Holding

Repayment must be for a period exceeding seven years; a loan repaid within exactly seven years does not satisfy the ‘not less than seven years’ requirement of Rule 1(v).

Summary

The respondent, Braithwaite & Co. Ltd., obtained a Rs 50 lakh term loan repayable in five instalments over a period of seven years and claimed the loan amount as part of its capital base to obtain the 10 % statutory deduction under Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Income‑Tax Officer rejected the claim on the ground that the loan was not repaid “during a period of not less than seven years”. The Tribunal held that only the last instalment of Rs 16 lakh satisfied the condition, and the Calcutta High Court affirmed that the whole loan qualified. On appeal, the Supreme Court examined the meaning of “not less than seven years” and held that the expression requires a period exceeding seven years, not merely up to seven years. Consequently, the entire loan did not meet the requirement, but the Tribunal’s order allowing Rs 16 lakh to be included remained untouched, so revenue was entitled to deny inclusion of the remaining Rs 34 lakh. The appeal was allowed and the High Court judgment set aside.

Issues considered

Does repayment of a term loan within exactly seven years satisfy the condition ‘during a period of not less than seven years’ under Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964?
Can the whole term loan be included in the capital base for the purpose of claiming the statutory 10 % deduction?

Legislation cited

Companies (Profits) Surtax Act, 1964s. Rule 1(v) of Second Schedule, s. Section 2(5), s. Section 2(8)

Subjects

Term loanCapital baseCompanies (Profits) Surtax ActRule 1(v)Statutory deductionInterpretation of ‘not less than’Income tax

Judgment

COMMISSIONER OF INCOME TAX, CALCUTTA A
v.
BRAITHWAITE AND CO. LTD.

11;1ARCH 3, 1993

[KULDIP SINGH AND N.M. KASLIWAL, JJ.]

Companies (Profits) Surtax Act, 1964:

Second Schedule Rule l(v)-Term Loan from Bank-Repayment
during a period of seven years-Whether amounts to "repayment during a C
period of not less than seven years''-Wliether the repayment qualifies for
inclusion in the capital base.

The respondent-company obtained a Term Loan of Rs. 50,00,000
repayable within a period of seven years. The company included propor-
tionate amount of the said Term Loan in its capital base and claimed the D
statutory 10% deduction in the calculation of its chargeable profits for the
assessment year 1965-66. The Income-tax Officer rejected the claim of the
respondent company on the ground that the repayment of the Term Loan
was not during a period of not less than 7 years as contemplated in Rule
l(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. E
On appeal, the Appellate Assistant Commissioner reversed the findings of
the Income-tax Officer. Revenue preferred further appeal to the Tribunal
which held that only the last instalment of Rs. 16,00,000 satisfied the
requirements of Rule l(v); but in respect of the other four instalments
aggregating to Rs. 34,00,000 the Tribunal allowed the appeal of the Depart-
ment and rejected the claim of the respondent-company. However at the F
instance of the respondent-company, Tribunal referred to the High Court
the question whether the Tribunal was right in holding that only Rs.
16,00,000 out of the loan of Rs. 50,00,000 taken from Bank qualified for
inclusion in the capital base under Rule 1(v). The High Court answered
the question in the negative and in favour of the respondent-company. G
Against this, Revenue has come in appeal.

Allowing the appeal, this Court,

HELD : 1. On a plain reading of the proviso to Rule l(v) of Second
Schedule to the Companies (Profits) Surtax Act, 1964, it is clear that in H
187
188 SUPREME COURT REPORTS (1993] 2 S.C.R.

A order to claim benefit of the said provision the borrowed money has to be
repaid during the period of more than seven years. The only interpretation
which can be given to the expression "during a period of not less than seven
years' is that the said period should go beyond seven years. The reasoning
is simple. The period of seven years would not complete till the last
'minute' or even the last 'second' of the said period is counted. The period
B
of 'not less than seven years" can only mean till after the completion of
seven years. Therefore the repayment of borrowed amount during the
period of seven years does not mean repayment 'during a period of not
less than seven years". To claim the benefit under Rule l(v) of the Second
Schedule to the Act the repayment of the borrowed money must be during
C a period which is more than seven years. [191D·G)

2. In the instant case, the entire term loan of Rs. 50,00,000 taken
from the bank does not qualify for inclusion in the capital base under Rule
l(v) of the Second Schedule to the Act but in view of the fact that the order
of the Tribunal granting relief to the respondent-company to the extent of
D Rs. 16 lacs has not been challenged by the department, the Revenue shall
be entitled to relief to the extent of Rs.34 lacs only as not qualified for
inclusion in the capital base. [192E-F)

CIVIL APPELLATE JURISDICTION Civil Appeal No. 1034
E (NT) of 1977.

