Sabyasachi Mukharji, J.
1. This reference relates to the assessment year 1964-65. The question arises as to the treatment of Rs. 75 lakhs representing a loan from the British Oxygen Co. Ltd., a company incorporated in the United Kingdom. The assessee-company is an Indian company, which was a 100% subsidiary of the British Oxygen Co. Ltd. till 1958. In 1958, the company was converted into a public limited company, as a result of which 30% of the shareholdings of the assessee-company had to be given up by the British Oxygen Co. Ltd. in favour of the public. The result was that the British company, viz., the British Oxygen Co. Ltd., sold 6,00,000 shares of Rs. 10 each with a premium of Rs. 35 for each share. The sale proceeds as reduced by any tax liabilities, if any, were agreed to be left with the assessee-company as a loan at a rate of interest, tentatively arrived at, of 6%, but which was variable. In November, 1957, the British Oxygen Co. Ltd. wrote a letter to the assessee in which it was made clear that the sale proceeds would be kept with the assessee for a period of 7 years at a rate of 6% which was variable. Unfortunately, the letters negotiating the loans and the letter granting this loan had not been set out in extenso in any of the orders or annexures to the statement of case. Here we are setting out the gist of the letters as summarised in para. 2 of the statement of case. It is further stated that the permission of the Reserve Bank was also obtained, as a result of which the sale proceeds of 6,00,000 ordinary shares in question hold by the British Oxygen Co. Ltd. less certain deductions for tax liabilities, etc:, were allowed to be kept as a loan with the assessee for a period of seven years on certain terms. The sum was actually returned to the British Oxygen Co. Ltd. in two instalments of Rs. 55,58,166 and Rs. 19,41,834 on the 10th March, 1966, and 23rd May, 1966, respectively. The sum had actually been kept in June, 1958, and were returned on the above two dates which fell beyond the period of 7 years.
2. In these circumstances, the assessee-company requested the ITO to treat the amount of Rs. 75,00,000 as part of the capital base of the company for surtax purposes under Clause (1)(v) of the Second Schedule of the Companies (Profits) Surtax Act, 1964. In this connection, it would be appropriate, in the view we have taken, to set out the relevant portion of the order of the ITO :
'As regards, the loan from M/s. British Oxygen Co. Ltd. the loans were given by the company from the sale proceeds of its shares in India. It is not a loan advanced from sources in a country outside India. Clause V and the proviso thereto clearly stipulate that the borrowing should take place outside the country and that funds should be utilised for creation of capital assets in India. Since the borrowings has been made in India this will not form part of the capital base of the company. The proviso to Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, states that the money borrowed should be by an agreement under which there should be a provision for repayment during a period of not less than seven years. In its letter dated 20th May, 1969, the company has intimated that there was no formal agreement with M/s. British Oxygen Co. Ltd. for the loan of Rs. 75,00,000. The company has, however, enclosed copies of letters exchanged with British Oxygen Co. Ltd., regarding the loan. The letters exchanged do not have the character of a firm agreement between the two contracting companies. The terms and conditions are kept in a fluid state. In the letter dated 7th November, 1957, the rate of interest has not been decided upon. Subsequently, in its letter dated 25th November, 1957, the British company has stipulated interest at 6% but here again the interest rate will be subject to adjustment in the light of prevailing conditions. The mode of repayment of loan after 7 years is also not stipulated. The letters cannot, therefore, be treated as an agreement as contemplated in Rule 1(v) of the Second Schedule to the Surtax Act. Besides it is not proved that the entire loan taken from the company has been utilised for the creation of capital assets, which by itself does not go to prove that the loan was in fact utilised for the creation of such capital assets. For these reasons, the loan taken from M/s. British Oxygen Ltd. is not taken in to account for capital computation.'
