Decided on August 28,1963



P.N.BHAGWATI, J.M.SHELAT - (1.) THIS Reference is under section 66(1) of the Income Tax Act and the question referred to this Court is Whether on the facts of the case interest paid as per the resolution dated 17-11-1956 could be allowed under section 9(1)(iv) as interest on borrowed capital with which the property was constructed ?
(2.) THE relevant assessment years are 1958-1959 and 1959-1960 of which the relative accounting years are Samvat Years 2013 and 2014 THE facts relevant to this Reference are as follows:- Prior to April 25 1951 certain merchants trading in oil seedsetc. formed themselves into an association. Under the rules of that association those who wished to become members of the association and carry on business of forward contracts in the aforesaid commodities were required to pay to the association Rs. 30/as entrance fees and Rs. 3 0 as deposit in addition to the subscription fees as may be fixed from time to time. Since the assessee company did not produce the rules or regulations of that association it is not possible to say what were the terms and conditions upon which the members of the aforesaid whether that association was registered or not either under the Societies Registration Act or under any other statute. It appears from the resolution dated November 20 1945 passed at an extraordinary general meeting of the association that the Association started constructing a building of its own in the year 1945 The association had at that time rupees three and a half lakhs lying in a current account with a bank and that amount was lying as a deposit fund to the credit of its members. The resolution provided that out of our associations membership deposit of approximately 3 1/2 lakhs of rupees which is lying in current account in bank Rs 3 30 0 should be given as a loan towards building account at 3% interest The building was completed some time in 1948 at a total cost of Rs. 8 74 866 The position at that stage was that the said association had a building reserve fund of Rs. 6 45 851 which was utilized towards the cost of construction of the building. Therefore only Rs. 2 29 15 had to be used from the deposit fund in pursuance of the aforesaid resolution dated November 20 1945 towards the cost of construction. According to that resolution the association was to pay interest at the rate of 3 per cent per annum on the deposit fund given as a loan for construction purposes. Inspite of that resolution however no amount by way of interest was paid from 1945 to 1956. The effect of that fact would be that so far as the said association was concerned it did not have in fact to pay any amount as and by way of interest all throughout that period in respect of the amount of Rs. 2 29 15 which was taken from the aforesaid deposits and spent towards the cost of construction of the building. It is nobodys case that the amount of interest payable under the said resolution was either allowed to accumulate or that it was decided by any resolution of the said association or otherwise that it was to be paid in future. It would therefore appear that interest payable upon the aforesaid sum of Rs. 2 29 15 was allowed to lapse and no member of the association either claimed it or was paid. On April 25 1951 the association was incorporated as a limited company under the provisions of the Indian Companies Act VII of 1913. The assessee company did not produce any agreement or other deed to show that it took over the business and assets of the said association and if so under what terms and conditions. The only thing relied upon by Mr. Kaji for the assessee company was the Memorandum and the Articles of Association of the assessee company. Clause III of the Memorandum of Association recites the objects for which the assessee company was established and sub-clause (1) thereof relied upon by Mr. Kajiprovides inter alia that one of the objects of the company was to take over with its existing assets and liabilities the existing Rajkot Oil Seeds and Bullion Merchants Association ( situated at Commercial Chambers Rajkot) which was so far recognised by the State of Rajkot and Saurashtra and to get the same registered under the Indian Companies Act 1913 Though one of the objects of the assessee company thus was to take over the existing assets and liabilities of the said association and to get it incorporated under the Companies Act the assessee company did not produce as aforesaid any document nor did it lead any evidence to show on what terms and conditions the company took over those assets and liabilities. In the absence of any rules or regulations of the said association also it is impossible to know what were the liabilities of that association in connection with the deposits which the members had paid to that association and out of which the sum of Rs. 2 29 15 was spent towards the cost of construction. It is therefore impossible to say what was the liability of the assessee company vis-avis the amount of Rs. 2 29 15 spent by the said association towards the cost of construction of the said building which was one of the assets presumably taken over by the assessee company alter its incorporation.
(3.) ON or about December 17 1955 the assessee company received a letter from the Forward Market Commission directing the assessee company to stop its business of trading in forward contracts in view of the impending proposed merger of all such associations throughout Saurashtra into a new representative association. The company accordingly ceased to carry on its business as from December 17 1955 with the result that the only income that the assessee company had hence forward was the income arising from the aforesaid building. ON November 17 1956 at an extraordinary general meeting the assessee company passed a resolution which was to the following effect :- It is resolved that all members who have deposits with the association should be paid interest at the rate of 6% per annum with effect from Asho Sudi 1S. Y. 2012. The amount should be paid by association at the end of the year on Diwali. The assessee company having stopped its business which was its principal object in the relevant previous year for the assessment year 19581959 it was no longer competent to retain the deposits of its members. Therefore it had to pass the aforesaid resolution agreeing to pay to its members interest at the aforesaid rate of 6 per cent. The company claimed interest paid during the two accounting years i.e. Samvat Years 2013 and 2014 as an allowance under section 9 of the Act. Section 9(1)(iv) provides inter alia- 9 (1) The tax shall be payable by an assessee in respect of the bona fide annual value of property consisting of any buildings.......of which he is the owner .......... subject to the following allowances namely- (iv).......where the property has been acquired constructed repairedrenewed or reconstructed with borrowed capital the amount of any interest payable on such capital. The question that had to be considered by the income-tax authorities was whether the interest paid by the assessee company in pursuance of the resolution dated November 17 1956 was an allowance permissible under clause (iv) of section 9(1). The Income-tax Officer disallowed the claim made by the assessee company on the ground that interest chargeable on deposits paid by the associations members was not an allowable deduction against the property involved. He was of the view that the money utilized for building the property was never borrowed as a capital for the construction of the building that the amount was received by way of deposits from the members of the association that it was this deposit which was utilized in constructing the property and since the money was received from the members not as borrowed capital for the purpose of the construction but as deposit which had only been incidentally utilized by the association for the construction of the property the claim of the assessee company was untenable. He also found that as no interest had been claimed during the entire period from 1945 to 1956during which period the association had received the income from the property the claim made by the assessee company was not allowable. On an appeal filed by the assessee company against the aforesaid order the Appellate Assistant Commissioner partially allowed that Appeal and held that the amount of Rs. 2 29 15 could be treated as an amount invested out of the deposits of the members and directed allowance of the amount of interest thereupon at the rate of 6 per cent per annum. The reasons given by him for his order were that the building had admittedly been constructed after the resolution dated November 20 1945 had been passed by which it had been resolved to give a loan of Rs. 3 30 0 out of deposit moneys of the members that the building had been constructed out of the deposits of the members and that therefore there could be no doubt that the nature of that portion of the membership deposit which was utilized in the construction of building was converted into borrowed capital from the date of the aforesaid resolution dated 20-11-1945.He was further of the view that the fact that no interest had been paid upon the aforesaid amount right from 1945 to 1956 was not material and that merely upon that ground it could not be said that the building was not constructed with borrowed capital.;

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