N.V. Balasubramanian, J.
1. In pursuance of the direction of this court in T. C. P. No. 583 of 1982, dated April 11, 1983, the Income-tax Appellate Tribunal has stated a case and referred the following questions of law :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 15 lakhs due by the assessee to the Tamil Nadu Industrial Investment Corporation Limited as on July 1, 1971, was includible in the capital base as provided in Clause (v) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the mortgage loans of Rs. 60 lakhs and Rs. 2,58,981 respectively from the Syndicate Bank and the Punjab National Bank were includible in the capital base in terms of Clause (v) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?'
2. The tax case arises under the provisions of the Companies (Profits) Surtax Act, 1964, and it relates to the assessment year 1973-74. It involves interpretation of Clause (v) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act'), which reads as under :
'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. The assessee-company had approached the Madras Industrial Investment Corporation Limited later known as Tamil Nadu Industrial Investment Corporation Limited for the grant of certain financial assistance. The Tamil Nadu Industrial Investment Corporation was not able to provide and was not able to extend the credit facilities to the extent needed by the assessee. Therefore, the assessee approached the Punjab National Bank for the grant of the loan of Rs. 70 lakhs. The Punjab National Bank agreed to lend a sum of Rs. 70 lakhs to the assessee on the collateral security of the guarantee to be furnished by the Madras Industrial Investment Corporation Limited. The terms of the repayment of the loan were that the assessee should repay to the bank by December, 1969, a sum of Rs. 45 lakhs in six instalments and the balance amount of loan outstanding on December 31, 1969, should be taken over from the bank by the Madras Industrial Investment Corporation Limited (hereinafter referred to as 'the Corporation'). The Punjab National Bank advanced money on these terms and the terms of repayment were also duly adhered to. The assessee has paid to the bank a sum of Rs. 45 lakhs by December, 1969, and the balance of Rs. 25 lakhs was paid by the corporation to the bank and by that payment the loan to the bank was discharged and the loan was taken over by the Corporation from the bank. But, in so far as the assessee is concerned, it was due to pay to the Corporation on January 1, 1971, a sum of Rs. 15 lakhs. Since the amount was outstanding in the beginning of the financial year, the assessee claimed that this amount should be included in its capital base. The Income-tax Officer rejected the claim on the ground that the loan due to the Corporation was a separate loan and hence, since the period of repayment was less than five years, it was not liable to be included in the capital computation of the company.
4. The Commissioner of Income-tax (Appeals), on appeal preferred by the assessee, held that the two loans form part of a same transaction and since the period of repayment was for a period of more than seven years, the outstanding loan amount to the Corporation was liable to be included in the capital base of the company.
5. Aggrieved by the order of the Commissioner (Appeals), the Revenue carried the matter in appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal also held that the loan by the bank, repayment to the bank by 1969 and loan to the corporation have to be treated as part of a single transaction and if it is taken as a part of a single transaction the loan was outstanding for a period of more than seven years and the loan amount has to be taken into account in the capital computation of the company. Challenging the finding of the Appellate Tribunal the Revenue sought for and obtained a reference and the first question of law set out above has been referred.
6. In so far as the facts relating to the second question of law are as under :
The Syndicate Bank by a mortgage deed dated September 10, 1969, advanced a sum of Rs. 50 lakhs to the assessee on condition that the assessee should repay the loan in full by the end of five years from the date of the loan. The assessee subsequently approached the bank for extension of time for the repayment of the loan. The bank by their letters dated April 14, 1976, and December 2, 1977, extended the time for repayment up to June 30, 1979, and if the extended period is taken into account the loan outstanding would certainly qualify for inclusion in the capital. However, the Income-tax Officer was of the view that the subsequent modification in the repayment of the loan cannot be taken into consideration and accordingly, he held that under the terms of the mortgage deed dated September 10, 1969, the loan has to be repaid within a period of five years and hence, it would not qualify for inclusion in the capital base of the company. The Commissioner of Income-tax (Appeals), however, did not agree with the view of the Income-tax Officer and his view was confirmed by the Appellate Tribunal. Similarly, there was a loan due to Punjab National Bank by the assessee for a sum of Rs. 25,18,981. The bank had advanced a sum of Rs. 30 lakhs and out of the loan advanced a sum of Rs. 25,18,981 was due to the bank and the question arose whether that loan has to be taken into account in the capital computation of the assets of the company. The terms of the loan with the Punjab National Bank are similar as found in the case of the loan by the Syndicate Bank and as in the case of the Syndicate Bank there was also an extension of time limit for the repayment of the loan and by letters dated December 4, 1976, and December 16, 1977, the Punjab National Bank extended the period of repayment up to July 4, 1980. The Appellate Tribunal following the reasonings arrived at in the case of the Syndicate Bank loan held that the loan by the Punjab National Bank would also qualify for inclusion in the capital base of the company. It is against that part of the Appellate Tribunal's order regarding the inclusion of the loan given by the Syndicate Bank as well as by the Punjab National Bank that the second question has been referred to us. But in the second question, the loan amount due to the Punjab National Bank is stated as Rs. 2,58,981 and the correct figure according to us was Rs. 25,18,981 and the correct figure of Rs. 25,18,981 is substituted for the figure of Rs. 2,58,981 in the second question of law referred to us.
7. Mr. C.V. Rajan, learned counsel for the Revenue, submitted that the Tribunal was not correct in holding that the loan by the bank as well as by the Corporation should be treated as a single transaction. According to learned counsel the corporation stood only as a guarantor for the repayment of the loan by the assessee to the bank and when the entire loan due to the Punjab National Bank was discharged by the payment of Rs. 45 lakhs by the assessee and Rs. 25 lakhs was taken over by the Corporation, the loan due by the assessee to the Corporation is a separate transaction and it is not correct to hold that both the transactions should be treated as a single transaction.
8. Mr. P. P. S. Janarthana Raja, learned counsel for the assessee, on the Other hand, submitted that the entire transaction has to be seen and the Tribunal has come to the correct conclusion that both the loans should be treated as part of a single transaction.
9. We have carefully considered the rival submissions of learned counsel for the parties. The fact remains that the assessee initially approached the Corporation for extending credit facilities to the extent of Rs. 70 lakhs. The Corporation was unable to extend the credit facilities to the extent needed by the assessee. Therefore, the Punjab National Bank was approached for extending credit facilities. The Punjab National Bank has agreed to lend a sum of Rs. 70 lakhs to the assessee on condition that the Corporation should execute a collateral security and under the terms of the loan, the assessee has repaid to the bank by December, 1969, a sum of Rs. 45 lakhs and the balance amount as on December 31, 1969, was taken over from the bank by the Corporation. The assessee had adhered to the terms of the loan and repaid the sum of Rs. 45 lakhs by December, 1969. The Corporation took over the balance of liability from the bank by paying the sum of Rs. 25 lakhs to the bank. The Appellate Tribunal noticed that there was a tripartite agreement and under the tripartite agreement, the bank has to look to the assessee only for a sum of Rs. 45 lakhs and to the Corporation for the balance of Rs. 25 lakhs. The assessee was not compelled to repay the entire loan of Rs. 70 lakhs to the bank within the period of five years. The assessee agreed to repay the loan of a sum of Rs. 70 lakhs by December 31, 1972, and the assessee discharged the loan by payment of Rs. 45 lakhs to the bank and Rs. 25 lakhs to the Corporation. Though the bank had received the sum of Rs. 70 lakhs advanced by December, 1969, in considering the question what is the time allowed to the assessee to repay the entire loan of Rs. 70 lakhs under the tripartite agreement, we hold that the period of repayment of entire loan is more than seven years. As already seen, the assessee has to repay the loan of Rs. 45 lakhs before December 31, 1969, and it has to pay to the Corporation Rs. 25 lakhs by December, 1972. The Corporation paid the sum of Rs. 25 lakhs to the bank and got itself substituted in the place of the bank and the assessee had repaid the money to the Corporation by December 31, 1972. So far as the assessee is concerned, the period allowed to repay the loan of Rs. 70 lakhs is more than seven years and that is the real test to determine the time allowed to the assessee to repay the loan. The assessee, in our view, had a period of more than seven years to repay the entire loan of Rs. 70 lakhs. It is true that a part of the loan was discharged by payment to the bank and the remaining part was discharged by payment to the Corporation. So far as the assessee is concerned, the loan is a single and indivisible one. Since the assessee had a period of more than seven years to repay the loan of Rs. 70 lakhs, we are of the view that the Tribunal has come to a correct conclusion in holding that the transaction has to be treated as a single transaction so far as the assessee is concerned and the time allowed to repay the loan is more than seven years. Since the loan is taken as a single transaction, we hold that the Tribunal was correct in holding that the outstanding amount due by the assessee to the Corporation as on January 1, 1971, was includible in the capital base as provided in Clause (v) of Rule 1 of the Second Schedule to the Act. Accordingly, we answer the first question of law referred to us in the affirmative and against the Department.
10. So far as the second question is concerned, we will first take up the case of the Syndicate Bank and the reasoning given in the Syndicate Bank case will also equally apply to the loan due to the Punjab National Bank. The Syndicate Bank advanced a loan of Rs. 50 lakhs to the assessee on September 10, 1969. It is stated that it was a mortgage loan. Under the terms of the loan, the assessee has to repay the loan by the end of the fifth year from the date of the loan. The assessee has approached the Syndicate Bank for extension of time to repay the loan. The bank decided the matter and communicated the decision by their letters dated April 14, 1976, and December 2, 1977, extending the time up to June 30, 1979. The extension of the time granted by the bank is with reference to the same loan that was granted on September 10, 1969. The case of the department is that the extension should be ignored as the original loan was granted by a registered deed and hence, the subsequent extension by the bank cannot be done by a letter. It was also contended that the extension of time should also be ignored for the purpose of Sub-clause (v) of Rule 1 of the Second Schedule to the Act. We are unable to agree with both the contentions of the Revenue. The Syndicate Bank had decided to extend the time to repay the loan and informed the assessee by their letter dated April 14, 1976, and December 2, 1977, to extend the time. The bank by their letters have agreed to extend the period of the loan and in our view there is no law that there should be formal document setting out the modification or granting extension of time for the repayment of the loan. The parties have agreed mutually that the benefit of extension of the period of loan should be extended to the borrower and for that purpose there was exchange of letters between the borrower and the lender and the bank by their conduct had agreed for extension of time for the repayment of the loan. In this situation, it is not necessary to have a formal registered deed for the purpose of extending the time limit prescribed for the repayment of the loan. The objection of the learned counsel for the Revenue is that the original loan was given by mortgage deed and without a registered deed it is not possible for the bank to extend the time limit for the repayment of the loan and for that purpose, he placed reliance on the provisions of Sections 91 and 92 of the Indian Evidence Act, 1872. Firstly, the provisions of the Evidence Act do not apply to income-tax proceedings and the strict rules of evidence do not apply. Even assuming that section 91 of the Evidence Act applies, the section provides that when the terms of a contract have been reduced to the form of a document, no evidence shall be given in proof of the terms of such contract except the document itself or secondary evidence of its contents in cases in which the secondary evidence is admissible under the provisions contained earlier. This provision of Section 91 has no application to the facts of the case. It is not the case of the assessee that it has produced certain evidence before the Income-tax officials with reference to the terms of the loan that was obtained under the deed of mortgage and it is not the case of the department that the assessee has not produced the original document Consequently, the provisions of Section 91 of the Indian Evidence Act have no application to the facts of the case. In so far as the applicability of Section 92 of the Indian Evidence Act is concerned, Section 92 excludes the evidence of oral agreement. Proviso 4 to Section 92 provides as under :
'The existence of any distinct subsequent oral agreement to rescind or modify any such contract, grant or disposition of property, may be proved, except in cases in which such contract, grant or disposition of property is by law required to be in writing, or has been registered according to the law in force for the time being as to the registration of documents'
11. Under proviso 4 to Section 92 of the Indian Evidence Act oral evidence is not admissible where by a subsequent oral agreement there is a modification of the original contract, where such a contract was by law required to be in writing. In this case it is not by virtue of an oral agreement the original mortgage deed was modified. It was only on exchange of letters between the assessee and the bank, the bank has deliberated and after due deliberation the bank has extended the period of time for the repayment of the loan by their two letters. It is not a case of oral agreement but by written agreement the original time prescribed for the repayment of the loan was extended. Therefore, the provisions of Section 92 of the Indian Evidence Act are not attracted. The only question that remains is whether the bank by their letters dated December 4, 1976, and December 16, 1977, has extended the period of loan. In our view there is no necessity for the bank to have a formal registered deed, when it was agreed to extend the period of loan. The letters exchanged, in our view, would be sufficient to show the conduct of the bank and the letters would be an evidence indicating that the bank has accepted the terms of the agreement regarding repayment. When the bank has agreed to extend the time limit by their letters dated April 14, 1976, and December 2, 1977, it is to be read as part of the original document itself and if so read, the period of loan is not five years as originally stipulated, but the period as mutually agreed subsequently. If it is taken into account the period of repayment of the loan exceeds the period prescribed by Clause (v) of Rule 1 of the Second Schedule to the Act. Similar will be the case with reference to the loan by the Punjab National Bank also. A similar question whether the bank by their letter can extend the period of repayment of the loan was the subject matter of consideration before the Gujarat High Court. In New India Industries Ltd. v. CIT : [1977]108ITR181(Guj) , the bank by their letter extended the period for repayment of the loan and the Gujarat High Court held that the letter would be sufficient for the extension of time for the repayment of the loan. The Gujarat High Court in that case held as under (headnote) :
'The bank, by its letter dated April 3, 1963, had agreed to the postponement of the dates of repayment in instalments asked for by the company in its letter of March 19, 1963, provided that the entire loan was repaid before December 1, 1968 ; and the company, by its letter dated April 24, 1963, agreed to repay fully before December 1, 1968, in five instalments as stated in that letter. The minutes book of the board of directors of the company showed that the bank had agreed to this. Reading the letters of April 3, 1963, and April 24, 1963, together, it was clear that there was an agreement between the bank and the company to modify the terms of the agreement of December 1, 1961, as regards repayment of the loan of Rs. 50 lakhs. In law, there was no necessity to have a formal document setting out the terms of the modification and if the parties referred to the execution of any such formal document, it was only a matter of keeping the record.'
12. The above decision of the Gujarat High Court was confirmed by the Supreme Court in CIT v. New India Industries Ltd. : [1995]212ITR653(SC) , wherein the Supreme Court held that the subsequent correspondence between the parties would result in the modification of the agreement and the subsequent correspondence can be taken into account to find out whether there was any extension of time for the repayment of the loan. In our view, the decision of the Gujarat High Court which is confirmed by the Supreme Court would squarely apply to the facts of the case in our hand. There is no infirmity in the order of the Appellate Tribunal holding that by their letters the bank had extended the period for repayment of the loan and if those letters are taken into account the period for repayment of the loan exceeds the period prescribed in the Sub-clause (v) of Rule 1 of the Second Schedule to the Act. In that view of the matter we hold that there is no infirmity in the order of the Appellate Tribunal holding that the subsequent modification for repayment of the loan which is for more than seven years would be taken into account.
13. Accordingly, we answer the second question of law referred to us subject to the modification of the figure in the affirmative and against the Revenue. In the circumstances of the case, there will be no order as to costs.