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.....";