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Commissioner of Income-tax Vs. CochIn Refineries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 77 of 1977
Judge
Reported in(1983)32CTR(Ker)137; [1983]142ITR441(Ker)
ActsIncome Tax Rules, 1962 - Rule 19A; Income Tax Act, 1961 - Sections 80J
AppellantCommissioner of Income-tax
RespondentCochIn Refineries Ltd.
Appellant Advocate P.K.R. Menon, Adv.
Respondent Advocate K.V.R. Shenoi,; P.K. Kurien,; K.A. Nayar,;
Cases ReferredLaxman Bharmaji v. Emperor
Excerpt:
.....a of income tax rules, 1962 - secured notes issued as per agreements acknowledge indebtedness of company - such notes issued under common seal of company - controller of capital issues, ministry of finance, government of india had consented to issuance of notes - in respect of notes issued in pursuance of agreement of 1964 it is specifically provided that it is intention that expression 'notes' shall have same meaning as 'debentures' in indian law - revenue has no case that notes issued as per agreement of 1964 are in any way different from notes issued as per agreement of 1967 - notes are transferable and are in series - transferability of each note assured after agreement and from wording of note - tribunal right in treating dollar loans as debentures for purpose of granting relief..........really arises for our consideration is what is a debenture. are the loans in the real sense of the term debentures the i.t. act does not define a debenture. the companies act, 1956, in section 2(12) gives an inclusive definition. it states that ' debenture ' includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. the same is the meaning given in the english companies act of 1948 (section 455). palmer would state that the term securities in the definition clause is apparently used in a sense slightly in excess of its strict legal meaning.8. lindley j. observed in an early case british india steam navigation co. v. irc [1881] 7 qbd 165 :'what the correct meaning of ' debenture' is i do not know. i do not find.....
Judgment:

Chandrasekhara Menon, J.

1. Two questions have been referred to this court under Section 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Cochin Bench, which are said to arise from an order of the Tribunal disposing of the appeals filed by the assessee, Cochin Refineries Ltd., Ambalamugal, and the Department for the assessment year 1971-72. The two questions are:

'(1) Whether, on the facts and in the circumstances of the case, and on an interpretation of the agreements entered into by the company with certain financiers, the Tribunal is right in law in treating the medium term dollar loan amounting to Rs. 90,00,000 and dollar loan amounting to Rs. 1,31,86,875 as debentures for the purpose of granting relief under Section 80J of the Income-tax Act 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in treating the interest income from bank deposits as business income of the assessee for the purpose of Section 80J of the Income-tax Act, 1961 ?'

2. At the outset itself we might state that we answer question No. 2 against the assessee and in favour of the Revenue in view of the decision of this court in regard to the same assessee in respect of the assessment year 1970-71, when the same question was referred to this court in I.T.Rs. Nos. 71 and 72 of 1977. This court said there (the decision is reported in : [1982]135ITR278(Ker) --CIT v. Cochin Refineries Ltd.) (p. 287) :

' The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset. In the case before us, the income by way of interest from the deposits is no doubt an income derived by investing surplus cash of the assessee generated as profits of the industrial undertaking. But, it is notmoney derived from the business activity of the industrial undertaking but by the business activity of deposit of the business asset in banks. Within the meaning of the term ' derived from ' it will not be possible to hold that the income so generated is the income falling within Section 80J.'

3. We may now refer to the relevant facts necessary for a consideration of the first question. The assessee is a public limited company in which the Govt. of India is a shareholder. The assessee had entered into agreements with financiers in the United States called Loan and Note Purchase Agreements on July 1, 1964, and on December 31, 1967. The agreement on July 1, 1964, was with different financiers. The agreement in 1967 was with Philips Petroleum International Corporation. According to the agreement of 1964 the assessee-company will authorise issuance and sale of 12 million U.S. dollars as 5 3/4% secured notes series A and the borrowing of 6 million U.S. dollars at the same rate but known as secured notes series B. The notes were to be issued and secured by a deed of trust and mortgage dated July 1, 1964, the mortgage being between the company and the First National City Bank as the trustee and the creditors. The notes would be dated, should mature and should bear interest which shall be payable on such terms and provisions as provided in the mortgage deed and guaranteed by the Govt. of India in pursuance of the terms of the guaranteed agreements dated July 1, 1964. The Controller of Capital Issues has consented to the issue. It is specifically defined in the agreement that the term ' notes ' shall mean any note authenticated and delivered under the said indenture, it being the intention that the expression shall have the same meaning as ' debentures ' under Indian law.

