foreign seller to the assessee as a result of a borrowing by the assessee and to be returned to the foreign seller as provided in the agreement. We may now briefly refer to the decisions to which our attention was drawn by the learned junior standing counsel in this connection. Lakshmanier Sons v. CIT EPT [1950] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute cannot be regarded as borrowed capital. In Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC), the Supreme Court pointed out that an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan and though it may be that a loan of money results in a debt, every debt does not involve a loan and every creditor entitled to receive a debt cannot be regarded as a lender. Applying this to the present case, at best the assessee was a debtor, but the transaction by which the assessee became such a debtor, was not a loan borrowed and it cannot, therefore, claim that there was a borrowing by the assessee. In CIT v. Sundaram Fasteners Ltd. [1984] 149 ITR 773 (Mad), we had occasion to consider the question whether interest paid by the assessee on amounts paid by various persons for the purchase of the shares of another company held by the assessee should be allowed as deduction under s. 36(1)(iii) of the Act. The amounts received from the intending buyers of the shares were held not to arise out of an act of borrowing by the assessee and lending by the purchasers and, therefore, the assessee was not entitled to claim a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 947 is apposite. In that case, the assessee borrowed moneys from the Madras Industrial Investment Corporation Ltd. for the purpose of discharging its liabilities and also for payment towards machinery supplied. The amount outstanding to the Corporation as on January 1, 1963, which was the relevant date for the assessment year 1964-65 for purposes of assessment to surtax, was Rs. 8,82,607. The ITO included the entire amount in the computation of capital; but the Commissioner held that a sum of Rs. 5,89,607 should be treated as money not borrowed for the creation of a capital asset and will have to be excluded. The Tribunal agreed with that view except that it reduced the amount to be excluded to Rs. 5,71,747. Before this court, an argument was raised that even though moneys had not been borrowed for the immediate purpose of creating a capital asset, yet it had the object of creating a capital asset because the borrowed moneys were utilised for the discharge of loans already incurred for acquisition of machinery and that even if the immediate object is to be taken into account, that was also fulfilled, viz., liquidation of the debts of the company which were utilised for the purch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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