1. The assessee, a limited company, purchased certain machinery from M/s. Unitechna, Berlin, GDR. In accordance with the terms and conditions embodied in an agreement between the assessee and M/s. Unitechna, a sum of Rs. 7,43,750 payable by the assessee towards consideration for the acquisition of a capital asset to the foreign supplier, viz., Unitechna, was shown and treated as a long-term loan in the books of the assessee. In the course of the assessment proceedings for the assessment years 1973-74, 1974-75 and 1975-76, for purposes of assessment to surtax, the assessee claimed that this amount of Rs. 7,43,750 represented moneys borrowed by the company for the acquisition of a capital asset and should, therefore, be included in the computation of capital. The ITO, on a consideration of the claim so made by the assessee, negatived the same holding that the assessee had not borrowed any money but had merely agreed to pay the consideration for the purchase of machinery in instalments to the foreign seller and such amounts could not be included in the capital base. To hold so, the ITO relied upon the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT : 56ITR52(SC) . Thereupon, the assessee preferred appeals before the AAC of Income-tax, Madras, contending that r. 1(v) of the Second Schedule to the Surtax Act will be applicable and, therefore, the amount of Rs. 7,43,750 representing the outstanding amount due to M/s. Unitechna towards the purchase of machinery ought to be treated as forming part of the capital base for purpose of surtax. The AAC rejected this claim of the assessee. On further appeals by the assessee to the Tribunal, it took the view that the guarantee given by an established bank in India to the foreign seller for the repayment of the unpaid purchase consideration would render what was originally unpaid purchase money into a loan as well as borrowed money within the meaning of r. 1(v) of the Second Schedule and that that rule was not limited in its operation to capital borrowed for purposes of business and, therefore, the sum of Rs. 7,43,750 has to be treated as part of the capital of the assessee for surtax purposes. On this conclusion, the appeals preferred by the assessee were allowed. Aggrieved by this, the Revenue has come up on a reference before this court under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), on the following common question of law for the three assessment years in question :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,43,750 constituted monies borrowed and could be included in the capital base for the purpose of surtax assessments for the assessment years 1973-74, 1974-75 and 1975-76 ?'
2. Before us, the learned junior standing counsel, Mr. N. V. Balasubramanian, contended that having regard to the terms and conditions of the agreement under which the assessee purchased the capital asset, viz., machinery in this case from Unitechna, Berlin, the sum of Rs. 7,43,750 represented only the balance of consideration that had remained unpaid by the assessee for the purchase of the capital asset and that there was no borrowing at all by the company. The learned counsel further submitted, relying upon the language employed in the proviso to r. 1(v) in the Second Schedule, that what is contemplated is that the acquisition or purchase of capital asset like machinery should be preceded by an act of borrowing by the company and in its absence, it cannot be said that there was a borrowing by the company so as to enable it to claim its inclusion in the computation of the capital base. Attention in this connection was drawn by the learned counsel to the decision in Ramaswami Ayyangar v. CIT : 18ITR150(Mad) , Lakshmanier & Sons v. CIT & EPT : 18ITR734(Mad) , Bombay Steam Navigation co. (1953) Pvt. Ltd. v. CIT : 56ITR52(SC) , CIT v. Sundaram Fasteners Ltd. : 149ITR773(Mad) and Kannapiran Mills Ltd. v. CIT : 106ITR947(Mad) . On the other hand, the learned counsel for the assessee, while supporting the order of the Tribunal, submitted that even the balance of unpaid consideration, as in this case, would fall within the scope of the expression 'moneys borrowed' under r. 1(v) of the Second Schedule and can be taken into account for the purpose of computation of the capital base under r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
3. Before proceeding to consider these submissions, it is necessary to refer to the relevant terms of the agreement between the assessee and the foreign seller, M/s. Unitechna. Article V of the agreement deals with the terms of payment and dues as under :
'In principle, the payment will be effected within the frame of the existing commercial and payments agreement between the GDR and India.
2. The total price of the machines, equipments and materials according to art. IV - 1, amounting to Rs. 10,00,000, has to be paid by the purchaser to the seller.
(a) 7.5% of the total price, i.e., Rs. 75,000 as advance payment on or before September 30, 1967, by transfer to the Deutsche Aubenhandels Bank AG, 108, Berlin, Behrenstr. 22 in favour of M/s. Unitechna, Aubenhandelsgeselleschaft MbH, 108, Berlin Behrenstr. 53/54.