4. As per the agreement of 1967 the assessee-company agreed to borrow from the Philips Petroleum Company up to U.S. Dollars 2,500,000 in accordance with the terms of the agreement and to issue its 6% notes in the total principal amount to evidence such borrowings. The notes were in the form attached thereto as Ex. 1 to the agreement. They would be guaranteed by the Govt. of India pursuant to the terms of the guarantee agreement. As per the guarantee agreement, the President of India unconditionally guaranteed the holder of the notes the due and punctual payment of, (i) the principal, whether at maturity, upon acceleration of maturity or otherwise, and the interest on, and the premium, if any, on payment thereof, (ii) any additional sums payable on account of any ' income-tax ' as defined therein, (iii) any amounts payable by the company under the Loan and Note Purchase Agreement, and (iv) any expense incurred in the protection of the rights of the holder. It was also provided by the guarantor that the agreement is made for the benefit of PPIC and of the several holders from time to time of the notes and it may be enforced directly by the holders of such notes or by any of them, fromtime to time as often as occasion may arise, as well as by PPIC. No doubt this agreement is addressed to one financier and after the Commissioning of the business. To that extent it is different from the 1964 agreement. Verbal changes are there on account of this fact. The 1964 agreement has been followed by a mortgage and trust deed. There is no such deed in respect of 1967 agreement, but as noted earlier, there is a guarantee by the President of India as the holder of the majority of the stock of the company. The President of India had unconditionally guaranteed the holder of the note the punctual payment of the interest and the repayment of the principal. There is no difference at all in the wordings in both the guarantee agreements excepting as required by the change in situations. The Reserve Bank had also given a guarantee to the U.S. lenders, PPIC, which guarantee is also identical in words and context with that given by the Reserve Bank for the loans in 1964. The notes are also identically worded excepting for some minor changes. We might note here that the Revenue has also proceeded on the basis that the notes issued as per both the agreements are not debentures and there is no difference in respect of the notes as per the 1964 agreement with that of the notes as per the 1967 agreement.

5. In claiming relief under Section 80J of the I.T. Act and giving computation of the capital employed, the assessee-company did not treat the two dollar loans aforementioned as liabilities under Rule 19A of the I.T, Rules. It may be pointed out here that Section 80J allows a deduction from the income, in respect of newly established industrial undertakings, an amount representing 6% of the capital employed. As per Rule 19A of the Rules dealing with the computation of the capital, the aggregate of the amounts of borrowed moneys and debts due by the assessee are deducted in ascertaining the capital employed. It is also, however, provided that in the case of companies, the amount of its debentures need not be deducted as a debt to ascertain the capital. Treating the two dollar loans as debentures, the company did not deduct the amount as per these. The ITO, however, treated them as liabilities and deducted these loan amounts from the aggregate value of the assets in the ascertainment of capital. Thus the relief under Section 80J was worked out on a smaller figure than what was claimed by the assessee.

6. The assessee-company appealed as, according to them, the two loans represented debentures. Their contention was, however, rejected and the appeals were dismissed by the AAC. However, on further appeal by the assessee-company to the Income-tax Appellate Tribunal, the Tribunal found that both these loans are debentures and the assessee's contention was accepted. This decision gave rise to the application for reference and the subsequent reference of the question by the Tribunal to this court.

7. The short question that really arises for our consideration is what is a debenture. Are the loans in the real sense of the term debentures The I.T. Act does not define a debenture. The Companies Act, 1956, in Section 2(12) gives an inclusive definition. It states that ' debenture ' includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. The same is the meaning given in the English Companies Act of 1948 (Section 455). Palmer would state that the term securities in the definition clause is apparently used in a sense slightly in excess of its strict legal meaning.

