DIVAN C.J. - In this case, at the instance of revenue out of the following four questions the first three question and at the instance of the assessee the fourth question have been referred to us by the Tribunal for our opinion :
'(1) Whether, from the facts and in the circumstances of the case, it can be held that the amount of Rs. 2,29,015 paid by the members of the association as deposits amounted to borrowed capital in the hands of the assessee-company ?
(2) if so, whether the Tribunal was correct in holding that the house property in question was acquired by the assessee-company with the said borrowed capital ?
(3) If so, whether in law the assessee-company would be entitled to the deduction of interest at the rate of 6 p. c. or any other rate on this amount under sections 9(1)(vi) and 24(1)(vi) of the Indian Income-tax Act, 1922, and the Income-tax Act, 1961, respectively ?
(4) Whether, on the facts and circumstances of the case, the assessee company can claim deduction in question on the ground that the said property was constructed with the aid of the said amount ?'
The facts leading to this reference may now be shortly stated : The assessee is a limited company registered under the provisions of the Indian Companies Act, 1913. The relevant assessment years are 1960-61, 1961-62, 1962-63 and 1963-64. The point involved in this reference is whether the assessee, the respondent in this reference, is entitled to claim deduction of interest under section 9(1)(iv) of the Indian Income-tax Act, 1922, so far as assessment year 1960-61 and 1961-62 are concerned, and under section 24(1)(vi) of the Income-tax Act, 1961, so far as assessment years 1962-63 and 1963-64 are concerned. The contention of the assessee in these proceedings has been that it has paid interest on borrowed capital for acquiring the house property in question.
In 1936, an association by the name of Rajkot Seeds and Oil Merchants Association was formed by some merchants at Rajkot. For acquiring membership rights in the association, a person had to deposit an amount of Rs. 3,000 with the association. This amount of deposit was by way of security deposit taken for the due performance of the obligations of a member under the rules of association for discharge of his obligation to the association and to other members of the association. The association had its own rules and under the rules it was provided that the deposit paid had its own rules and under the rules it was provided that the deposit paid by a member to the association could be refunded when the member ceased to hold membership rights in the associations. On November 7,1945, the association agreed to purchase a plot of land at Rajkot for construction of a building. Subsequently, a sale deed conveying the plot of land to the association was executed on January 24,1946. On a November 20,1945, at a general meeting of the association it was resolved that out of the total amount of Rs. 3,50,000 approximately, lying in the current account of the association with the bank, being the aggregate amount of deposits given by the members to the association, a sum amounting Rs. 3,30,000 should be utilised for the construction of a building which was proposed to be built on the plot of land for which at that time the agreement of sale had been entered into by the association. Under that resolution of November 20,1945, it was further resolved that interest at the rate of three per cent. per annum should be paid by association to the deposit account in respect of these moneys. Out of the sum of Rs. 3,30,000 which was thus authorised to be utilised, actually an amount of Rs. 2,29,015 was utilised for the construction of house property on the land which was purchased on January 24,1946. This association was an unregistered association and on August 27,1947, the name of the association was changed to Rajkot Seeds, Oil and Bullion Merchants Association. In 1948, the association building was completed and the total cost of construction came to Rs. 8,74,866. Out of this total amount, Rs. 6,45,851 were spent out of the building fund which had been built up by the association and the balance of Rs. 2,29,015 was spent in pursuance of the resolution of November 20, 1945, out of the aggregate of the deposit amounts of the members. On March 31, 1950, the association which till then was an unregistered body, resolved to get itself registered as a company under the Indian Companies Act, which was then in force. Pursuant to this resolution, draft memorandum and articles of association were prepared and on April 25, 1951, the association was converted into a limited liability company under the name of Rajkot Seeds, Oil and Bullion Merchants Association Ltd. For the sake of convenience we will hereinafter refer to the unregistered association as 'the association' and we will refer to the limited company as 'the assessee-company'. One of the object of the assessee-company under the memorandum of association was to take over the existing assets and liabilities of Rajkot Seeds Oil and Bullion Merchants association. On May 12, 1951, the governing body of the assessee-company resolved to make necessary entries in the books of the company to give effect to its object of taking over the existing assets and liabilities of the association with effect from May 7, 1951. The books of account of the unregistered association were closed as on May 5, 1951, that day being a Saturday and the accounts of the assessee-company were started as from May 7, 1951, that day being a Monday. All the existing assets and liabilities in the books of the unregistered association as they stood at the time of closing of the books as on May 5, 1951, including the closing cash balance of Rs. 5,309.30 and the deposits of the members of the association as well as the building reserve account were transferred to the books of the assessee-company as on May 7, 1951.
