R.S.PATHAK - (1.) THESE appeals has special leave are directed against the judement of the High Court at Allahabad disposing of an Income-tax Reference in favour of the assessee and against the Revenue.
(2.) THE assessee is a coperative society running a sugar mill. For the assessment year 1968-69 it claimed payment of interesting amounting to Rs. 1,81,716. This was interest paid to the accounts of its 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- share holder 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 the 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 or 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 money available in the 'Loss Equalisation and Capital Redemption Reserve Fund' was utilised by the assessee for the purpose of its business. A part of the amount was also utilised for converting the party paid up shares into fully paid up shares. On 8/09/1967 the Board of Directors of the Society decided in their meeting to pay interest at 6% on the balance available in the aforesaid Fund to its various members to whom the balance money belonged. It was on this account that the Society claimed an amount of Rs. 1,18,716.00 for the assessment year 1968-69. The claim was rejected by the Income-tax Officer. He took the view that the amounts deposited by the members of the Society in the 'Loss Equalisation and Capital Redemption Reserve Fund' did not represent loans taken by the assessee but constituted a contribution by the members to convert partly paid up shares into fully paid up shares and they could not be considered as capital borrowed for the purpose of its business. He held that S. 36(1)(iii) of the Income-tax Act did not apply to such interest and that it was not admissible as a deduction in computing the total income of the assessee. For the assessment years 1969-70 to 1972-73 the claim to deduction on this account was as follows : JUDGEMENT_240_SUPP2_1989Html1.htm The Income-tax Officer took the same view for these assessment years as he did for the assessment year 1968-69.
(3.) IN appeals preferred by the assessee the Appellate Assistant Commissioner of INcome-tax confirmed the disallowance for the assessment year 1968-69 on the ground that Bye-law No. 50 did not provide for the refund of the amount standing to the credit of the members at any time before the payment of the loan to the INdustrial Finance Corporation of INdia, that the loan was still outstanding on 30/06/1967, the last day of the previous year relevant to the assessment year 1968-69, and moreover the Bye-law did not provide for payment of interest at all. He observed that the Directors could not pay any interest unless the Bye-law was amended by the members of the assessee. He observed that the interest paid must be regarded as an ex gratia payment to the producer members of the society who had contributed to the Fund and that it was not made for the purpose of the business of the assessee 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 money was eligible for deduction under S. 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 S. 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 S. 36(1)(iii). It said that it was not necessary that borrowing must contain an element of payment of interest and that even if a deposit was made by the members of the society which was utilised for the purposes of the business of the assessee, the finds represented by such deposit would be 'capital borrowed' for the purposes of S. 36(1)(iii) of the Act. The Appellate Tribunal also recorded that it was not disputed that the deposits were taken for the purposes of the business. In the circumstances, the Appellate Tribunal held that when the Board of Directors of the assessee considered it proper to pay interest on those deposits such interest was admissible under S. 36(1)(iii) of the Act.;