COMMISSIONER OF INCOME-TAX, LUCKNOW versus BAZPUR CO-OPERATIVE SUGAR FACTORY LTD.

Citation: [1989] 2 S.C.R. 840 · Decided: 01-05-1989 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Appeal(s) allowed

Judgment (excerpt)

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COMMISSIONER OF INCOME-TAX, LUCKNOW 
v. 
BAZPUR CO-OPERATIVE SUGAR FACTORY LTD. 
MAY l, 1989 
[R.S. PATHAK, CJ. AND L.M. SHARMA, J] 
Income Tax Act, 1961: Section J6( l)(iii)-Cooperative Society-
Amounts deposited by members in Loss Equalisation and CapitiM.,. 
Redemption Fund-Whether deduction admissible. 
The respondent-assessee is a co-operative society running a sugar 
mill. With a view to inducing its members to make further contribution 
to its capital it incorporated a bye-law which provided for the establish-
ment of a 'Loss Equalisation & Capital Redemption Reserve Fund'. 
Every producer-shareholder was required to deposit every year an 
amount to this fund which was to be utilised for the purpose of making 
the l!artly paid shares fully paid, and after defraying the loan taken 
· from the Industrial Finance Corporation the balance was to be 
refunded to the members. The money available in the Fund was utilised 
by the society for the purpose of its business. A part of the amount was 
eventually utilised for converting the partly paid shares into fully paid 
shares. It was then decided by the society to pay interest on the balance 
available in the ~·und. The interest thus paid to its members was sought 
to be claimed as deduction in computing the income of the assessee. 
The Income Tax Officer rejected the claim holding that the 
amount did not represent loans taken by the assessee .or capital 
borrowed for the purpose of its business. The Appellate Assistant 
Commissioner confirmed the disallowance. The Income Tax Appellate 
Tribunal accepted the second appeal of the assessee and held that it was 
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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 )I.. 
society which was utilised for the purpose of the business of the assessee, 
the funds represented by such deposit would be 'capital borrowed' for 
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the purpose of s. 36(1)(iii) of the Income Tax Act,.1961. The High Court 
agreed with the view taken by the Appellate Tribunal and answered the 
questions referred to it in favour of the assessee and against the 
Revenue. 
While allowing the appeals and answering the questions in the 
H negative in favour of the Revenue, this Court. 
840 
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C.LT. LUCKNOW v. BAZPUR SUGAR FACTORY 
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HELD: (l) Section 36(I)(iii) of the Income Tax Act, I96I pro-
vides that in computing the income chargeable under the head 'profits 
and gains of business or profession' a deduction shall be allowed of the 
amount of interest paid in respect of capital borrowed for the purposes 
of the business or profession. [845G, HJ 
(2) The words 'borrowed money' should not be given a strained 
,meaning and it should be considered whether in ordinary commercial 
~sage the relationship was that of a borrower and lender and the trans-
actions were loan transactions .. To constitute borrowed money there 
must be a real borrowing and a reaUending. [846B, D] 
(3) It is apparent that the deposits made by the members cannot 
be regarded as loans advanced by the members to the assesse~. There 
was never any intention between the assessee and its members to treat 
the deposits made by the members as loans and that the relationship 
between the assessee and the members should be that cif borrower and 
lender. [847F, G J 
Port of London Authority v. Commissioner of Inland Revenue, 
[I922] 2 KB 599 (CA); Commissioner of Inland Revenue v. Port of 
London Authority, [I923] AC 507; Inland Revenue Commissioner v. 
Rowntree & Co. Ltd., [1948] 1 ALL ER 482 (CA); Commissioner of 
Income-tax, Gujarat Iv. Rajkot Seeds, Oil & Bullion Merchants As-
sociation Ltd., [1975] IOI ITR 748; Commissioner of Excess Profits 
Tax, Central Calcutta v. Bhartia Electric Steel Co. Ltd., [1954] 25 ITR 
I92; Bombay Steam Navigation Co. [1953]; Private Ltd. v. Commis-
sioner of Income-tax Bombay, [1965] 56 ITR 52 and Madhav Prasad 
Jatia v. Commissioner of Income-tax Uttar Pradesh, [1979] ll8 ITR 
200, referred to. 
(4) A loan necessarily supposes a return of the money loaned. The 
circumstance that there was no certainty that any balance would 
remain for refund to the members would in itself indicate that the 
deposits conld not be regarded as loans. [847G, H] 
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CIVIL APPELLATE lURISDICTION: Civil Appeals Nos. 
G. 
1358-61 of 1979. 
From the Judgment and Order dated 6.9.78 of the Allahabad 
High Court in I.T.R. No. 114/78. 
B.B. Ahuja, K.C. 

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