Though the association had resolved to pay interest at the rate of three per cent. per annum on the amount out of the deposit account utilised for the construction of the building till 1956, neither the association nor the assessee-company paid any interest to the deposit account on the amounts which were used for the construction of the building. On November 17, 1956, the assessee-company passed a resolution to the effect that interest at the rate of six per cent. per annum should be paid on the deposits of its member with effect from Aso Sud 1 of Samvat year 2012 (some date in October, 1956). It may be pointed out that the forward contracts business of the assessee-company was suspended by the directions issued by the Forward Markets Control Commission on December 17, 1955, and, thereafter, the company was not doing any business. In pursuance of the resolution of November 17, 1956, the assessee-company paid during the accounting periods corresponding to the assessment year 1960-61 to 1963-64, interest on deposit of its members amounting to Rs. 15,510, Rs. 15,610, Rs. 17,010 and Rs. 15,840 respectively. These amount were claimed by the assessee-company as proper deduction under section 9(1)(vi) of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62 and under section 24(1)(vi) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64. The assessee-company contended that these amounts ware paid as interest on the capital borrowed for acquiring the house property in question.
For the assessment year 1958-59 and 1959-60, the assessee-company had claimed deduction of the amount of interest paid on the deposits on the ground that this interest had been paid by the assessee-company for the construction of the house property. The claim for assessment years 1958-59 and 1959-60 was disallowed by the Income-tax Officer but was allowed by the Appellate Assistant Commissioner and the matter was taken to the Tribunal. For those two years the Tribunal held that the assessee-company was not entitled to the deduction claimed by it. In view of this decision of the Tribunal in respect of this very amount for the assessment year 1958-59 and 1959-60, when thee question arose of allowing deduction of interest on the deposit amounts so far as assessment year 1960-61 to 1963-64 were concerned, the Income-tax Officer disallowed the claim of the assessee-company for deduction of amounts of interest for the assessment year under consideration in this reference. The assessee-company preferred apples to the Appellate Assistant Commissioner. In the meanwhile, for the assessment year 1958-59 and 1959-60, the assessee-company had taken the matter by way of a reference to the High Court and at the instance of the assessee-company the Tribunal had referred the case to the High Court. The decision of the High Court on that reference in connection with the assessment year 1958-59 and 1959-60 is Rajkot Seeds, Oil & Bullion Merchants Assn. Ltd. v. Commissioner of Income-tax The decision was delivered by this High Court on August 28, 1963. It may be pointed out that for the assessment year 1958-59 and 1959-60, the contention of the assessee-company was that the amount of interest paid by it was in respect of borrowed capital for constructing the house property. The High Court in Rajkot Seeds, Oil & Merchants Ass. Ltd. v. Commissioner of Income-tax held that since it was thee association which constructed the property and not the assessee-company and since the association did so by spending a part of the deposits lying with it to the credit of its members, even assuming that the amount of Rs. 2,29,015 was borrowed capital, it would be the association and not the assessee-company which could be said to have constructed the property in question with borrowed capital. The High Court further held that there was no nexus or connection between the capital borrowed for the construction of the building and that the interest payable under the resolution. Hence, this High Court held that the interest claimed by the assessee-company as interest on borrowed capital for construction the house property in question was not allowable under section 9(1)(iv) of the Act of 1922.
At the stage when the matter was argued before the Income-tax Appellate Tribunal for assessment years 1960-61 to 1963-64, which are under consideration before us, the decision of the Gujarat High Court was known and the assessee-company contended that at any rate the interest was climbable has a deduction as interest paid on borrowed capital for acquiring the house property under consideration. With reference to these four years, the additional contention of the assessee-company thus was that the house property in question had been acquired with borrowed capital. The Tribunal rejected the contention of the assessee-company that the house property was constructed with the help of the borrowed capital but the Tribunal accepted the contention of the assessee-company that this house property was acquired with the help of borrowed capital, particularly in the light of the taking over of the taking over of the assets and liabilities of the association as on May 7, 1961; the Tribunal held that the house property under consideration was acquired with borrowed capital in the shape of the liability incurred by the assessee-company to its members for returning the deposits which were originally deposited with the association but the liability in respect of which was taken over by the assessee-company. Under these circumstances, the Tribunal allowed the appeals of the assessee-company for the four years under consideration and at the instance of the revenue three out of the four questions hereinabove set out have been referred to us whereas the fourth question apparently has been referred to us at the instance of thee assessee since the assessee wants to keep the question open regarding the construction of the house property by the assessee-company with the aid of the borrowed capital.
