Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, and having regard to the fact that no money was received against the debentures issued in terms of the trust deed dated 24th August, 1962, the Tribunal was right in holding that the said debentures should be included in capital under Clause (iv) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?'
2. The assessee is a company. It carries on business in the manufacture and sale of pharmaceutical goods. It closes its accounts on 31st March. Its surtax assessment for the assessment year 1965-66 covered the previous year ended 31st March, 1965. On 24th August, 1962, the assessee-company issued in favour of the Bank of Baroda without any payment having been made by it, 6 1/2% first mortgage debentures of the value of Rs. 20 lakhs and offered the same as collateral security against cash credit arrangements with the State Bank for financing its capital project of penicillin division. The dispute before the Tribunal was whether such debentures could be included in the computation of the assessee-company's capital for the purpose, of its surtax assessment for the assessment year 1965-66. This question has to be resolved in the background of Rule 1, Clauses (iv) and (v) of Schedule II to the C.(P.)S.T. Act, 1964, as it stood at the relevant time. The said provision was as follows :
'(iv) its debentures, if any ; 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 seven years.'
3. With effect from 1st April, 1974, this provision has undergone a little change and Clause (iv) of Rule 1 of Schedule II, with which we are concerned, reads as follows:
'(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 seven years from the date of issue thereof; and.....'
4. While filing its original surtax return for the assessment year 1965-66, on 30th September, 1965, the assessee-company had not included the mortgage debentures of Rs. 20 lakhs in its computation of capital. However, in a revised return this sum was included as a permissible deduction under Clause (iv) of Rule 1 of Schedule IT to the C.(P.)S.T. Act, 1964. In the course of hearing before the ITO who made the surtax assessment for this year the assessee abandoned its claim under Clause (v) of Rule 1 of Schedule II and pressed an alternative claim under Clause (iv) of Rule 1 of the same Schedule. The ITO held that the loan taken from the Bank of Baroda did not satisfy the conditions laid down in either Clause (iv) or (v) of Rule 1 of. Schedule II and he rejected the assessee's claim. An appeal was preferred before the AAC pressing each of the alternative claims under Clause (iv) and Clause (v) of Rule 1 of Schedule II, but that was also rejected.
5. There was a further appeal before the Tribunal against the order of the AAC arising out of the surtax assessment for the assessment year 1965-66. It was urged on behalf of the assessee that the inclusion of debentures in the capital of a company for the purpose of surtax assessment as provided under Clause (iv) of Rule 1 of Schedule II to the C.(P.)S.T. Act, 1964, was not circumscribed by any condition whatsoever and so it would be unreasonable to include in the computation of capital only such debentures as had been issued against actual cash payments while excluding the debentures issued to the bank as collateral securities for raising loans. As regards the assessee's alternative claim under Clause (v) of Rule I of Schedule II, it was urged that the loan was raised in terms of a debenture trust deed dated 24th August, 1962, and the loan was incurred for the creation of capital assets in India. On behalf of the assessee, a copy of the certificate issued by the Bank of Baroda on 4th September, 1969, was also filed before the Tribunal to the effect that the debentures were redeemable on or before 31st March, 1973, and it was submitted that the cash credit facilities would remain valid up to the maximum period of the redemption of the debentures. It was, therefore, urged that even assuming that the assessee's claim was under Clause (v) of Rule 1 of Schedule II, it would have to be held that all the conditions required under that clause and its proviso had also been fulfilled. On the other hand, on behalf of the revenue, it was submitted that the assessee having abandoned its claim under Clause (iv) of Rule 1 of Schedule II at the assessment stage it should not be allowed to agitate this claim in appeal before the Tribunal. It was further urged that the loan was not one which was originally granted for a period of 7 years, though it might have actually been allowed for such a period and hence the claim would have to be rejected in terms of the proviso to Clause (v). The Tribunal held, inter alia, as follows :
'We find that the assessee's case is fully covered by Clause (iv) of Rule 1 of the Second Schedule. In our view, all types of debentures, irrespective of whether or not they were issued against such contributions, will be eligible for inclusion in capital in terms of this clause. Hence, we do not consider the alternative claim under Clause (v). The assessee cannot be denied the benefit of inclusion of the mortgage debentures actually utilised by it, for determining its capital for the purpose of the Surtax Act. If the actual amount of debentures utilised in the particular year was less than Rs. 20,00,000, the amount to be included will, however, have to be reduced accordingly.'
