( 1 ) ITRC. No. 15 of 1974 is a reference under Sec. 19 of the Super Profits tax Act, 1963. read with Sec. 256 (1) of the Income-Tax Act, 1961, and itrc. No. 7 of 1974, ITRC. No. 8 of 1974, ITRC. No. 9 of 1974, ITRC. No. 16 of 1974 and ITRC. No. 17 of 1974 are references under S. 18 of the companies (Profits) Surtax Act, 1964, read with 3. 256 (1) of the Income- tax Act, 1961, made by the Income-Tax Appellate Tribunal, Bangalore bench, referring certain questions of law for the opinion of this Court. The first question is common to ITRCs. 15 to 17 of 1974 and so is the second question to all the six references, except, of course, for variations in the sums involved. Accordingly, these references are disposed of by a common order. ( 2 ) SINCE the reference in ITRC. No. 15 of 1974, and the questions of fact and law arising therein are typical and illustrative of the scope of the questions referred, we may deal with ITRC. No. 15 of 1974 first. ( 3 ) THE questions of law referred for the opinion of this Court in the said ITRC. No. 15 of 1974 are the following:" (1 ). Whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the sum of Rs. 15,50,168 being the provision for taxation as on 1-4-1962 was not to be included in computing the capital for the assessment year 1963-64 for purposes of levy of super profits tax ? (2 ). Whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the sum of Rs. 4,91,761 outstanding as on 1-4-1962 being the amount advanced by the National and Grindlays bank Ltd to the assessee against bills drawn by the assessee on its customers for supplies was not moneys borrowed and outstanding for purposes of the computation of capital under Super Profits Tax Act, 1963, for the assessment year 1963-64 ?" ( 4 ) THE assessee is a public limited company carrying on the business of breweries and the reference ITRC. 15 of 1974 respects proceedings for the assessment to super profits tax under the Super Profits Tax act, 1963, in relation to the assessment year 1963-64 corresponding to the previous year ended on 31-3-1963. ITRCs. 15 of 1974 respects proceedings for the assessment to super profits tax under the Super Profits Tax act, 1963, in relation to the assessment year 1963-64 corresponding to the previous year ended on 31-3-1963. ITRCs. 7, 8, 9, 16 and 17 of 1974 relate to assessment years 1969-70; 1967-68; 1968-69; 1966-67 and 1965-66 respectively and arise out of proceedings for assessment to sur-tax under the companies (Profits) Sur-Tax Act, 1964. ( 5 ) SO far as the first question which is common in ITRCs. 15, 16 and 17 of 1974 is concerned, learned Counsel on both si'des submitted that the question is concluded by the decision of this Court in the Mysore electrical, Industries Ltd, Bangalore v. Commr of Super Profits Tax, mysore, Bangalore, TRC. 11/1967 dt. 28-10-1969. and that the question requires to be answered against the assessee and in favour of the Revenue. Accordingly, we answer the first question in ITRCs. 15, 16 and 17 of 1974 in favour of the revenue and against the assessee. ( 6 ) THE second question in ITRC. 15 of 1974 arises out of a dispute in regard to the exclusion of the sum of Rs. 4,91,761 in the computation of the capital in accordance with Rules in the Second Schedule to the super Profits Tax Act, 1963. Corresponding questions in ITRCs. 7, 8, 9. 16 and 17 of 1974 raise the same proposition in the context of analogous provisions contained in the Companies (Profits) Sur-Tax Act, 1964. The charging provisions of these taxing statutes provide! that there shall be charged on every company a tax at rates specified in their schedules for every assessment year in respect of so much of its 'chargeable profits' of the previous year as exceed what is styled the 'standard deduction' in the Super Profits Tax Act, 1963, and 'statutory deduction' in the corresponding successor legislation in Companies (Profits) Sur-Tax Act, 1964. The expressions 'standard deduction' and 'statutory deduction' are defined in S. 2 (9) and S. 2 (8) respectively of the said two Acts to mean an amount equal to a certain percentage,-statutorily fixed, of the capital of the company as computed in accordance with provisions of the Second schedule to the said Acts. This sum of Rs. The expressions 'standard deduction' and 'statutory deduction' are defined in S. 2 (9) and S. 2 (8) respectively of the said two Acts to mean an amount equal to a certain percentage,-statutorily fixed, of the capital of the company as computed in accordance with provisions of the Second schedule to the said Acts. This sum of Rs. 4,91,761 represented the amount of bills 'discounted' and remaining outstanding as on 31-3-1962, which was claimed by the assessee as representing 'moneys borrowed' by it from its Bankers- m/s National and Grindlay Bank Ltd-and were part of its capital. The corresponding figures in ITRCs. 7, 8, 9, 16 and 17 are Rs. 7,21,052; rs. 4,23,558; Rs. 1,46,147; Rs. 10,91. 