From the Judgment and Order dated 18.7.75 of the Calcutta High
Court in I.T.R. No. 44 of 1972.

J. Ramamurthi, R. Ayyam Perumal and Ms. A Subhashini (N.P.) for
F the Appellant.

K.C. Dua for the Respondent.

The Judgment of the Court was delivered by

G KULDIP SINGH, J. The respondent-company obtained a Term
Loan of Rs. 50,00,000 from the National Grindlays Bank Ltd. The agree-
ment dated August 1, 19(\4 provided for repayment of the loan in five
instalments. The last instalment was to be paid on July 31, 1971. Thus the
loan was to be paid back within the period of seven years from the date of
H the agreement. The question for our consideration is whether the repay-
C.l.T. v. BRAITiiWAITE [KULDIP SINGH, J.] 189

ment under the agreement was "during a period of not less than seven A
years" within the proviso to Rule l(v) of the Second Schedule to the
Companies (Profits) Surtax Act, 1964 (the Act).

The Act imposed a surtax on so much of the chargeable profits of
every company as exceeded the statutory deduction. "Chargeable profits"
were defined by Section 2(5) of the Act to mean the total income as
B
computed under the Income-tax Act, 1961 and adjusted in accordance with
the First Schedule to the Act. "Statutory deduction" was defined by Section

- 2(8) of the Act to mean an amount equal to ten per cent of the capital of
the company as computed in accordance w.ith the provisions of the Second
Schedule to the Act or an amount of Rs. 2,00,000 whichever was greater. C
Rule 1 of the Second Schedule to the Act provided how the capital of a
company was to be computed. The relevant part of the Rule is as under :

"1. Subject to the other provisions contained in this
Schedule, the capital of a company shall be the aggregate D
of the amounts as on the first day of the previous year
relevant to the assessment year, of -

(i) ...........................

(ii) ............................ .. E
(m) ...............................

(iv) ..........-.............. ..

(v) any moneys borrowed by it from Government or the F
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
G
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 borKJwed provides for the repayment
thereof during a period of not less than seven years. H
190 SUPREME COURT REPORTS [1993) 2 S.C.R.

A EXPLANATION: .........................

The agreement dated August 1, 1964 provided for repayment of the
loan in five instalments as follows :

1. On July 31, 1967 Rs. 5 lakhs
B ,
2. On July 31, 1968 Rs. 7 lakhs ~

3. On July 31, 1969 Rs. 10 lakhs

4. On July 31, 1970 Rs. 12 lakhs
c 5. On July 31, 1971 Rs. 16 lakhs

The respondent-company included proportionate amount of the
Term Loan of Rs. 50,00,000 in its capital base and claimed statutory
percentage of the said amount as deduction in the calculation of its
D chargeable profits assessable for the assessment year 1965· 66. The In·
come-tax Officer rejected the claim of the responment-company on the
ground that the repayment of the Term Loan was not "during a period of
not less than seven years". On appeal the Appellate Assistant Commis·
sioner rev~rsed the findings of the Income-tax Officer and held that the
provisions of Rule l(v) of the Second Schedule to the Act were satisfied
E
and as such the respondent-company was entitled to include the Term
Loan for the purposes of computing the chargeable profits. The Depart·
ment preferred further appeal to the Income-tax Appellate Tribui!al. The
Tribunal held that only the last instalment of Rs. 16,00,000 was payable
'during a period of not less than seven years" and as such satisfied the
F requirements of Rule l{v) but so far as the other four instalments aggregat·
ing to Rs. 34,00,000 were concerned the Tribunal allowed the appeal of the
Department and rejected the claim of the respondent-company. At the
instance of the respondent-company the Appellate Tribunal referred the
following question for adjudication :
G "Whether, on the facts and in the circumstances of the
case, the Tribunal was right in holding that only Rs.
16,00,000 out of the loan of Rs. 50,00,000 taken from the
Bank qualified for inclusion in the capital base under rule
l(v) of the Second Schedule to the Companies (Profits)
Surtax Act, 1964 ?"
•
H
C.l.T. ''· BRAITIIWAITE [KULDIP SINGH, J.] 191

~- The High Court answered the question in the negative and in favour A
of the respondent-company. This appeal by special leave is by the Income-
tax Department against the judgment of the High Court.

