JUDGMENT
B.J. Divan, C.J.
1. In this case, at the instance of the assessee, the following two questions have been referred to us for our opinion :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the agreement dated December 1, 1961, was not modified as urged by the assessee-company and that the repayment of the loan was to be made within a period of seven years ?
(2) Whether, on the facts and in the circumstances of the case, the loan of Rs. 50,00,000 taken by the assessee-company from the Bank of Baroda Ltd. qualified for inclusion in computation of its capital for the purposes of surtax chargeable under the Act ?”
2. The facts leading to this reference are as follows. We are concerned with assessment years 1964-65, 1965-66, 1966-67 and 1967-68, the relevant 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 seven years. The Bank of Baroda Ltd. agreed to advance the loan of Rs. 50 lakhs under a refinance scheme against demand promissory notes signed by the company and equitable mortgage of the company’s properties. On December 1, 1961, an agreement was executed between the assessee-company and the Bank of Baroda Ltd. incorporating the terms and conditions under which the loan of Rs. 50 lakhs was advanced. The company’s proposal as contained in its letter of May 2, 1961, was deemed to constitute the basis of the agreement. Schedule II to the agreement provided for instalments of repayment and it was provided that the loan of Rs. 50 lakhs was to be repaid by six instalments as follows :
Rs.
June 30, 1963 7,50,000 June 30, 1964 7,50,000 June 30, 1965 7,50,000 June 30, 1966 7,50,000 June 30, 1967 10,00,000 June 30, 1968 10,00,000
3. Thus, the loan was to be repaid by six annual instalments, the first four instalments being of Rs. 7,50,000 each and the last two instalments being of Rs. 10 lakhs each. This was the schedule for repayment of the entire loan of Rs. 50 lakhs as set out in the agreement. It is not in dispute that the loan of Rs. 50 lakhs was advanced by instalments as requested by the assessee-company in its letter of May 2, 1961, that is, the first amount of Rs. 10 lakhs was borrowed out of this loan of Rs. 50 lakhs in July, 1961, and the last part of the loan was taken in the month of April, 1962, or round about that date. By the time the agreement of December 1, 1961, was executed, the company had already received Rs. 20 lakhs by two instalments of Rs. 10 lakhs each but it was upon the agreement of the parties that this amount of Rs. 20 lakhs was treated as part of the loan of Rs. 50 lakhs for which the agreement was executed on December 1, 1961.
4. After the amount was borrowed, the assessee-company found that there was delay in production of photographic paper for which the plant was set up and for the setting up of which plant loan of Rs. 50 lakhs was borrowed from the Bank of Baroda. Because of this delay, the assessee-company was not in a position to repay the loan as per the terms of the agreement for repayment as set out in Schedule II to the agreement of December 1, 1961. The first instalment of Rs. 7,50,000 was repayable on June 30, 1963, according to the original terms of the agreement. Since it was not in a position to pay 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, 1963, to the Bank of Baroda, the assessee-company stated that the loan would be repaid before December 1, 1968, by the following five instalments, namely : –
First instalment of Rs. 7,50,000 on 1-12-1964.
Second instalment of Rs. 7,50,000 on 1-12-1965.
Third instalment of Rs. 10,00,000 on 1-12-1966.
Fourth instalment of Rs. 12,50,000 on 1-12-1967.
Fifth instalment of Rs. 12,50,000 on 1-12-1968.
