Secured borrowing exception requires actual creation of charge or equitable mortgage, not mere authorisation or registration formalities.

The exception to disallowance for secured borrowings applies only where a mortgage, charge or pledge has actually been created over company assets before the relevant date. A board resolution authorising future security, or its lodgment with the Registrar of Companies, is only an intimation and does not itself create a charge. A later registration certificate cannot cure the absence of a completed security, and an equitable mortgage requires proof of deposit of title deeds or delivery of title documents with intent to secure the debt. On these facts, no completed security was established, so the exception was unavailable and the interest disallowance stood justified.

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Issues: Whether the assessee had created a charge on its assets on 2 December 1976 or otherwise before the end of the relevant previous year so as to bring the borrowed sums within the exception to disallowance under section 40A(8)(b)(ix) of the Income-tax Act, 1961.

Analysis: The exception applied only if the loan was secured by the creation of a mortgage, charge or pledge over company assets. The board resolution merely authorised future creation of a charge and did not identify the assets or effect any present security. Lodgment of that resolution with the Registrar of Companies was only a statutory intimation and not the creation of a charge. The later certificate of registration was also ineffective for the assessee, apart from being after the relevant year. The deed of agreement executed on 17 March 1977 likewise did not disclose the essential ingredients of an equitable mortgage, because there was no proof of deposit of title deeds or of delivery of documents of title with intent to create security as required by section 58(f) of the Transfer of Property Act, 1882.

Conclusion: The assessee failed to establish that any charge or equitable mortgage had been created before the relevant date. The exception in section 40A(8)(b)(ix) was therefore inapplicable, and the disallowance of interest was justified.

Ratio Decidendi: To attract the exception for secured borrowings, the assessee must prove a completed mortgage, charge or pledge by evidence showing an actual creation of security, not merely an intention, authorisation, or registration formalities.

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