TaxTMI 
TaxTMI 
1989 (5) TMI 2
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....the bye-laws of the society. The bye-law as amended provides : "50. There shall be established a 'Loss Equalisation and Capital Redemption Reserve Fund' in the society. Every producer-shareholder shall deposit every year a sum not less than 0.32 paise and not more than 0.48 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 "Equalisation and Capital 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 September 8, 1967, the board of directors of the society decided, in their meeting, to pay interest at 6 per cent. on the balance available in the aforesaid Fund to....
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....rpose of its business represented moneys borrowed for the purpose of its business and that interest paid on such moneys was eligible for deduction under section 36(1)(iii) 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 36(1)(iii) 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 36(1) (iii). It said that it was not necessary that the 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 purposes of the business of the assessee, the funds represented by such deposit would be "capital borrowed" for the purposes of section 36(1)(iii) 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 circumstances, the Appellate Tribunal held ....
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.... the assessee ?" A further question common to the assessment years 1969-70 to 1972-73 was also framed. It reads "Whether the Tribunal was right in law in holding that the impugned payments of interest did not contravene the provisions of section 57 of the Uttar Pradesh Co-operative Societies Act, 1965 ?" The High Court agreed with the view taken by the Appellate 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 36(1)(iii) of the Income-tax Act can be allowed. Section 36(l)(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 ? Wha....
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...., 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 (p. 57) : "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 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 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....