5. Thus, under the new arrangement which the assessee-company agreed to, instead of six instalments, the loan was to be repaid by five annual instalments each of them payable on or before December 1 of the relevant year and the first of such instalments to start on December 1, 1964. The first two instalments under the new arrangement were of Rs. 7,50,000, the third instalments was of Rs. 10 lakhs and the last two instalments were to be of Rs. 12,50,000 each. Thereafter, till November 18, 1964, there appears to have been no correspondence but there was a resolution of the board of directors of the assessee-company at the meeting of July 24, 1963, and the resolution shows that the chairman informed the meeting that, as decided at the previous board meeting, the company had written to the bank that the loan of Rs. 50 lakhs would be repaid in the five instalments which we have already referred to. The bank, according to the minutes, informed the company that the Refinance Corporation for Industry had agreed to the above mode of payment and the bank would send necessary documents for execution by the company in that connection. The directors thereupon resolved that the company should execute such documents as may be required by the Bank of Baroda Ltd. to be executed in connection with the modification of the terms of repayment of the loan of Rs. 50 lakhs granted to the company under the refinance scheme as requested by the company and agreed to by the bank and it authorised the affixing of the common seal of the company to such of the documents as may be required to be sealed in the presence of any two directors of the company who were to sign the same and that the documents be countersigned by the managing agents of the company. Thereafter, five letters were written by the Bank of Baroda to the assessee-company shortly before the respective dates of each of the instalments falling due on December 1 of each calendar year from 1964 onwards. The first of such letters 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 reschedule 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 payment of instalments of the loan, were, in fact, paid on each of the due dates, that is, December 1 of each of the five years commencing from 1964. Apart from these five letters no other document in the shape of a regular agreement modifying the agreement of December 1, 1961, nor any letter from the Bank of Baroda indicating that it had agreed to the terms proposed by the assessee-company regarding rescheduling of the payment of instalments, was brought on the record; there was no document to show that the Bank of Baroda had approached the Refinance Corporation for Industry for modification of the terms of repayment and whether the said Corporation had agreed to such modification. The Bank of Baroda Ltd., in its turn, had obtained refinance from the Refinance Corporation for Industry Ltd. in respect of the loan advanced by the Bank of Baroda to the assessee-company. The question arose whether under the provisions of the Companies (profits) Surtax Act, 1964, in computing the capital employed for the purpose of surtax under the Act, moneys borrowed by the assessee-company from the Bank of Baroda were includible in the total amount of capital in accordance with rule 1,clause (v), of the Second Schedule to the Act. According to the assessee-company, under the terms of the agreement as modified, the last instalment for repayment of the loan was payable on December 1, 1968, and since the first amount under the loan was advanced in the month of July, 1961, there was a period of not less than seven years between the first instalment of payment of the loan and the last instalment of repayment. The assessee-company contended that the loan would qualify for inclusion in the computation of capital of the assessee for the purpose of surtax under the Act. The Income-tax Officer rejected the assessee-company’s contention and held that, since the loan was to be repaid within a period of seven years, it could not be included in computing the capital of the assessee-company. The assessee-company carried the matter in appeal to the Appellate Assistant Commissioner who confirmed the view taken by the Income-tax Officer. The Appellate Assistant Commissioner held that since the repayment of the loan was agreed to be made under the original agreement of December 1, 1961, and was in fact made within a period of seven years, the conditions laid down in the proviso to rule 1(v) of 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 assessee-company 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 Tribunal, therefore, dismissed the appeals filed by the assessee-company. Since the same question arose in each of the four assessment years with which we are concerned, four appeals were filed before the Tribunal and they were all disposed of by one common judgment.
6. In order to appreciate the contentions urged before us it is necessary to notice that under section 4 of the Companies (Profits) Surtax Act, 1964, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in the Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Now the statutory deduction under section 2, sub-section (8), means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater. The “chargeable profits” under section 2(5) means the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. Under the First Schedule rules for computing the chargeable profits are set out and the Schedule provides that in computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act has to be adjusted as set out in the different rules in the First Schedule. Under the Second Schedule, rules for computing the capital of a company for the purposes of surtax for the purpose of computing the statutory deduction are set out. It is obvious that larger the amount of capital, the larger is the amount representing ten per cent. of that capital and since the statutory deduction is an amount representing ten per cent. of the capital of the company or an amount of two hundred thousand rupees, whichever is greater, the company contends for computation of its capital in such a manner that the figure of capital as computed in accordance with the rules under the Second Schedule is as large as possible in accordance with law. Under rule 1 of the Second Schedule it is provided :
“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 – ……….
(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 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.”
7. 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 any such moneys, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount the same proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous year. Thus, by reading rules 1 and 3 together, the average capital employed by the company throughout the year is ascertained and it is that capital of which ten per cent. is considered for the statutory deduction under section 2, sub-section (8). A pointed out above, under section 4, the income of the company as computed under the provisions of the First Schedule which is in excess of the statutory deduction, is taxable.
