1985 (3) TMI 46 - HC - Income Tax

Rs. 7,43,750 Excluded from Surtax Capital Base: No Borrowing Relationship

The High Court held that the sum of Rs. 7,43,750 did not qualify as 'monies borrowed' and thus could not be included in the capital base for surtax ... Surtax Issues Involved:1. Whether the sum of Rs. 7,43,750 constituted 'monies borrowed' and could be included in the capital base for surtax assessments for the assessment years 1973-74, 1974-75, and 1975-76.Detailed Analysis:Issue 1: Whether the sum of Rs. 7,43,750 constituted 'monies borrowed' and could be included in the capital base for surtax assessments for the assessment years 1973-74, 1974-75, and 1975-76.The assessee, a limited company, purchased machinery from M/s. Unitechna, Berlin, GDR. According to the agreement, Rs. 7,43,750 was payable towards the purchase of this capital asset and was shown as a long-term loan in the assessee's books. During assessment proceedings for surtax, the assessee claimed this amount as 'moneys borrowed' for acquiring a capital asset and sought its inclusion in the capital computation.The Income Tax Officer (ITO) rejected this claim, stating that the assessee had not borrowed money but had agreed to pay the purchase consideration in installments. The ITO relied on the Supreme Court decision in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52, which held that an agreement to pay the balance of consideration does not constitute a loan.The Appellate Assistant Commissioner (AAC) also rejected the assessee's claim. Upon further appeal, the Tribunal concluded that the unpaid purchase consideration, guaranteed by an Indian bank, constituted a loan under Rule 1(v) of the Second Schedule to the Surtax Act. Consequently, the Tribunal allowed the assessee's appeal.The Revenue, dissatisfied with the Tribunal's decision, referred the matter to the High Court under Section 256(1) of the Income Tax Act, 1961.The High Court examined the terms of the agreement between the assessee and M/s. Unitechna. The agreement outlined the payment structure: 7.5% as advance payment, 7.5% via an irrevocable letter of credit, and the remaining 85% in sixteen half-yearly installments. The agreement also required the assessee to open an irrevocable banker's guarantee and pay interest on the outstanding balance.The High Court observed that the agreement provided for installment payments for the purchase price, not a borrowing. The relationship between the assessee and Unitechna was that of debtor and creditor, not borrower and lender. The court emphasized that borrowing involves a positive act of lending and acceptance of money as a loan, which was absent in this case.The High Court referred to several precedents, including Lakshmanier & Sons v. CIT & EPT [1950] 18 ITR 734 (Mad) and Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC), which clarified that not all debts are loans and that the relationship of borrower and lender must exist for an amount to be considered borrowed money.The High Court concluded that the unpaid purchase consideration did not transform into a borrowing due to the bank guarantee. The unpaid amount remained a trading debt, not borrowed capital. The court also noted that the proviso to Rule 1(v) of the Second Schedule requires that the borrowing must precede the acquisition of the capital asset and must be for its creation, which was not the case here.The court found that the Tribunal erred in its interpretation and concluded that the amount in question could not be included in the capital base for surtax purposes. The High Court answered the reference in the negative, in favor of the Revenue, and awarded costs to the Revenue.ConclusionThe High Court determined that the sum of Rs. 7,43,750 did not constitute 'monies borrowed' and could not be included in the capital base for surtax assessments for the relevant assessment years. The court emphasized the necessity of a borrowing relationship, which was absent in this case, and ruled in favor of the Revenue.