vil Appeals Nos
1358 61 of 1979
From the Judgment and Order dated 6978 of the Allaha bad High Court in ITR No 11478
Ahuja KC Dua and Miss A Subhashini for the appel lants
842 SC Manchanda Mrs AK Verma and Joel Pares for the respondent
The Judgment of the Court was delivered by PATHAK CJ
These appeals by special leave are directed against the judgment of the High Court at Allahabad dispos ing of an Income tax Reference in favour of the assessee and against the Revenue
The assessee is a co operative society running a sugar mill
For the assessment year 1968 69 it claimed payment of interest amounting to Rs 1817 16
This was interest paid to the accounts of its members who had deposited certain amounts with the assessee in accordance with Bye law No 50 and it was debited by the assessee to its profit and loss account
In the initial years of the working of the Society certain partly paid shares were allotted to its farmer members
With a view to inducing these members to make further contribution to the capital of the Society bye law No 50 was incorporated in the Bye laws of the Society
The bye law as amended provides 50
There shall be established a Loss Equalisation  Capital Redemption Reserve Fund  in the society
Every producer shareholder shall deposit every year a sum not less than 032 paise and not more than 048 paise per quintal of the sugarcane supplied by him to the society as may be determined by the Board until the shares to be subscribed by the members are fully paid up
The amount standing to the credit of this fund presently or to be credited in future shall be used for making the partly paid shares fully paid up
The balance of the said amount shall be refunded to the members soon after the present loan from the Industrial Corporation of India is repaid whereafter the fund shall cease to exist
 The money available in the Loss Equalisation and Capi tal Redemption Reserve Fund  was utilised by the assessee for the purpose of its business
A part of the amount was also utilised for converting the partly paid up shares into fully paid up shares
On 8 September 1967 the Board of Directors of the Society decided in their meeting to pay interest at 6 on the balance available in the aforesaid Fund to its various members to whom the balance money be longed
It was on this account that the Society claimed an amount of Rs 118716 for the assessment year 1968 69
843 The claim was rejected by the Income Tax Officer
He took the view that the amounts deposited by the members of the Society in the Loss Equalisation and Capital Redemption Reserve Fund  did not represent loans taken by the assessee but constituted a contribution by the members to convert partly paid up shares into fully paid up shares and they could not be considered as capital borrowed for the purpose of its business
He held that section 361iii of the Income tax Act did not apply to such interest and that it was not admissible as a deduction in computing the total income of the assessee
For the assessment years 1969 70 to 1972 73 the claim to deduction on this account was as follows 1969 70 
Rs 134609 1970 71 
Rs 134609 1971 72 
Rs 134609 1972 73 
Rs 134609 The Income Tax Officer took the same view for these assess ment years as he did for the assessment year 1968 69
In appeals preferred by the assessee the Appellate Assistant Commissioner of Income tax confirmed the disallow ance for the assessment year 1968 69 on the ground that Bye law No 50 did not provide for the refund of the amount standing to the credit of the members at any time before the payment of the loan to the Industrial Finance Corporation of India that the loan was still outstanding on 30 June 1967 the last day of the previous year relevant to the assessment year 1968 69 and moreover the Bye law did not provide for payment of interest at all
He observed that the Directors could not pay any interest unless the Bye law was amended by the members of the assessee
He observed that the interest paid must be regarded as an exgratia payment to the producer members of the society who had contributed to the Fund and that it was not made for the purpose of the business of the assessee or on the ground of commercial expediency
The same order was passed by the Appellate ASsistant Commissioner on the appeals for the remaining years
In second appeals filed by the assessee for all the assessment years the Income Tax Appellate Tribunal held that the amount standing to the credit of the Loss Equalisation and Capital Redemption Reserve Fund  which was utilised by the assessee for the purpose of its business represented moneys borrowed for the purpose of its business and that interest paid on such moneys was eligible for deduction under 844 section 361iii of the Income tax Act 1961
The Appellate Tribunal negatived the contention of the Revenue that only such deposits could constitute capital borrowed  within the meaning of section 361iii of the Act which were initially borrowed with the stipulation to pay interest thereon
The Appellate Tribunal observed that the expression capital borrowed  had not been defined in the Income tax Act and that its ordinary meaning would have to be gathered in construing the meaning of section 361iii
It said that it was not necessary that borrowing must contain an element of payment of interest and that even if a deposit was made by the members of the society which was utilised for the pur poses of the business of the assessee the funds represented by such deposit would be capital borrowed  for the purposes of section 361iii of the Act
The Appellate Tribunal also recorded that it was not disputed that the deposits were taken for the purposes of the business
