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Commissioner Of Income Tax, Calcutta v. M/S Braithwaite & Co. Ltd. .
Factual and Procedural Background
The respondent-company borrowed a term loan of Rs 50,00,000 from National Grindlays Bank Ltd. under an agreement dated 1 August 1964. The agreement scheduled repayment in five annual instalments, the last being due on 31 July 1971—exactly seven years from the date of the agreement.
For the assessment year 1965-66, the company included a proportionate amount of this loan in its capital base and claimed a statutory deduction under the Companies (Profits) Surtax Act, 1964. The Income-tax Officer disallowed the claim, holding that the repayment schedule did not satisfy the proviso to Rule 1(v) of the Second Schedule because the loan was repayable within, and not beyond, seven years.
The Appellate Assistant Commissioner reversed that decision, but the Income-tax Appellate Tribunal partially restored the disallowance, permitting inclusion of only the last instalment (Rs 16,00,000). At the company’s instance, the Tribunal referred a question of law to the High Court, which answered in favour of the company. The Revenue obtained special leave to appeal to the Supreme Court.
Legal Issues Presented
- Whether the phrase “during a period of not less than seven years” in the proviso to Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 requires that repayment extend beyond seven years, or whether repayment within exactly seven years suffices.
- Consequently, whether any part of the Rs 50,00,000 term loan qualifies for inclusion in the company’s capital base for the purpose of computing statutory deduction.
Arguments of the Parties
Appellant's Arguments (Income-tax Department)
- No portion of the loan qualifies because the agreement fixed the last repayment on 31 July 1971, rendering the repayment period less than seven years in law.
- The expression “during a period of not less than seven years” should be construed to mean a period that exceeds seven full years.
Respondent's Arguments (Company)
- The loan is repayable within seven years, and a seven-year period is itself “not less than seven years.”
- Accordingly, the entire loan amount satisfies Rule 1(v) and should be included in the capital base.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ramanasari v. Muthusami Naik | Interpretation of “not less than” as requiring clear, whole days. | Supported the view that “not less than seven years” means that the full seven-year period must elapse before repayment can occur. |
| Railway Sleepers Supply Company, Re (1885) LR 29 Ch D 204 | “Not less than” indicates a minimum or clear period beyond the stated number. | Reinforced the Court’s conclusion that repayment must be scheduled to extend beyond seven years to meet the statutory requirement. |
Court's Reasoning and Analysis
The Court adopted a literal interpretation of the proviso to Rule 1(v). It held that the phrase “during a period of not less than seven years” necessarily implies a repayment period extending beyond seven years. The Court reasoned that until the last minute—or even the last second—of a seven-year span has expired, the period remains “less than seven years.” Therefore, a schedule that ends exactly on the seventh anniversary does not satisfy the proviso.
Applying this construction, the Court determined that the respondent-company’s entire term loan was repayable within seven years and thus failed the statutory criterion. The Court found further support for its interpretation in earlier authorities equating “not less than” with “clear” or whole periods, underscoring the requirement of a minimum period that exceeds the stated duration.
Because the Tribunal’s earlier relief regarding Rs 16,00,000 had achieved finality (the Revenue having not appealed that part), the Court confined the Revenue’s relief to the balance Rs 34,00,000.
Holding and Implications
Held: The entire term loan of Rs 50,00,000 does not qualify for inclusion in the company’s capital base under Rule 1(v); however, owing to the unchallenged portion of the Tribunal’s order, the Revenue may disallow only Rs 34,00,000.
Implications: The decision clarifies that, for purposes of the Companies (Profits) Surtax Act, a loan agreement must stipulate repayment extending beyond seven years to benefit from Rule 1(v). The ruling affects the computation of statutory deductions but sets no broader precedent beyond the interpretation of similar “not less than” formulations in fiscal statutes.
Kuldip Singh, J.— The respondent-company obtained a term loan of Rs 50,00,000 from the National Grindlays Bank Ltd. The agreement dated August 1, 1964 provided for repayment of the loan in five instalments. The last instalment was to be paid on July 31, 1971. Thus the loan was to be paid back within the period of seven years from the date of the agreement. The question for our consideration is whether the repayment under the agreement was “during a period of not less than seven years” within the proviso to Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 (the Act).
2. The Act imposed a surtax on so much of the chargeable profits of every company as exceeded the statutory deductions. “Chargeable profits” were defined by Section 2(5) of the Act to mean the total income as computed under the Income Tax Act, 1961 and adjusted in accordance with the First Schedule to the Act. “Statutory deduction” was defined by Section 2(8) of the Act to mean an amount equal to ten per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule to the Act or an amount of Rs 2,00,000 whichever was greater. Rule 1 of the Second Schedule to the Act provided how the capital of a company was to be computed. The relevant part of the rule is as under:
“1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of —
(i) to (iv)***
(v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India:
Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.