(b) 7.5% of the total price, i.e., Rs. 75,000 by opening of an irrevocable and indivisible documentary letter of credit with the Deutsche Aubenhandels Bank AG. 108, Berlin, Behrenstr. 22, in favour of the seller, on or before September 30, 1967.
(c) 85% of the total price, i.e., Rs. 8,50,000 become due in 16 (sixteen) equal half-yearly instalments, i.e., Rs. 53,125 each.
The First instalment become due 6 (six) months
' Second ' 12 '' Third ' 18 '' Fourth ' 24 '' Fifth ' 30 '' Sixth ' 36 '' Seventh ' 42 '' Eighth ' 48 '' Ninth ' 54 '' Tenth ' 60 '' Eleventh ' 66 '' Twelfth ' 72 '' Thirteenth ' 78 '' Fourteenth ' 84 '' Fifteenth ' 90 '' Sixteenth ' 96 ' after the last partial shipment, evidenced by the date of the bill of lading.
3. For the credited amount at 8.5% of the total value, the purchaser has to open with a first class bank an irrevocable banker's guarantee in favour of the seller including interest. The banker's guarantee has to be opened on or before September 30, 1967.
4. For the credited part of 85% of the total price, the purchaser has to pay interest amounting to 4.5% p.a. on outstanding balance and these are not included in the contract value. The interest has to be paid together with the respective instalments.
5. In case of any delay of any of the payments according to 2 and 4/1, the purchaser has to pay to the seller a penalty amounting to 0.5% for each commenced week of the value of the overdue amount.'
4. From the clauses of the agreement referred to above, it is clear that the agreement provided only for the payment by the assessee in instalments of the price for which the foreign seller, M/s. Unitechna, had agreed to make available the machinery to the assessee. The payment referred to is as price and for purchase of the machinery by the assessee. That this is so, is made further clear by clause (2) which sets out the total price of the machines, equipment and other materials and specifically says that that amount has to be paid by the purchaser to the seller, viz., by the assessee in the manner provided under cls. (a) to (c). Under clause (a), the assessee should make an advance payment of Rs. 75,000 on or before September 30, 1967, and that amount represents 7.5% of the total price. Similarly, cl.(b) obliges the assessee to open an irrevocable letter of credit for Rs. 75,000 on or before September 30, 1967, again representing 7.5% of the total price. The balance of 85% of the total price , viz., Rs. 8,50,000, has to be paid by the assessee under clause (c) in sixteen equal half-yearly instalments of Rs. 53,125 each and the due time for the payment of those instalments has also been indicated thereunder. Further, under cl(3), the assessee is obliged to open an irrevocable banker's guarantee in favour of Unitechna on or before September 30, 1967, in respect of 85% of the total value of the machinery. Clause (4) obliges the assessee to pay interest at the rate of 4.5% per annum on the outstanding balance and though this amount is not included in the value of the contract, it is stipulated that interest should be paid together with the instalment. Clause (5) provides for the payment by the assessee to Unitechna of a penalty amounting to 0.5% for the delay in respect of any of the payments. There is no dispute that the assessee had purchased the machinery in accordance with the aforesaid terms and conditions and that it owed a sum of Rs. 7,43,750 which had also been guaranteed by a bank in India. The question is whether what was essentially unpaid purchase money even under the terms of the agreement got transformed into a borrowing and assumed the character of a loan as a result of a guarantee in respect of this amount given by a bank in India in favour of the seller as the Tribunal was inclined to view it.