8. It is, clear, therefore, that so far as clause (v) of rule 1 is concerned, the following five requirements must be met before a particular loan or borrowing qualifies for inclusion in the capital under rule 1(v). Those five requirements are :
(1) As of the first day of the previous year there must be moneys borrowed by the company.
(2) The moneys must have been borrowed from any one of the institutions or the Government as mentioned in clause (v) so far as borrowing in India are concerned or they may be borrowed from any person in a country outside India.
(3) The moneys must have been borrowed for the creation of a capital asset in India.
(4) They must have been borrowed under an agreement, and
(5) The agreement must provide for the repayment of the borrowed moneys during a period of not less than seven years.
9. Unless all these five conditions are met, the amount of loan cannot qualify for inclusion in capital for the purposes of computing the capital of the company for the purposes of surtax under rule 1 of the Second Schedule. As pointed out earlier while narrating the facts leading to this reference, one of the questions before the Tribunal was whether the company had established that there was a modification as regards the terms of repayment set out in the original agreement of December 1, 1961.
10. It was contended by Mr. Kaji on behalf of the revenue as a preliminary objection that the finding of the Tribunal that there was no modification of the terms of the agreement of December 1, 1961, was a finding of fact and that it could not be disturbed by the High Court unless that finding of fact was challenged as being perverse or unreasonable or based on no evidence and that too by a specific question framed for the purpose.
11. 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 filed 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.”
12. 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.
13. As regards this preliminary contention Mr. Kaji also relied upon the following observations of Ramaswami J. in Commissioner of Income-tax v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), at a page 613 of the report :
“On behalf of the appellant Mr. Sen submitted at the outset that the High Court was not legally justified in interfering with the findings of fact reached by the Appellate Tribunal and in concluding that there was no arrangement or scheme between the lender and the borrower for the transference of funds from Pudukottai to Madurai. In our opinion, there is justification for the argument put forward on behalf of the appellant and the High Court erred in law in interfering with the findings of the Appellate Tribunal in this case. In India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC) it was pointed out by this court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact first by an application under section 66(1). If the party concerned has failed to file an application under section 66(1) expressly raising the question about the validity of the findngs of fact, he is not entitled to urge before the High Court that the findings are vitiated for any reason.”
14. Similar observations are also to be found in Commissioner of Income-tax v. Kamal Singh Rampuria [1970] 75 ITR 157 (SC). At page 160 of the report, Ramaswami J., delivering the judgment of the Supreme Court, observed :
“On behalf of the appellant it was pointed out that the basis of the reasoning of the High Court was that there was no evidence to support the finding of the Tribunal that the Income-tax Officer had reason to believe that there was any omission on the part of the assessee to disclose fully and truly all material facts necessary for the assessment year 1945-46. It was argued that in doing so, the High Court answered a question entirely different from the one referred to it and, therefore, exceeded the jurisdiction conferred on it by section 66(1) of the Act. In other words, the argument was that, in the absence of a question whether the finding of the Tribunal was based on no evidence or that it was perverse, the High Court exceeded its jurisdiction in examining for itself the materials in support of the Tribunal’s finding and acting as a court of appeal. In our opinion, there is justification for the argument put forward on behalf of the appellant.”
15. Following the earlier decision 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 Commssioner 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 question under section 66(1). In India Cement Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC) it was pointed out by this court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact, first, by an application under section 66(1). If the party concerned 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 any reason. The same view has been expressed by this court in Commissioner of Income-tax v. Sir Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC). We are, therefore, of the opinion that the High Court was in error in embarking upon a reappraisal of the evidence before the Appellate Tribunal and in setting aside the finding of fact of the Appellate Tribunal that the termination of the managing agency agreement was not a bona fide transaction and the same was done for an improper or oblique purpose.”
