TMI Blog1975 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ant previous years being calendar years 1963, 1964, 1965 and 1966, respectively. The question arises in connection with computation of capital with reference to the provisions of the Companies (Profits) Surtax Act, 1964. The assessee is a public limited company. It established a photo-paper factory at Mulund near Bombay in 1963. For the purpose of setting up that factory, it applied for a loan of Rs. 50 lakhs from the Bank of Baroda Ltd., Bombay, on May 2, 1961. In this letter the assessee-company informed the bank that it required the loan of Rs. 50 lakhs in five instalments of Rs. 10 lakhs each, the first instalment to be received by the company in July, 1961, and the last instalment of the loan to be received in April, 1962. It was further stated in the letter that the production of the company was expected to commence from June, 1962, and, hence, the company would not be in a position to commence repayment of the loan before April, 1963. The bank, therefore, was requested to allow the assessee-company to pay the first instalment of repayment in April, 1963, and the subsequent instalments as per the schedule attached to the application for loan and that too within a period of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this instalment due on June 30, 1963, the assessee-company addressed a letter dated March 19, 1963, to the managing director of the Bank of Baroda requesting that the schedule for repayment of loan should be extended by one year for each of the instalments so that the first instalment would be paid on June 30, 1964, instead of June 30, 1963, as originally agreed. In reply to this letter the Bank of Baroda wrote to the assessee-company on April 3, 1963, stating that the bank was agreeable to consider the assessee-company's request for postponement of the payment of instalments provided the entire loan was repaid before December 1, 1968. As regards rescheduling of instalments of loan, the Bank of Baroda stated that the assessee-company could either have postponement of all instalments by a period not exceeding six months or have a change in the number of instalments. The Bank of Baroda further stated that on receipt of reply from the assessee-company, the bank would approach the Refinance Corporation for Industry Ltd. for modification in terms of repayment and thereafter the bank would communicate to the assessee-company the decision of the Corporation. By its letter dated April 24, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etters was of November 18, 1964, the second letter was of November 12, 1965, the third letter was of November 15, 1966, the fourth letter was of November 15, 1967, and the fifth letter was of November 15, 1968. In each of these five letters the Bank of Baroda reminded the assessee-company that the instalment (according to the rescheduled scheme) would be due on or before December 1 of that particular year and the assessee-company was called upon to remit the amount of the instalment on the due date and on November 15, 1968, the assessee-company was called upon to pay up the amount of the last instalment, namely, Rs. 12,50,000, due on December 1, 1968, together with the amount of interest from July 1, 1968, to November 30, 1968. It may be pointed out that under the terms of the agreement of December 1, 1961, interest on the loan under the agreement was to be paid on June 30, and December 31, in each calendar year and since the last instalment of the loan was to be repaid on December 1, 1968, the interest from July 1, 1968, to November 30, 1968, was also demanded in the letter of November 15, 1968. It is not in dispute that these five instalments, according to the rescheduling of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Second Schedule to the Act were not satisfied. The assessee took the matter in further appeal to the Tribunal. Before the Tribunal it was not disputed on behalf of the assesseecompany that if it was held that the agreement dated December 1, 1961, was not modified as contended by the company, the loan of Rs. 50 lakhs would not qualify for inclusion in computing its capital for the purposes of surtax under rule 1(v) of the Second Schedule to the Act. The first instalment of Rs. 10 lakhs was advanced in July, 1961, and the last instalment of repayment of loan was payable as originally set out in the Schedule to the agreement of December 1, 1961, on June 30, 1968, and hence if it was held that the agreement of December 1, 1961, was not modified as regards the terms of repayment, the loan of Rs. 50 lakhs would not qualify for inclusion under rule 1 (v). According to the Tribunal, the assessee-company had failed to prove that there was modification of the terms regarding repayment of the loan as alleged by the assessee-company. The Tribunal, therefore, held that the loan did not qualify for inclusion in computing the capital of the assessee-company for the purposes of surtax. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of--...... (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 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 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 seven years. " Under rule 3 of the Second Schedule where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the earlier rules of the Second Schedule is increased by any amount during that previous year on account of increase of paid-up share capital or issue of debentures or borrowing of any moneys referred to in clause (v) of rule 1 or is reduced, inter alia, by repayment of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable or based on no evidence and that too by a specific question framed for the purpose. Mr. Kaji relied on the dictum of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC), where the Supreme Court observed at page 64 : "........ it seems to us that, in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under section 66(1). If he has failed to file an application under section 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other. " Section 66(1) referred to in this passage is section 66(1) of the Indian Income-tax Act, 1922, equivalent to section 256(1) of the Income-tax Act, 1961. It may be pointed out that under the Companies (Profits) Surtax Act, 1964, section 18 provides that section 256 of the Income-tax Act, 1961, applies to proceedings under the Companies (Profits) Surtax Act, 1964. As regards this preliminary contention Mr. Kaji also relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is justification for the argument put forward on behalf of the appellant." Following the earlier decisions in India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC) and Commissioner of Income-tax v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), the Supreme Court held in Commissioner of Income-tax v. Greaves Cotton Co. Ltd. [1968] 68 ITR 200 (SC), at page 206: " It is well established that the High Court is not a court of appeal in a reference under section 66 of the Income-tax Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of the High Court to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts. It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is unreasonable or perverse. But, in the hearing of a reference under section 66 of the Income-tax Act it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded on the footing that a formal agreement or document setting out the terms of the modification of the original agreement of December 1, 1961, was required to be executed. The question that has to be asked in this connection is, whether if a similar point had arisen before the High Court in second appeal, it could be said that the conclusion of the District Court in the same set of facts that there was no modification of the original agreement of December 1, 1961, could be said to be a finding of fact merely or a mixed question of law and fact. It is not open to the High Court to take into consideration any material other than the materials which the Tribunal took into consideration but while considering what were the formalities, if any, required by law to be gone through before the agreement of December 1, 1961, could be modified, the Tribunal has interpreted the basis agreement of December 1, 1961, which formed the contractual relationship between the bank and the assessee-company and while interpreting that basic document, the Tribunal has, in our opinion, committed certain errors in law. It is the commission of those errors which ultimately led the Tribunal to insist th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, even an oral agreement to modify the terms of the agreement of December 1, 1961, could be proved provided evidence about that oral agreement was led. In our opinion, the Tribunal has erred in overlooking the provisions of proviso (4) to section 92 of the Indian Evidence Act when it held that, in the absence of a written agreement setting out the terms of the modification of the original agreement of December 1, 1961, that agreement of December 1, 1961, could not be said to have been modified. It is in this very narrow field, therefore, that it can be said there is a mixed question of law and fact as regards question No. (1) referred to us. In order to decide whether the agreement of December 1, 1961, was modified or not, it would be necessary to refer to some of the documents which have been filed in this case or which have been referred to in the order of the Tribunal. The first letter is of March 29, 1961, at annexure " J ", addressed by the assessee-company to the Bank of Baroda Ltd., Bombay. The letter says : " As per the conversation the undersigned had with you, we enclose herewith the necessary forms of application duly filled in. We also enclose herewith a stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown by annexure " M " in connection with the application for term loan of Rs. 50 lakhs under the refinance scheme : " With reference to your application for a loan of Rs. 50 lakhs (Rs. fifty lakhs) under the refinance scheme we are glad to inform you that you have been sanctioned a loan of Rs. 50 lakhs as requested by you against a demand pronote to be signed by the company and against an equitable mortgage of the company's land, building and machinery, etc., situated at Baroda and also land and building under construction at Mulund and against machinery which the company will be importing in connection with its proposed project for the manufacture of photographic printing paper, costing about Rs. 85.90 lakhs. The Refinance Corporation have accepted the proposal in principle. Interest will be charged on this loan at 63% p.a. Then the agreement of December 1, 1961, was entered into between the Bank of Baroda and the assessee-company. The second recital of the agreement, annexure " N ", mentions : " WHEREAS THE BORROWER has applied to the bank for a loan advance of Rs. 50,00,000 (Rupees fifty lakhs only) upon the basis of and for the purposes set forth in the (sic) 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind we shall not be able to repay the first instalment due in June, 1963, of Rs. 7,50,000. We shall, therefore, be obliged if you will kindly grant us an extension of one year. Similarly, the other instalments due in 1964 and subsequent years may also be extended for one year. Thus, the entire repayment of schedule will be extended for one year commencing from the 1st instalment in June 1964, to the final instalment on 30th June, 1969. We have personally explained to you the reasons in detail. " This was addressed to the managing director of the Bank of Baroda Ltd. and the signatory was the director of the managing agents of the assessee-company. On April 3, 1963, the manager of the Bank of Baroda wrote back to the assessee-company as follows : " We refer to your letter dated 19th March, 1963, regarding terms of repayment of the above advance and have to advise you that the bank is agreeable to consider your request for postponement of the payment of the instalments provided the entire loan is repaid before 1st December, 1968. You may either have a postponement of all instalments by a period not exceeding six months or have a change in the number and amount of instalmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no written communication from the Bank of Baroda to the assessee-company setting out that the Refinance Corporation had agreed to the modification and rescheduling of the repayment of the loan of Rs. 50 lakhs. There is no document on the record showing as to what was the arrangement arrived at between the Refinance Corporation and the Bank of Baroda regarding the rescheduling of the repayment of the loan of Rs. 50 lakhs. However, we have got this contemporaneous document in the shape of the minutes of July 24, 1963, where, according to the chairman, the bank had informed the company that the Refinance Corporation for Industry Ltd. had agreed to the rescheduling of the payment and that the bank would send the necessary documents for execution by the