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Issues: (i) Whether the original loan agreement was modified by mutual agreement between the bank and the assessee by the exchange of correspondence and subsequent conduct; (ii) Whether, on the modified terms, the borrowed moneys were repayable during a period of not less than seven years so as to qualify for inclusion in the assessee's capital under the surtax schedule.
Issue (i): Whether the original loan agreement was modified by mutual agreement between the bank and the assessee by the exchange of correspondence and subsequent conduct.
Analysis: The agreement of borrowing could be modified by subsequent agreement between the contracting parties, and no formal written instrument was necessary where the law did not require the modification to be in writing. The correspondence showed a proposal by the assessee, a counter-proposal by the bank, and acceptance by the assessee. The later letters issued by the bank demanding instalments in the revised schedule, together with the contemporaneous minutes, supported the existence of the modified arrangement. The requirement of a further formal document was treated as a matter of form and not a condition for the formation of the modified agreement. The reasoning also proceeded on the principle that a contract not required by law to be in writing may be altered orally or by correspondence, and that subsequent conduct may confirm the alteration.
Conclusion: The agreement was modified; this issue was decided in favour of the assessee and against the revenue.
Issue (ii): Whether, on the modified terms, the borrowed moneys were repayable during a period of not less than seven years so as to qualify for inclusion in the assessee's capital under the surtax schedule.
Analysis: The relevant provision required that the borrowing be for creation of a capital asset in India and that the agreement provide for repayment during a period of not less than seven years. The period was to be judged from the date of the borrowing arrangement and by looking to the final date for completion of repayment under the agreement as modified. The Court rejected the contention that the clause required a lump-sum advance or that the benefit could be denied merely because some instalments fell within seven years. On the modified schedule, repayment was spread beyond seven years from the first advance, satisfying the statutory requirement. Once the modified agreement was accepted, the borrowing fell within the clause governing inclusion in capital for surtax purposes.
Conclusion: The loan satisfied the seven-year repayment requirement and qualified for inclusion in capital; this issue was decided in favour of the assessee and against the revenue.
Final Conclusion: The reference was answered wholly in favour of the assessee, the modified repayment arrangement was upheld, and the loan was held includible in the capital computation for surtax.
Ratio Decidendi: For a borrowing to qualify for inclusion in capital under the relevant surtax provision, the decisive inquiry is whether the agreement as actually modified provides for repayment completing beyond seven years from the initial advance, and such modification may be proved by correspondence and subsequent conduct without a formal written amendment where no writing is legally required.
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