17. So far as the first question which has been referred to us is concerned, the question before the Tribunal was whether the original agreement of December 1, 1961, was modified by mutual agreement between the assessee company and the Bank of Baroda. The Tribunal after taking into consideration various facts came to the conclusion that in the absence of any document setting out formally the terms of the modification of the original agreement as contemplated by the resolution of the board of directors of July 24, 1963, there could not be any modifications of the agreement of December 1, 1961. The Tribunal also held that in the absence of any documentary evidence clearly indicating that the bank and the Refinance Corporation for Industry Ltd. had agreed to the modification of the agreement, it was not prepared to rely solely on the five letters addressed by the Bank of Baroda to the assessee-company in November of each of the five years 1964 to 1968 (both inclusive) and the Tribunal was not prepared to hold that there was a modification of the terms of the agreement dated December 1, 1961.
18. Now, this conclusion of the Tribunal that there was no modification of the terms of the agreement of December 1, 1961, is a mixed question of law and fact. The Tribunal seems to have proceeded 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 basic 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 that a formal agreement setting out the terms of the modification was required to be executed between the bank and the assessee-company and if there was no such formal document, the original agreement of December 1, 1961, could not be said to have been modified as regards the terms of repayment of the loan of Rs. 50 lakhs.
19. We may point out that under section 91 of the Indian Evidence Act, when the terms of a contract, or of a grant, or of any other disposition of property, have been reduced to the form of a document, and in all cases in which any matter is required by law to be reduced to the form of a document, no evidence shall be given in proof of the terms of such contract, grant or other disposition of property, or of such matter, except the document itself, or secondary evidence of its contents in cases in which secondary evidence is admissible under the provisions of the Indian Evidence Act. We are not concerned with the exceptions of section 91. Under section 92 of the Evidence Act, when the terms of any such contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved according to section 91, no evidence of any oral agreement or statement shall be admitted as between the parties to any instrument or their representatives-in-interest, for the purpose of contradicting, varying, adding to, or subtracting from, its terms. However, proviso (4) to section 92 states that the existence of any distinct subsequent oral agreement to rescind or modify any such contract, grant or disposition of property, may be proved, except in cases in which such contract, grant or disposition of property is by law required to be in writing, or has been registered according to the law in force for the time being as to the registration of documents. Now, the agreement of December 1, 1961, was not a document which was required to be in writing so far as the provisions of the Act are concerned and no provision of law is pointed out to us in respect of the proposition that the terms of this contract or agreement between the assessee-company and Bank of Baroda was required to be in writing. Since no charge was created by the agreement of December 1, 1961, it was not required to be registered under the Indian Companies Act. Therefore, so far as the provisions of the Indian Evidence Act are concerned, 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.
20. 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 letters 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 statement of estimated withdrawals against this loan of Rs. 50,00,000, for payments to be made in respect of factory construction and equipment. We may add that we will need this arrangement to commence by the middle of May, 1961.”
21. In reply, by letter dated April 24, 1961, annexure “K” to the reference, the Bank of Baroda wrote to the assessee-company :
“We refer to your letter dated 29th March, 1961, in the above connection and are pleased to inform you that your request for loan of Rs. 50,00,000 has been sanctioned on the following terms and conditions :
Limit Rs. 50,00,000.
Security : 1. Demand Pronote signed by you.
2. Equitable mortgage of your land and buildings,
machinery, etc., situated at Baroda and also
land and building construction at Mulund
and machinery to be imported in connection
with your proposed project for the manufacture
of photographic printing paper costing about
Rs. 85 Lakhs to Rs. 90 lakhs.
Rate of interest. 2 3/4% over Reserve Bank of India rate, minimum
6 3/4%.
This loan is sanctioned subject to the proviso that the Refinance Corporation for Industry Ltd. agree to refinance the bank in the respect.
We note that you will avail of the loan account by instalments spread over a period 2 years."
22. In connection with the application for loan of Rs. 50 lakhs, the assessee-company wrote by its letter dated May 2, 1961, annexure "L" :
"With reference to your letter ADV : 43/1108 dated the 24th March, 1961, we beg to enclose herewith the application for the above loan of Rs. 50,00,000. We require this loan in instalments as under :
1st instalment of Rs. 10 lakhs in July, 1961.
2nd " of Rs. 10 lakhs in September, 1961.
