1981 (2) TMI 70 - HC - Income Tax

Disallowed Interest On Borrowed Capital u/s 36(1)(iii) - The capital provided u/s 23 of the Act by the Central Govt. or thee State Govt. is the capital borrowed for the purposes of the business or profession - HELD THAT - In case of CEPT v. Bhartia Electric Steel Co. Ltd. 1953 (5) TMI 16 - CALCUTTA HIGH COURT the question was whether it was money had and received or borrowed money . It was held that there has to be a positive act of lending coupled with acceptance by the other side of the money as a loan. Thus it is clear that an element of refund or repayment is inherent in the concept of borrowing. There is no provision in the Act which contemplates the repayment of the capital so provided u/s 23 of the Act. Apart from that S. 23 of the Act provides that the Central Govt. and the State Govt. may provide any capital. In other words it is not by virtue of any agreement etc. between the parties but because of the statutory provision that the Governments are obliged to provide the capital. It is u/s 26 of the Act that the corporation may borrow money in the open market for the purpose of raising its working capital. Thus the distinction has been made in the Act itself between the capital provided u/s 23 and the capital borrowed u/s 26. There is no obligation to refund the capital provided by the Governments. In this view of the matter the capital provided u/s 23 of the Act by the two Governments cannot be said to be capital borrowed as contemplated u/s 36(1)(iii) of the I.T. Act. Thus the answer to the question is in the negative that is against the assessee and in favour of the revenue.

Summary

Issues:
1. Interpretation of section 36(1)(iii) of the Income-tax Act, 1961 regarding deduction of interest paid.
2. Determination of whether the capital provided by the Central and State Governments can be considered as capital borrowed for business purposes.

Analysis:

Issue 1: Interpretation of section 36(1)(iii) of the Income-tax Act, 1961 regarding deduction of interest paid.
The case involved the PEPSU Road Transport Corporation, which paid interest to the Northern Railway and the Punjab Government. The question was whether this interest payment was in respect of capital borrowed for the business, as per section 36(1)(iii) of the Income-tax Act, 1961. The Tribunal held that the interest paid was not admissible under this provision. It was reasoned that the capital provided to the assessee was not borrowed in a traditional sense, as there was no formal loan agreement, and no provision for repayment of the capital. As per the Tribunal's interpretation, the interest payment did not meet the criteria for deduction under section 36(1)(iii).

Issue 2: Determination of whether the capital provided by the Central and State Governments can be considered as capital borrowed for business purposes.
The assessee argued that the interest on capital provided by the Governments should be deductible under section 36(1)(iii) since it was payable as per the provisions of the Act. However, the Court analyzed the distinction between "capital provided" under section 23 and "capital borrowed" under section 26 of the Act. It was noted that there was no obligation to refund the capital provided by the Governments, as indicated in section 39(2). The Court concluded that the capital provided under section 23 cannot be considered as capital borrowed for the purposes of the business, as required by section 36(1)(iii) of the Income-tax Act, 1961.

In conclusion, the Court ruled against the assessee, stating that the interest paid on the capital provided by the Governments was not eligible for deduction under section 36(1)(iii) of the Income-tax Act, 1961. The judgment emphasized the distinction between capital provided and capital borrowed, highlighting the lack of repayment obligation associated with the capital provided by the Governments.