539 and Rs. 4,71,963 respectively. The income-Tax Officer did not accept this contention but held that the amount represented a liability on the bills discounted and was only a contingent liability and could not constitute moneys borrowed and outstanding as on 1-4-1962. ( 7 ) THE Appellate Asst Commr to whom the assessee appealed, noticing certain facts in his order dt. 18-10-1976, called for a further report from the Income-Tax Officer with a view to determining the character in which the said Bank received payments in respect of the bills drawn by the assessee. In his report the Income-Tax Officer, relying on the correspondence with the Bank on the matter, affirmed his earlier opinion that the nature of the transaction between the assessee and its bankers was a purchase of the bills and that what was given credit to in the account of the assessee was the value of the consideration for the purchase. The assessee, on the contrary, relied on another letter dt. 4-3-1967 issued by the Bank in which the Bank called the facility "a short-term interest-bearing advance to the Company pending realisation of the proceeds of the bills from the drawees". Finally, the Appellate Asst Commr decided the matter against the assessee holding that the amounts did not represent borrowings and were not includible in the assessee's capital. ( 8 ) THE assessee preferred a second appeal before the Income-Tax appellate Tribunal, Bangalore Bench and reiterated its contention that the amounts represented moneys borrowed by it from the Banking institutions and that the same should have been treated as such. ( 8 ) THE assessee preferred a second appeal before the Income-Tax appellate Tribunal, Bangalore Bench and reiterated its contention that the amounts represented moneys borrowed by it from the Banking institutions and that the same should have been treated as such. Noticing this argument, the Tribunal in para-23 of its order, has had this to say as to the nature of the transactions :"the assessee had arranged for bill discounting facilities with the national Grindlays Bank Ltd in order to ensure that its funds are not blocked in outstanding bills for supply of goods to customers. The facility was arranged primarily in connection with the assessee's sales of goods to Phipson and Co Ltd and Herbertsons Ltd. On effecting credit sales to these companies the assessee used to pass the usual entries regarding such sales in the books of account and also to draw a bill of exchange on the purchaser. This bill is discounted with the national and Grindlays Bank Ltd. Thereafter when the bill is collected by the bank the assessee is given credit for the same wiping out the debit standing against its name for the amount given by the bank to the assessee on the discounting of the bill. The bank used to charge the usual commission on the discounting of the bills. " ( 9 ) THE Tribunal held that the assessee had not established that the amounts in question represented moneys lent by the Bank to the assessee. It held that the Bank purchased the bills in the course of its banking business and had acquired certain rights in the bills and what was paid to the assessee was a consideration for the acquisition of such rights and should not be characterised, as loans. The Tribunal also took the view that the circumstance that if the drawees defaulted, the Bank could have recourse to the assessee for the realisation of the amount did not detract from the true nature of the transaction as one under which the bills were purchased by the Bank and what was credited to the assessee's account was the consideration therefor. The assessee's appeal before the Tribunal was, thus, unsuccessful. ( 10 ) WE ought perhaps to notice here another argument urged for the revenue before the Tribunal based on Rule 1 (v) of the Second Schedule to the Companies (Profits) Sur-Tax Act, 1964. The assessee's appeal before the Tribunal was, thus, unsuccessful. ( 10 ) WE ought perhaps to notice here another argument urged for the revenue before the Tribunal based on Rule 1 (v) of the Second Schedule to the Companies (Profits) Sur-Tax Act, 1964. The Tribunal held on the basis of the said provision, that the amounts in question would, in any event, fall outside the pale of capital. However, by a separate order dt. 24-6-1972 the Tribunal, on the admisson made by the Revenue that reliance on Rule 1 (v) or the proviso thereto was not apposite, made a record to that effect. It is necessary to record here that the Revenue did not seek to support the order on the basis of Rule 1 (v) of the Second schedule to the Companies (Profits) Sur-Tax Act, 1964. ( 11 ) SRI Ramamani, learned Counsel for the assessee, contended that the transactions in questions were as between a banker and its constituent and were in essence transactions of lending and borrowing and that the endorsements of the bills drawn on the assessee's two customers- phipson and Co Ltd and Herbertsons Ltd- constituted collateral security for the advances made by the Bank. ( 12 ) THE question is whether the transaction under which the bills question were endorsed by the