3rd " of Rs. 10 lakhs in November, 1961.
4th " of Rs. 10 lakhs in February, 1962.
5th " of Rs. 10 lakhs in April, 1962.
The production of the company is expected to commence from June, 1962, and as such we cannot commence repayment of the loan till April, 1963. We shall, therefore, thank you to kindly arrange for granting the loan for Rs. 50 lakhs and afterwards converting it into a term loan with the Refinance Corporation for Industry Private Ltd., so that we may be able to repay the first instalment in April, 1963, and the subsequent instalments as per schedule given, within a period of 7 years.”
23. On June 14, 1961, the Bank of Baroda wrote back to the assessee-company 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 6 3/4% p.a.”
24. 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, a copy whereof is annexed to this agreement (hereinafter called ‘the borrower’s proposal’).”
25. Under the terms of the agreement, clause 5 provided for repayment and was in the following terms :
“The advance shall be repayable by the borrower on the 30th day of June, 1968, by six instalments as per schedule II annexed hereto, the first of which shall be on the 30th day of June, 1963, and the subsequent instalments on 30th day of June in each year and the borrower shall in the meantime pay interest at the rate of 6 1/2% per annum as on 30th June and 31st December.”
26. Under clause 7 of the agreement, the bank was to be a liberty to assign the debt and the benefits of the agreement and the securities for the advance and the security documents to the Refinance Corporation for Industry Ltd. as security for any refinance obtained by the bank from the said Corporation in respect of the loan agreed to be advanced by the bank to the borrower (assessee-company) and the borrower, if and whenever required by the bank to do so at the borrower’s own expenses, was required to execute and join in doing and executing all such acts, things, deeds, documents or assurances as the bank may require for the effectuation of such assignment. Schedule II to the agreement provided for repayment as set out hereinabove, namely, four instalments of Rs. 5,50,000 and the last two instalments of Rs. 10,00,000, each of these six instalments being payable on June 30, of the six years 1963 to 1968 (both inclusive). It appears that an amount of Rs. 20 lakhs was received by the assessee-company even before the execution of the agreement of December 1, 1961, and, as shown by the journal voucher, annexure “O”, the amount of Rs. 20 lakhs was transferred to the mid-terms loan account and the demand loan account was closed by the bank and the amount of Rs. 20 lakhs was treated as part of the loan of Rs. 50 lakhs under the agreement of December 1, 1961. Then come three letters which are referred to in the Tribunal’s order but which are not annexed and a compilation of these three letters has been produced before us by Mr. Patel for the assessee. By the letter of March 19, 1963, the assessee-company wrote to the Bank of Baroda, inter alia, regarding the term loan for Rs. 50 lakhs under the refinance scheme as follows :
“As there has been delay in the production of photographic paper we find 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.”
27. 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.
28. 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 instalments.
On receipt of your reply, we shall approach the Refinance Corporation for Industry Ltd. for a modification in the terms of repayment and thereafter communicate to you the decision of the Corporation.”
29. On April 24, 1963, the director of the managing agents of the assessee-company wrote to the Bank of Baroda Ltd. :
“We acknowledge receipt of your letter No. Section 45/1064 dated 3-4-1963 on the above subject.
We confirm that the amount of loan will be fully repaid before 1st December, 1968. The loan shall be repaid in the following instalments :
First instalment of Rs. 7,50,00 payable on 1-12-1964.
Second instalment of Rs. 7,50,000 payable on 1-12-1965.
Third instalment of Rs. 10,00,000 payable on 1-12-1966.
Fourth instalment of Rs. 12,50,000 payable on 1-12-1967.
Fifth instalment of Rs. 12,50,000 payable on 1-12-1968.
Kindly confirm the above terms of repayment.”
30. It is common ground that there was no written confirmation from the Bank of Baroda after April 24, 1963. However, at the meeting of the board of directors of the assessee-company held on July 24, 1963, as shown by annexure ‘Q’ –
“The Chairman informed the meeting that as decided at the last board meeting, the company had written to the bank that the loan of Rs. 50 lakhs would be repaid in the following instalments :
Rs.
