Y.V. Anjaneyulu, J.
1. This reference arises under section 18 of the Companies (Profits) Surtax Act, 1964, read with section 256(1) of the Income-tax Act, 1961, and it relates to the assessment year 1971-72. The Income-tax Appellate Tribunal referred the following three questions of law for the opinion of this court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 2,69,048 should be treated as a reserve for the purpose of computation of capital base
2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 87,50,000 representing the U.S. Aid Loan has to be included for the purpose of computation of capital base
3. Whether. on the facts and in the circumstances of the case, the word 'person' includes the Government of the United State, ?'
2. It is necessary to notice a few facts in order to appreciate the contentions involved.
3. The assessee is a public company. The previous year relevant for the surtax assessment year commenced on January 1, 1970, and ended on December 31, 1970. It would appear that the assessee's foreign collaborators paid U.S. dollars 502,541 towards equity shares subscribed in the company. The amount was deposited by the assessee in the First National City Bank, New York. The money was not repatriated by the assessee into India and remained in the bank to the credit of the assessee. While the amount remained in deposit with the bank in New York, rupee was devalued on June 6, 1966. As a result of devaluation, the corresponding value of the same remaining in deposit with the bank in New York increased by Rs. 2,69,048 in terms of Indian rupees. To give effect to the above increase, the assessee-company passed entries in its accounts debiting the First National City Bank account with the sum of Rs. 2,69,048 and crediting contra an account called 'Gain on devaluation'. - In the balance-sheet for the year ended December 31, 1969, the assessee-company showed a sum of Rs. 30,48,470 under the head 'Reserve and Surplus'. This sum of Rs. 30,48,470 included the sum of Rs. 2,69,048 above referred to. In connection with the surtax assessment year 1971-72, the assessee-company claimed that the sum of Rs. 2,69,048 should be treated as a reserve for purposes of rule 1 of the Second Schedule to the Surtax Act. The assessee's contention was that the above sum of Rs. 2,69,048 should be treated as 'Other reserve' under rule 1(iii) of the Second Schedule. The Income-tax Officer declined to accept the contention. The reasons given by the Income-tax Officer were somewhat involved; but it would appear that the Income-tax Officer was of the view that the sum of Rs. 2,69,048 represented a reserve brought into existence by revaluing the book asset and is, therefore, hit by Explanation 1 to rule 2 of the Second Schedule. On appeal, the Appellate Assistant Commissioner as well as the Tribunal declined to accept the Income-tax Officer's view and allowed the assessee's claim that the sum in question should be treated as a reserve and included in the computation of the capital of the assessee-company for the purpose of surtax under rule 1 of the Second Schedule above referred to. On an application by the Commissioner of Income-tax, the Tribunal referred the first question of law for the opinion of this court.
4. Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, reiterated the contention that the sum of Rs. 2,69,048, was brought into existence as a reserve by revaluation of the asset and is, therefore, hit by Explanation 1 to rule 2 of the Second Schedule. Sri Dalvi, learned counsel for the assessee-company, supported the order of the Tribunal on two grounds : firstly, he urged that Explanation 1 under rule 2 has no application at all since the Explanation must be considered to be a part of rule 2 of the Second Schedule. Inasmuch as rule 2 has no application to the facts relevant for the above purpose (it is not the Department's case that rule 2 has any application), the question of applying Explanation 1, learned counsel contends, does not arise. The second ground urged by the learned counsel is that, in any event, Explanation I cannot be invoked because the reserve is not brought into existence by revaluation of any book asset. Learned counsel contends that the expression 'book asset' refers to a notional, fictitious and intangible asset and, in the present case, the revaluation made is in respect of a tangible asset.
5. Since the controversy centres round Explanation I under rule 2 of the Second Schedule, it is necessary to extract the same :
'A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.'
6. We do not think that the learned counsel for the assessee-company is right in his submission that Explanation 1 goes along with rule 2 of the Second Schedule and if rule 2 has no application, Explanation 1 has also no application. Explanations 1, 2 and 3 under rule 2 clearly indicate that they apply not with reference to rule 2, but with reference to the entire Second Schedule. Rule 2 of the Second Schedule is for the limited purpose of reducing the capital by the cost of assets producing income not taxable under of the Income-tax Act. That rule has no relevance for any of the Explanations mentioned under the rule. Explanation 1 above referred to has direct reference to rule 1, because it refers to 'paid up share capital' referred to in sub-rule (i) and 'reserves' referred to in sub-rule (iii) of rule 1 of the Second Schedule. Similarly, Explanation 2 again refers to paid-up share capital, which has relevance only to rule 1 (i). Explanation 3 expressly indicates that it has reference to rules 1, 2 and 3. We are, therefore, unable to accept the contention of the learned counsel for the assessee that Explanations 1, 2 and 3 occurring after rule 2 have relevance necessarily to rule 2 alone and if rule 2 is not applicable in the facts and circumstances of a case, the Explanations are not applicable. We requested the learned counsel to illustrate, in what circumstances, the Explanations 1, 2 and 3 would come into operation vis-a-vis rule 2; but we could not get any satisfactory answer. Indeed, it does not appear that Explanations 1 and 2 have any relevance at all to rule 2 and Explanation 3 has relevance to rules 1, 2 and 3 as specifically mentioned therein. We, therefore, consider that the application of Explanation 1 has to be examined independently of rule 2. We must also reject the contention of the learned counsel for the assessee that the expression 'book asset' occurring in Explanation 1 refers to a notional, fictitious and intangible asset. In the first place, there is nothing to support this contention in the Explanation itself. The expression 'book asset' should be understood in its normal sense as any asset appearing as such in the books of account of an assessee-company. We are unable to appreciate how paid-up share capital can be brought into existence or increased by revaluation of a fictitious or notional asset. The plain effect of Explanation 1 is that, if any asset appearing in the books of account of an assessee is revalued in order to create or increase paid-up share capital or reserve, then Explanation 1 will be applicable. We, therefore, reject the contention of the learned counsel for the assessee on this point.