3. He, therefore, did not accept the assessee's contention.
4. The matter went up in appeal before the AAC. He went into the matter in greater detail. He has set out the history and thereafter observed that the contention before him was that the amount of Rs. 75,00,000 should be included in the computation of capital under Clause (v) of Rule 1 to Schedule II and he referred to the relevant portion of the clause, which we shall also do presently. He also referred to the fact that the representative filed a copy of the letter dated 25th November, 1967, from the British Oxygen Co. Ltd. to the assessee which was reproduced. The portion he had reproduced is as follows :
'We hereby confirm our previously expressed agreement that, when the proposed increase in issued share capital of 6,80,000 shares of Rs. 10 each at par to this company has been completed raising the issued share capital, which your company has, to 2,00,000 share of Rs. 10 each, we propose to sell 30% of our total shareholding, i.e., 6,00,000 shares of Rs. 10 each to the Indian public at a premium of Rs. 3'50 per share and to leave the proceeds of sale, less all expenses and capital gains tax, on loan to your company for a period of 7 years at the rate of interest from time to time applicable to loans from our company to your company. Such rate of interest shall be subject to adjustment in the light of prevailing conditions, but at present stands at 6% per annum and we confirm that this will be the rate in force at the date of the publication of the offer for sale.'
5. We may incidentally point out that though the original loan letter was not set out in the relevant year, the confirmation thereafter in 1967 has been set out as hereinbefore stated.
6. Thereafter, the AAC observed, as it was contended before him, as follows :
'The representative also states that though it is not possible to establish that the loan was specifically utilised for the creation of capital asset, the fact that during the years 1958-1961, substantial capital expenses have been incurred by the appellant conclusively proves that the loan was utilised for creating capital assets in India. The additions on fixed assets in various years are stated to be as under :
It is contended that the loan should be included in the computation of capital under Clause (v) of Rule 1 to the Second Schedule.'
7. Thereafter, the AAC proceeded to make the following observations :
'From a reading of Clause (v) of Rule 1 it appears to me that the following conditions must be present:
(i) Loan should be borrowed from a person in a country outside India. I am of the opinion that the borrowing must be outside India.
(ii) The loan borrowed for the creation of capital assets in India.
(iii) There must be an agreement under which such monies are borrowed providing for the repayment during a period of not less than seven years.
The first condition is not present as M/s. British Oxygen Co. Ltd. sold a part of its shares in India and utilised the sale proceeds by way of a deposit in the appellant company. The borrowing can be regarded outside India. Secondly, it is for the appellant to prove that the entire loan has been borrowed for the creation of capital assets in India and no inference can be drawn from the balance-sheet that the loan could have been used for creation of assets in India. It is admitted that no separate account has been kept and that it is not able to establish that the amount of Rs. 75,00,000 has been only used for the creation of capital assets. In view of this, the amount of Rs. 75,00,000 has been used towards capital assets has not been proved by the appellant. Thirdly, there must be an agreement under which the repayment should be during a period of not less than seven years. The letter dated 25th November, 1957, from B.O.C. states 'We hereby confirm our previously expressed agreement...' This letter and the fact that the amount of Rs. 75,00,000 was kept as a loan with the appellant for a period of not less than seven years should be taken as fulfilling condition No. (iii). The amount of Rs. 75,00,000 cannot be included in the computation of capital under Clause (v) of Rule 1 to the Second Schedule as conditions (i) and (ii) are not fulfilled.'
8. There was an appeal before the Appellate Tribunal on this aspect and the Tribunal, in dealing with the said letter as referred to hereinbefore, observed that the borrowings were not made in a country outside India, and, secondly, there was no evidence of actual creation of the capital assets from out of the borrowings. The Tribunal, thereafter, set out the assessee's arguments and also referred in para. 6 of its order that the departmental representative, on the other hand, had emphasized the findings and conclusion of the lower authorities and adopted the reasons given by the AAC.
9. Now, there is some confusion. Because, according to the Tribunal, the findings of the AAC were as follows:
(i) The borrowings were not made in a country outside India; and
(ii) There was no evidence of the actual creation of capital assets from out of the borrowings.