8. Lindley J. observed in an early case British India Steam Navigation Co. v. IRC [1881] 7 QBD 165 :

'What the correct meaning of ' debenture' is I do not know. I do not find anywhere any precise definition of it. We know that there are various kinds of instruments commonly called debentures. You may have mortgage debentures, which are charges of some kind on property. You may have debentures which are bonds;......You may have a debenturewhich is nothing more than an acknowledgment of indebtedness. And you may have a thing like this, which is something more ; it is a statement by two directors that the company will pay a certain sum of money on a given day, and will also pay interest half-yearly at certain times and at a certain place, upon production of certain coupons by the holder of the instrument. '

9. Chitty J. said in Levy v. Abercorris Slate and Slab Co. [1888] 37 Ch D 260 :

' I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art.'

10. Palmer quotes the same judge stating in another case, Edmonds v. Blaina Furnaces Co. [1887] 36 Ch D 215:

' The term itself imports a debt--an acknowledgment of a debt--and speaking of the numerous and various forms of instruments which have been called debentures without anyone being able to say the term is incorrectly used, I find that generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security. '

11. After quoting these decisions the learned author states (Palmer's Company Law, 20th Edn., pp. 367-368) :

' In modern commercial usage a debenture denotes an instrument issued by the company, normally--but not necessarily--called on the face of it a debenture, and providing for the payment of, or acknowledging the indebtedness in, a specified sum--say, 100--at a fixed date, with interest thereon. It usually--but not necessarily--gives a charge by wayof security, and is often--though not invariably--expressed to be one of a series of like debentures.

But the term, as used in modern commercial parlance, is of extremely elastic character, for

(1) it is sometimes used, both by lawyers and businessmen, to describe an instrument which is not called, on the face of it, a debenture, e.g., a bond ;

(2) it is used of an instrument which is not one of a series. A single debenture may be issued to one man ;

(3) it is not the less a debenture because

(a) it is not under seal; or

(b) it does not contain a charge ; or

(c) it does not provide for payment at any fixed date but only in the event of winding up, or on some contingency ; or

(d) there is no personal liability on the company to pay but the company charges its property as security for the debt of another person.

Although the modern meaning of the term ' debenture' is thus very wide, it would go too far to assert that every document creating or acknowledging an indebtedness of the company is a debenture. Commercial men and lawyers would certainly not use this term when referring to bills of exchange or other negotiable instruments, deeds of covenant and many other documents in which a company stipulates to pay a sum of money.'

12. A debenture is certainly a document which either creates a debt or acknowledges it. While it may usually be one of a series, it need not necessarily be so. As Palmer has pointed out, a single debenture may be issued to one party. As Chitty J. in Edmond's case [1887] 36 Ch D 215 and a Division Bench of the Bombay High Court in Laxman Bharmaji v. Emperor, AIR 1946 Bom 18 : 16 Comp Cas 31 point out :

' In determining what is or is not a debenture within the section we are not bound to hold that an instrument is a debenture because it is called a debenture by the company issuing it, nor to hold it is not a debenture because it is not so called by the company. We must look at the substance of the instrument itself, and, without the assistance of any precise legal definition form the best opinion we can whether the instrument is or is not a debenture.'

13. Turning to this case we find that the secured notes concerned, issued as per the agreements, acknowledge the indebtedness of the company. They are issued under the common seal of the company. The Controller of Capital Issues, Ministry of Finance, Govt. of India, had consented to the issuance of the notes. In respect of the notes issued in pursuance of the 1964 agreement it is specifically provided that it is the intention that theexpression ' notes ' shall have the same meaning as ' debentures' in Indian law. However, as noted earlier, the notes issued as per both the agreements are worded identically except for some minor changes. And as we have pointed out earlier, the Revenue has no case that the notes issued as per the 1964 agreement are in any way different from the notes issued as per the 1967 agreement. The 'notes' are transferable. They are in a series. The transferability of each note is assured from the agreement and from the wording of the 'note '.

14. In the circumstances, the Tribunal was right in treating the dollar loans as debentures for the purpose of granting relief under Section 80J of the I.T. Act, 1961. Therefore, we answer question No. 1 in favour of the assessee and against the Revenue.

15. A copy of the judgment under the seal of the High Court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.


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