company in that connection. The Tribunal, while considering all this evidence found that it was necessary that the Refinance Corporation should also agree to the modification of the original agreement of December 1, 1961. The Tribunal has observed in paragraph 7 of its order : " It is clear from the letter dated April 3, 1963, written by the Bank of Baroda Ltd. to the assessee-company that the Bank of Baroda was to approach t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt of the reply from the assessee-company, the bank would approach the Refinance Corporation for Industry Ltd. for a modification in the terms of repayment and thereafter communicate to the assessee-company the decision of the Corporation, it was merely trying to protect its own interest in the arrangement with the Refinance Corporation. Between the assessee-company and the Bank of Baroda the only question was as to whether there was an agreement between the bank and the assessee-company to modify the terms of the repayment. Merely because there is a reference to a concurrence on the part of the Refinance Corporation, it does not mean that such a concurrence on the part of the Refinance Corporation was a condition precedent to the agreement of modification being entered into. Really speaking, the three letters, of March 19, 1963, from the assessee-company to the Bank of Baroda, of April 3, 1963, from the Bank of Baroda to the assessee-company, of April 24, 1963, by the assessee-company to the Bank of Baroda, go to show that, first, there was a proposal for modification of the terms of the agreement. This proposal proceeded from the assessee-company. The Bank of Baroda was agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this connection. The only document, if any was to be executed, as between the Bank of Baroda and the assessee-company, was a formal agreement. In our opinion, in law, there was no necessity to have a formal agreement setting out the terms of the modification and if the parties referred to the execution of any such formal agreement, it was merely a matter of keeping the record and setting out in formal terms the terms of the modification recorded in the letters of April 3, 1963, and April 24, 1963. In our opinion, the Tribunal has erred in law in overlooking this important aspect of counter-proposal by the bank as set out in the letter of April 3,1963, and acceptance of that counter-proposal by letter of April 24, 1963. Once the agreement of modification, was complete, no further document, really speaking, was necessary and the reference in the minutes book of the board of directors of the assessee-company of the meeting of July 24, 1963, to the execution of a formal agreement was merely a formality as compared with the substance of the agreement between the parties. The five letters addressed by the Bank of Baroda to the assessee-company in the month of November of each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of Baroda to the assessee-company, we get the reference to the Industrial Development Bank instead of to the Refinance Corporation for Industry Ltd. The attention of the Tribunal was drawn to the resolution passed by the board of directors of the assessee-company on July 24, 1963, but the Tribunal held that there must have been correspondence between the assessee-company and the Bank of Baroda conveying the information referred to in the resolution of the board of directors and the best evidence to prove that the bank and the said Corporation had agreed to the modification of the terms regarding repayment was the letter of the bank itself and since that letter was not produced on the record of the case, the Tribunal declined to hold that there was a modification of the terms of the agreement between the parties. In our opinion, the Tribunal has overlooked the provisions of section 92, proviso (4), of the Indian Evidence Act, and has also overlooked the fact that the contracting parties, namely, " the Bank of Baroda and the assessee-company, were the only two parties concerned who were to arrive at an agreement for modification and once that agreement for modification was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income has to be added back in computing the chargeable profits for purposes of surtax under this particular Act. Therefore, considering the scheme of the First and the Second Schedules to the Act it is in contemplation of the legislature that the moneys borrowed may fluctuate from year to year depending upon the actual money advanced under the agreement and the amount of repayment in course of time. Therefore, It is not possible to accept the contention of Mr. Kaji for the revenue that clause (v) contemplates a lump sum advance all received at one particular time. One must not forget that these moneys are being advanced by financial institutions or the Government and they are being borrowed for the creation of capital assets in India. It is, therefore, not likely that the borrower would receive a lump sum payment and go on paying interest when in fact the entire amount is not required by him for the purposes of creation of the capital asset all at a time. Under these circumstances it is following the usual commercial practice that the increase and decrease in the sums borrowed is contemplated and, therefore, what we have to consider is the amount actually borrowed and we have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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. It is obvious that since the legislature has in contemplation the repayment of the loan, the period of seven years must mean from the date of the payment of the loan or the moneys advanced under the agreement and, therefore, what has really to be looked at is whether, on an interpretation of the terms about repayment, the agreement provides for the repayment of the entire loan on a date beyond the period of seven years counting from the date of the initial advance under that agreement. Unless this interpretation is placed on the last part of the proviso to clause (v) of rule 1 of the Second Schedule, we will not be giving full effect to the words " repayment thereof " and " during a period of not less than seven years ". In our opinion, the legislature has provided an outer limit to the repayment of the loan by using the words " not less than seven years ". Therefore, if the spread-over of the repayment has been provided in the terms of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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