10. Therefore, when in para. 6 of its order the Tribunal reiterates that the departmental representative emphasised the findings and conclusion of the lower authorities and adopted the reasons given by the AAC, it is not quite clear whether it referred to the entire order of the AAC or the summary which the Tribunal made as indicated before. The Tribunal thereafter referred to the fact that permission was obtained from the Reserve Bank of India and the loan was for a period of over 7 years. The Tribunal further observed that, the loan transaction stood beyond reasonable doubt and the mere fact that interest was variable did not detract from the bona fides of the loan transaction and had also no other relevance to the decision of the issue before them. As to the objection taken by the department that the assessee could get the advantage of Rule 1(v) only if the borrowings were effected outside India the Tribunal was of the view that that would be putting a very strained and narrow interpretation on the relevant words in Rule 1(v). What was required was that the borrowings should have been made from a person in a country outside India. If as a result of the mutual arrangement it actually transpired that certain sale proceeds were adjusted against a loan transaction in India it did not mean that the assessee had not borrowed from a person in a country outside India. Then the Tribunal went on to observe that coming to the objection of the department that the loan was not fully utilised for the creation of capital assets in India the Tribunal referred to the balance-sheets for and from the accounting year ended 30th December, 1958, to the accounting year ended 30th September, 1961 and observed that the loan of Rs. 75 lakhs was utilised in capital expenses. In this connection, the Tribunal has referred to the report of the directors for the accounting year ending on 30th September, 1958, which had observed as follows :
'Directors' Report.--The financing of the replacement and expansion programme has involved the provision of substantial amounts of foreign exchange for the import of capital goods. Over and above the sum available from the subscription by the British Oxygen Company Ltd. of the sterling equivalent of Rs. 63 lakhs in the form of share capital, it was estimated that further foreign exchange to the extent of approximately Rs. 75 lakhs would be required for the programme. The company has, therefore, been negotiating with the Industrial Credit & Investment Corporation of India Ltd. and the Commonwealth Development Finance Company Ltd., London, for foreign exchange loans, as follows, of an amount in pound sterling equivalent to U.S. $ 950,000 from the former and 225,000 from the latter. It is expected that these negotiations will be successfully concluded very shortly.
The assistance from The British Oxygen Company Ltd. in the form of loans is also an important feature of the company's arrangements for financing the expansion programme and details of these loans are given elsewhere in the annual report under 'Notes on Accounts'.
Notes on Accounts:
The loan of Rs. 75 lakhs from The British Oxygen Company Ltd, is in pursuance of the arrangement whereby The British Oxygen Company Ltd. agreed to leave the net proceeds of sale of 6,00,000 ordinary shares, less capital gains tax, if any, on the loan to the company for a period of seven years. The exact amount of the loan can be determined only after capital gains tax, if any, payable by The British Oxygen Company Ltd. has been settled. The rate of interest applicable to the loan at present stands at 6% per annum.'
11. The Tribunal thereafter went on to observe that from the above extracts one could easily conclude that the loan of Rs. 75 lakhs was utilised for the creation of capital assets in India. This view was fortified by the additions made to the fixed assets in various years and these were not required to be produced. The details had already been given by the AAC which we have set out hereinbefore. In those circumstances, the Tribunal accepted the assessee's contention and allowed these sums to enter into the capital for the purpose of Rule 1(v) of Schedule II.
12. In those circumstances, under Section 256(1) of the I.T, Act, the following question has been referred to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the loan of Rs. 75 lakhs taken from British Oxygen Ltd. represented monies borrowed from a person in a country outside India within the meaning of Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?'
13. It appears that the revenue wanted two other questions to be referred and, as the Tribunal had refused to refer those two questions, the revenue had come up under Section 256(2) of the I.T. Act, 1961, and this court directed reference on the two further question, in Income-tax Reference No. 8 of 1980. We have heard the said reference along with the Income-tax Reference No. 183 of 1974. In order to dispose of the entire matter in that subsequent reference the following two questions should be set out:
'1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the proviso to Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and of the agreement under which the moneys were borrowed from British Oxygen Ltd., the Tribunal was correct in holding that the entire- sum of Rs. 75,00,000 (Rupees seventy-five lakhs only) was borrowed for the creation of the capital assets in India and in that view holding that the said sum should be included in computing the capital of the assessee for the purpose of the Companies (Profits) Surtax Act, 1964 ?'
2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the sum of Rs. 75,00,000 (Rupees seventy-five lakhs only) borrowed from British Oxygen Ltd. was utilised for the creation of capital assets in India was based on no evidence or was otherwise unreasonable or perverse
14. Therefore, we have to examine these two aspects of the matter. For our present purpose, it is first necessary to set out the relevant provisions under which the inclusion of this amount of Rs. 75 lakhs in the computation of capital is claimed. For this purpose, we have to refer to Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964, which reads 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-
(i) its paid-up share capital;
(ii) its reserves, if any, created under the proviso (b) to Clause (vi-b) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (XI of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (XLIII of 1961);
(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (XI of 1922), or the Income tax Act, 1961 (XLIII of 1961);
(iv) the debentures, if any, issued by it to the public : Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of 7 years from the date of issue thereof, and
(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 : 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 7 years.'