5. Viewed in the light of the terms of the agreement referred to already, the arrangement between the assessee and Unitechna was one to pay the consideration for the acquisition of capital asset, viz., the machinery by the assessee in instalments. With reference to the unpaid instalments, the assessee at best was a debtor; but the transaction by which the assessee became such a debtor was not a borrowing. A borrowing imports a positive act of lending by one coupled with an acceptance by the other of the money as a loan and that is significantly absent in this case. The jural relationship between the assessee and Unitechna has to be found only within the four corners of the agreement entered into between them and that clearly negatives the relationship of borrower and lender between the assessee and Unitechna. In this case, the agreement merely provided for the purchase of a capital asset by the assessee on long-term credit, as it were, with a stipulation for the payment of the price in instalments; but such an arrangement would not amount to borrowing of capital. The Tribunal was merely influenced by the circumstance that the unpaid purchase money had been guaranteed by a bank in India and though the Tribunal accepted that it cannot be said that the assessee borrowed money and paid for the purchase of the machinery to the same person from whom the money was borrowed, yet it concluded that in view of this circumstance, the outstanding amount has to be regarded as money temporarily used by the assessee and to be returned to the foreign seller according to a specified scheme, In order to qualify for inclusion in the computation of the capital base, any amount has to originate as a borrowing. If in its origin, it is not a borrowing in the sense that the relationship of borrower and lender did not exist between the assessee and the person advancing the money, then by no subsepuent act or deed by way of guaranteeing what is otherwise not a brrowing, it cannot be converted into one such. We are plainly unable to appreciate as to how an amount which under the terms of the agreement between the assessee and the foreign supplier is only unpaid sale consideration, can be metamorphosed into a borrowing bringing into existence the relationship of borrower and lender which cannot be found on the terms of the agreement. May be, the assessee owed a debt in the shape of unpaid instalments to Unitechna, the foreign seller. But that debt is not traceable to a borrowing by the assessee and M/s. Unitechna, though entitled to receive a debt from the assessee, cannot be termed as a lender. The guarantee given by the bank and the addition of interest to the outstanding instalments would not, in our view, alter the relationship of purchaser and unpaid vendor between the assessee and M/s. Unitechna.
6. We are also unable to appreciate the reasoning of the Tribunal to the effect that the outstanding amount can be regarded as moneys temporarily used by the assessee and to be returned to the foreigner according to a specified scheme. Even assuming that the assessee had purchased the capital asset from the foreign supplier and the property in the capital asset has passed by the assessee, we are unable to appreciate how moneys payable by the assessee to the foreign seller can be treated as moneys used by the assessee as to treat it as money having been made available by the foreign seller to the assessee as a result of a borrowing by the assessee and to be returned to the foreign seller as provided in the agreement.
7. We may now briefly refer to the decisions to which our attention was drawn by the learned junior standing counsel in this connection. Lakshmanier & Sons v. CIT & EPT : 18ITR734(Mad) , had to consider the question whether advance of moneys obtained by a selling agent for purposes of distribution of yarn manufactured by a textile mill which were adjusted towards the final payment of purchase price at the time of delivery of goods would be 'borrowed money' within the meaning of rule 2A of Schedule II to the EPT Act, 1940. The expression 'borrowing' was held to imply a loan on an ultimate analysis would not convert the money made available by the customer to the assessee as security deposit or borrowing or make the money 'borrowed money' within the meaning of the rule and, therefore, the borrowed money and the security deposits were not borrowed money within the meaning of rule 2A of Schedule II to the EPT Act, 1940. The same question also arose before the Supreme Court in Lakshmanier and Sons v. CIT & EPT : 23ITR202(SC) and the Supreme Court, with reference to the payments received by the assessee under the heading 'Contracts advance fixed deposit account' which was refundable on the completion of delivery under the contract, held that those amounts partook the nature of trading receipts and the amounts so received could not be regarded as borrowed money for purposes of rule 2A of Schedule II to the EPT Act, 1940. In doing so, the Supreme Court pointed out that the expression 'borrowed money' must be construed in its natural and ordinary meaning and implies a real borrowing and a real lending. Significantly that is absent in this case. The assessee in Ramaswami Ayyangar v. CIT : 18ITR150(Mad) , who was carrying on business in money-lending, claimed that he was entitled to deduct the interest paid on the death duty payable to the Government of Ceylon in relation to certain properties left by a deceased person. The court negatived the claim for deduction holding that the amount which was not paid as death duty was used for the purpose of business, but it could in no sense be regarded as a borrowing and that what was contemplated was a lending of money to a borrower and the borrowing of the money from a lender with a contractual stipulation for repayment with interest on the loan and that the relationship of borrower and lender being absent, the