Cit v. New India Industries Ltd.

1. The question for decision in these appeals relates to the construction of the proviso to Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. It may be mentioned that the provision contained in the proviso to Rule 1(v) therein has been omitted from 1-4-1977. This question therefore is not of any practical significance at this stage.

2. The High Court (New India Industries Ltd. v. CIT (1977) 108 ITR 181 (Guj)) has taken the view that there was a modification of the agreement by the subsequent correspondence between the parties as a result of which the loan fell out of the purview of the aforesaid proviso to Rule 1(v). The finding of the High Court is as under (at ITR pp. 205-06):

“… Therefore, if the spread over of the repayment has been provided in the terms of the agreement in such a manner that the repayment is completed by a date beyond seven years from the first advance made under the agreement under which the monies are borrowed, the loan in question will qualify for inclusion in the capital of the company computed for the purposes of surtax. However, once we find that the monies were advanced as of a particular date and under the terms of agreement under which those monies were advanced, the final date for the repayment of the entire amount falls beyond the period of seven years counting from the date of the first advance under the agreement, the loan would qualify for inclusion in the capital. In the instant case the first advance of Rs 10 lakhs under the agreement was paid in the month of July 1961. The second amount was paid some time in the month of September 1961. That too was of Rs 10 lakhs. These two items aggregating to Rs 20 lakhs were subsequently adjusted by mutual agreement between the parties against this loan of Rs 50 lakhs and, therefore, they must be deemed to have been made by agreement between the parties under this loan agreement of 1-12-1961. The terms of the agreement as modified provided for repayment by 1-12-1968, and thus the repayment of this loan was during a period of not less than seven years, that is, so spread over a period of not less than seven years counting from the date of the first advance under this agreement of 1-12-1961. In view of this conclusion, so far as the facts of the present case are concerned, the loan of Rs 50 lakhs was to be repaid not within a period of seven years….”

3. In our opinion, the finding reached by the High Court on the basis of the subsequent correspondence between the parties which resulted in the modification of the agreement does not suffer from any infirmity in the present case to require us to take a different view. It is, therefore, clear that the High Court's answer to the questions of law referred to it for decision do not suffer from any infirmity. Consequently, the appeals are dismissed. No costs.