1st instalment to be paid before 1-12-1964 7,50,000 2nd -do- 1-12-1965 7,50,000 3rd -do- 1-12-1966 10,00,000 4th -do- 1-12-1967 12,50,000 5th -do- 1-12-1968 12,50,000 31. The bank informed the company that the Refinance Corporation for Industry had agreed to the above mode of payment and that they would send necessary documents for execution by the company in that connection. The directors passed the following resolution regarding the said matter :
‘Resolved that the company do execute such documents as may be required by the Bank of Baroda Ltd. to be executed in the connection with the modification of the terms of repayment of the loan of Rs. 50 lakhs granted to the company under the Refinance Scheme as requested by the company and agreed to by the bank and that the common seal of the company be affixed to such of the documents as may be required to be sealed in the presence of any two directors of the company who shall sign the same and that they be counter-signed by the managing agents of the company’.”
32. It is common ground that there 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 the Refinance Corporation for Industry Ltd. for modification in the terms of repayment after the receipt of the assessee-company’s reply. It would appear that the Bank of Baroda Ltd. had obtained refinance from the Refinance Corporation for Industry Ltd. in respect of the loan advanced by it to the assessee-company. The bank had assigned the debt due from the assessee-company and the benefits and securities under the aforesaid agreement dated December 1, 1961, to the said Corporation. It was under these circumstances that it was necessary for the bank to obtain concurrence of the said Corporation for the modification of the terms regarding the repayment of the loan.”
33. In the first instance the Tribunal has misdirected itself in law in interpreting the agreement of December 1, 1961. That agreement was an agreement between the assessee-company and the Bank of Baroda. The Bank of Baroda on its own, for itself, had entered into an arrangement with the Refinance Corporation for Industry Ltd. and had obtained refinance loan of Rs. 50 lakhs but the assessee-company had no contractual nexus with the Refinance Corporation. Even under the terms of the agreement of December 1, 1961, it was contemplated that, if necessary, the securities may be assigned by the bank to the Refinance Corporation. Clause 7 of the agreement of December 1, 1961, provided that the bank shall be at liberty to assign the debt and the benefit of the agreement and the securities for the advance and the security documents to the Refinance Corporation for Industry Ltd. as security for any refinance obtained by the bank from the said Corporation. Merely because there is a reference to the refinancing arrangement between the Refinance Corporation and the Bank of Baroda and further merely because it was in contemplation of the parties that the securities and the benefits of the agreement in connection with this loan of Rs. 50 lakhs may be transferred or assigned by the Bank of Baroda to the Refinance Corporation, it does not follow that there was a tripartite agreement between the Bank of Baroda, the Refinance Corporation and the assignee-company. Under these circumstances, so far as the assessee-company was concerned, it was bound to deal only with the Bank of Baroda Ltd. and not with the Refinance Corporation. Therefore, when the Bank of Baroda mentioned in the letter of April 3, 1963, that on receipt 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 as 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.
34. 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 agreeable to consider the request for modification regarding the terms of repayment but it suggested two things : (1) the entire loan was required to be repaid before December 1, 1968; and (2) the assessee-company could have an option subject to this overriding condition of repayment of the entire loan before December 1, 1968, either to postpone all instalments referred to in the agreement of December 1, 1961, by a period not exceeding six months, or, in the alternative, for a change in the number and amount of instalments. Thereafter, this counter-proposal of the bank was accepted by the assessee-company by its letter of April 24, 1963, inasmuch as it agreed that the whole amount of the loan would be fully repaid before December 1, 1968, and it accepted the second alternative of having a change in the number of instalments, namely, instead of six instalments, it agreed to repay the entire loan in five instalments and the amount of instalments was varied as mentioned earlier. In our opinion, reading the letters of April 3, 1963, and April 24, 1963, together, it is clear that there was an agreement between the Bank of Baroda and the assessee-company to modify the terms of the agreement of December 1, 1961, as regards repayment of the loan of Rs. 50 lakhs. Since the agreement to modify was arrived at by the exchange of these two letters of counter-proposal and acceptance of the counter-proposal, no further confirmation was called for and if the parties contemplated the execution of any formal document, that was merely with a view to set out in formal terms the agreement which was embodied in the letter of April 3, 1963, from Bank of Board to the assesse-company and the reply of April 24, 1963, from the assesse-company to the Bank of Baroda. The words in the letter of April 24, 1963 : “Kindly confirm the above terms of repayment” were merely as surplusage because if the agreement was in fact arrived at by the acceptance of the counter-proposal, nothing further was required to be done and we find from the contemporaneous document, namely, the minutes book of the board of directors of the assessee-company held on July 24, 1963, that the bank had informed the assessee-company that the Refinance Corporation for Industry Ltd. had agreed to the newly suggested mode of repayment and that the necessary documents for execution by the company would be sent by the bank 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.
