JUDGMENT
S.P. Bharucha, C.J.
1. This is a reference under the Companies (Profits) Surtax Act, 1964 (for short, “the Act”). The question that we are called upon to answer, at the instance of the Revenue, reads thus :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the decision of the Commissioner of Income-tax (Appeals) by holding that the value of debentures issued in favour of financial institutions represented borrowings from these institutions and that they fulfilled the requirements of the provisions of rule 1(v) of the Schedule to the Companies (Profits) Surtax Act, 1964 ?”
2. The relevant assessment year is 1975-76.
3. In arriving at the capital base for the computation of surtax, the assessee claimed that the average value of the debentures which it had issued in favour of five institutions formed part of its capital base for surtax purpose. The debentures were issued on October 1, 1973. They were issued to the Industrial Credit and Investment Corporation of India Ltd., the Industrial Development Bank of India, the Industrial Finance Corporation of India, the Life Insurance Corporation of India and the Unit Trust of India. They were repayable in 14 half-yearly instalments commencing from December 1, 1975. Before the Income-tax Officer, the assessee relied upon rule 1(iv) of the Second Schedule to the Act. The Income-tax Officer held that the requirements of rule 1(iv) were not satisfied and disallowed the assessee’s claim. The assessee preferred an appeal. The Commissioner of Income-tax (Appeals) arrived at the finding that the assessee’s claim under rule 1(iv) of the Second Schedule to the Act could not be allowed. Before the Commissioner, the assessee advanced an alternative contention. It made a claim also under rule 1(v) of the Second Schedule to the Act. The Commissioner found that the debentures represented due assessee’s borrowings from various financial institutions, that the borrowing had been made for the purpose of creation of capital asset in India, that the debenture loans were to be repaid within a period of not less than seven years, and that, therefore, the conditions in rule 1(v) were satisfied. The Commissioner directed the Income-tax Officer to compute the capital base by taking into account the loans granted to the assessee by all the aforesaid financial institutions other than the Unit Trust of India. The Revenue preferred an appeal from the order of the Commissioner (Appeals) to the Income-tax Appellate Tribunal. The relevant portion of the Tribunal’s findings reads thus :
“….that the debentures represented borrowings from various financial institutions; they were borrowed for the creation of a capital asset in India and the redemption of the loans was to be within a period of not than seven years….
It is common knowledge that borrowals can be either converted into debentures or not. It is well-known that a debenture-holder is a creditor of the company as distinct from a shareholder. The debenture is a document creating an acknowledged debt (Ghosh on Company Law). While, in the Income-tax Act, 1961, the question is whether a loan covered by debentures should not be treated as a liability deductible under rule 19A, the question in the Surtax Act is quite different. The Surtax Act provides that certain borrowals have to be teated as part of the capital reserve. The question is not whether a debenture is a borrowal or not. A debenture is one type of borrowal and other loans not covered by any document of the type of debentures are also borrowals. One of the qualifications for inclusion in the capital base of debentures is that they must be debentures issed to the public. Other loans which could be included in the capital base are those advanced by certain financial institutions as enumerated in rule 1(v) of the Second Schedule to the Surtax Act with certain other stipulations regarding repayment. Therefore, we do not have to consider here whether a debenture is a borrowal or not. In the instant case, the debentures are not issued to the public. Therefore, they are not to be considered under rule 1(iv). Rule 1(v) relates to borrowals from financial institutions and thus the borrowals do not exclude debentures. If the intention of the Legislature was to exclude debentures issed to financial institutions also, rule 1(iv) would have been worded differently specifying that only debentures issed to the public excluding debentures issued to the financial institutions, would be included in the capital base. It is also possible to interpret that rule 1(v) covers all borrowals from financial institutions including those covered by debentures but excluded under rule 1(iv). In this view of matter, we agree with the Commissioner of Income-tax (Appeals) and reject the ground raised by the Revenue.”
4. It is convenient to set out the provisions of clauses (iv) and (v) of rule 1 of the Second Schedule to the Act. They read thus :
“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 – …
(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 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 monies are borrowed provities for the repayment thereof during a period of not less than seven years….”
5. It was contended by Mr. Raghavendra Rao, learned counsel for the Revenue, first, that the assessee had made a claim before the Income-tax Officer only under rule 1(iv) and that this aspect alone had been examined by the Income-tax Officer; therefore, the Income-tax Officer should be allowed to examine whether the borrowings by the assessee had been made for the creation of a capital asset as required by the rule 1(v). Mr. Rao contended, secondly, that debentures were not loans and that the case of the assessee did not, therefore, fall within rule 1(v). In this respect, he drew our attention to the definition of “debentures” in section 2(12) of the Companies Act. Debentures are there defined in inclusive terms thus :
“‘debenture’ includes debenture stock, bonds and other securities of a company, whether constituting a charge on the assets of the company or not.”
6. The contention that goes that goes to the root of the matter is the second contention of Mr. Raghavendra Rao. Mr. Kumar, learned counsel for the assessee, answering this contention, drew our attention to Palmer’s Company Law, Twenty-Fourth Edition. At page 666, in paragraphs 43-09, Palmer says :
“A company which has power to borrow may borrow in such manner as it thinks fit. It can, therefore, raise money on a legal mortgage of any specific portions of its property, or by equitable charge, e.g., deposit of title deeds, or by a floating charge on the whole undertaking of the company, or by bonds, or by promissory notes, or by debentures or debenture stock.”
