1978 (3) TMI 95 - HC - Income Tax

Summary

Issues:
1. Claim of deduction under section 19(ii) of the Income-tax Act, 1961 for interest payable by a co-operative society to its employees on their provident fund accounts.
2. Interpretation of the term "borrowed money" in the context of section 19(ii) of the Act.
3. Whether the investment of provident fund amounts in Government securities by a co-operative society constitutes "borrowed money."

Analysis:

1. The judgment revolves around the claim of deduction made by a co-operative society for the interest payable to its employees on their provident fund accounts. Initially, the Income-tax Officer accepted the claim for certain assessment years but later disallowed it for subsequent years, leading to an appeal by the assessee.

2. The primary issue addressed by the Court was the interpretation of the term "borrowed money" as per section 19(ii) of the Income-tax Act, 1961. The Income-tax Officer contended that the co-operative society did not borrow any money, hence disallowing the deduction. This interpretation was challenged by the assessee.

3. The Court analyzed the nature of the transactions between the co-operative society and its employees regarding the provident fund investments. It was observed that the society acted as an investing agent, investing the provident fund amounts in Government securities as per the executive committee's resolution. The interest earned was credited back to the employees' accounts, indicating no borrowing relationship between the society and its employees.

4. Referring to the case of Inland Revenue Commissioners v. Rowntree & Co. Ltd., the Court emphasized the requirement of a genuine borrowing relationship between a borrower and a lender for the term "borrowed money" to apply. The Court held that the phrase "money borrowed" in section 19(ii) should be interpreted in its ordinary commercial sense, excluding transactions that do not align with the essence of borrowing.

5. Ultimately, the Court ruled in favor of the department, rejecting the claim of the co-operative society for deduction under section 19(ii) of the Act. The Court concluded that the investment of provident fund amounts in Government securities did not constitute "borrowed money" within the meaning of the Act, based on the absence of a genuine borrowing arrangement between the society and its employees.

6. The judgment underscores the importance of interpreting legal terms in their commercial context and upholding the fundamental principles of borrowing for the applicability of relevant provisions under the Income-tax Act, 1961.