35. The five letters addressed by the Bank of Baroda to the assessee-company in the month of November of each of the years 1964 to 1968 (both inclusive) provide evidence of subsequent conduct indicating that the bank had accepted the modification of the terms of the agreement regarding repayment. If there was any doubt about the existence of the agreement for modification of the terms of the original agreement of December 1, 1961, that doubt is resolved by this evidence of the subsequent conduct. In each of these five years the amount which has been demanded is in accordance with rescheduling of the instalments, the amounts of the instalments and the dates of instalments for repayment of the loan of Rs. 50 lakhs and these letters could have been written by the Bank of Baroda Ltd. to the assessee-company only if the agreement to modify the terms of the original agreement of December 1, 1961, had been arrived at. Under these circumstances it is clear that this mixed question of law and fact must be answered in favour of the assessee by stating that the terms of the original agreement of December 1, 1961, had in fact been modified by mutual agreement between the parties to that agreement, namely, the Bank of Baroda Ltd. and the assessee-company. In our opinion, the Tribunal has erred in reading the terms of the agreement of December 1, 1961, as constituting an assignment of the debt due from the assessee-company to the Refinance Corporation, or assignment of the securities under the agreement of December 1, 1961, to the Refinance Corporation. The agreement itself merely indicates that the assessee-company had agreed, if the necessity arose, to do all things necessary to enable the Bank of Baroda to complete its own refinance arrangement with the Refinance Corporation for Industry. We may point out that by the Industrial Development Bank of India Act, 1964, a new institution was established for providing credit and other facilities for the development of industry and for matters connected therewith and further to amend certain enactments. By section 25 of the Industrial Development Bank of India Act, 1964, being Act 18 of 1864, the undertaking of the Refinance Corporation for Industry Ltd. including all business, property, assets and liabilities, rights, interests, privileges and obligations of whatever nature, were transferred to and vested in the development bank set up under the Act. That is why in the letter of November 18, 1964, and other subsequent letters from the 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.
36. 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 the 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 arrived at, nothing further was required to be done and the Tribunal has erred in insisting that there should have been a formal document setting out the terms of the agreement for modification.
37. Under these circumstances the conclusion of the Tribunal that the terms of the agreement of December 1, 1961, were not modified as contended by the revenue on a mixed question of law and fact, was erroneous. We, therefore, hold that the terms of the agreement dated December 1, 1961, were modified. The first part of question No. (1) must, therefore, be answered in the negative and in favour of the assessee.
