Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - By-laws of assessee-co-operative society provided that deposits were to be made by members in 'Loss equalisation and capital redemption reserve fond' for purpose of making partly paid shares fully paid up, and balance of amount would be applied to loan taken from Industrial Finance Corporation and thereafter whatever remained would be refunded to depositing members resulting in extinction of fund - In assessment years 1968-69 to 1972-78, assessee paid interest to its members on balance amount in aforesaid account - Whether such interest was an allowable deduction in view of fact that there was never any relationship of borrower and lender between assessee and its members - Held, no Facts The assessee was a co-operative society running a sugar mill. In the initial years of the working of the society, certain partly paid shares were allotted to its former 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 which, inter alia, provided that deposits were to be made by the members in the 'Loss equalisation and capital redemption reserve fund' for the purpose of making the partly paid shares fully paid up, and it was understood that the balance of the amount would be applied to the loan taken from the Industrial Finance Corpn. of India and thereafter whatever remained would be refunded to the depositing members resulting in the extinction of the fund. 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 partly paid up shares into fully paid up shares. On 8-9-1967 the board of directors of the society decided in their meeting to pay interest at 6 per cent 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 assessee claimed deduction of the interest for the assessment years 1968-69 to 1972-73. The claim was rejected by the ITO. He took the…

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