TMI Blog1993 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... enture holders make debentures redeemable before the expiry of seven years?" At the instance of the Revenue : "(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-company was entitled to inclusion in its capital base 49 per cent. of the debentures of Rs. 60 lakhs subscribed by the I.C.I.C.I. and the L.I.C. ? (4) On the facts and in the circumstances of the case, whether the Tribunal having held that the debentures were not issued to the public and, therefore, conditions of clause (iv) were not complied with, was justified in again considering the question of its inclusion under clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" (The questions are renumbered for the sake of convenience). The relevant assessment year is assessment year 1974-75. The relevant facts having a bearing on the subject-matter of this reference are briefly summarised as under : (a) The assessee is a limited company manufacturing air compressors, conveyors, gears and other pneumatic tools. On or about March 29, 1972, the assessee-company issued debentures of Rs. 100 lakhs to the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benture as also the convertible portion of each debenture which is not so converted together with interest accrued up to the date of payment against the surrender of the debentures to be redeemed. Provided, however, that the company shall have the option to redeem the debentures mentioned above by lots at any time on or after the expiry of ten years from the date of allotment but not later than the expiry of twelve years from the date of allotment subject to the following provisions : (a) The debentures to be redeemed as aforesaid shall be determined by a drawing which the trustees shall cause to be made at the instance of the company and every such drawing as aforesaid shall be made in office hours on a working day at the registered office of the company or at the head office of the trustees, as the case may be, and shall be made in the presence of the trustees ; (b) Forthwith after every such drawing the trustees shall notify to the company in writing the number of debentures which shall have been drawn for redemption and the company shall thereupon give to such debenture holders, whose debentures have been so drawn at least one month's prior notice in writing in the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a company for the purpose of surtax. The said Rules are contained in the Second Schedule to the Companies (Profits) Surtax Act, 1964. Rule 1(i) is also relevant for consideration of the question referred to us. The said Rules read as under: "THE SECOND SCHEDULE 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 ; . . (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 the 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 Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India : Provided that such moneys are borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a second appeal before the Tribunal. By its order dated March 5, 1981, the Tribunal partly allowed the appeal and allowed the claim of the assessee to the extent of 49 per cent. of Rs. 60 lakhs, i.e., the non-convertible portion of debentures redeemable after the expiry of ten years from date of allotment. In the first instance, it is necessary to consider as to whether the debentures are not borrowings and the borrowings in the form of debentures fall outside the purview of rule 1(v). In CIT v. Motor Industries Co. Ltd. [1993] 199 ITR 375, Chief Justice, S. P. Bharucha, as he then was, speaking for the Division Bench of the High Court of Karnataka, in terms, rejected the contention of the Revenue that the debentures were not borrowings. Rule 1(v) of the relevant rules applies to all borrowings from the categories of persons named therein whether in the form of debentures or otherwise except in respect of debentures issued to the members of the public covered under rule 1(iv) and the borrowings covered by the proviso of rule 1(v) of the said Rules. The borrowings in question supported by debentures which are the subject-matter of this reference do not fall under rule 1(iv) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions herein did not form part of any "public issue" of debentures. The assessee did not make any public issue of the debentures. Rule 1(iv) of the said Rules is thus inapplicable. In our opinion, rule 1(v) of the Rules is applicable to all borrowings including against debentures other than debentures issued to the public provided the monies are borrowed for creation of a capital asset in India and the company is not obliged to repay the loan within a period of less than seven years. Merely because the debentures issued to the public are separately provided for in rule 1(iv) thereof, it does not follow that the borrowings from the financial institution are excluded from the operation of rule 1(v) just because the same are supported by the issue of debentures. Learned counsel for the Revenue submits that in view of the specific provision contained in rule 1(iv) of the Rules providing for inclusion of debentures issued to the public in the capital base of the company, borrowings in the form of debentures from the financial institutions and others are excluded from the purview of rule 1(v) of the Rules by implication. It is not possible to accept this submission. If such a constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el J., refused to apply the maxim "where to have done so would have produced a wholly irrational situation". In the abovereferred Supreme Court judgment in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392, the apex court observed that the abovereferred doctrine had no universal application and it did not apply unless the general and special provision occupied the same field. In this case, rule 1(iv) deals with borrowings in the form of debentures from the "public" generally when there is a public issue of debentures, and rule 1(v) deals with borrowings from financial institutions and others named therein. Both the sub-rules do not occupy the same field. Both the sub-rules provide for borrowings from different categories of lenders and occupy different fields. Learned counsel for the assessee has submitted that borrowings from financial institutions covered under rule 1(v) of the said Rules cannot be excluded from the purview thereof merely because the same are supported by instruments of debenture. Learned counsel for the assessee is clearly right. We accept the submission made by learned counsel for the assessee and reject the submission made by learned counsel for the Revenue. W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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