Shareholder loan not treated as loan capital for capital base computation under the Income-tax Act; statutory wording given commercial meaning.

A shareholder's short-term loan was not "loan capital" for computing capital base under section 109(iii)(4) and determining the applicability of section 104. The expression was treated as a commercial concept distinct from an ordinary loan, requiring borrowings from shareholders to have the character of capital, typically through fixed-term arrangements such as debentures, mortgages or loan stock. A loan raised at year-end, without a fixed term and repayable after a few years, did not meet that description. The court held that treating every shareholder loan as loan capital would render the statutory wording redundant and undermine the object of section 104; the issue was answered against the assessee.

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Issues: Whether a shareholder's short-term loan of Rs. 1,00,000 could be treated as "loan capital" for the purpose of computing the capital base under section 109(iii)(4) and deciding the applicability of section 104 of the Income-tax Act, 1961.

Analysis: The expression "loan capital" in section 109(iii)(4) was held to denote a commercial concept distinct from an ordinary loan simpliciter. The words "loan capital which is the property of the shareholders" were read as requiring borrowings from shareholders to have the character of capital, ordinarily represented by fixed-term arrangements such as debentures, mortgages, or loan stock, and not short or medium-term borrowings. A mere shareholder loan raised on the last day of the accounting year, without a fixed term and with repayment after a few years, did not satisfy that description. The Court also held that a construction treating any shareholder loan as loan capital would make the statutory language redundant and would defeat the object of section 104.

Conclusion: The Rs. 1,00,000 shareholder loan was not "loan capital" within section 109(iii)(4), and the answer to question 1 was against the assessee and in favour of the Revenue.

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