1. The Income-tax Appellate Tribunal, Madras Bench, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961, as applied to surtax by Section 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act'). for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that, in respect of the monies borrowed by the assessee from Madras Industrial Investment Corporation Ltd. and outstanding on the first day of the previous year, a sum of Rs. 5,71,747 in not liable to be included as capital computed for the purpose of assessment under the Companies (Profits) Surtax Act, 1964 ?'
2. The facts which have given rise to the above question are fairly simple The assessee-company commenced acquiring fixed assets like machinery and buildings from 1949. It augmented its resources consisting of share capital by accepting loans often called fixed deposits from various parties. The assessee utilised these monies obtained on such loans for the purpose of acquiring fixed assets for the company. By an agreement dated April 23, 1951, entered into between the assessee and the Madras Industrial Investment Corporation Ltd., the assessee borrowed a sum of Rs. 5,00,000 for the specific purpose of discharging the then liabilities of the assessee, namely, a sum of Rs. 5,00,000. Again, under another agreement dated March 24, 1959, entered into between the assessee and the Madras Industrial Investment Corporation Ltd., the assessee borrowed a further sum of Rs. 11,50,000 of which a sum of Rs. 4,20,000 was earmarked for payment towards machinery supplied and the balance of Rs. 7,30,000 was earmarked for payment towards deposits taken from the public. We are concerned with the assessment year 1964-65. As on January 1, 1963, which was the relevant date for the assessment year, there was an outstanding to the extent of Rs. 8,83,607 out of which Rs. 78,607 was the balance outstanding under the first loan and the balance was outstanding under the second loan. The Income-tax Officer included the entire outstanding amount of Rs. 8,83,607 in the capital under the Second Schedule to the Act, to which we shall make detailed reference later. However, the Commissioner of Income-tax revised that order under Section 16 of the Act after giving an opportunity to the assessee and directed that out of the sum of Rs. 8,83,607, the amount of Rs. 5,89,607 had to be treated as money not borrowed for the creation of capital asset in India and hence will have to be excluded from the computation of capital. Against this order of the Commissioner of Income-tax, the assessee preferred an appeal. The Income-tax Appellate Tribunal substantially affirmed the order of the Commissioner except to the extent of determining the amount to be excluded as Rs. 5,71,747 as against Rs. 5,89,607 directed to be excluded by the Commissioner. It is this conclusion of the Tribunal that is challenged in the form of the question referred to this court.
3. Section 4 of the Act is the charging section and that section states :
'Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first 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. Section 2(5) of the Act defines the expression 'chargeable profits' as meaning 'the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with, the provisions of the First Schedule'. Section 2(8) of the Act defines the expression 'statutory deduction' as meaning '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'. There are two provisos to this definition. But for the purpose of the present case, a reference to them is unnecessary. Section 2(9) of the Act states:
'All other words and expressions used herein but not defined and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act.'
5. As will be seen, the definition of the term 'chargeable profits' in Section 2(5) refers back to the First Schedule of the Act while the definition of the term 'statutory deduction' in Section 2(8) refers back to the Second Schedule. It is not necessary to make a detailed reference to the provisions contained in the First Schedule for the simple reason that no controversy arises in this case with reference thereto. But the controversy centres on certain provisions contained in the Second Schedule which is relevant for computing the capital so as to arrive at the statutory deduction. Paragraph (1) of the Second Schedule opens by stating:
'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 ...'
6. Several amounts are mentioned thereunder, and we are concerned with item (v) thereof, which is as follows:
'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 :
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.'
7. It is the meaning of this item which has to be determined in the present proceedings.
8. As we have pointed out already, the two borrowings in the present case have been made from the Madras Industrial Investment Corporation which is notified by the Central Government as contemplated in item (v) as above. Therefore, the criterion regarding the lender is satisfied. Equally under the agreement entered into between the assessee and the said Corporation, the repayment has to be during a period of not less than seven years and, therefore, that criterion is also satisfied. The only question which has to be decided is whether the other criterion of the moneys being borrowed for the creation of a capital asset in India is satisfied or not in the present case.
9. It is not in controversy that the sum of Rs. 5,71,747 was not directly spent for acquisition of any machinery for the assessee-company, and the same was applied for discharging other loans with which the machinery was acquired. Consequently, the question falls within a narrow compass, namely, whether this sum of Rs. 5,71,747 borrowed by the assessee and applied for discharging earlier debts, which debts themselves were incurred for acquisition of machinery, can be said to be moneys borrowed 'for the creation of a capital asset in India'. Before proceeding further, we can immediately point out that the Tribunal was not right in holding that the definition of the term 'capital asset' contained in Section 2(14) of the Income-tax Act, 1961, will not apply to the proviso extracted above, since Section 18 of the Act while applying certain provisions of the Income-tax Act, 1961, to the Act, does not enumerate Section 2(14) of the Income-tax Act, 1961. We have already extracted Section 2(9) of the Act and that expressly states that all other words and expressions used herein but not defined and denned in the Income-tax Act, shall have the meanings respectively assigned to them in that Act. The expression 'capital asset' has not been defined in the Act, but has been defined in the Income-tax Act, 1961. Consequently, by virtue of Section 2(9) of the Act, the definition of the expression 'capital asset' contained in Section 2(14) of the Income-tax Act, 1961, will be applicable to the expression 'capital asset' occurring in the proviso to item (v) of para. 1 of the Second Schedule to the Act. Section 2(14) of the Income-tax Act defines the expression 'capital asset' as follows:
''capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.'
