Case: Commissioner Of Income-Tax, Lucknow Vs. Bazpur Co-Operative Sugar Factory Ltd

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 Association for the discharge of his obligations to the Association 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 Commissioner of Excess Profit Tax v. Bhartia Electric Steel Co. Ltd. ((1954) 25 ITR 192 : AIR 1954 Cal 526 ) in the context of the third proviso to Rule 5-A 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 money on the shares had ever intended to borrow. This Court in Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT ((1965) 56 ITR 52 : (1965) 1 SCR 770 : AIR 1965 SC 1201 ), was dealing with a claim to deduction under Section 10(2)(iii) 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 were to be paid interest. This Court observed : (SCR pp. 774-75) "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 consideration had been borrowed from a stranger interest paid thereon 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." 14. The point was also discussed by this Court in Madhav Prasad Jatia v. CIT ((1979) 3 SCC 634 : 1979 SCC (Tax) 279 : (1979) 118 ITR 200 ) where the question was whether the interest claimed under Section 10(2)(iii) of the Indian Income Tax Act, 1922 related to borrowing for the purpose of the business. 15. In the present case, Bye-law 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 for conversion the partly paid up shares into fully paid up shares and thereafter for defraying the loan taken from the Industrial Finance Corporation of India. Any balance remaining was to be refunded to the members. The circumstance 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 return of the money loaned. Even under the original Bye-law 50, which provided for deposits by the members to the 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 holding that the claim to deduction on account of interest paid by the assessee to its members was admissible under Section 36(1)(iii) of the Act. 16. It is urged by learned counsel for the assessee that if the claim to deduction cannot be rested on Section 36(1)(iii) 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 that in Madhav Prasad Jatia ((1979) 3 SCC 634 : 1979 SCC (Tax) 279 : (1979) 118 ITR 200 ) that the question of law expressly took in the claim to diction not only with reference to Section 10(1)(iii) but alternatively with reference to Section 10(2)(xv) 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 of it 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]Section 36(1)(iii) of the Act provides that in computing the income chargeable under the head profits and gains of business or profession a deduction shall be allowed 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 Redemption Reserve Fund represents capital borrowed by the assessee 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 ofLondon Authority v. IRC ((1922) 2 KB 599 (CA) : 12 TC, Lord Strendale, M. R. observed that in order that there be borrowed money there must be a borrowed and a lender, and later, when the Revenue took the case in appeal to the House of Lords, the House of Lords laid down inIRC v. Port of London Authority ((1923) AC 507 (HL))that to constitute borrowed money there must be "a real borrowing and a real lending". Again inIRC v. Rowntree and Co. Ltd. ((1948) 1 All ER 482, 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 CIT v. Rajkot Seeds, Oil and Bullion Merchants Association Ltd. ((1975) 101 ITR 748 (Guj HC) 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 insofar 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 Association for the discharge of his obligations to the Association 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 Commissioner of Excess Profit Tax v. Bhartia Electric Steel Co. Ltd. ((1954) 25 ITR 192 : AIR 1954 Cal 526 ) in the context of the third proviso to Rule 5-A 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 money on the shares had ever intended to borrow. This Court in Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT ((1965) 56 ITR 52 : (1965) 1 SCR 770 : AIR 1965 SC 1201 ), was dealing with a claim to deduction under Section 10(2)(iii) 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 were to be paid interest. This Court observed : (SCR pp.n 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 consideration had been borrowed from a stranger interest paid thereon 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."14. The point was also discussed by this Court in Madhav Prasad Jatia v. CIT ((1979) 3 SCC 634 : 1979 SCC (Tax) 279 : (1979) 118 ITR 200 ) where the question was whether the interest claimed under Section 10(2)(iii) of the Indian Income Tax Act, 1922 related to borrowing for the purpose of the business15. In the present case, Bye-law 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 for conversion the partly paid up shares into fully paid up shares and thereafter for defraying the loan taken from the Industrial Finance Corporation of India. Any balance remaining was to be refunded to the members. The circumstance 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 return of the money loaned. Even under the original Bye-law 50, which provided for deposits by the members to the 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 holding that the claim to deduction on account of interest paid by the assessee to its members was admissible under Section 36(1)(iii) of the Act16. It is urged by learned counsel for the assessee that if the claim to deduction cannot be rested on Section 36(1)(iii) 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 that in Madhav Prasad Jatia ((1979) 3 SCC 634 : 1979 SCC (Tax) 279 : (1979) 118 ITR 200 ) that the question of law expressly took in the claim to diction not only with reference to Section 10(1)(iii) but alternatively with reference to Section 10(2)(xv) 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 of it 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