assessee in favour of its bankers-the national and Grindlays Bank Ltd amounted to a pledge of the bills as security for the loans advanced by the Bank on their security or constituted absolute transfer of the bills, equivalent to discount. A dividing line between the two ideas is some times difficult to draw. The presumption in all cases of negotiation is in favour of absolute transfer, and this presumption is heightened when the transfer is by endorsement. The question is, however, one of fact, and the presumption is rebuttable. It may be shown that this endorsement was not by way of transfer, but merely by way of affording the additional security of the pledgor's name in a transaction which was really one of pledge only. (See Re Firth, Ex Parte Schofieid, 1879 12 Ch. D 337. The business of buying bills at a discount is well known and is quite distinct from lending of-money. (See Re Firth, Ex Parte Schofieid, 1879 12 Ch. D 337. The business of buying bills at a discount is well known and is quite distinct from lending of-money. It is no doubt true, as contended by Sri rajashekhara Murthy, learned Counsel for the Revenue, that an agreement, express or implied, between a bank and its constituent that the latter should be allowed to draw against the bills before clearance may entitle the bank to the character of a 'holder for value' in respect'of the bills. In such a case the bank receives the sum for itself and not for the customer. In order to ascertain the true nature of the transactions in the present case an advertence to the manner in which it has been treated in the books of account of the assessee may be relevant. The assessee sells its merchandise on credit amongst others, to two of its customers. viz, phipson and Co Ltd and Herbertsons Ltd. On a credit sale being so effected a bill of exchange is drawn on the purchaser requiring the latter to pay on the stipulated date to or to the order of the National and Grindlays Bank ltd. In the course of the appellate order, the Appellate Asst Commr of income-Tax has excerpted the nature of entries that are made in the books of Account of the assessee in this behalf. The entries illustrative of a case in the year 1961 are as follow: "27-12-61 National and Grindlay Bank Dr. 26,703-69 Cr. 26,703-69 to Herbertsons Ltd, Calcutta (being bill drawn against invoice no. 690/27-12-1961) on 29-12-61, the appellant received from the Bank a letter dt. 28-12-61 intimating "we have today credited your account with Rs. 46,821-69 from your bill on Bombay for ( 13 ) TWO important elements that characterise these transactions are: first that the full value of the bill is given credit to in the account of the assessee; and secondly, that interest on 'the sums so given credit to is charged to the assessee by the Bank till the date of realisation of the bill. The bill was endorsed to the Bank in the limited way in which the drawer of a bill could negotiate a bill of exchange before acceptance. The question is whether in its true legal significance and effect the transaction is one of purchase of the bills, amounting to discount, by the bankers. The bill was endorsed to the Bank in the limited way in which the drawer of a bill could negotiate a bill of exchange before acceptance. The question is whether in its true legal significance and effect the transaction is one of purchase of the bills, amounting to discount, by the bankers. In Corpus Juris Secundum, the transaction of discount is described thus :"a discount is a transaction by which a bank, in making a loan on a promissory note or other paper, deducts the interest in advance, so that the borrower receives only the face Value of the obligation less the interest on such face value from the time when the loan is negotiated, until its maturity. The term 'discount' is also used to designate the interest which is thus withheld in advance. It has also been considered that the purchase of commercial paper for a sum less than its face is" a discount. "in American Jurisprudence-Volume 10, para, 689 at page 660, 'discount' is defined as follows :"discounts. A discount is denned as a loan upon an evidence of debt in which the compensation for the use of the money until the maturity of the debt is deducted from the principal and retained by the lender at the time of making the loan. The term 'discount' has been interpreted to mean a charge for a loan in advance, whether called interest, compensation, or premium, and the 'discounting' of a note by a bank is understood to consist of the lending of money upon it, and deducting the interest, or premium in advance. The term 'discount', when used in a general sense, is equally applicable to either business or accommodation paper and is appropriately applied to either loans or sales by way of discount when a sum is counted off or taken from the face or amount of the paper at the time the money is advanced upon it, whether that sum is taken for interest. upon a loan or as the price agreed upon a sale. "in Halsbury's Laws 6f England, Fourth