Gopalan Nambyar, C.J.
1. The assessee is a limited company, the shares of which are owned by the Government of Kerala. For expansion of the capacity of the company, financial assistance was promised by the Government of India and by the Government of Kerala. In the budget for the year 1969-70, the Government of Kerala provided for Rs. 10.5 lakhs under '96 Capital Outlay' and another Rs. 10.5 lakhs under 'Q. Loans and Advances'.
2. In this reference, we are concerned with the Rs. 10.5 lakhs given under '96 Capital Outlay'. On February 5, 1970, the company approached the Government for disbursement of the money. By G.O. dated March 26, 1970, the Government sanctioned the amount. The condition in the G.O. was that the company should pay interest at 7 1/2% per annum to the Government from the date of drawal of the amount towards share capital till the date of allotment of shares to the Government. Similarly, in the budget for the year 1970-71, provision was made for financial assistance for the expansion of the scheme of the company. Rs. 16 lakhs was allocated, the condition for re-payment and in regard to payment of interestbeing similar as the payment for capital outlay noticed earlier. The chargeable period for the purpose of this revision is the year ended December 31, 1972. For the purpose of levy of surtax it became necessary to determine the capital base at the beginning of the accounting year relevant to the assessment year with reference to the provisions of Rule (1), Sub-rule (v), of Schedule II of the Companies (Profits) Surtax Act, 1964. The company claimed that Rs. 26.5 lakhs received from the Kerala Government should be treated as part of the share capital in view of Sub-rule (v) of Rule 1 of Schedule II. The Tribunal held that the claim of the assessee was unjustified for two reasons: (1) that it was not a loan or a borrowing from the Government, but the amounts had been advanced only towards the allotment of shares; and (2) that the amount cannot be treated as paid up capital. In other words, the Tribunal was of the view that the amounts cannot be regarded either as paid up capital or as borrowed capital. On the facts noticed, this finding of the Tribunal is correct. The amounts were paid to the company for allotment of shares to the Government. There is no obligation to pay interest. The obligation was only to allot shares and not to return the amount borrowed.
3. The statutory provisions may usefully be seen. Section 4 of the Companies (Profits) Surtax Act, 1964, reads :
'4. Charge of tax.--Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.'
4. The statutory deduction defined in Section 2, Clause (8), of the Act reads as follows:
' 'Statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater:......'
5. Sub-rule (v) of Rule 1 of Schedule II, read as follows :
'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 IndustrialFinance Corporation of India or the Industrial Credit and InvestmentCorporation of India or any other financial institution which the CentralGovernment may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or anyperson 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.'
6. In the light of these provisions, apart from the reason given by the Tribunal that the amount in question cannot be regarded either as borrowed capital or as paid up capital, there is also the additional fact that the shares were actually allotted by the company within the period of seven years. The shares were actually allotted in 1976.
7. The question of law referred for our determination and opinion is:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 26.5 lakhs is not monies borrowed within the meaning of Sub-rule (v) of Rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964 '
8. In view of the facts noticed earlier, we answer the question in the affirmative, i.e., in favour of the revenue and against the assessee. We make no order as to costs.
9. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal.