Bombay High Court
Kirloskar Pneumatic Co. Ltd. vs Commissioner Of Surtax on 9 December, 1993
Equivalent citations: [1994]210ITR485(BOM)
Author: Sujata V. Manohar
Bench: Sujata V. Manohar
JUDGMENT
D.R. Dhanuka J.
1. The Income-tax Appellate Tribunal has referred the following questions to this court for its opinion under section 18 of the Companies (Profits) Surtax Act, 1964, read with section 256(1) of the Income-tax Act, 1961. The first two of the questions are referred at the instance of the assessee and the remaining two at the instance of the Revenue :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the debentures issued to the public financial institutions was not issued to the 'public' within the meaning of clause (iv) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act ?
(2) Whether, on the facts and in the circumstances of the case and on an interpretation of clause 3(A) of the debentures trust deed, the Tribunal was right in holding that mere option to the debenture holders make debentures redeemable before the expiry of seven years ?"
2. At the instance of the Revenue :
"(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-company was entitled to inclusion in its capital base 49 per cent. of the debentures of Rs. 60 lakhs subscribed by the I. C. I. C. I. and the L. I. C. ?
(4) On the facts and in the circumstances of the case, whether the Tribunal having held that the debentures were not issued to the public and, therefore, conditions of clause (iv) were not complied with, was justified in again considering the question of its inclusion under clause (v) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"
3. (The questions are renumbered for the sake of convenience).
4. The relevant assessment year is assessment year 1974-75.
5. The relevant facts having a bearing on the subject-matter of this reference are briefly summarised as under :
(a) The assessee is a limited company manufacturing air compressors, conveyors, gears and other pneumatic tools. On or about March 29, 1972, the assessee-company issued debentures of Rs. 100 lakhs to the following five institutions :
(1) I. C. I. C. I., (2) Life Insurance Corporation of India, (3) Unit Trust of India, (4) New India Assurance Co. Ltd., (5) British India General Insurance Co. Ltd.
6. The said debentures did not form part of any "public issue". Particulars of allotment of debentures issued by the assessee are as under :
Rs.
(1) I. C. I. C. I. 30,00,000
(2) L. I. C. of India 30,00,000
(3) Unit Trust of India 25,00,000
(4) New India Assurance Co. Ltd. 10,00,000
(5) United India Assurance Co. Ltd. 5,00,000
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Total 1,00,00,000
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7. On March 29, 1972, a debenture trust deed was executed between the assessee and the Bank of Maharashtra, Pune. The debenture trust deed provided that the expression "debentures" shall be on 10,000, 8 1/4 per cent. debentures of Rs. 1,000 each of the company issued in the Form set out in the Fourth Schedule thereunder written, of the aggregate value of Rs. 1 crore. The trust deed divided the aforesaid debentures into two portions :
"(1) Non-convertible portion of debenture representing 49 per cent. of value of each debenture redeemable after expiry of ten years but not later than 12 years;
(2) 'The convertible portion of debenture' representing 51 per cent. of the value of Rs. 1,000 each, in respect whereof the debenture trust deed conferred an option on debenture holders to get the convertible portion thereof into equity. The debenture trust deed provided that such option shall be exercised by the debenture holder in the manner prescribed at any time between the 1st day of April, 1975, and 31st day of March, 1976.
The trust deed provided that the company shall be bound to pay the amount in respect of non-convertible portion of debentures as well convertible portion thereof where no such option was exercised on or after expiry or ten years from date of allotment but not later than 12 years from the date of allotment thereof."
8. The relevant portion of clause 3(A) of the debenture trust deed reads as under :
"3. (A) The company hereby covenants with the trustees that the company will at any time on or after the expiry of ten years from the date of allotment of debentures but not later than the expiry of twelve years from the date of allotment of debentures pay to the holders for the time being of the debentures then outstanding, the non-convertible portion of each debenture as also the convertible portion of each debenture which is not so converted together with interest accrued up to the date of payment against the surrender of the debentures to be redeemed. Provided, however, that the company shall have the option to redeem the debentures mentioned above by lots at any time on or after the expiry of ten years from the date of allotment but not later than the expiry of twelve years from the date of allotment subject to the following provisions :
(a) The debentures to be redeemed as aforesaid shall be determined by a drawing which the trustees shall cause to be made at the instance of the company and every such drawing as aforesaid shall be made in office hours on a working day at the registered office of the company or at the head office of the trustees, as the case may be, and shall be made in the presence of the trustees;
(b) Forthwith after every such drawing the trustees shall notify to the company in writing the number of debentures which shall have been drawn for redemption and the company shall thereupon give to such debenture holders, whose debentures have been so drawn at least one month's prior notice in writing in the manner provided hereinafter of the company's intention to redeem such debentures on the date named at the registered office of the company against surrender of the debentures to be redeemed;
(c) At the time, date and place so notified, each debenture holder whose debenture or debentures is or are notified for redemption shall be bound to surrender to the company the debenture or debentures which is or are to be redeemed and upon receiving evidence of such surrender the trustees shall cause to be paid to the debenture holder the amount due and payable to him in respect of such redemption. The interest on the debentures so notified for redemption shall cease from the date mentioned therefor in such notification unless upon the registered holder of such debenture demanding on or after the date and at the place for redemption monies payable in respect thereof and tendering the certificate for such debentures payment of the redemption monies shall have been refused;
(d) All such debentures as and when redeemed shall be cancelled or with the consent of the debenture holders by special resolution as mentioned in the Fifth Schedule hereto shall be kept alive for the purpose of re-issue in terms of section 121 of the Act."
9. The said debenture trust deed conferred an option on the registered holder of the debenture to convert the convertible portion thereof at any time by issue of notice in writing delivered at the registered office of the company at any time between April 1, 1975, and March 31, 1976, and to require the company to apply the value of the convertible portion of such debenture in full payment of the price payable for the equity share. If such an option was exercised by the debenture holder, the company was not obliged to repay the amount of loan represented by the convertible portion of the debenture. In such an eventuality, the erstwhile debenture acquired the character of equity and became part of paid-up capital of the company. The paid-up capital of the company is includible in the capital base of the company for the purpose of surtax under rule 1(i) of the relevant Act.
10. During the course of assessment proceedings for the assessment year 1974-75, the assessee claimed that the debentures referred to hereinabove be included in the capital base of the company for purpose of surtax under rule 1(iv) or rule 1(v) of the Rules for computation of capital of a company for the purpose of surtax. The said Rules are contained in the Second Schedule to the Companies (Profits) Surtax Act, 1964. Rule 1(i) is also relevant for consideration of the question referred to us. The said Rules read as under :
11. "THE SECOND SCHEDULE
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;. . . .
(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
(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 than seven years.
Explanation. - . . . . . . ."
12. By its letter dated February 27, 1980, addressed to the Commissioner of Income-tax (Appeals), the assessee informed the said authority that the assessee was restricting its claim to inclusion of debentures in the capital base to debentures worth Rs. 60 lakhs only, i.e., Rs. 30 lakhs subscribed by the Industrial Credit and Investment Corporation of India and Rs. 30 lakhs subscribed by the Life Insurance Corporation, under rule 1(v) of the said Rules. By the said letter, the assessee informed the appellate authority that rule 1(v) of the said Rules was applicable to moneys borrowed by the assessee from the parties named therein including the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf. By the said letter, the assessee informed the said authority that by the Central Government Notification No. 3497, dated September 28, 1968, the Central Government had notified the Life Insurance Corporation as one of the financial institutions borrowings from whom were liable to be included in computation of capital of the borrowing company for the purpose of surtax.
13. On January 31, 1975, the Surtax Officer passed his original order of assessment for the assessment year 1975-76. By his order dated February 26, 1976, the Appellate Assistant Commissioner set aside the said assessment order with a direction to pass a fresh assessment order de novo after taking into consideration the claim of the assessee for inclusion of the abovereferred borrowings in the form of debentures in the capital base of the company for the purpose of surtax. By order dated October 17, 1977, the Surtax Officer passed a fresh assessment order for the relevant assessment year rejecting the claim of the assessee for inclusion of the amount of the abovereferred debentures in the capital base of the company under clauses (iv) and (v) of rule 1. By his order dated March 5, 1980, the Commissioner of Surtax (Appeals), the first appellate authority accepted the claim of the assessee for inclusion of debentures to the extent of Rs. 60 lakhs in the capital of the company for the purpose of surtax. The Revenue filed a second appeal before the Tribunal. By its order dated March 5, 1981, the Tribunal partly allowed the appeal and allowed the claim of the assessee to the extent of 49 per cent. of Rs. 60 lakhs, i.e., the non-convertible portion of debentures redeemable after the expiry of ten years from date of allotment.
14. In the first instance, it is necessary to consider as to whether the debentures are not borrowings and the borrowings in the form of debentures fall outside the purview of rule 1(v). In CIT v. Motor Industries Co. Ltd. [1993] 199 ITR 375, Chief Justice, S. P. Bharucha, as he then was, speaking for the Division Bench of the High Court of Karnataka, in terms, rejected the contention of the Revenue that the debentures were not borrowings. Rule 1(v) of the relevant rules applies to all borrowings from the categories of persons named therein whether in the form of debentures or otherwise except in respect of debentures issued to the members of the public covered under rule 1(iv) and the borrowings covered by the proviso of rule 1(v) of the said Rules. The borrowings in question supported by debentures which are the subject-matter of this reference do not fall under rule 1(iv) of the said Rules and are not covered under the proviso to rule 1(v) of the Rules as indicated below. We are in respectful agreement with the ratio and the conclusion of the decision of the High Court of Karnataka in the abovereferred case, i.e., CIT v. Motor Industries Co. Ltd. [1993] 199 ITR 375. In our opinion, the borrowings which are the subject-matter of this reference are covered under rule 1(v) of the said Rule.
15. In Palmer's Company Law, Twenty-fourth edition, the following statement of law is to be found at page 666 in paragraph 43.09 :
"A company which has power to borrow may borrow in such manner as it thinks fit. It can, therefore, raise money on a legal mortgage of any specific portions of its property, or by equitable charge, e.g., deposit of title deeds, or by a floating charge on the whole undertaking of the company, or by bonds, or by promissory notes, or by debentures or debenture stock."
16. After quoting several judgments from several cases, Palmer observed at page 672 of his standard work as under :
"In modern commercial usage, a debenture denotes an instrument issued by a company, providing for the payment of, or acknowledging the indebtedness in, a specified sum at a fixed date, with interest thereon."
17. The debenture may provide for a charge by way of security or may not so provide.
18. Section 2(12) of the Companies Act provides an inclusive definition of the expression "debenture" as under :
"Debenture' includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not."
19. The debentures may provide for security on the assets of the company or may be in the form of a mere acknowledgment of the borrowing without creation of any security or charge on the assets of the company.
20. We shall now discuss each of the questions referred to us by the Tribunal.
21. The first question which arises for consideration of the court is as to whether the debentures issued by the assessee to the financial institutions referred to in letter dated February 27, 1980, can be considered as debentures issued to the public within the meaning of rule 1(iv) of the Second Schedule. We have no doubt in our mind that the debentures issued to the financial institutions cannot be considered as issued to the public within the meaning of the said rule. The debentures allotted to the financial institutions herein did not form part of any "public issue" of debentures. The assessee did not make any public issue of the debentures. Rule 1(iv) of the said Rules is thus inapplicable.
22. In our opinion, rule 1(v) of the Rules is applicable to all borrowings including against debentures other than debentures issued to the public provided the monies are borrowed for creation of a capital asset in India and the company is not obliged to repay the loan within a period of less than seven years. Merely because the debentures issued to the public are separately provided for in rule 1(iv) thereof, it does not follow that the borrowings from the financial institution are excluded from the operation of rule 1(v) just because the same are supported by the issue of debentures.
23. Learned counsel for the Revenue submits that in view of the specific provision contained in rule 1(iv) of the Rules providing for inclusion of debentures issued to the public in the capital base of the company, borrowings in the form of debentures from the financial institutions and others are excluded from the purview of rule 1(v) of the Rules by implication. It is not possible to accept this submission. If such a construction is accepted by the court, it would lead to irrational results and anomalies. Learned counsel for the Revenue relied on the judgment of the Supreme Court in the case of CIT v. Shahzada Nand and Sons [1966] 60 ITR 392 in support of his submission that the doctrine "generalia specialibus non derogant" be applied to this case. It is, of considerable significance that in this very case it was held by the court that the said doctrine has no universal application. It was further held by the court that the said doctrine could be applied only if the general and special provisions occupy the same field. We are of the view that in the instant case, rule 1(iv) deals with the subject-matter of debentures issued to a particular category of persons whereas rule 1(v) deals with the subject-matter of borrowings from the financial institutions and others referred to in the said Rules. We have no hesitation in holding that rule 1(iv) and rule 1(v) do not occupy the same field. Learned counsel for the Revenue also relied on a passage from Maxwell on the Interpretation of Statutes in support of his submission concerning implied exclusion of such debentures allotted to the financial institution from the purview of rule 1(v) of the said Rule. The said passage relied on by learned counsel reads as under :
24. "Expressio unius exclusio alterius :
By the rule usually known in the form of this Latin maxim, mention of one or more things of a particular class may be regarded as silently excluding all other members of the class; expressum facit cessare tacitum. Further, where a statute uses two words or expressions, one of which generally includes the other, the more general term is taken in a sense excluding the less general one; otherwise there would have been little point in using the latter as well as the former."
25. At page 295 of the same book, the learned author has further observed as under :
"But the rule, expressio unius, may not always provide the answer to the problems of construction. It is often a valuable servant, but a dangerous master to follow in the construction of statutes or documents."
26. In the footnote 49 appended thereto, the learned author has referred to several cases in support of the abovereferred proposition including the judgment of the English Court in the case of In re Newspaper Proprietors' Agreement [1962] L. R. 3 R. P. 81 at page 95 in which Russel J., refused to apply the maxim "where to have done so would have produced a wholly irrational situation". In the abovereferred Supreme Court judgment in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392, the apex court observed that the abovereferred doctrine had no universal application and it did not apply unless the general and special provision occupied the same field. In this case, rule 1(iv) deals with borrowings in the form of debentures from the "public" generally when there is a public issue of debentures and rule 1(v) deals with borrowings from financial institutions and others named therein. Both the sub-rules do not occupy the same field. Both the sub-rules provide for borrowings from different categories of lenders and occupy different fields.
27. Learned counsel for the assessee has submitted that borrowings from financial institutions covered under rule 1(v) of the said Rules cannot be excluded from the purview thereof merely because the same are supported by instruments of debenture. Learned counsel for the assessee is clearly right. We accept the submission made by learned counsel for the assessee and reject the submission made by learned counsel for the Revenue. We find that our construction of the said rule is supported by the ratio of the judgment of the High Court of Karnataka in the case of CIT v. Motor Industries Co. Ltd. [1993] 199 ITR 375.
28. The next question which arises for the consideration of the court is as to whether the agreement under which monies were borrowed by the assessee from the concerned financial institutions in the form of debentures provided for repayment thereof during the period of less than seven years as contemplated under the proviso to rule 1(v) of the said Rules. Merely because an option was conferred on the debenture holder to get the convertible portion of debentures converted into equity within a period of less than seven years, it does not follow that the company was required to repay the amount of loan within a period of less than seven years. If such an option was exercised the company was not required to repay the amount of borrowing at all. In such a case the debenture would get converted into equity and the amount of erstwhile borrowing would form part of paid-up capital and thus capital base for the purpose of surtax under rule 1(i) of the relevant Rules. The non-convertible debentures as well as the convertible debentures where no option was exercised were required to be redeemed after a period of ten years as already indicated in the earlier part of this judgment. In our opinion, the debentures of the value of Rs. 60 lakhs are includible in the capital base of the company for the purpose of surtax during the relevant assessment year. In our view, the Tribunal was not right in restricting the relief claimed by the assessee to 49 per cent. of the value of the said debentures.
29. In the premises, we answer the questions referred to us as under :
(a) We answer question No. 1 in the affirmative and in favour of the Revenue;
(b) We answer question No. 2 in the negative and in favour of the assessee;
(c) We answer question No. 3 as under :
The assessee is entitled to inclusion of debentures of Rs. 60 lakhs subscribed by I. C. I. C. I. and L. I. C. in its capital base for the purpose of surtax, i.e., Rs. 30 lakhs each in entirety, and not merely 49 per cent. thereof;
(d) We answer question No. 4 in the affirmative and in favour of the assessee;
(e) No order as to costs.