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TMI Blog1974 (1) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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, on the facts and circumstances of the case, the assessee-company can claim deduction in question on the ground that the said property was 'constructed' with the aid of the said amount ? " The facts leading to this reference may now be shortly stated : The assessee is a limited company registered under the provisions of the Indian Companies Act, 1913. The relevant assessment years are 1960-61, 1961-62, 1962-63 and 1963-64. The point involved in this reference is whether the assessee the respondent in this reference, is entitled to claim deduction of interest under section 9(1)(iv) of the Indian Income-tax Act, 1922, so far as assessment years 1960-61 and 1961-62 are concerned, and under section 24(1)(vi) of the Income-tax Act, 1961, so far as assessment years 1962-63 and 1963-64 are concerned. The contention of the assessee in these proceedings has been that it has paid interest on borrowed capital for acquiring the house property in question. In 1936, an association by the name of Rajkot Seeds and Oil Merchants Association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself registered as a company under the Indian Companies Act, which was then in force. Pursuant to this resolution, draft memorandum and articles of association were prepared and on April 25, 1951, the association was converted into a limited liability company under the name of Rajkot Seeds, Oil and Bullion Merchants Association Ltd. For the sake of convenience we will hereinafter refer to the unregistered association as " the association " and we will refer to the limited company as " the assessee-company ". One of the objects of the assessee-company under the memorandum of association was to take over the existing assets and liabilities of Rajkot Seeds Oil and Bullion Merchants Association. On May 12, 1951, the governing body of the assessee-company resolved to make necessary entries in the books of the company to give effect to its object of taking over the existing assets and liabilities of the association with effect from May 7, 1951. The books of account of the unregistered association were closed as on May 5, 1951, that day being a Saturday and the accounts of the assessee-company were started as from May 7, 1951, that day being a Monday. All the existing assets and liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to the deduction claimed by it. In view of this decision of the Tribunal in respect of this very amount for the assessment years 1958-59 and 1959-60, when the question arose of allowing deduction of interest on the deposit, amounts so far as assessment years 1960-61 to 1963-64 were concerned, the Income-tax Officer disallowed the claim of the assessee-company for deduction of amounts of interest for the assessment years under consideration in this reference. The assessee-company preferred appeals to the Appellate Assistant Commissioner. In the meanwhile, for the assessment years 1958-59 and 1959-60, the assessee-company had taken the matter by way of a reference to the High Court and at the instance of the assessee-company the Tribunal had referred the case to the High Court. The decision of the High Court on that reference in connection with the assessment years 1958-59 and 1959-60 is Rajkot Seeds, Oil Bullion Merchants Assn. Ltd. v. Commissioner of Income-tax. The decision was delivered by this High Court on August 28, 1963. It may be pointed out that for the assessment years 1958-59 and 1959-60, the contention of the assessee-company was that the amount of interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration and at the instance of the revenue three out of the four questions herein have set out have been referred to us whereas the fourth question apparently has been referred to us at the instance of the assessee since the assessee wants to keep the question open regarding the construction of the house property by the assessee-company with the aid of the borrowed capital. We may point out that in question No. (3) obviously there is some mistake because section 24(1)(vi) is of the Income-tax Act, 1961, and not of the, Indian Income-tax Act, 1922. We, therefore, reframe question No. (3) so as to bring out the real controversy between the patties as follows : (3) If so, whether in law the assessee-company would not be entitled to the deduction of interest at the rate of 6 p.c. or any other rate on this amount under section 9(1)(iv) and section 24(1)(vi) of the relevant Income-tax Act ? " As regards question No. (4), in view of the decision of this High Court in Rajkot Seeds, Oil Bullion Merchants Assn. Ltd. v. Commissioner of Income-tax, Mr. Kaji for the assessee has not canvassed the question before us though he has not given up his contention and in the light o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt from each member and interest on the amount thus borrowed from members should also be paid at 3 per cent. per annum. It is optional to tend this amount, not compulsory to do so......If any individual member does not desire to lend the amount of Rs. 1,500, then the deficit amount should be borrowed at the above rate of interest from the other members who way desire to advance larger amounts, such amounts being borrowed from them in equal proportions." It may also be pointed out that under the rules and regulations of the unregistered association, every person who wished to become a member of the association had to deposit Rs. 3,000 in cash or had to deposit security of the face value of Rs 3,000. Interest was not to be paid on cash deposited as and by way of deposit. If any documents were deposited as and by way of security for purposes of deposit, the ownership of the securities was to be transferred to the association but the amount of interest realised on those securities was to be paid to the member concerned. When the member ceased to be a member, of the association, then the amount of, the deposit was to be refunded by the association after deducting the dues of the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor." To complete the narration of facts as emerging from the, record of this case, we may point out that resolution No. 5A passed by the assessee-company at its extraordinary general meeting held on November 17, 1956, was in these terms : " This extraordinary meeting of the Rajkot Seeds, Oil and Bullion Merchants Association Limited the assessee-company resolves that the amounts of deposit of the different members lying with the company should bear interest at six per cent. per annum from Aso Sad 1 Samvat Year 2012 and the amount of interest should be paid to the different members of the company at the end of Diwali of each Samvat