1974 (1) TMI 24 - HC - Income Tax

Assessment Proceedings, Bona Fide, Gift Tax, Income Tax Authorities, Market Value, Reason To Believe, Reassessment Proceedings

Issues Involved:
1. Whether the amount of Rs. 2,29,015 paid by the members of the association as deposits amounted to 'borrowed capital' in the hands of the assessee-company.
2. Whether the Tribunal was correct in holding that the house property in question was 'acquired' by the assessee-company with the said 'borrowed capital'.
3. Whether in law the assessee-company would not be entitled to the deduction of interest on this amount under sections 9(1)(iv) and 24(1)(vi) of the Indian Income-tax Act, 1922, and the Income-tax Act, 1961, respectively.
4. Whether the assessee-company can claim deduction on the ground that the said property was 'constructed' with the aid of the said amount.

Detailed Analysis:

Issue 1: Borrowed Capital
The primary issue was whether the deposits amounting to Rs. 2,29,015 paid by the members of the association constituted 'borrowed capital' for the assessee-company. The court examined the nature of these deposits and the historical context, noting that the deposits were initially paid as security for membership obligations. The court referred to English case law to define 'borrowed money,' concluding that a real borrowing and lending relationship must exist. The court found that the unregistered association could not lend money to itself and that the character of the deposits did not change with the resolution of November 20, 1945. Even upon the formation of the assessee-company, there was no real transaction of borrowing and lending. Therefore, the court concluded that the amount of Rs. 2,29,015 did not constitute 'borrowed capital' in the hands of the assessee-company.

Issue 2: Acquisition with Borrowed Capital
Since the court concluded that the amount of Rs. 2,29,015 was not 'borrowed capital,' the question of whether the house property was acquired using borrowed capital did not arise. However, the court noted that even if it were considered borrowed capital, the house property could not be said to have been acquired with this specific borrowed amount due to the package deal nature of the asset and liability transfer from the unregistered association to the assessee-company.

Issue 3: Entitlement to Deduction of Interest
Given the conclusion that the amount did not constitute 'borrowed capital,' the court held that the assessee-company was not entitled to the deduction of interest under sections 9(1)(iv) of the Indian Income-tax Act, 1922, and section 24(1)(vi) of the Income-tax Act, 1961. The court reframed the question to clarify the relevant sections and concluded that the assessee-company would not be entitled to the deduction of interest at the rate of 6% or any other rate.

Issue 4: Construction with Borrowed Capital
The court noted that the assessee-company did not canvass this question in light of the previous High Court decision in Rajkot Seeds, Oil & Bullion Merchants Assn. Ltd. v. Commissioner of Income-tax, which held that the property was constructed by the association and not the assessee-company. Therefore, this issue was decided in favor of the revenue and against the assessee.

Conclusion:
1. Issue 1: The amount of Rs. 2,29,015 did not amount to 'borrowed capital' in the hands of the assessee-company.
2. Issue 2: The question did not arise but was decided in favor of the revenue, stating that the house property was not acquired with borrowed capital.
3. Issue 3: The assessee-company was not entitled to the deduction of interest under the relevant sections of the Income-tax Acts.
4. Issue 4: The property was not constructed with borrowed capital, and the issue was decided against the assessee.

The court granted a certificate for leave to appeal to the Supreme Court under section 66A(2) and section 261, recognizing that substantial questions of law regarding the interpretation of the relevant provisions were involved.

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