38. Since the Tribunal came to the conclusion that the agreement of December 1, 1961, was not modified it has not examined the question of law as to whether the repayment of the loan was to be made within a period of seven years as contemplated by clause (v) of rule 1 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. As pointed out earlier in the course of this judgment, five conditions are required to be satisfied before it can be said that the moneys borrowed are includible in computing the capital of the company for the purpose of surtax. The crucial question that has been urged before us is whether, in view of the modified terms of the agreement, there was an agreement which provided for repayment of the moneys borrowed during a period of not less than seven years. It must be borne in mind that the “moneys borrowed” occurring at the commencement of clause (v) of rule 1 of the Second Schedule refers to any moneys borrowed from any one of the institutions or persons referred to in the main part of clause (v). What has to be looked at is the moneys shown as having been borrowed as on the first day of the commencement of the previous year and under rule 3 of Schedule II, any increase and decrease has to be suitably adjusted as contemplated by rule 3 so that the average capital employed throughout the year is taken into consideration for the purpose of computing the capital of the company for the purpose of surtax. It may also be pointed out that under rule 3 of the First Schedule which contains rules for computing the chargeable profits, interest payable by the company in respect of moneys referred to in clause (v) of rule 1 of the Second Schedule for the previous year relevant to the assessment year allowed as a deduction in computing its total 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 Schedule 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 not to consider whether it was borrowed in a lump sum all at a time. The agreement for borrowing, however, comes into the picture when we have to consider the terms regarding repayment. The last part of the proviso to clause (v) of rule 1 to the Second Schedule contemplates that the agreement under which the moneys are borrowed should provide for the repayment of the borrowed moneys during a period of not less than seven years. The real controversy between the parties as regards interpretation of this particular provision turns upon this last part as to whether the repayment should be in one lump sum or by instalments, and secondly, whether the period of seven years should be counted from the commencement of the first borrowing under the agreement or from the actual date of borrowing of the moneys which are remaining outstanding as of the first day of the previous year. In our opinion, by using the word “repayment” of the borrowed moneys, what is contemplated is the terms of the agreement between the parties; the agreement may be the original agreement between the parties or it may be the agreement as modified by mutual consent between the parties; the terms of the agreement have to be looked at for the purpose of the last part of the proviso to clause (v) of rule 1 of the Second Schedule and on a perusal of that agreement as it stands after modification, if any, one has to ask oneself whether under the terms of that agreement the provision for repayment is such that the repayment of the borrowed moneys is contemplated during a period of not less than seven years. Mr. Kaji submitted two alternative submissions regarding the interpretation of this last part of the proviso. He contended that if instalments for repayment are provided in the agreement and some of the instalments are within seven years, then the proviso can never apply. In the alternative, he contended that the proviso would not apply to those instalments for repayment which fell within the period of seven years. In our opinion, it is not possible to accept either of those two submission of Mr. Kaji. 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. 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 agreement in such a manner that the repayment is completed by a date beyond seven years from the first advance made under the agreement under which the moneys are borrowed, the loan in question will qualify for inclusion in the capital of the company computed for the purposes of surtax. However, once we find that the moneys were advanced as of a particular date and under the terms of agreement under which those moneys were advanced, the final date for the repayment of the entire amount falls beyond the period of seven years counting from the date of the first advance under the agreement, the loan would qualify for inclusion in the capital. In the instant case the first advance of Rs. 10 lakhs under the agreement was paid in the month of July, 1961. The second amount was paid some time in the month of September, 1961. That too was of Rs. 10 lakhs. These two items aggregating to Rs. 20 lakhs were subsequently adjusted by mutual agreement between the parties against this loan of Rs. 50 lakhs and, therefore, they must be deemed to have been made by agreement between the parties under this loan agreement of December 1, 1961. The terms of the agreement as modified provided for repayment by December 1, 1968, and thus the repayment of the loan was during a period of not less than seven years, that is, so spread over a period of not less than seven years counting from the date of the first advance under this agreement of December 1, 1961. In view of this conclusion, so far as the facts of the present case are concerned, the loan of Rs. 50 lakhs was to be repaid not within a period of seven years but during a period of not less than seven years and the second part of question No. 1 must, therefore, be answered in the negative, that is, against the revenue and in favour of the assessee.
39. So far as question No. 2 is concerned, in view of the above discussion, it must be held that the loan of Rs. 50 lakhs taken by the assessee-company from the Bank of Baroda Ltd. qualified for inclusion in computation of its capital for the purposes of surtax chargeable under the Companies (Profits) Surtax Act, 1964.
We must point out that we have allowed Mr. Kaji to go into different aspects of this second question because on this question of law in the facts and the circumstances of the case it was permissible to him as observed by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC) to make his submission on different aspects of the question of law which has been referred to us. We, therefore, answer the question referred to us as follows :
Question No. 1 : In the negative as to both the parts, that is, in
favour of the assessee and against the revenue.
Question No. 2 : In the affirmative, that is, in favour of the assessee
and against the revenue.
40. The Commissioner will pay the costs of this reference to the assessee.