10. There is an Explanation to this definition and it is not necessary to refer to the same for the purpose of this case. Therefore, we proceed on the basis that the expression 'capital asset' occurring in the proviso to item (v) of para. 1 of the Second Schedule means property of any kind held by the assessee.
11. The question then for consideration is whether the two borrowings were made 'for creation of any capital asset', namely, for acquisition of property of any kind.
12. Mr. S. Swaminathan, learned counsel for the assessee, sought to advance two contentions before us. One is that even though the moneys had not been borrowed for the immediate purpose of creating a capital asset, it had the object of creating a capital asset because the moneys so borrowed were utilised for the discharge of loans which were already utilised for acquisition of the machinery; in other words, the proviso to item (v) of para. 1 of the Second Schedule to the Act should not be read as if the object of the borrowing to be taken into account is only the immediate object and not the ultimate object. The second argument is that even if it is the immediate object that is to be taken into account, the immediate object in the present case has been liquidation of the debts of the company which were utilised for the purchase of machinery, and by the liquidation of the debts of the company, the assets of the company had been increased and, therefore, the object had been the 'creation of capital asset in India'. We are unable to accept either of these two arguments. As far as the first argument is concerned, there is no need, for the purpose of construing the proviso, to think of immediate object or ultimate object or proximate object, in view of the clear language contained in the proviso. The language is 'for the creation of a capital asset in India'. Consequently, the object of the borrowing must be, or, in other words, the borrowing must be, for 'the creation of a capital asset in India'. The word 'for' itself will show that the creation of the capital asset must be subsequent to the borrowing and the creation could not precede the borrowing. If the creation of a capital asset had preceded the borrowing, the borrowing itself could not be for the creation of a capital asset in India. Therefore, in view of the specific language in the proviso, namely, 'for the creation of a capital asset in India', it is clear that the borrowing must be for the purpose of bringing into existence a capital asset, and the proviso will have no application to a case where the creation of a capital asset in India had already been made prior to the borrowing. Hence, we are of the opinion that in view of the clear and unambiguous language of the proviso, the only conclusion possible is that the capital asset in India should be created as a result of the borrowing. In other words, the borrowing should be for the creation of such capital asset in India. Therefore, the fact that the capital asset had already come into existence as a result of some borrowing and the present borrowing was utilised to discharge those loans will not in any way help the case of the assessee.
13. The second limb of the argument has also to share the same fate. The very idea of the creation of a capital asset in India referred to in the proviso will clearly show that it will not take into account any intangible additions to the assets of a company as shown in the balance-sheet. As a matter of fact, the definition of the terra 'capital asset' occurring in Section 2(14) of the Income-tax Act, 1961, refers to 'property of any kind held by an assessee', Therefore, such a notional or intangible addition to assets as a result of the liquidation of the existing liabilities will not come within the scope of the expression 'capital asset' as defined in Section 2(14) of the Income-tax Act, 1961, which applies, as we pointed out already, to the term 'capital asset' occurring in the proviso to item (v) of para. I of the Second Schedule to the Act.
14. Mr. Swaminathan lastly contended that the proviso referred to above will govern only a borrowing from any person in a country outside India occurring as the last of the lenders mentioned in item (v) of para. 1 of the Second Schedule, and it will not cover a borrowing from other institutions mentioned in the said item. We are unable to entertain this argument for the simple reason that no such argument was advanced before the Tribunal and, therefore, such a question cannot be said to arise out of the order of the Tribunal. Even assuming that such a question could be considered as an aspect of the question referred to this court, still we have no hesitation in rejecting this contention. The proviso stands apart as a proviso to the entire item (v) and not only to the last of the lenders mentioned in item (v). There is nothing in the context of the proviso also to show that it was intended to be correlated only to 'any person in a country outside India' from whom moneys are borrowed by the assessee. Even when the company borrows moneys from the Government or from the other institutions mentioned in item (v), the said borrowing may be for the creation of a capital asset outside India where the company may carry on its activities. Therefore, neither in item (v) nor in the proviso, there is anything in the subject or context to show that the proviso was intended to cover only the last class of lenders, namely, any person in a country outside India, and not the other institutions enumerated in item (v) of para. 1 of the Second Schedule to the Act. Under these circumstances, we answer the question referred to us in the affirmative and against the assessee. The Commissioner will be entitled to his costs of the reference. Counsel's fee is Rs. 500.