Explanation.—***”
3. The agreement dated August 1, 1964 provided for repayment of the loan in five instalments as follows:
1. On July 31, 1967 Rs 5 lakhs 2. On July 31, 1968 Rs 7 lakhs 3. On July 31, 1969 Rs 10 lakhs 4. On July 31, 1970 Rs 12 lakhs 5. On July 31, 1971 Rs 16 lakhs
4. The respondent-company included proportionate amount of the term loan of Rs 50,00,000 in its capital base and claimed statutory percentage of the said amount as deduction in the calculation of its chargeable profits assessable for the assessment year 1965-66. The Income Tax Officer rejected the claim of the respondent-company on the ground that the repayment of the term loan was not “during a period of not less than seven years”. On appeal the Appellate Assistant Commissioner reversed the findings of the Income Tax Officer and held that the provisions of Rule 1(v) of the Second Schedule to the Act were satisfied and as such the respondent-company was entitled to include the term loan for the purposes of computing the chargeable profits. The department preferred further appeal to the Income Tax Appellate Tribunal. The Tribunal held that only the last instalment of Rs 16,00,000 was payable “during a period of not less than seven years” and as such satisfied the requirements of Rule 1(v) but so far as the other four instalments aggregating to Rs 34,00,000 were concerned the Tribunal allowed the appeal of the department and rejected the claim of the respondent-company. At the instance of the respondent-company the Appellate Tribunal referred the following question for adjudication:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only Rs 16,00,000 out of the loan of Rs 50,00,000 taken from the Bank qualified for inclusion in the capital base under Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964?”
5. The High Court answered the question in the negative and in favour of the respondent-company. This appeal by special leave is by the Income Tax Department against the judgment of the High Court.
6. Learned counsel for the appellant contended that no part of the term loan of Rs 50,00,000 qualified for inclusion in the capital base because the provisions of Rule 1(v) of the Second Schedule to the Act were not satisfied. According to him under the term loan agreement dated August 1, 1964 the last instalment was to be paid on July 31, 1971 and as such the period of repayment was less than seven years. He further contended that in the context the expression “during a period of not less than seven years”, means a period of more than seven years. The learned counsel for the respondent, on the other hand, argued that the term loan was payable within the period of seven years. According to him the period of seven years is obviously a period which is “not less than seven years”.
7. We are of the view that on the plain reading of the proviso to Rule 1(v), Second Schedule to the Act it is clear that in order to claim benefit of the said provision the borrowed money has to be repaid during the period of more than seven years. The only interpretation which can be given to the expression “during a period of not less than seven years” is that the said period should go beyond seven years. The reasoning is simple. The period of seven years would not complete till the last ‘minute’ or even the last ‘second’ of the said period are counted. In other words till the last minute of the seven years period is completed the period remains less than seven years. In the present case the agreement was entered on August 1, 1964. The last instalment was to be paid on July 31, 1971. The seven years were to complete at 12 a.m (between the night of July 31, 1971 and August 1, 1971). Even if the loan was paid back at 11.59 p.m on July 31, 1971 the period would be less than seven years by one minute. It is, therefore, obvious that the period of “not less than seven years” can only mean till after the completion of seven years. We, therefore, hold that the repayment of borrowed amount during the period of seven years does not mean repayment “during a period of not less than seven years”. To claim the benefit under Rule 1(v) of the Second Schedule to the Act the repayment of the borrowed money must be during a period which is more than seven years.
8. We find support in the view taken by us in the following cases. In Ramanasari v. Muthusami Naik Section 18 of the Madras Rent Recovery Act VIII of 1865 required that, in fixing the day of sale, not less than seven days must be allowed ‘from the time of the public notice and not less than 30 days from the date of distraint’. The sale was held on February 13, but the notice was published on February 6. It was held that ‘not less than’ means the same as ‘clear’ and seven whole days must elapse between the day of the notice and the day fixed for sale. In Railway Sleepers Supply Company, Re (1885) LR 29 Ch D 204 the expression ‘not less than’ given number of days means ‘clear days’. It was held that the expression ‘not less’ indicates ‘a minimum’.
9. In the present case the whole of the term loan was payable within the period of seven years and as such the loan of Rs 50,00,000 taken by the respondent-company from National Grindlays Bank was not qualified for inclusion in the capital base under Rule 1(v) of the Second Schedule to the Act. The Tribunal in part and the High Court were not justified in deciding the issue in favour of the respondent-company. Since the order of the Tribunal, granting relief to the respondent-company to the extent of Rs 16,00,000 has become final, no interference is called for to that extent.
10. We allow this appeal, set aside the judgment of the High Court and answer the question in the manner that the entire term loan of Rs 50,00,000 taken from the bank does not qualify for inclusion in the capital base under Rule 1(v) of the Second Schedule to the Act but in view of the fact that the order of the Tribunal granting relief to the respondent-company to the extent of Rs 16 lakhs has not been challenged by the department, the Revenue shall be entitled to relief to the extent of Rs 34 lakhs only as not qualified for inclusion in the capital base. In the facts and circumstances of this case, we leave the parties to bear their own costs.
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