Foreign lender requirement under surtax rules turns on the lender's location, and evidence-backed capital use finding was upheld.

For rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the relevant inquiry is the source of the borrowing: it is enough that the lender is a person in a country outside India, and the borrowing transaction need not itself be effected outside India. The court accepted this construction in favour of the assessee. The Tribunal's finding that the borrowed sum was utilised for the creation of capital assets in India was supported by balance-sheets, the directors' report and other materials, and was not perverse. That factual finding was therefore upheld, while the matter was remitted only on the remaining question whether the moneys were borrowed for that purpose.

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Issues: (i) Whether, for the purposes of rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, it was necessary that the borrowing itself be effected outside India, or whether it was sufficient that the lender was a person in a country outside India. (ii) Whether the Tribunal's finding that the sum of Rs. 75 lakhs was utilised for the creation of capital assets in India was based on no evidence or was otherwise unreasonable or perverse.

Issue (i): Whether, for the purposes of rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, it was necessary that the borrowing itself be effected outside India, or whether it was sufficient that the lender was a person in a country outside India.

Analysis: The provision was construed with reference to the source of borrowing rather than the situs of the transaction. The scheme of the schedule showed that the clause was directed to the origin of the funds forming the capital base. On that construction, the requirement was satisfied if the lender was a person in a country outside India, and it was unnecessary that the act of borrowing should itself take place outside India.

Conclusion: The requirement was that the lender be a person in a country outside India, and not that the borrowing must take place outside India. The issue was decided in favour of the assessee.

Issue (ii): Whether the Tribunal's finding that the sum of Rs. 75 lakhs was utilised for the creation of capital assets in India was based on no evidence or was otherwise unreasonable or perverse.

Analysis: The Tribunal relied on the balance-sheets, the directors' report, and surrounding materials showing capital expenditure and expansion of the business. Those materials constituted relevant evidence on the question of utilisation of the borrowed money, and the finding could not be characterised as perverse or unsupported by evidence.

Conclusion: The finding that the borrowed amount was utilised for the creation of capital assets in India was supported by evidence and was not perverse. The issue was decided in favour of the assessee.

Final Conclusion: The borrowing need not have been effected outside India if the lender was a person in a country outside India, and the finding on utilisation for capital assets was sustained. The matter was, however, sent back for determination of the remaining requirement as to whether the moneys were borrowed for the purpose of creation of a capital asset in India.

Ratio Decidendi: Under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the relevant inquiry is the identity and location of the lender rather than the situs of the borrowing transaction, and a factual finding on utilisation of funds for capital assets will not be disturbed if supported by evidence.

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