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TMI Blog1980 (11) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ember, 1957, the British Oxygen Co. Ltd. wrote a letter to the assessee in which it was made clear that the sale proceeds would be kept with the assessee for period of 7 years at a rate of 6% which was variable. Unfortunately, the letters negotiating the loans and the letter granting this loan had not been set out in extenso in any of the orders or annexures to the statement of case. Here we are setting out the gist of the letters as summarised in para. 2 of the statement of case. It is further stated that the permission of the Reserve Bank was also obtained, as a result of which the sale proceeds of 6,00,000 ordinary shares in question held by the British Oxygen Co. Ltd. less certain deductions for tax liabilities, etc., were allowed to be kept as loan with the assessee for a period of seven years on certain terms. The sum was actually returned to the British Oxygen Co. Ltd. in two instalments of Rs. 55,58,166 and Rs. 19,41,834 on the 10th March, 1966, and 23rd May, 1966, respectively. The sum had actually been kept in June, 1958, and were returned on the above two dates which fell beyond the period of 7 years. In these circumstances, the assessee-company requested the ITO to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The matter went up in appeal before the AAC. He went into the matter in greater detail. He has set out the history and thereafter observed that the contention before him was that the amount of Rs. 75,00,000 should be included in the computation of capital under cl. (v) of r. 1 to Sch. II and he referred to the relevant portion of the clause, which we shall also do presently. He also referred to the fact that the representative filed a copy of the letter dated 25th November, 1967, from the British Oxygen Co. Ltd. to the assessee which was reproduced. The portion he had reproduced is as follows : " We hereby confirm our previously expressed agreement that, when the proposed increase in issued share capital of 6,80,000 shares of Rs. 10 each at par to this company has been completed raising the issued share capital, which your company has, to 2,00,000 share of Rs. 10 each, we propose to sell 30% of our total shareholding, i.e., 6,00,000 shares of Rs. 10 each to the Indian public at a premium of Rs. 3.50 per share and to leave the proceeds of sale, less all expenses and capital gains tax, on loan to your company for a period of 7 years at the rate of interest from time to time applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of this, the amount of Rs. 75,00,000 has been used towards capital assets has not been proved by the appellant. Thirdly, there must be an agreement under which the repayment should be during a period of not less than seven years. The letter dated 25th November, 1957, from B.O.C. states. We hereby confirm our previously expressed agreement...' This letter and the fact that the amount of Rs. 75,00,000 was kept as a loan with the appellant for a period of not less than seven years should be taken as fulfilling condition No. (iii). The amount of Rs. 75,00,000 cannot be included in the computation of capital under clause (v) of rule to the Second Schedule as conditions (i) and (ii) are not fulfilled." There was an appeal before the Appellate Tribunal on this aspect and the Tribunal, in dealing with the said letter as referred to hereinbefore, observed-that the borrowings were not made in a country outside India, and, secondly, there was no evidence of actual creation of the capital assets from out of the borrowings. The Tribunal, thereafter, set out the assessee's arguments and also referred in para. 6 of its order that the departmental representative, on the other hand, had empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as involved the provision of substantial amounts of foreign exchange for the import of capital goods. Over and above the sum available from the subscription by the British Oxygen Company Ltd. of the sterling equivalent of Rs. 63 lakhs in the form of share capital, it was estimated that further foreign exchange to the extent of approximately Rs. 75 lakhs would be required for the programme. The company has, therefore, been negotiating with the Industrial Credit ` Investment Corporation of India Ltd. and the Commonwealth Development Finance Company Ltd., London, for foreign exchange loans, as follows, of an amount in pound sterling equivalent to U.S. $950,000 from the former and pounds 225,000 from the latter. It is expected that these negotiations will be successfully concluded very shortly. The assistance from The British Oxygen Company Ltd. in the form of loans is also an important feature of the company's arrangements for financing the expansion programme and details of these loans are given elsewhere in the annual report under 'Notes on Accounts'. Notes on Accounts: The loan of Rs. 75 lakhs from The British Oxygen Company Ltd. is in pursuance of the arrangement whereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said sum should be included in computing the capital of the assessee for the purpose of the Companies (Profits) Surtax Act, 1964 ? 2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the sum of Rs. 75,00,000 (Rupees seventy-five lakhs only) borrowed from British Oxygen Ltd. was utilised for the creation of capital assets in India was based on no evidence or was otherwise unreasonable or perverse ? Therefore, we have to examine these two aspects of the matter. For our present purpose, it is first necessary to set out the relevant provisions under which the inclusion of this amount of Rs. 75 lakhs in the computation of capital is claimed. For this purpose, we have to refer to r. I of Sch II to the C. (P.) S.T. Act, 1964, which reads as follows: " 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 (i) its paid-up share capital ; (ii) its reserves, if any, created under the proviso (b) to clause (vi-b) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (XI of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) deals with paid-up share capital; cl. (ii) deals with the reserves created under certain conditions; cl. (iii) covers the reserves of certain other conditions; and cl. (iv) deals with debentures. Lastly, cl. (v) deals with borrowings made from certain specified institutions and from any person in a country outside India. Now, it is significant that all these clauses are dealing primarily with the sources which form the capital base of the company. This is an indication that the emphasis in this rule is not on the situs of the transaction but on the sources from which the amounts are drawn to form the capital. Apart from that the opening expressions of cl. (v) are as follows: "Any moneys borrowed by it" (viz., the company concerned) " from Government or the Industrial Finance Corporation of India " or other specified institutions or any person in a country outside India ". Now, if the expression any person in country outside India " was meant to mean that the person must be of country outside India as well as the transaction of borrowing should be done outside India then it would be difficult to fit in with the other provisions of the Act. Take for an instance, was it the inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land or not. The same observations were also reiterated in the 9th Edn. of the same book at page 179. It is not necessary as we have said, in the view we have taken, because we are of the opinion that the situs of the borrowing is not a relevant consideration but the person or the source of borrowing is the relevant consideration, as mentioned in the first part of cl. (v) of r. 1 of Sch. II. The proviso, however, which we have set out, of that rule contemplates two further conditions, that is to say, it contemplates that " moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than 7 years ". On the facts, the Tribunal by referring to the factum of utilisation and the balance-sheet and the directors report, the relevant portions of which we have set out hereinbefore, has come to the conclusion that there was evidence that there was a utilisation of the moneys borrowed for the expansion of the capital base of the company. This question whether the money was utilised for an expansion of capital or for the purpose of capital is a question primarily of facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal had summarised the findings of the AAC in para. 4 of its order where it summarised that the AAC had held that the borrowings were not made of a person outside the country of India. There was no evidence about the actual creation of the capital asset from the borrowings. The Tribunal had not referred to the fact that the AAC had held in a way though not very clearly that the borrowing was not made for the creation of capital asset of the company. There is no categorical finding of the Tribunal on this question. The question No. 1 in I.T. Reference No. 8 of 1980 proceeds on the assumption that there was a finding of the Tribunal that the borrowing was for the creation of the capital asset and the question posed was, whether such a finding was correct in law. There is no question posed directing whether such a finding was perverse as stipulated in question No. 2, in I.T. Ref. No. 8 of 1980, in respect of the finding of the Tribunal on the aspect of utilisation of borrowing for creation of capital asset. It appears to us, however, that this is an important aspect, that is to say, that the utilisation of the borrowed money not only must be made for the creation of the capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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