In the circum stances the Appellate Tribunal held that when the Board of Directors of the assessee considered it proper to pay inter est on those deposits such interest was admissible under section 361iii of the Act
During the heating of the appeals for the assessment years 197071 and 197 1 72 it was pointed out by the Revenue that the auditors of the assessee had observed in their audit report that the payment of interest on the Loss Equalisation and Capital Redemption Reserve Fund  should not have been made by the assessee in view of section 57 of the Uttar Pradesh Co operative Societies  Act which reads Fund not to be divided Except as otherwise specifically provided in this Act no part of the Funds other than the net profits of a co operative society shall be paid by way of bonus or dividend or otherwise distributed among its members Provided that a member may be paid remuneration on such scale as may be laid down in the bye laws for any services rendered by him to the co operative society The Appellate Tribunal held that section 57 was not relevant as the payment of interest to the shareholders on the amounts deposited by them did not represent any payment by the Society by way of bonus or dividend or otherwise of any part of its funds other than its net profits
The Appellate Tribunal also observed that the interest paid by the asses see to the Loss Equalisation and Capital Redemption Reserve Fund  was met from out of the net profits of the assessee
It was found that the assessee had sufficient income out of which the interest 845 could be paid by it
For these reasons it held that the payment of interest was not affected by section 57 of the Uttar Pradesh Co operative Societies Act
At the instance of the Revenue the following two ques tions in respect of the five assessment years were referred by the Appellate Tribunal to the High Court at Allahabad for its opinion
Whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund which were actually used by the assessee for the purposes of its business represented capital borrowed by the assessee for the purpose of its business within the meaning of section 361iii of the Act 2
Whether the Tribunal was right in law in allowing inter est on such balances standing to the credit of the Loss Equalisation and Capital Redemption Reserve Fund as a deduc tion in computing the total income of the assessee A further question common to the assessment years 1969 70 to 1972 73 was also flamed
It reads Whether the Tribunal was right in law in holding that the impugned payments of interest did not contravene the provi sions of section 57 of the Uttar Pradesh Co operative Societies Act 1965 The High Court agreed with the view taken by the Appel late Tribunal and answered the questions in favour of the assessee and against the Revenue
Before us the parties have confined themselves to the first two questions and it is requested that we need not consider the third question
In these appeals the question is whether the claim to deduction under section 361iii of the Income tax Act can be allowed
Section 361iii of the Act provides that in computing the income chargeable under the head profits and gains of business or profession  a deduction shall be al lowed of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession
Can it be said that the credit balance in the Loss Equalisation and Capital Redemp 846 tion Reserve Fund  represents capital borrowed by the asses see for the purposes of its business What is borrowed money  has been construed by the Courts in England in a number of cases
In Port of London Authority vs Commissioner of Inland Revenue Lord Stemdale MR observed that in order that there be borrowed money there must be a borrower and a lender and later when the Revenue took the case in appeal to the House of Lords the House of Lords laid down in Commissioners of Inland Revenue vs Port of London Authority that to constitute bor rowed money there must be a real borrowing and a real lending
Again in Inland Revenue Commissioners vs Rowntree  Co Ltd  the Court of Appeal considered the meaning of the words borrowed money  and observed that the words should not be given a strained meaning and that it should be considered whether in ordinary commercial usage the relationship was that of a borrower and a lender and the transactions were loan transactions
These cases were relied upon by the Gujarat High Court in Commis sioner of Incometax Gujarat Iv
Rajkot Seeds Oil  Bullion Merchants Association Ltd in support of the conclusion that on the facts of the case before the High Court there was no relationship of borrower and lender between the Rajkot Seeds and Oil and Bullion Merchants Association and its members in so far as deposits by the members were concerned
It was held that the amounts were deposited by way of security taken for the due performance of the obligation of a member under the Rules of the Asso ciation for the discharge of his obligations to the Associa tion and to the other members of the Association
There was no loan or borrowing at all
This question had in fact been considered by the Calcutta High Court as long ago as Commis sioner of Excess Profits Tax Central Calcutta vs Bhartia Electric Steel Co Ltd in the context of the third proviso to Rule 5A of Schedule I to the Excess Profits Tax Act 1940
The money in question in that case had been obtained by the issue of shares and it was held that it could not possibly be said that the persons who had taken up the deferred shares had ever intended to grant a loan or that the Company which had obtained money on the shares had ever intended to borrow
This Court in Bombay Steam Navigation Co 1953 Private Ltd vs Commissioner of Income tax Bombay  was dealing with a claim to deduction under section 102iii of the Indian Income tax Act 1922 in a case where under an agreement certain assets were to be taken over by the assessee from the Scindia Steam Navigation Company Ltd and part of the consideration was paid by the assessee while the balance remained unpaid
