1989 (5) TMI 2 - SC - Income Tax

Co-operative Society - Interest on Borrowed Capital - Whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund which were actually used by the assessee for the purposes of its business represented capital borrowed by the assessee for the purpose of its business within the meaning of section 36(1)(iii) - Whether the Tribunal was right in law in allowing interest on such balances as a deduction in computing the total income of the assessee

Summary

Issues Involved:
1. Whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund represent capital borrowed by the assessee for the purpose of its business within the meaning of section 36(1)(iii) of the Income-tax Act.
2. Whether the Tribunal was right in allowing interest on such balances as a deduction in computing the total income of the assessee.
3. Whether the impugned payments of interest contravened the provisions of section 57 of the Uttar Pradesh Co-operative Societies Act, 1965.

Detailed Analysis:

Issue 1: Whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund represent capital borrowed by the assessee for the purpose of its business within the meaning of section 36(1)(iii) of the Income-tax Act.

The Supreme Court examined whether the credit balances in the Loss Equalisation and Capital Redemption Reserve Fund could be considered as "capital borrowed" under section 36(1)(iii) of the Income-tax Act. The court referred to the bye-law No. 50, which indicated that deposits were made by the producer-members to convert partly paid shares into fully paid shares and to repay a loan taken from the Industrial Finance Corporation of India. The court noted that these deposits could not be regarded as loans advanced by the members to the assessee because the deposits represented contributions for specific purposes and not loans. A loan necessarily implies a return of the money loaned, which was not certain in this case. Consequently, the court concluded that the deposits did not constitute borrowed capital.

Issue 2: Whether the Tribunal was right in allowing interest on such balances as a deduction in computing the total income of the assessee.

The Income-tax Appellate Tribunal had allowed the deduction of interest on the credit balances, interpreting the term "capital borrowed" broadly. However, the Supreme Court disagreed, stating that there was no relationship of borrower and lender between the assessee and its members. The deposits were contributions for converting shares and repaying a loan, not loans themselves. Therefore, the interest paid on these deposits could not be deducted under section 36(1)(iii) of the Income-tax Act. The court also mentioned that the necessary facts to consider a claim under section 37 of the Act were not before them.

Issue 3: Whether the impugned payments of interest contravened the provisions of section 57 of the Uttar Pradesh Co-operative Societies Act, 1965.

Although the parties requested the court not to consider this issue, the Appellate Tribunal had previously held that section 57 was not relevant. The Tribunal reasoned that the payment of interest did not represent a distribution of funds other than net profits and was met from the net profits of the assessee.

Conclusion:

The Supreme Court allowed the appeals, setting aside the High Court's judgment. The first and second questions framed by the Appellate Tribunal were answered in the negative, in favor of the Revenue and against the assessee. The court did not provide an opinion on whether the assessee could raise a claim under section 37 of the Income-tax Act when the case goes back to the Appellate Tribunal. There was no order as to costs.