7. The term “debenture” is dealt with in Chapter 44 (at page 672). It is said not to be a technical term. Palmer quotes the judgment of Lindley J. (in British India Steam Navigation Co. v. IRC [1881] 7 QBD 165) and Chitty J. (in Levy v. Abercorris Slate and Slab Co. [1887] 37 Ch D 260) in this connection and says that, in modern commercial usage, a debenture denotes an instrument issued by a company, providing for the payment of, or acknowledging the indebtedness in, a specified sum at a fixed date, with interest thereon. It usually provides a charge by way of security and is often expressed to be one of a series of like debentures Mr. Kumar also drew our attention to Pennington’s Treatise on Company Law, Fourth Edition, where much to the same effect has been stated.
8. The Supreme Court in Narendra Kumar Maheswari v. Union of India, , considered what a debenture was and held, after quoting Palmer’s Company Law, that it had been defined to mean, essentially, an acknowledgment of debt with a commitment to repay the principle with interest. It also pointed out that an instrument which was compulsorily convertible into shares had to be regarded as equity and not as a loan or a debt.
9. Mr. Kumar also drew our attention to the judgment of the Kerala High Court in CIT v. Cochin Refineries Ltd. [1983] 142 ITR 441. This was a case in which the assessee claimed relief under section 80J of the Income-tax Act, 1961, by asserting that certain dollar loans were debentures. The loans had been advanced against the issuance and sale of what were called “notes”. The Kerala High Court noted that the questions that arose for its consideration was : what was a debenture ?; were the loans in the real sense of the term ‘debentures’ ? After quoting from the judgments of Lindley J., Chitty J. and Palmar, the Kerala High Court found that the “notes” acknowledged the indebtedness of the company. They had been issued under the common seal of the company after consent to such issuance was secured from the Controller of Capital Issues. The agreement also provided that it was the intention of the parties that the ‘notes’ bore the same meaning as “debentures” in Indian law. The “notes” were transferable and they were in a series. Accordingly, the Kerala High Court upheld the conclusion of the Tribunal that the loans were debentures for the purpose of granting relief under section 80J of the Income-tax Act, 1961.
10. We think it necessary to look again at clauses (iv) and (v) of rule 1. Clause (iv) relates to debentures issued to the public, while clause (v) relates to moneys borrowed by the assessee from the Government or named or notified financial institutions. A debenture is issued to acknowledge a debt. It is, in the instant case, issued to acknowledge the debt owing by the assessee to the financial institutions from which it obtained loans. It is the finding of Commissioner, recorded by the Tribunal in the statement of case, that these borrowings were made by the assessee for the creation of a capital asset in India and that the redemption of the loans was to be within a period of not less than seven years. It is also clear from the statement of case that the debentures were repayable in fourteen half-yearly instalments commencing from December 1, 1975.
11. In relation to the requirement of the period of not less than seven years, our attention was drawn to the judgment of the Gujarat High Court in New India Industries Ltd. v. CIT [1977] ITR 181. It was contended on behalf of the Revenue before the Gujarat High Court that if the instalments for repayment were provided for in an agreement and some of the instalments were to be paid within a period of seven years, the terms of the proviso to clause (v) of rule 1 would not apply. In the alternative, it was contended that the proviso would not apply to those instalments repayment of which fell within the period of seven years. This, incidentally, was the view that the Income-tax Officer took in the instant case. The Gujarat High Court repelled the contention, in our view, rightly, by holding thus (at page 205) :
“In the first place, by use of the words ‘during a period of not less than seven years’, the Legislature has indicated that the repayment of the loan under which the moneys are borrowed is spread over a particular period and the use of the word ‘during’ brings in this spreading over of the amount 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.”
12. The Bombay High Court in CIT v. Zenith Steel Pipes Ltd. [1990] 181 ITR 291, found that it was not in dispute before it that the assessee had borrowed moneys from financial institutions specified in clause (v) of rule 1 and that the moneys were borrowed under an agreement under which they were to be repaid during the period of not less than seven years. To its mind, the fact that the assessee was able to pay back the money before the expiry of the period of seven years was not relevant for the purpose of rule 1(v).
13. In our view, for the reasons aforestated, the contention of the Revenue that the debentures are not borrowings and that the claim of the assessee falls outside the provisions of rule 1(v) must be rejected.
14. Great emphasis was laid by Mr. Raghavendra Rao upon the fact that the claim under rule 1(v) had not been made by the assessee before the Income-tax Officer. In his submission, the Income-tax Officer had no opportunity to examine whether the requirements of rule 1(v) of the Act were satisfied. Our attention was drawn by Mr. Rao to the judgment of the Supreme Court in Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1. It is difficult to see how this judgment can be of any assistance to the Revenue. The High Court had there held that, if an item of income was taxed, the question of its non-taxability ought to be taken to have been considered by the Income-tax Officer, though no claim of non-taxability had been made by the assessee before the Income-tax Officer. The Supreme Court did not find it possible to agree with the view of the High Court. The High Court had assumed that a portion of the profit in the relevant assessment year was exemption. The Supreme Court observed that it found no basis for the assumption in the statement of case drawn up by the Tribunal.
15. As we have mentioned, in the statement of case, the Tribunal has said that the Commissioner had held, “that the debentures represented borrowings from various financial institutions; they were borrowed for the creation of a capital asset in India and the redemption of the loans was to be within a period of not less than seven years.” The Tribunal proceeded upon this finding of fact and, agreeing with the Commissioner, held that the claim of the assessee under rule 1(v) was acceptable.
16. In the circumstances, we do not think that the matter requires to be remanded to the Income-tax Officer to enable him to consider whether the requirements of rule 1(v) have been met.
17. In the result, the question posed to us is answered in the affirmative and in favour of the assessee.
18. There shall be no order as to costs.