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TMI Blog1989 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... members, who had deposited certain amounts with the assessee in accordance with bye-law No. 50 and it was debited by the assessee to its profit and loss account. In the initial years of the working of the society, certain partly paid shares were allotted to its farmer-members. With a view to inducing these members to make further contribution to the capital of the society, bye-law No. 50 was incorporated in 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on the ground of commercial expediency. The same order was passed by the Appellate Assistant Commissioner on the appeals for the remaining years. In second appeals filed by the assessee for all the assessment years, the Income-tax Appellate Tribunal held that the amount standing to the credit of the "Loss Equalisation and Capital Redemption Reserve Fund" which was utilised by the assessee for the purpose 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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) of the Act ? 2. Whether the Tribunal was right in law in allowing interest on such balances standing to the credit of the Loss Equalisation and Capital Redemption Reserve Fund as a deduction in computing the total income of 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not possibly be said that the persons who had taken up the deferred shares had ever intended to grant a loan or that the company which had obtained money on the shares had ever intended to borrow. This court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, was dealing with a claim for deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922, in a case where, 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, inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on between the assessee and its members to treat the deposits made by the members as loans and that the relationship between the assessee and the members should be that of borrower and lender. The High Court erred in holding that the claim to deduction on account of interest paid by the assessee to its members was admissible under section 36(1)(iii) of the Act. It is urged by learned counsel for the assessee that if the claim to deduction cannot be rested on section 36(1)(iii) of the Act, it should be regarded as admissible under section 37 of the Act. We are not satisfied that all the facts necessary for considering a claim for deduction under section 37 are before us. It will be noticed that in Madhav Prasad Jatia [1979] 118 ITR 200 (SC) the question of law expressly took in the claim to deduction not only with reference to section 10 (1) (iii) but alternatively with reference to section 10(2)(xv) of the Indian Income-tax Act, 1922. Whether or not it is still open to the assessee to raise that question before the Appellate Tribunal when the case goes back to it for disposing of it in conformity with the opinion expressed by this court in these appeals is question on which we pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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