Addl. Commissioner Of Income-Tax, Karnataka v. Bangalore Soft Drinks (P.) Ltd.

Srinivasa Iyengar, J.:— The Income-tax Appellate Tribunal, Bangalore Bench, referred the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 6,00,000 was not borrowed moneys or debt due by the assessee-company within the meaning of rule 19A(3)?”

2. For the assessment year 1971-72, the assessee claimed relief under s. 80J amounting to Rs. 1,32,267. This was allowed by the ITO. It had been computed as follows:

Rs. “Written down value of depreciable assets on 1-4-1970 including land 26,74,862 Current assets 10,98,322 Loans and advances 1,31,404 39,04,588

Rs. Deduct: Secured loans 13,04,009 Unsecured loans 2,11,341 Current liabilities 1,84,754 17,00,104 22,04,484 Whereof 6% 1,32,267”

3. The Commissioner of Income-tax referred to a balance-sheet as at March 31, 1970, of the company and noticed that the share capital account was as follows:

Rs. “Issued and subscribed capital 14,00,000 Share deposits 6,00,000”

4. He was of the opinion that the capital assets shown at Rs. 26,74,862 included share deposits amounting to Rs. 6,00,000 and that this amount had been received towards allotment of shares to non-resident shareholders and the permission of the Reserve Bank of India was necessary in regard to this allotment and it was received only after April 1, 1970, i.e, on April 6, 1970. He was of the opinion that the amount of Rs. 6,00,000 constituted a liability and, therefore, was a debt and should have been deducted while computing the capital under r. 19A of the I.T Rules for the purpose of allowing relief under s. 80J of the I.T Act, 1961.

5. He, accordingly, issued a notice under s. 263 of the Act in response to which, the assessee stated that the proposed action was not justified and the actual allotment of shares could be done only after April 6, 1970, since there was some delay in the grant of approval by the Reserve Bank of India and could not be done earlier and that all such moneys, whether called as deposits or share capital, should be included in the determination of the capital employed for purposes of relief under s. 80J, and the amount cannot be construed as money borrowed or as a debt. However, the Commissioner did not accept the contention of the assessee. He observed that as on April 1, 1970, the amount of Rs. 6,00,000 had not been converted into share capital and at any rate had not assumed the characteristics of share capital and must be treated as a liability and the ITO should have excluded a sum of Rs. 6,00,000 from the capital computation, and directed recomputation of capital and withdrawal of the excess relief which, according to him, had been granted by the ITO.

6. This order of the Commissioner was challenged in appeal before the Income-tax Appellate Tribunal. It referred to the decisions of the Supreme Court in Shree Ram Mills Ltd. v. CEPT, [1953] 23 ITR 120, Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT, [1965] 56 ITR 52 and Kesoram Industries and Cotton Mills Ltd. v. CWT, [1966] 59 ITR 767, and held that the amount of 6,00,000 cannot be said to be a debt as on the first day of the computation period, namely, April 1, 1970. It observed that the liability to repay or return the amount would arise only in the event of the Reserve Bank refusing permission for the allotment of shares and, therefore, a return of the amount was only contingent and an amount payable on such a contingency could not be termed as a debt until the contingency had happened. The Tribunal also held that the amount could not be said to be a borrowing because there was consensus in this behalf and there was no offer for lending money which had been accepted. Accordingly, the Tribunal set aside the order of the Commissioner and restored that of the ITO.

7. At the instance of the Commissioner, the above reference has been made. In our opinion, on the admitted facts, the answer to the question must be in the affirmative.

8. Rule 19A prescribes the mode in which the capital employed in an industrial undertaking should be computed for the purposes of giving relief under s. 80J. Several kinds of assets are mentioned and as to how the value thereof should be taken and in item V of sub-r. (2) of the said rule, it is mentioned that in the case of assets being cash in hand, the amount thereof. Therefore, whatever amount is held by the industrial undertaking as cash in hand or in bank is an item to be taken into account in computing the capital employed. Rule 19A(3) provides that the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee shall be deducted from the aggregate of the amounts as ascertained under sub-r. (2). The amounts having been paid for purposes of allotment of shares, it cannot at all be considered that the amounts were paid by way of loan or that there was any kind of borrowing by the assessee. The amounts had been paid for a specific purpose and could be returned only if the shares were not allotted. In the instant case, the return of the amount would be only if the Reserve Bank had not approved the allotment of shares. That was a contingency which did not happen as on the first day of the computation period. Therefore, it cannot be said that there was any debt in existence owed by the assessee to any one as on the first day of the computation period. Therefore, the view taken by the Tribunal is correct and must be upheld. The question is accordingly answered in the affirmative and in favour of the assessee.