Learned counsel for the appeallant contended that no part of the
Term Loam of Rs. 50,00,000 qualified for inclusion in the capital base
B
because the provisions of Rule l(v) of the Second Schedule to the Act were
not satisfied. According to him under the Term Loan-Agreement dated
August 1, 1964 the last instalment was to be paid on July 31, 1971 and as
such the period of repayment was less than seven years. He further
contended that in the context the expression "during a period of not less
thaIJ, seven years'\ means a period or more than seven years. The learned c
counsel for the respondent, on the other hand, argued that the Term Loan
was payable within the period of seven years. According to him the period
of seven years is obviously a period which is "not less than seven years".

We are of the view that on the plain reading of the pro,iso to Rule D
l(v), Second Schedule to the Act it is clear that in order to claim benefit
of the said provision the borrowed money has to be repaid during the
period of more than seven years. The only interpretation which can be
given to the expression "during a period of not less than seven years" is that
the said period should go beyond seven years. The reasoning is simple. The
period of seven years would not complete till the last 'minute' or even the E
last 'second' of the said period are counted. In other words till the last
minute of the seven years period is completed the period remains less than
seven years. In the present case the agreement was entered on August 1,
- 1964. The last instalment was to be paid on July 31, 1971. The seven years
were to complete at 12 a.m. (between the night of July 31, 1971 and August F
1, 1971). Even if the loan was paid back at 11.59 p.m. on July 31, 1971 the
period would be less than seven years by one minute. It is, therefore,
obvious that the period of "not less than seven years" can only mean till
after the completion of seven years. We, therefore, hold that the repayment
of borrowed amount during the period of seven years does not mean
repayment "during a period of not less than seven years". To claim the G
benefit under Rule l(v) of the Second Schedule to the Act the repayment
of the borrowed money must be during a period which is more than seven
years.

We find support in the view taken by us in the following cases. In H
192 SUPREME COURT REPORTS [1993] 2 S.C.R.

~-
A Ramanasari v. Muthusami Naik, !LR 30 Madras 248, Section 18 of the
'
Madras Rent Recovery Act VIII of 1865 required that, in fixing the day of
sale, not less than seven days must be allowed 'from the time ohhe public
notice and not less than 30 days from the date of distraint'. The sale was
held on the 13th February, but the notice was published on 6th February.
It was held that 'not less than' means the same as 'clear' and seven whole
B days must elapse between the day of the not_ice and the day fixed for sale.
In re T71e Railway Sleepers Supply Company LJ 1885 54 Ch 720, the
expression 'not less' than given number of days means 'clear days'. It was
held that the expression 'not less' indicates 'a minimum'.

C In the present case the whole of the Term LOan was payable within
the period of seven years and as such the loan of Rs. 50,00,000 taken by
the respondent-company from National Grindlays Bank was not qualified
for inclusion in the capital base under Rule l(v) of the Second Schedule
to the Act. The Tribunal in part and the High Court were not justified in
deciding the issue in favour of the respondent-company. Since the order
D of the Tribunal, granting relief to the respondent-company to the extent of
Rs. 16,00,000 has become final, no interference is called for to that extent.

We allow this appeal, set aside- the judgment of the High Court and
answer the question in the manner that the entire term loan of Rs.
50,00,000 taken from the bank does not qualify for inclusion in the capital
E
base under Rule l(v) -of the Second Schedule to the Act but in view of the
fact that the order of the Tribunal granting relief to the respondent-com-
pany to the extent of Rs.16 lacs has not been challenged by the department,
the Revenue shall be entitled to relief to the extent of Rs. 34 lacs only as
not qualified for inclusion in the capital base. In the facts and circumstan-
F ces of this case, we leave the parties to bear their own costs.

G.N. Appeal allowed.