amount due under the statute cannot be regarded as borrowed capital. In Bombay Steam Navigation Co (1953) Pvt. Ltd. v. CIT : 56ITR52(SC) , the Supreme Court pointed out that an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan and though it may be that a loan of money results in a debt, every debt cannot be regarded as a lender. Applying this to the present case, at best the assessee was a debtor, but the transaction by which the assessed became such a debtor, was not a loan borrowed and it cannot, therefore, claim that there was a borrowing by the assessee. In CIT v. Sundaram Fasteners Ltd. : 149ITR773(Mad) , we had occasion to consider the question whether interest paid by the assessee on amounts paid by various persons for the purchase of the shares of another company held by the assessee should be allowed as deduction under s. 36(1)(iii) of the Act. The amounts received from the intending buyers of the shares were held not to arise out of an act of borrowing by the assessee and lending by the purchasers and, therefore, the assessee was not entitled to claim a deduction for the payment of interest paid by it to the intending purchasers. On a due consideration of the terms of the agreement and the manner in which the liability of the assessee in the sum of Rs. 7,43,750 had arisen, we are of the view that the assessee did not borrow any amount at all from the foreign supplier. That takes us on to a consideration of the interpretation put upon the proviso to rule 1(v) of the Second Schedule by the Tribunal. The Tribunal was of the opinion that the provisions of rule 1(v) of the Second Schedule clearly apply to the assessee. We have earlier pointed out how there was no borrowing by the assessee from the foreign supplier under the terms of the agreement relating to the purchase of the capital asset by the assessee from the foreign seller. The opening words of rule 1(v) of the Second Schedule contemplates a borrowing by the company from any one of the institutions mentioned therein or any person in a country outside India. In the absence of a borrowing, as in this case, the assessee cannot take advantage of rule 1(v). Besides, the requirements of the proviso are also not fulfilled in this case, even on the assumption that the assessee had made a borrowing. The proviso runs as under :
'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.'
8. A consideration of the language employed in the proviso indicates that the creation of a capital asset must be the result of a borrowing. In other words, the borrowing must precede the acquisition or creation of the capital asset, viz., machinery in this case. The other requirement is that the agreement under which the moneys are borrowed should provide for the repayment during a period of not less than seven years. In this case, there was no borrowing by the assessee at all as we have found earlier. Even assuming that there was such a borrowing, it did not precede the acquisition or the creation of the capital asset. Further, from the terms of the agreement already referred to, it is seen that moneys were not borrowed under the agreement. Therefore, none of the requirements of the proviso are fulfilled in this case. It is in this connection that the decision of this court in Kannapiran Mills Ltd. v. CIT : 106ITR947(Mad) is apposite. In that case, the assessee borrowed moneys from the Madras Industrial Investment Corporation Ltd. for the purpose of discharging its liabilities and also for payment towards machinery supplied. The amount outstanding to the Corporation as on January 1, 1963, which was the relevant date for the assessment year 1964-65 for purposes of assessment to surtax, was Rs. 8,82,607. The ITO included the entire amount in the computation of capital; but the Commissioner held that a sum of Rs. 5,89,607 should be treated as money not borrowed for the creation of a capital asset and will have to be excluded. The Tribunal agreed with that view except that it reduced the amount to be excluded to Rs. 5,71,747. Before this court, an argument was raised that even though moneys had not been borrowed for the immediate purpose of creating a capital asset, yet it had the object of creating a capital asset because the borrowed moneys were utilised for the discharge of loans already incurred for acquisition of machinery and that even if the immediate object is to be taken into account, that was also fulfilled, viz., liquidation of the debts of the company which were utilised for the purchase of machinery and that had resulted in the creation of a capital asset in India. In rejecting this contention, it was pointed out that the use of the word 'for' will show that the creation of the capital asset must be subsequent to the borrowing and the creation could not precede the borrowing and that the proviso will have no application to a case where the creation of a capital asset had already been made prior to the borrowing. We have earlier found that there was no borrowing at all by the assessee and even assuming there was one, the creation of the capital asset could not precede the borrowing as in this case and, therefore, requirements of the proviso are also not fulfilled. We may also point out that a Tribunal was in error in stating that r.1 deals with capital corresponding to the assets in the assessee's balance-sheet. In the decision in Kannapiran Mills. Ltd. v. CIT : 106ITR947(Mad) , it has been pointed by this court at page 953 that the idea of creation of a capital asset referred to in the proviso does not take into account intangible additions to the assets of a company shown in the balance-sheet. Under these circumstances, we are of the opinion that the view taken by the Tribunal is unsustainable. We, therefore, answer the question referred to us in the negative and in favour of the Revenue. The assessee will pay the costs of reference to the Revenue. Counsel's fee Rs. 500 one set.