For agreeing to deferred payment of the balance of the consideration the Scindias 847 were to be paid interest
This Court observed An agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan
A loan of money undoubtedly results in a debt but every debt does not involve a loan
Liability to pay a debt may arise from diverse sources and a loan is only one of such sources
Every creditor who is entitled to receive a debt cannot be regarded as a lender
If the requisite amount of considera tion had been borrowed from a stranger interest paid there on for the purpose of carrying on the business would have been regarded as a permissible allowance but that is wholly irrelevant in considering the applicability of clause iii of sub section 2 to the problem arising in this case
The legislature has under clause iii permitted as an allowance interest paid on capital borrowed for the purposes of the business if interest be paid but not on capital borrowed clause iii will have no application 
 The point was also discussed by this Court in Madhav Prasad Jatia vs Commissioner of Income tax UP  where the question was whether the interest claimed under section 102iii of the Indian Income tax Act 1922 related to borrowing for the purpose of the business
In the present case Bye law No 50 indicates that deposits were to be made by the producer members in the Loss Equalisation and Capital Redemption Reserve Fund  for the purpose of making the partly paid shares fully paid up and it was understood that the balance of the amount would be applied to the loan taken from the Industrial Finance Corporation of India and thereafter whatever remained would be refunded to the depositing members resulting in the extinction of the Fund
It is apparent that the deposits made by the members cannot be regarded as loans advanced by the members to the assessee
The moneys deposited represent ed contribution by the members for converting the partly paid up shares into fully paid up shares and thereafter for delaying the loan taken from the Industrial Finance Corpora tion of India
Any balance remaining was to be refunded to the members
The circumstances that there was no certainty that any balance would remain for refund to the members would in itself indicate that the deposits could not be regarded as loans
A loan necessarily supposes a return of the money loaned
Even under the original Bye law No 50 which provided for deposits by the members to the 848 Loss Equalisation and Capital Redemption Reserve Fund  it was contemplated that the deposits would be accumulated and be utilised for repayment of the initial loan taken from the Industrial Finance Corporation of India and thereafter for redeeming the Government share  and the balance of the deposit after meeting losses would be converted into share capital and each producer member would be issued shares of the assessee
There was never any intention between the assessee and its members to treat the deposits made by the members as loans and that the relationship between the assessee and the members should be that of borrower and lender
The High Court erred in holding that the claim to deduction on account of interest paid by the assessee to its members was admissible under section 361iii of the Act
It is urged by learned counsel for the assessee that if the claim to deduction cannot be rested on section 361iii of the Act it should be regarded as admissible under section 37 of the Act
We are not satisfied that all the facts necessary for considering a claim for deduction under section 37 are before us
It will be noticed in Madhay Prasad Jatia supra that the question of law expressly took in the claim to deduction not only with reference to section 101iii but alternatively with reference to section 102xv of the Indian Income tax Act 1922
Whether or not it is still open to the assessee to raise that question before the Appellate Tribunal when the case goes back to it for disposing it of in conformity with the opinion expressed by this Court in these appeals is a question on which we propose to express no view at this stage
In the result the appeals are allowed the impugned judgment of the High Court in all these cases is set aside and the first and the second questions framed by the Appel late Tribunal are answered in the negative in favour of the Revenue and against the assessee
There is no order as to costs
RSS Appeals allowed


Summary:
The appellants in the appeal were appointed in or about January 1959 as Trade Apprentices in Locomotive Component Works
In August 1961 there was a merger of Locomotive Component Works with Diesel Locomotive Works as a result of which all the members of the staff of LCW were taken over by DLW
The appellants were appointed skilled artisans on July 19 1962 after successfully completing the training period of 3 12 years
The channel for promotion to higher posts was 1 Skilled Artisan 2 Highly Skilled Grade II 3 Highly Skilled Grade I 4 Chargeman C 5 Chargeman B 6 Chargeman A 7 Assistant Foreman and 8 Foreman
In September 1963 the appellants were promoted to the post of Instructor C which was equivalent to the post of Charegman C
The posts were inter changeable
The appellants were further promoted on September 22 1964 to the post of Chargeman B Some of the respondents in the appeal who were direct Recruits also competed with the appellants for the post of Chargeman B but could not qualify in the written test
On August 11 1966 the Genera1 Manager DLW pre pared and issued a seniority list of Chargeman B
This list was challenged by I certain direct recruits in a writ petition to the High Court