15. Though we have set out practically the material portion of the rule, we are really concerned with the interpretation of Clause (v) of the said rule under Schedule II, Now, the first question that has been urged in this case is, whether the money has to be borrowed from a person who is only outside India or whether the moiety has to be borrowed outside India as well as the person from whom the borrowing is made should be in a country outside India. 'In other words, whether the expression or any person in a country outside India' in the last limb of the first part of Clause (v) of Rule 1 contemplates cumulative conditions requiring the residence of the lender as well as the act of borrowing to be done outside India or whether it is sufficient if only the lender is a person outside India. Now, if we consider the scheme of the Act, we may get some light. The scheme of the rule in the Act is to impose certain taxes on certain profits, leaving aside which according to the Legislature is considered to be in excess of normal return on capital, and for this purpose the capital base has to be computed. The source of the capital is the main purpose of Rule 1 of Schedule II. For instance, Clause (i) deals with paid-up share capital; Clause (ii) deals with the reserves created under certain conditions; Clause (iii) covers the reserves of certain other conditions; and Clause (iv) deals with debentures. Lastly, Clause (v) deals with borrowings made from certain specified institutions and from any person in a country outside India. Now, it is significant that all these clauses are dealing primarily with the sources which form the capital base of the company. This is an indication that the emphasis in this rule is not on the situs of the transaction but on the sources from which the amounts are drawn to form the capital. Apart from that the opening expressions of Clause (v) are as follows: 'Any moneys borrowed by it' (viz., the company concerned) 'from Government or the Industrial Finance Corporation of India' or other specified institutions 'or any person in a country outside India'. Now, if the expression 'any person in a country outside India' was meant to mean that the person must be of a country outside India as well as the transaction of borrowing should be done outside India then it would be difficult to fit in with the other provisions of the Act. Take for an instance, was it the intention that if any loan is taken from the Government or the Industrial Finance Corporation for foreign exchange with the amount for crediting in a country abroad, would such a loan be considered to be within the ambit of Clause (v) of Rule 1 of Schedule II The intention clearly is that such loans are covered. As a matter of fact, it is well known that various expansion programmes of many companies require a large amount of foreign exchange and these sometimes from abroad are borrowed from recognised financial institutions and it is those contingencies that are sought to be covered by Clause (v) of this rule. But it also includes any borrowing from any person in a country outside India. Another significant point is that there is no comma after the expression 'borrowed by it'. The expression 'borrowed by it' in the first part of Clause (v) of Rule 1 deals with the sources from which the borrowing covered by the clause is contemplated. In that view of the matter, in so far as the AAC and the ITO held that the borrowing must be outside India and that it was not sufficient if the lender was a person of any country outside India, we are unable to agree. We are of the opinion that the requirement of the first part of Clause (v) of Rule 1 would be fulfilled if the lender was a person of any country outside India.
16. If it was otherwise, then, of course, in a transaction of this nature where the act of borrowing was done by letters exchanged from the United Kingdom to India, the actual situs of borrowing would have raised an interesting and complex question : where is the act of borrowing or what is the situs of borrowing in respect of a transaction which is covered by correspondence Is it where the money is utilised or handed over or is it where the negotiation or lending took place or how is the contract of borrowing concluded Now, on this aspect, our attention was drawn to some observations of the Judicial Committee in the case of CIT v. Currimbhoy Ibrahim & Sons Ltd.  3 ITR 395, where the Judicial Committee was discussing the principle under which the situs of a property was to be determined. In the view we have taken, it is not necessary to deal with this aspect. Our attention was also drawn to Dicey's Conflict of Laws, 7th Edn. at p. 192, which enunciated the principles of private international Law under which it is determined whether the contract is made in England or not. The same observations were also reiterated in the 9th Edn. of the same book at page 179. It is not necessary as we have said, in the view we have taken, because we are of the opinion that the situs of the borrowing is not a relevant consideration but the person or the source of borrowing is the relevant consideration, as mentioned in the first part of Clause (v) of Rule 1 of Schedule II.
