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TMI Blog1977 (2) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... estions of fact and law arising therein are typical and illustrative of the scope of the questions referred, we may deal with I.T.R.C. No. 15 of 1974 first. The questions of law referred for the opinion of this court in the said I.T.R.C. No. 15 of 1974 are the following : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 15,50,168 being the provision for taxation as on April 1, 1962, was not to be included in computing the capital for the assessment year 1963-64, for the purposes of levy of super profits tax ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 4,91,761 outstanding as on April 1, 1962, being the amount advanced by the National Grindlays Bank Ltd. to the assessee against bills drawn by the assessee on its customers for supplies was not moneys borrowed and outstanding for purposes of the computation of capital under the Super Profits Tax Act, 1963, for the assessment year 1963-64 ? " The assessee is a public limited company carrying on the business of breweries and the reference, I.T.R.C. No. 15 of 1974, respects proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neys borrowed " by it from its bankers-- M/s. National Grindlays Bank Ltd.--and were part of its capital. The corresponding figures in I.T.R.C. Nos. 7, 8, 9, 16 and 17 are Rs. 7,21,052, Rs. 4,23,558, Rs. 1,46,147, Rs. 10,91,539 and Rs. 4,71,963, respectively. The Income-tax Officer did not accept this contention but held that the amount represented a liability on the bills discounted and was only a contingent liability and could not constitute moneys borrowed and outstanding as on April 1, 1962. The Appellate Assistant Commissioner to whom the assessee appealed, noticing certain facts in his order dated October 18, 1976, called for a further report from the Income-tax Officer with a view to determining the character in which the said bank received payments in respect of the bills drawn by the assessee. In his report, the Income-tax Officer, relying on the correspondence with the bank on the matter, affirmed his earlier opinion that the nature of the transaction between the assessee and its bankers was a purchase of the bills and that what was given credit to in the account of the assessee was the value of the consideration for the purchase. The assessee, on the contrary, relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's account was the consideration therefor. The assessee's appeal before the Tribunal was, thus, unsuccessful. We ought perhaps to notice here another argument urged for the revenue before the Tribunal based on rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal held, on the basis of the said provision, that the amounts in question would, in any event, fall outside the pale of capital. However, by a separate order dated June 24, 1972, the Tribunal, on the admission made by the revenue that reliance on rule 1(v) or the proviso thereto was not apposite, made a record to that effect. It is necessary to record here that the revenue did not seek to support the order on the basis of rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Sri Ramamani, learned counsel for the assessee, contended that the transactions in question were as between a banker and its constituent and were in essence transactions of lending and borrowing and that the indorsements of the bills drawn on the assessee's two customers--Phipson Co. Ltd. and Herbertsons Ltd.--constituted collateral security for the advances made by the bank. The que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant received from the bank a letter dated December 28, 1961, intimating " we have today credited your account with Rs. 46,821.64 from your bill on Bombay for Rs. 26,703.69 Rs. Less Rs. 34.50 26,669.19 From your Bill on Calcutta for Rs. 20,178.70 Less Rs. 26.25 20,152.45 -------------------- 46,821.64 -------------------- As such, on December 29, 1961, the appellant passed the following entry : Rs. Rs . Bank charges Dr. 60.75 To N G. Bank Cr. 60.75 (being bank charges on bills) On the due date, the bill being paid by the purchaser the appellant passed the following entry : Interest paid account Dr. 399.48 To N G. Bank Cr. 399.48 (being interest on bills realised), this debit being made in accordance with the bank's letter dated March 30, 1962, to the effect " we have today debited your account with rupees three hundred ninety nine and paise forty-eight being interest on bill for Rs. 26,703.69 on Herbertsons Ltd., Bombay, paid." Again, the assessee is stated to have changed its accounting procedure in 1965 and the entries typical to these transactions are on these lines : " When hundi is drawn Rs. Rs. 9-12-1965 1. Bills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned as follows: " Discount :--A discount is defined as a loan upon an evidence of debt in which the compensation for the use of the money until the maturity of the debt is deducted from the principal and retained by the lender at the time of making the loan. The term ' discount ' has been interpreted to mean a charge for a loan in advance, whether called interest, compensation, or premium, and the ' discounting' of a note by a bank is understood to consist of the lending of money upon it, and deducting the interest of premium in advance. The term 'discount', when used in a general sense, is equally applicable to either business or accommodation paper and is appropriately applied to either loans or sales by way of discount when a sum is counted off or taken from the face or amount of the paper at the time the money is advanced upon it, whether that sum is taken for interest upon a loan or as the price agreed upon a sale." In Halsbury's Laws of England, fourth edition, volume 3, para. 151 referring to discounting of bills, it is stated : " Discounting of bills.--When a banker discounts a bill he buys it for its face value less a sum representing interest for the period which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , directing the payment to be made to the Standard Bank of South Africa in Johannesburg. On 7th September, 1944, the company delivered to the London branch of the same bank the bill of exchange together with the documents of title to the goods. In accordance with the arrangement made with the branch of the bank, the bank subsequently credited the company's account with the sum of pound 81. 1s. 6d. and simultaneously debited another account of the company with the same sum plus the sum representing interest at 5 per cent. calculated for the period which elapsed before the bill matured and the difference in the exchange. In proceedings for assessment to excess profits tax, the company contended that the said pound 81.1s. 6d. credited to its account was borrowed money, within the meaning of para. 2 of Schedule (VII) to the Finance (No. 2) Act, 1939, which provided that " no borrowed money shall be deducted for the purpose of excess profits duty ". Wrottesley J., in the King's Bench Division, dealing with the question, observed : " The answer to the question whether this was a loan or not depends on what the parties, the company and the bank, agreed at the time expressly, if there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that stage, as it appears to me, the company's liability, if they desired to resort to it, apart from the bill itself ....... Another point which Mr. Hills made was this. He said : If I look at the company's accounts I shall find that this sum of money and many others like it are described in the company's own accounts as contingent liabilities in the shape of discounted bills at 31st March, 1941. That is true. But it seems to me that that is really an accurate description. It is true it is contingent because, of course, they would only in fact be liable to the bank on the bill in the event of the customer either declining to accept it or not meeting the bill at maturity. So I think it is a proper description of the liability, but that does not make it any the less a liability ....... " In the present case as stated earlier, full amount of the bill was given credit to in the account of the assessee with the bank and no sum towards what amounts to a " discount " was charged. Interest on the amount advanced was charged from the date of the credit till the date of realisation of the bills. Besides, at the time of their delivery to the bank, they had not been accepted by the dra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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