Year." The first question that we have to consider is whether the deposit amount lying with the association was " borrowed capital " when the association resolved in 1945 to utilise part of the amount of deposit for the purpose of constructing a building. What is meant by " borrowed money " has come up for consideration before the courts in England on several occasions. In Port of London Authority v. Commissioners of Inland Revenue, one of the questions before the Court of Appeal in England was regarding the interpretation of the words " borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take borrowed money first. If this be borrowed money there must be a borrower and a lender, and it seemed to me that no satisfactory answer was given to the question--who was the lender ? Here again the Crown relied on an alternative and said the lender was either the transferring companies or their debenture and shareholders who now hold the stock, the contention being that either the company or the stockholders must be taken to have lent 22,000,000 l., the amount of the stock of the Port of London Authority, who issued stock in return for the loan. The first answer seems to me to be the simple one, that neither the companies nor the stockholders did anything of the sort. The former transferred their undertakings, and the latter gave up all rights against the former in return for receiving certain rights against the Port of London Authority. Some effect must be given to the ordinary use of language and to the actual facts of the case, and to my mind it is a misuse of language and a travesty of the facts to call this a lending of money, especially as the Crown are uncertain as to who is the lender. To accept this contention it seems to me would be to do away with rule 3 of the Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties to the transaction ; neither did any party borrow money or lend it." Lord Sumner observed at page 520 : " It is not borrowed money, for there was no borrowing by the Port of London Authority and if, by an unlicensed stretch of the imagination, a purchase on credit is a purchase, in which the buyer pays to the seller cash on delivery which he has borrowed from the seller himself for that purpose, the holders of the port stock, at any rate, sold nothing and, therefore, did not even fictionally lend anything." At page 526, Lord Phillimore who gave a dissenting opinion but who agreed with the rest of the learned law Lords regarding the construction of the words " borrowed money " observed : " It is said that the particular liability is neither unpaid purchase money nor borrowed moneys nor debt, and that it must come under one of the three if it is to be taken as a deduction from capital. I agree with the Court of Appeal that it is not unpaid purchase money or borrowed moneys, but I stick at the word 'debt'." Thus, it is obvious, according to the decision of the Court of Appeal and the decision of the House of Lords affirming the decision of the Court of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of the Commissioners that in ordinary commercial usage the relationship between the parties was not that of borrower and lender ought not to be disturbed. The dicta in Port of London Authority's case were applied by the Court of Appeal. At page 486 of the report, Tucker L.J. has observed: " I think the speeches in the Port of London case in the House of Lords indicate that the proper approach to this case is to construe these words 'borrowed money' as words which require the existence of a borrower and lender, and that there must be a real borrowing in the legal sense of the word. I find it difficult, if not impossible, to appreciate how there can be borrowed money unless the legal relationship of lender and borrower exists between A and B. After all, the words 'borrow' and 'lend' are not words of narrow legal meaning. They represent a transaction well-known to business people which has taken its place in the law as a result of commercial transactions among the merchants of this country, and when the law, under the Bills of Exchange Act or elsewhere, has to deal with matters of this kind, it is dealing with commercial transactions. As Somervell L.J. put it during the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other and there must be a real transaction of borrowing and lending in order to amount to any borrowing. It is in the light of these cases two of which were decided in the context of taxation statutes that we will now consider whether the amount of Rs. 2,29,015 was borrowed capital so for as the association was concerned. It is true that the resolution of November 20, 1945, speaks of lending money from the amount of the deposits of members to the building account and it was also mentioned in the resolution that interest was to be paid on, these amounts at the rate of three per cent. per annum. But it must be borne in mind that this association before its incorporation in 1951 was an unregistered association. The members of the association, therefore, in a body passed this resolution to utilise part of the amount lying as and by way of deposit with the association for the purpose of constructing the building. The association being an unregistered association, it could not be said that the association was lending money to itself by utilising part of the deposit money for construction of the building. It must not be forgotten that when the members paid the deposits to the associati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity for the due performance by each member of his obligations towards the association and towards other members in respect of transactions effected through the machinery provided by the assessee-company. It is difficult, therefore, to accept the contention on behalf of the assessee-company that by taking over the liability in respect of these deposit amounts the assessee-company borrowed any money from the members or that there was any real transaction of lending and borrowing between the assessee-company and the members. Neither was there any borrowing by the company nor was there any lending by the members to utilise the words of the House of Lords in Port of London Authority's case. Even if this conclusion of ours is wrong, there is still a further difficulty in the way of the assessee-company and it is this. Out of the total assets of the company it is very difficult to say that the assessee-company acquired this particular asset, the house property under consideration with the aid of the borrowed capital, namely, the amount of deposits, the liability for which was taken over by the assessee-company with effect from May 7, 1951. The company, as we have pointed out earlier, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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