7. At the same time, we are also unable to accept the contention of the learned standing counsel for the Revenue that Explanation 1 has application to the facts and circumstances of the case. The object of Explanation 1 is to prevent companies from bringing into existence or increasing paid-up share capital or reserve by revaluation or otherwise of any book asset. Let us assume that the value of buildings according to the books of account was Rs. 100. If the company seeks to revalue the buildings and increases the valuation to Rs. 200 and consequently creates or brings into existence a reserve of Rs. 100 by correspondingly debiting the sum of Rs. 100 to the building account to raise the value to Rs. 200, it follows that the increase made on revaluation is hit by Explanation 1. The reserve of Rs. 100 created by the company cannot be taken into account for computing the capital of the company for the purpose of surtax. It would, therefore, appear that the object of Explanation 1 is to exclude reserves created in respect of book assets, whether by revaluation or otherwise. In our opinion, Explanation 1 will have no application in a case where there is no revaluation of a book asset. In the present case, we have seen that, on account of devaluation, the value of rupee has increased and the sum of Rs. 2,69,048 credited by the assessee-company to 'Gain on devaluation' account represents the real increase in value of the asset which is realised as opposed to any unrealised increase by taking recourse to revaluation. Inasmuch as the value of the asset has actually gone up, it was necessary for the company to give effect to the actual increase and that was done by the assessee by crediting the increase to a reserve account. This is not a case where a book asset is revalued within the meaning of Explanation 1. The sum of Rs. 2,69,048, in our opinion, represents an increase in the value of the asset, which is realised. In this view of the matter, we consider that Explanation 1 has no application to the facts and circumstances of this case. We accordingly answer the first question referred in the affirmative, that is to say, in favour of the assessee and against the Revenue.
8. Questions Nos. 2 and 3 relate to the same aspect. It would appear that the assessee-company borrowed a sum of Rs. 87,50,000 from the U.S. Agency for International Development (USAID). USAID, it appears, is a part of the Department of the Government of the U. S. A. The assessee claimed that he sum borrowed is liable to be included for computing the capital of the assessee-company for the purpose of surtax under rule (v) of the Second Schedule. The claim for inclusion was rejected by the Income-tax Officer on the short ground that USAID cannot be considered to be a 'person' for purposes of rule 1 (v) and, consequently, the sum borrowed is not liable to be included in the capital. The Appellate Assistant Commissioner and the Tribunal accepted the assessee's contention and the Commissioner asked for reference of questions Nos. 2 and 3 to this court for its opinion.
9. We may quote below rule 1(v) of the Second Schedule :
'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 - ..
(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.'
10. The assessee's contention is that the USAID loan represented 'moneys borrowed by it from any person in a country outside India'. According to the assessee, USAID is 'any person in a country outside India' and, consequently, the moneys borrowed ought to be included for computing the capital. The expression 'person' is defined under section 2(31) of the Income-tax Act, 1961, and that definition is made applicable to the Surtax Act by section 2(9). It is further seen that the definition of the expression 'person' is an inclusive definition in section 2(31) of the Income-tax Act. The definition of the expression 'person' in section 2(42) of the General Clauses Act is also an inclusive definition. It cannot, therefore, be said that the definition, as contained either in the Income-tax Act, which is applicable to the Surtax Act or the General Clauses Act, is exhaustive. The expression 'person' is of a wide connotation and there is no reason why it should be interpreted as not including a foreign government. Learned standing counsel for the Revenue has not been able to invite our attention to any authority which supports the Revenue's plea that USAID cannot be said to be a 'person' for purposes of rule 1(v) of the Second Schedule. If the intention of the Legislature is to include all borrowals made even from ordinary individuals, companies, corporations, etc., outside India for the purpose of computing the capital for surtax purposes, we do not see why a borrowal made from a foreign government should be excluded. In our opinion, if borrowals made by an assessee from persons satisfying the requirements of the inclusive definition in section 2(31) of the Income-tax Act, 1961, can be included for computing the capital, we do not see any justifiable ground for excluding borrowals made from a foreign Government. As observed by us already, the expression 'person' is of wide connotation and it includes, in our opinion, the Department of a foreign Government like USAID. Learned counsel for the assessee invited our attention to a decision in Madras Electric Supply Corporation Ltd. v. Boarland (Inspector of Taxes)  27 ITR 612 to support the proposition that the expression 'person' includes Crown. We find that the above-referred decision supports the view that a Government falls within the meaning of the expression 'person'. In this view, we consider that the Income-tax Appellate Tribunal was justified in coming to the conclusion that the sum of Rs. 87,50,000 borrowed by the assessee-company from the USAID has to be included under rule 1(v) of the Second Schedule to the Surtax Act for the purpose of computing the capital of the assessee-company. We accordingly answer questions Nos. 2 and 3 referred to us in the affirmative, that is to say, in favour of the assessee and against the Revenue.
11. All the three questions referred are accordingly answered in favour of the assessee and against the Revenue. The Revenue shall pay the assessee's costs. Advocate's fee Rs. 500.