A Single 79 Judge quashed the seniority list and also the guidelinesrules framed by the General Manager DLW on the basis of which the seniority list was prepared on the ground that the General Manager DLW was not the General manager of the Railway and as such he had no authority to frame the rules or the guidelines for the purpose of prepa ration of the seniority list
It was further held that the guidelinesrules were violative of Articles 14 and 16 of the Constitution
Several appeals were preferred one of them being by the Railway Administration
The Division Bench while upholding the finding of the Single Judge that the General Manager DLW was not competent to frame the rulesguidelines disagreed with the finding that the rules guidelines were violative of Articles 14 and 16 of the Constitution
Pursuant to the aforesaid judgment the Railway Board issued an Advance Correction Slip No 70 inserting Rules 324 to 328 in the Railway Establishment Manual after rule 323 in Chapter III
Rule 3282 provided that selections and promotions made in the Diesel Locomotive Works from August 1 1961 upto the date of the notification of the rules shall not be invalid 
The amended rules came into effect from March 11 1973
The resultant situation was that Rule 3282 vitally affected the appellants by making invalid all the promotions given to them during the period August 1 1961 to March 11 1973 and the appellants were reverted back as Skilled Arti sans
The General Manager DLW a Circular dated 78th Decem ber 1973 directed appellants to appear at the Trade test and further informed that failure to do so would result in being passed over for fixation of seniority in the Highly Skilled Grade II
The representation against this Circular was turned down
Aggrieved by the introduction of Rule 3282 and also the issuance of Circular by the General Manager DLW the appellants filed a writ petition in the High Court The High Court overruled the contention that the new rules inserted in the Railway Establishment Manual by the Advance Correc tion Slip No 70 were invalid and held that the rules were quite valied and were not arbitriary or discriminatory
As regards promotion of the appellantsthe High court took the view that they were only interim and professional and not regular and as such no right was confirmed on appellants to hold the posts to which they were promoted
The high court accordingly dismissed the writ petition
80 On behalf of the appellants in the appeal by special leave it was contended that Rule 3282 as inserted in the Railway Establishment Manual by the Advance Correction Slip No 70 was invalid that the promotions of appellants up to the position of Chargeman A could not be set aside and appellants reverted back to their original position of Skilled Artisans and that the length of service of the appellants for a period of about 9 years has been completely wiped out by the said Rule 3282
Allowing the appeal and setting aside the judgment of the High Court HELD1
By virtue of Rule 157 of the Railway Establish ment Code the Railway Board has the power to frame rules but such rules must be framed with certain objects in view and must not be arbitrary
90E 2
The Court is always entitled to examine whether a particular rule which takes away the vested right of a railway employee or seriously affects him with retrospective effect has been made to meet the exigencies of circum stances or has been made arbitrarily without any real objec tive behind it
90E F 3
The Railway Administration was to comply with the order of the High Court and in compliance with the order it should have prepared the seniority lists in accordance with the existing rules
90C D 4
It is curious that instead of preparing the seniori ty list in accordance with the existing statutory rules as directed by the High Court the Railway Board amended the rules and inserted by the Advance Correction Slip No 70 among others Rule 3282
That rule wipes out not only the promotions granted to the appellants up to the post of Chargeman Grade B but also the length of service of the appellants for about nine years
89F G 5
This Court does not find any objective or purpose behind the framing of Rule 3282 to the serious prejudice of the appellants
The said Rule is arbitrary and therefore cannot be allowed to be operative to the detriment of the appellants
90F 6
The appellants were regularly promoted to the post of Chargeman C and thereafter to Chargeman B
In these circum stances no justification is found for the Railway Board to incor 81 porate a new rule viz Rule 3282 to the serious prejudice of the appellants
90C 7
A person can have lien on a post and not a lien on a place
There can be no doubt that a person appointed to a post on ad hoc basis cannot have any lien on the post
It is only when a person is appointed on a permanent basis he can claim lien on the post to which he is so appointed
87F G 8
It is not correct to say that the appellants were appointed or promoted to the post of Instructor C or Charge man C on an ad hoc basis or by way of an interim measure as held by the High Court
If they were appointed on ad hoc or purely temporary basis they could not have been promoted to the post of Chargeman B and Office Order No 25 dated Janu ary 22 1966 would have been quite inconsistent with such ad hoc or temporary appointments
87G H 9
Directed that Respondent Nos 1 and 2 shall not give effect to Rule 3282 as inserted in the Railway Establish ment Manual by the Advance Correction Slip No 70 in the case of appellants and Respondent Nos
3 to 6
Orders dated December 78th 1973 and January 7 1974 are quashed
Fur ther directed that Respondent Nos 1 and 2 fix the seniority of appellants and respondents 3 to 6 on the basis of their promotions to posts of InstructorChargeman C and Chargeman B 91B C