G.T. Nanavati, J.
1. Income-tax Reference No. 183 of 1978 pertains to the assessment year 1970-71 and Surtax Reference No. 6 of 1980 pertains to the subsequent assessment years 1971-72 and 1972-73.
2. The Income-tax Appellate Tribunal, Ahmedabad, has referred the following four questions to this court under section 256(1) of the Income-tax Act, 1961 :
'1. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the agreements under which Rs. 50 lakhs and Rs. 40 lakhs were borrowed provided for the repayment thereof during a period of less than seven years ?
2. Whether, in view of the facts and circumstances of the case, the Tribunal was justified in law in holding that the loans were not composite loans for a common object and supported by hypothecation of common goods
3. Whether, in view of the facts and circumstances of the case, the Tribunal was right in law in holding that the period of repayment of loan was not beyond seven years notwithstanding that the payment was made after seven years and a small amount was outstanding
4. Whether, in view of the facts and circumstances of the case, the Tribunal was justified in law in holding that the money borrowed was not for creation of capital assets in India ?'
3. The assessee-company borrowed from Bank of India, in all, Rs. 90 lakhs. It approached the Bank of India for the said loan in order to expand the production capacity of its Baroda plant and to erect a factory at Bangalore. The board of directors of the bank sanctioned a loan of Rs. 50,00,000 on June 11, 1964. The board of directors of the assessee-company passed a resolution at its meeting held on July 30, 1964, deciding to borrow the term loan of Rs. 50,00,000 offered by the bank. The agreement containing the terms and conditions on which the said amount was advanced by the bank to the assessee-company was executed on November 24, 1964. Under the agreement, the first installment of Rs. 50,00,000 was advanced to the assessee-company on November 27, 1964. The said loan was repayable in six annual installments. The first installment was to be paid on August 14, 1966, and the last on August 14, 1971. Another loan of Rs. 40,00,000 was sanctioned by the bank on December 22, 1966. The board of directors of the assessee-company, in its meeting held on April 30, 1967, resolved to avail of the loan under the terms and conditions set out in the resolution passed by the bank. The agreement containing the terms and conditions on which the second loan was advanced was executed on June 1, 1967. The first installment of the loan was advanced on June 30, 1967. This loan was repayable in six installments. The first installment was to be paid in 1968 and the last in 1974.
4. In the course of assessment proceedings, under section 6(2) of the Companies (Profits) Surtax Act, 1964, for the assessment year 1970-71, the assessee claimed that the two loans qualified to be included in the capital of the company for the purpose of surtax. The Income-tax Officer accepted the claim of the assessee and, while computing the capital of the assessee-company under the Second Schedule to the Act for the purpose of arriving at the statutory deduction, included the outstanding amount of Rs. 58,50,000 in the capital of the assessee company.
5. On examining the records of the assessment proceedings, the Commissioner of Income-tax noticed this inclusion of Rs. 58,50,000 in the capital of the assessee-company for the purpose of arriving at the statutory deduction. As he was of the opinion that the monies borrowed from the bank did not fulfill the conditions laid down in the proviso to clause (v) of rule 1 of the Second Schedule to the Act, and the statutory deduction was not allowable, he issued a notice to the assessee under section 16(1) of the Act. After hearing the assessee, the Commissioner held that the agreements under which monies were borrowed by the assessee provided for repayment thereof within a period of seven years and, therefore, the said loans did not qualify for capital computation under rule 1(v) of the Second Schedule to the Act. He, therefore, directed the Income-tax Officer to revise the surtax assessment by excluding the amount of Rs. 58,50,000 from the capital computation.
