1. The assessee is a public limited company. It was engaged in the business of manufacturing electrodes in collaboration with M/s. Griesheim GmbH of West Germany. The assessee's share capital consisted of 29,622 shares of Rs. 100 each, of which 11,907 shares were held by the foreign collaborators and 4,788 by Harshadray Private Limited. The foreign collaborators arranged through their bankers, Deutsche Bank, for a guarantee in the sum of Rs. 10 lakhs to enable the assessee to obtain a loan of like amount from the Bank of Baroda. It appears that the assessee ran into financial difficulties. An understanding was reached between the foreign collaborators and Harshadray Private Limited and it was recorded on January 18, 1971. The record of understanding noted that the foreign collaborators had arranged for a bank guarantee from the Deutsche Bank to the Bank of Baroda for Rs. 10. lakhs so that the Bank of Baroda could advance a loan of Rs. 10 lakhs to the assessee. Clauses (c) and (f) thereof read thus :
'(c) MGG shall pay in Deutsche mark the equivalent of Rs. 5 lakhs (Rupees Five Lakhs only) to Deutsche Bank AG in order to extinguish the liability to that extent under the bank guarantee furnished by Deutsche Bank AG to Bank of Baroda, and arrange to continue the bank-to-bank guarantee for Rs. 5 lakhs till end of September, 1973. GEE would pay the amount of Rs. 5 lakhs to Bank of Baroda on the expiry of the said guarantee. HPL guarantees payment of the said amount.
(f) MGG will be released of all financial obligations in relation to the affairs of GEE.'
2. The foreign collaborators made the payment provided for in cl.(c) of the record of understanding.
3. The ITO noted that the assessee's profit and loss appropriation account showed a credit of Rs. 5 lakhs as received from the foreign collaborators in part extinction of the guarantee arranged for by them. he concluded that the payment was in connection with the assessee's business and added the sum of Rs. 5 lakhs to the assessee's income.
4. The assessee preferred an appeal. The AAC considered the facts in some detail and upheld the assessee's contention. The Revenue preferred an appeal before the Income-tax Appellate Tribunal and argued that the sum of Rs. 5 lakhs constituted the assessee's income by virtue of s. 28(iv) of the I.T. Act, 1961. The Tribunal dismissed the appeal.
5. The Revenue sought to raise the following questions for reference to this court under s. 256(1) of the I.T. Act, 1961 :
'(1) Whether, on the facts and in the circumstances of this case, the finding of the Tribunal that the benefit obtained by the assessee in the partial discharge of its liability to the Bank of Baroda by the payment of Rs. 5,00,000 by the foreign collaborators was not a benefit secured by the assessee in the course of carrying on any way connected with its business operation was perverse ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 5,00,000 representing partial discharge of the assessee's liability to the Bank of Baroda, by the payment of this amount to the bank by the foreign collaborators, M/s. Griesheim GmbH, did not represent value of any benefit arising from the business chargeable as part of the profits and gains of the business of the assessee company in terms of section 28(iv) of the Act ?'
6. The Tribunal declined to do so. This application is made by the Revenue under s. 256(2) of the I.T. Act, 1961.
7. Mr. Dhanuka, learned counsel for the Revenue, relied upon the credit entry of Rs. 5 lakhs in the assessee's profit and loss appropriation account and submitted that inasmuch as the foreign collaborators had made the payment to reduce the assessee's liability under the guarantee and had given up their right to seek repayment thereof from the assessee, the amount of Rs. 5 lakhs was the value of a benefit arising from the assessee's business and was its income by virtue of s. 28(iv) of the I.T. Act, 1961.
8. The Tribunal has found as a fact that the payment was made by the foreign collaborators to the Deutsche Bank, and not to the assessee. It is clear from cl.(c) of the record of understanding that by making payment to the Deutsche Bank of the equivalent of Rs. 5 lakhs, the foreign collaborators were discharging their own liability. The assessee's liability to the Bank of Baroda for the balance amount of Rs. 5 lakhs remained. It is clear from cl. (f) that by so doing the foreign collaborators were to be released of all financial obligations in relation to the affairs of the assessee. This was not, therefore, a payment made by a guarantor to a creditor which has benefited a debtor.
9. Having regard to these facts and in the circumstances of this case, it does not appear to us that the amount of Rs. 5 lakhs can even be considered to be the value of any benefit arising from the assessee's business.
10. The application is, therefore, dismissed. No order as to costs.