17. The proviso, however, which we have set out, of that rule contemplates two further conditions, that is to say, it contemplates that '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 7 years'. On the facts, the Tribunal by referring to the factum of utilisation and the balance-sheet and the directors' report, the relevant portions of which we have set out hereinbefore, has come to the conclusion that there was evidence that there was a utilisation of the moneys borrowed for the expansion of the capital base of the company. This question whether the money was utilised for an expansion of capital or for the purpose of capital is a question primarily of facts and undoubtedly there were materials in the form of balance-sheet and the directors' report and if on a perusal of those materials the Tribunal has come to a conclusion that there was utilisation of the sums borrowed for the purpose of expansion of the capital base of the company then such a finding, in our opinion, cannot be described as perverse. We, therefore, do not propose to interfere with the findings of the Tribunal on this aspect of the matter.
18. The other aspect that the Tribunal has found is that the amounts were borrowed for a period of 7 years. On this, of course, the Tribunal has also referred to certain evidence, mainly the evidence of the fact that the loan was not repaid before 7 years and there being no evidence that there was a demand for a repayment of the loan prior to 7 years, in our opinion, the Tribunal was also within its jurisdiction to come to such a finding and such a finding of the Tribunal cannot be described as a perverse finding. But there is one aspect of the rule, viz., whether the borrowing had been done actually for the creation of capital asset of the company. It is one thing to say that the moneys borrowed or amounts borrowed had been utilised for the creation of a capital asset and it is a different thing to require that the amounts should he borrowed for the purpose of such creation. One may borrow money for one purpose and that available borrowed money may be utilised for another purpose. The statute requires that not only there should be a utilisation of the amounts borrowed for the purpose of capital asset but also the borrowing should have been made for the creation of such capital asset. Now, on this aspect, however, there is no clear finding of the Tribunal. The Tribunal seems to have proceeded on the basis, as would appear from the order of the Tribunal, which we have set out hereinbefore, that 'it was observed that the loan was not fully utilised for the creation of capital asset'. In p. 35 of the paper-book in I.T. Reference No. 183 of 1974, 'Coming now to the objection of the department, the loan was not fully utilised'.
19. On the other hand, on behalf of the revenue, it was urged before us, that the departmental representative had emphasised the findings and conclusions of the AAC and that would be apparent from the observations of the Tribunal in its appellate order in para. 6.
20. There is another aspect. The Tribunal had summarised the findings of the AAC in para. 4 of its order where it summarised that the AAC had held that the borrowings were not made of a person outside the country of India. There was no evidence about the actual creation of the capital asset from the borrowings. The Tribunal had not referred to the fact that the AAC had held in a way though not very clearly--that the borrowing was not made for the creation of capital asset of the company. There is no categorical finding of the Tribunal on this question. The question No. 1 in I.T. Reference No. 8 of 1980 proceeds on the assumption that there was a finding of the Tribunal that the borrowing was for the creation of the capital asset and the question posed was, whether such a finding was correct in law. There is no question posed directing whether such a finding was perverse, as stipulated in question No. 2, in I.T. Ref. No. 8 of 1980, in respect of the finding of the Tribunal on the aspect of utilisation of borrowing for creation of capital asset. It appears to us, however, that this is an important aspect, that is to say, that the utilisation of the borrowed money not only must be made for the creation of the capital asset but also the borrowings itself must be for the creation of the capital asset. We have found no categorical evidence on record to that effect. Therefore, the appropriate order, in our opinion, is to hold that the first part of the requirement is that the borrowing must be from a person outside the country of India and the actual borrowing need not be outside India. Therefore, we confirm the findings of the Tribunal in so far as it held that, (1) the borrowed money had been utilised for the creation of capital asset, and that (2) the borrowing had been made for a period of over 7 years. But there being no finding that the money had been actually borrowed for -the purpose of creation of capital asset, in our opinion, it requires adjudication and decision by the Tribunal on this aspect.
21. In that view of the matter, we answer the question referred to us in I.T. Ref. No. 183 of 1974, in the affirmative and in favour of the assessee, and we answer question No. 2 in I.T. Ref. No. 8 of 1980, in the negative and in favour of the assessee. We hold that question No. 1, for its full determination, requires adjudication by the Tribunal as to whether the moneys were borrowed for the purpose of creation of a capital asset in India. We, therefore, send the matter back, with the aforesaid observations to the Tribunal, to decide this question in accordance with law after giving such opportunities to the parties, if the Tribunal so considers, to adduce any additional evidence in this regard, and the Tribunal should thereafter, dispose of the appeal in accordance with the observations made in this judgment as early as possible.
22. The parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
23. I agree.