6. The assessee preferred an appeal against that order to the Income-tax Appellate Tribunal. The Tribunal held that the material date for considering the question whether repayment of the loan was within a period of seven years or not was the date on which the loan or the first installment thereof was advanced. The Tribunal further held that, even if the date of agreement was taken as the material date, the repayment was to be made within a period of seven years. The Tribunal rejected the contention raised on behalf of the assessee-company that there was a subsequent oral agreement between the assessee-company and the bank under which the loans were made repayable beyond the period of seven years. This contention was rejected, as it was taken by the assessee-company for the first time before the Tribunal and no evidence in support thereof was led. It was even conceded that there was no evidence or material to prove the said oral agreement or the terms thereof. The Tribunal also held that there was no evidence to show that the monies borrowed were utilised for creation of capital assets in India. It held that merely because there was an increase in the assets of the company after the taking of the two loans was of no consequence or relevance in the absence of any correlation between the monies borrowed and the increase in the assets of the company. The Tribunal, therefore, dismissed the appeal filed by the assessee.
7. For the assessment years 1971-72 and 1972-73, the same thing happened before the Income-tax Officer, the Commissioner of Income-tax and the Tribunal. The assessee-company then moved the Tribunal for making a reference in both the cases. Out of six questions proposed by it, the Tribunal has thought it fit to refer the four questions set out earlier in the judgment.
8. The facts are not in dispute and the contention which was raised before the Tribunal that there was a subsequent oral agreement, extending the period of repayment of loans, was not pressed before us. Therefore, what is required to be considered by us is whether the Tribunal was right in holding that the material date for considering whether repayment of the loan was within a period of seven years or not from the date on which the said loan or the first installment thereof was advanced. What is contended by learned counsel for the assessee is that the material date for such a purpose would be the date on which the loan is sanctioned by any of the financial institutions referred to in the proviso to clause (v) of rule 1 of the Second Schedule. When a borrower approaches a financial institution with a request to advance money to him, the financial institution with a request to advance money to him, the financial institution has to decide whether to advance a loan to him or not. When it decides to advance a loan, it merely takes a decision to that effect and it is then communicated to the borrower. The borrower thereafter agrees to accept the loan on the terms and conditions set out by the financial institution. Thereafter, the financial institution will take steps to advance the loan. All steps taken before making actual payments are in the nature of negotiations and till money is paid to the borrower, it cannot be said that the borrower has borrowed money from the financial institution. A borrower cannot be said to have borrowed money till he actually gets money. As rightly pointed out by the Tribunal, when the bank sanctioned two loans in this case, it was really a matter of their internal administration. That apart, rule 1(v), which reads as under :
'1. Subject to the other provisions contained in this Schedule, the capital of the company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of - ......
(v) any moneys borrowed by it from the 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 that seven years......'
contemplates borrowing moneys under an agreement.
9. The proviso, in terms, contemplates that the period of repayment should be provided in the agreement. If the money borrowed is made repayable during the period of not less than seven years, then only the borrower would be entitled to the benefit of the rule. Therefore, the material date for the purpose of the said sub-rule cannot be a date earlier than the date of the agreement. The Tribunal was, therefore, right in holding that the loans were repayable within the period of seven years.
10. It was urged by learned counsel for the assessee that the Tribunal committed an error in holding that there was no evidence on record to indicate that the moneys which were borrowed were utilised for creation of capital assets in India. He pointed out that, in the letter written to the bank a copy of which was already produced before the authorities, it was clearly mentioned that the moneys were required for the purpose of increasing the production capacity of the Baroda plant and for erecting a new factory at Bangalore. Thus, the moneys were borrowed for creation of capital assets within India. He also pointed out that the capital assets of the assessee-company had increased after the assessee obtained the said two loans and thus there could be no doubt that the moneys borrowed by the assessee-company from the bank were utilised for the purpose of creation of capital assets. Merely because moneys were borrowed with a particular intention, it cannot be said with certainty that the same were utilised for the purpose for which they were borrowed. Moneys borrowed for one purpose could have been utilised for another purpose. Therefore, it was necessary for the assessee to correlate the moneys borrowed from the bank with the increase in the assets of the company. Capital assets of the company might have increased because of some other borrowings or some other reasons. Admittedly, no evidence in that behalf was led by the assessee-company and, therefore, the Tribunal was right in holding that even that condition was not satisfied in this case.
11. In the result, all the four questions are answered in the affirmative, i.e., against the assessee and in favour of the Revenue. Both these references are disposed of accordingly with no order as to costs.