Law: Income Tax Act, 1961

Section: 36(1)(iii),

Income-tax---Admissible expenditure--Interest--Borrowed capital--Interest on--Cooperative society-- Deposit by members under Bye-law of Co-operative Society m Loss Equalization and Capital Redemption Reserve Fund--Amount standing in fund to be utilized for converting partly paid up shares into fully paid up shares--Balance to be refunded to members after a loan taken by society from I.F.C was paid-¬Amount deposited by members--Not loan to society or borrowed capital--Interest paid to members--Held not allowable as expenditure--Indian Income Act, 1961, S. 36 (1) (iii), Deposits made by the members under bye laws could not be regarded as loans advanced by them to the assessee society. The moneys deposited represented contribution by the members for converting the partly paid up shares into fully paid up shares and thereafter for defraying the loan taken from the Industrial Finance Corporation of India: Any balance remaining was to be refunded to the members. The circumstance that there was no certainty that any balance would remain for refund to the members in itself indicated that the deposits could not be regarded as loans. A loan necessarily supposes a return of the money loaned. There was never any intention on the part of the society or its members to treat the deposits as loans or that the relationship between the society and the members should be that of borrower and lender. The interest paid by the society to its members was not admissible as a deduction under section 36 (1) (iii) Bombay Steam Navigation Co. (1953) (P.) Ltd. v. C.I.T. (1965) 56 I T R 52 (SC); CEPT v. Bhartia Electric Steel Co. Ltd. (1954) 25 I T R 192 (Cal.); C.I.T. v. Rajkot Seeds, Oil and Bullion Merchants Association Ltd (1975) 101 ITR 748 (Guj.); I.R.C. v. Port of London Authority (1923) AC 507; I.R.C. v. Rowntree and Co. Ltd. (1948) 1 All ER 482 (CA); Madhav Prasad Jatia v. C.I.T. (1979) 118 I T R 200 (SC) and Port of London Authority v. I.R.C. (1922) 2 K13 599 (CA) ref. JUDGMENT R.S. PATHAK, C. J.--These appeals by special leave are directed against the judgment of the High Court at Allahabad disposing of an income-tax reference in favor of the assessee and against the Revenue. The…

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