Edn, Vol. 3, para) 151, referring to discounting of bills it is stated:"discounting of bills. When a banker discounts a bill he buys it for its face value less a sum representing interest for the period which the bill has to run. upon a loan or as the price agreed upon a sale. "in Halsbury's Laws 6f England, Fourth Edn, Vol. 3, para) 151, referring to discounting of bills it is stated:"discounting of bills. When a banker discounts a bill he buys it for its face value less a sum representing interest for the period which the bill has to run. The banker takes the bill as transferee for value, and has the holder's normal right to sue on the bill if it is dishonoured. In the case of a customer the amount of the bill, less discount, is normally carried to current account, and if the bill is unpaid the current account is normally debited and the bill is returned to the customer. If the banker wishes to retain his right of recourse to other parties because his customer's account cannot meet the debit, the banker retains the bill and debits a suspense account. , whether the bill is taken from a customer for collection or as security, or is discounted for him, is a question of fact. The presumption in favour of a bill being taken by way of absolute transfer rather than of pledge or security is not so appropriate in the case of banker and customer as in other cases. Indorsement of a specially indorsed bill is as necessary for collection as for transfer. Even indorsement by the customer of a bill indorsed generally is consistent with his merely putting his name on it as extra security. There is some doubt, whether the entry of the amount of such bills, less discount; as cash in the bankers books would be evidence of the banker having taken them as transferee. Possibly inferences might be drawn from whether the bank held itself out as a" discounting bank or not. Where the transaction is really one of discounting, the banker is of course at liberty to deal with the bill as he pleases, rediscounting or transferring it. " ( 14 ) IN Plein and Co; Ltd v. Inland Revenue Commrs, 175 LTR 453. the question was whether the transaction whereby a bank advances amounts of the bill to the shippers on receipt of bills of exchange drawn by the shippers was a transaction of loan or sale of the bill. " ( 14 ) IN Plein and Co; Ltd v. Inland Revenue Commrs, 175 LTR 453. the question was whether the transaction whereby a bank advances amounts of the bill to the shippers on receipt of bills of exchange drawn by the shippers was a transaction of loan or sale of the bill. The facts of the case were tha,t, a Company of shipping merchants who'bought goods in england as principals, packed them and shipped them to their customer-a certain Marks-in South Africa. In September, 1944, the company bought certain parts of cycles and caused them to be shipped to their customers in Johannesburg. The price the Company charged the customers was 81 4s Od plus an amount representing the difference in exchange between Sterling and South African currency. The company drew the bill of exchange for the sum 81 1s 6d on the customer payable 60 days after sight, directing the payment to be made to the standard Bank of South Africa in Johannesburg. On 7th Sepr, 1944, the company delivered to the London branch of the same bank the bill of exchange together with the documents of title to the goods. In accordance with the arrangement made with the branch of the bank, the bank subsequently credited the company's account with the sum of 81 1s 6d and simultaneously debited another account of the Company with the same sum plus the sum representing interest at 5 per eent calculated for the period which elapsed before the bill matured and th'e difference in the exchange. In proceedings of the assessment to excess profits tax, the company contended that the said 81 1s 6d credited to its account was borrowed money, within the meaning of para 2 of Schedule (VII) to the finance (No. 2) Act, 1939, which provided that "no borrowed money shall be deducted for purpose of excess profits duty". Wrottesley, J, in the King's Bench Division, dealing with the question observed :"the answer to the question whether this was a loan or not depends on what the parties, the company and the bank, agreed at the time expressly, if there were an express agreement, and, impliedly, if there were no express agreement. When the draft was forwarded by the company to the bank, the bank, it is true, credited the company with the full amount. When the draft was forwarded by the company to the bank, the bank, it is true, credited the company with the full amount. No deduction was made, as one would expect to find if there had been a. discounting. Incidently, therefore, it is pretty clear, I think, that the bank never discounted the bill. The Inland Revenue Commissioners say that the company sold the bill or the debt to the bank and the bank paid for it an amount of its funds, and so they say the credit is, therefore, not a loan but the purchase