6. Out of this order of the Tribunal, the aforesaid question indicated hereinbefore was referred to this court. It was submitted on behalf of the revenue that securing a loan and obtaining money on the issue of debentures were two different items. It was submitted that as a result of the issue of a debenture which was entitled under the relevant rule for inclusion in the computation of capital certain money would have been made available to the company. In view of the facts found by the Tribunal we are of the opinion that in View of the provisions as it stood at the relevant time the debentures in this case would be entitled, as rightly held by the Tribunal, to the extent as indicated by its order for inclusion in the computation of capital under Rule 1, Clause (iv). Our attention in this connection was drawn to a decision of the Bombay High Court in CIT v. Century Spg. & Mfg. Co. Ltd. : 111ITR6(Bom) , where it was held that by the issue of bonus shares in exchange for the capital reserve of the company there was no augmentation. There was no extra amount of money available to the company and, as such, such amount raised by the issue of bonus shares could not be included in the computation of capital. The Bombay High Court emphasised that what happened in such a case was that a part of the sum standing to the credit of one of the sub-items to be included in the computation of capital was during the previous year transferred to another item to be included in the computation of capital under Rule 1. Therefore, when bonus shares were issued as fully paid-up shares by the capitalisation of a part of the amount standing to the credit of the general reserves, the capital as computed in the manner provided by Rule 1 of Schedule II was not increased in any manner whatsoever. The facts of that case, in our opinion, are significantly different and the ratio of the said decision would have no application to the facts of the instant case. Indeed, there is no conflict between the ratio of that decision and the reasoning of the Tribunal in the instant case. Our attention was also drawn to certain definitions in books on accountancy and we were referred to Spicer & Pegler's Book-keeping and Accounts, 17th edn., p. 238, which defines that debenture is a written acknowledgment of a debt by a company, usuallyunder seal and generally containing provisions for payment of interest and repayment of capital. Our attention was also drawn to the observations appearing in the said book at page 249, where it is stated as follows :
'Companies often issue their own debentures as security for a loan, or a bank overdraft; Section 90(4) provides that debentures are not automatically redeemed by the repayment of the loan or overdraft.
Such security is termed 'collateral' or additional security ; the amount of the debentures will not appear in the company's accounts as a liability in addition to the loan or overdraft.
Debentures thus issued should be shown 'in short' in the balance-sheet and stated as having been issued as security. The loan against which they are issued will be extended as a liability in the usual way. A note of the issue should be made at the head of the Debenture Account in the ledger. The debentures require registration in the ordinary way.
No interest is payable on such debentures ; the interest on the bank loan or overdraft is paid in the usual way, and the bank will only resort to the debentures if it becomes necessary to protect their security, e.g., in a liquidation or when a receiver is appointed. The word 'secured' should appear after any liability appearing on the balance-sheet so secured.'
7. Similarly, reference was made to the observations appearing in Accountancy by William Pickles, 4th edn., p. 2394, where debenture was denned as a document acknowledging a loan to a company and is generally executed under the seal of- the company usually but not necessarily containing provisions as to payment of interest. None of these observations, in our opinion, in any way militate against the view taken by the Tribunal in this case. It was submitted that the subsequent amendment in 1974 was really clarificatory in nature and made it incumbent that debentures, if any, to be entitled to the computation of capital must be issued to the public. In view of the fact that the said provision was made effective 7 years subsequent to the relevant assessment year with which we are concerned in contradistinction to the Explanation which was included with effect from 1st April, 1974, only as a clarificatory measure, we must proceed on the basis of what the law was at the relevant time, not by taking a subsequent law as declaratory provisions of law. It does not appear from the scheme of the Act or the subsequent amendment made that it was so. Even apart from it, this aspect of the matter does not in any way help the revenue in our opinion. In view of the directions of the Tribunal that if the actual amount of debenture utilised in the particular year was less than Rs. 20 lakhs, the amount to be included would have to be reduced accordingly, in the facts and circumstances of the case and the language used, in our opinion, the Tribunal appears to have come to a correct conclusion. In the premises, the question referred to us is answered in the affirmative and in favour of the assessee.
8. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Suhas Chandra Sen, J.
9. I agree.