Debentures as borrowings under capital base rules when they fund a capital asset and repayment exceeds seven years.

Debentures issued to financial institutions may be treated as borrowings under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 where they substantively evidence debt, the funds were used to create a capital asset in India, and repayment was spread over more than seven years. On those facts, the debentures qualified for inclusion in the capital base. A remand to the Income-tax Officer was unnecessary because the Commissioner (Appeals) and the Tribunal had already recorded the relevant findings under rule 1(v), making further factual inquiry redundant.

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Issues: (i) whether debentures issued in favour of financial institutions constituted borrowings falling within rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and were includible in the capital base; (ii) whether the matter had to be remanded to the Income-tax Officer because the claim under rule 1(v) had not been raised before him.

Issue (i): whether debentures issued in favour of financial institutions constituted borrowings falling within rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and were includible in the capital base.

Analysis: Clause (iv) deals with debentures issued to the public, whereas clause (v) deals with moneys borrowed from specified financial institutions. A debenture is an instrument acknowledging debt, and in substance the debentures in question represented the assessee's borrowings from the named financial institutions. The facts found showed that the borrowings were for the creation of a capital asset in India and that repayment was spread over a period exceeding seven years, satisfying the proviso to rule 1(v).

Conclusion: The debentures fell within rule 1(v) and were to be included in the capital base; the finding was in favour of the assessee.

Issue (ii): whether the matter had to be remanded to the Income-tax Officer because the claim under rule 1(v) had not been raised before him.

Analysis: The record showed that the Commissioner (Appeals) and the Tribunal had already recorded findings that the borrowings satisfied the requirements of rule 1(v). In those circumstances, no useful purpose would be served by remitting the matter to the Income-tax Officer for fresh examination of the same facts.

Conclusion: Remand was unnecessary; the objection was rejected.

Final Conclusion: The reference was answered by holding that the assessee's debentures qualified as borrowings under rule 1(v), and the capital base was to be computed accordingly.

Ratio Decidendi: For the purposes of rule 1(v), debentures issued to financial institutions may be treated as borrowings where they evidence a debt incurred for creation of a capital asset in India and repayment is stipulated over not less than seven years.

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