price of the assignment of the debt. The books of the bank do not bear this out, for they debited the company's account with 83 3s 10d. That is fpimd as a fact. That is the same figure as that endorsed on the bill. . . . . . . . In this case the bank credited the whole amount and looked to the termination of the transaction by their headquarters in Johannesburg with Mr. Marks to reimburse the branch for that which was either lent or laid out during the currency of this period. That this was merely a loan in the first place is quite obvious from the nature of the transaction. At the stage when the bill was first lodged with the bank with the documents, the bill of exchange was incomplete in this sense-it was not accepted. If the Johannesburg customer had declined Jo accept it when it was presented, the bank had no remedy of any kind against Marks. . . . . . . . I think the argument of the appellants in this case depends upon my accepting the proposition that what took place in this case is an assignment of the debt. I think it is quite clear it is not. It is nothing of the kind. So that the only remedy in the case of non-acceptance here was a claim by the bank against the company-I suppose it would be by the London branch against the company unless the London branch chose to negotiate the bill through their branch in Johannesburg. There would also be to some extent-though it does not become necessary to decide that now-a remedy against the goods. There would also be to some extent-though it does not become necessary to decide that now-a remedy against the goods. Even when the Johannesburg customer, Marks had accepted the bill, I do not find anything to indicate that at that stage the bank accepted this as satisfying the loan which appears in the account as "debited", according to para. 6 (n) of the stated case. Both as regards the capital involved and as regards the interest, the bank still had at that stage, as it appears to. me, the company's liability, if they desired to resort to it, apart from the bill itself. . . . . . . . Another, point which Mr. Hills made was this. He said: if I look at the company's accounts I shall find that this sum of money and many others" like it are described in the Company's own accounts as contingent liabilities in the shape of discounted bills at 31st march, 1941. That is true. But it seems to me that that is really an accurate description. It is true it is contingent because, of course, they would only in fact be liable to the bank on the bill in the event of the customer either declining to accept it or not meeting the bill at maturity. So I think it is a proper description of the liability,, but that does not make it any the less a liability. . . . . . " ( 15 ) IN the present case, as stated earlier, full amount of the bill was given credit to in the account of the assessee with the bank and no sum towards what amounts to a "discount" was charged. Interest on the amount advanced was charged from the date of the credit till the date of realisation of the bills. Besides, at the tune of their delivery to the bank, they had not been accepted by the drawees. If the drawees declined to accept them, the bank would have had no recourse to them. The negotiation of the bills in favour of the bank was, obviously, only a financial arrangement between the bank and its constituent-the assesses. . Besides, at the tune of their delivery to the bank, they had not been accepted by the drawees. If the drawees declined to accept them, the bank would have had no recourse to them. The negotiation of the bills in favour of the bank was, obviously, only a financial arrangement between the bank and its constituent-the assesses. . It could not also mean that there was a transfer in favour of the bank of the property in the goods which the documents of title accompanying the bill represented, as indeed the goods were the subject matter of a subsisting contract of sale in favour of the drawees. The Bank recovered payments from the drawees to the credit and on behalf of its constituent, the assesee and charged the latter interest till date of such payments. ( 16 ) THE principles of law merchant that guide the matter, applied to the facts of the case, render the conclusion irresistible that the amounts given credit to the assessee upon endorsement of the bills were not the consideration for the 'discounting' of the bills as there was no 'discount'; but that the endorsement of the bills in favour of the bank was only a financial arrangement between the bank and its constituent to avoid freezing on credit to the latter and was done in the course of its usual banking transactions. The contention of Sri S. R. Rajashekhara Murthy to the contrary cannot be accepted. " ( 17 ) WE, accordingly, answer the questions referred in ITRCs. 7, 8, 9 and the second question referred in ITRCs. 15, 16 and 17 of 1974 in favour of the assessee and against the Revenue. . ( 18 ) THE assessee is entitled to its costs. Advocate's fee Rs. 250 one set. --- *** --- .