'(3) If so, whether in law the assessee-company would not be entitled to the deduction of interest at the rate of 6 p. c. or any other on this amount under section 9(1)(iv) and section 24(1)(vi) of the relevant Income-tax Act ?'
As regards question No. (4), in view of the decision of this High Court in Rajkot Seeds, Oil & Bullion Merchants Assn. Ltd. v. Commissioner of Income-tax, Mr. Kaji for the assessee has not canvassed the question before us though he has not given up his contention and in the light of the decision of this court in Rajkot Seeds, Oil & Bullion Merchants case, that question must be decided in favour of the revenue and against the assessee.
Before going to the legal points involved, we would like to point out that the language of the relevant provisions under section 9(1)(iv) of the Act of 1922 and section 24(1)(vi) of the Act of 1961 is almost identical and substantially the same so far as the questions involved in this reference are concerned. Under section 9(1)(iv) of the Act of 1922 the tax was payable by an assessee in respect of the bona fide annual value of property consisting of any building or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to the various allowances mentioned in the section, and the relevant portion of clause (vi) was
'(iv) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.'
Under section 24(1)(vi) of the Act of 1961, income from house property chargeable under the head 'income from house property' shall, subject to the provision of sub-section (2), be computed after making the deductions set out in the different clauses of sub-section (1) of section 24, Clause (vi) mentions :
'(vi) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.'
It is only by answering the question whether the assessee-company acquired the house property with borrowed capital that we can answer the questions which have been referred to us for our opinion.
Before discussing the authorities on the point it may be pointed out that the resolution of November 20, 1945, was in Gujarat and when translated into English, the resolution reads :
'Our association has in the current account with the bank an approximate amount of rupees three and a half lakhs for the membership deposit amount. Out of that Rs. 3,30,000 should be lent for building account and interest on the amount should be charged at three per cent. per annum. For the balance of the amount required for constructing the building, Rs. 1,500, should be borrowed on building account from each member and interest on the amount thus borrowed from members should also be paid at 3 per cent. per annum. It is optional to lend this amount, not compulsory to do so..... If any individual member does not desire to lend the amount of Rs. 1,500, then the deficit amount should be borrowed at the above rate of interest from the other members who may desire to advance larger amounts, such amounts being borrowed from them in equal proportions.'
It may also be pointed out that under the rules and regulations of the unregistered association, every person who wished to become a member of the association had to deposit Rs. 3,000 in cash or had to deposit security of the face value of Rs. 3,000. Interest was not to be paid on cash deposited as and by way of deposit. If any documents were deposited as and by was of security for purposes of deposit, the ownership of the securities was to be transferred to the association but the amount of interest realised on those securities was to be paid to the member concerned. When the member ceased to be a member of the association, then the amount of the deposit was to be refunded by the association after deducting the dues of the association. If any member of the association had been declared a defaulter in accordance with the rules and regulations of the association, then he forfeited his claim to the amount of the deposit and the amount was to be distributed proportionately amongst those members of the association who were creditors of the defaulting member. Thus, it is obvious that under the rules and regulations of the association, the amounts of the deposit were to be retained as deposit for due performance of the obligations by each member to the association and to the other members of the association.
Under the articles of association of the assessee-company, as pointed out by the Division Bench in Rajkot Seeds, Oil & Bullion Merchants Assn. Ltd. v. Commissioner on Income-tax, at page 695, the deposits paid to the assessee-company did not belong to the company nor did the ownership therein vest in the company. If it was so, it was not necessary to resort to the fiction of deeming clauses in article 16, namely, that the deposits shall be deemed to be under the absolute control of the company, and as if they belonged to the company absolutely. These deeming words were used presumably to confer absolute control over these deposits in the assessee-company which otherwise it would not have. Article 16 further provides that the assessee-company was to have control over these deposits subject to the provisions of the association and then, if there is a surplus after paying the dues due to the association, in favour of the members. There can, therefore, be no doubt that these deposits were deposits lying to the credit of the members, paid as and by way of security towards the performance by the members of their obligations towards the assessee-company and the members, arising under the transactions entered into by them through the machinery provided by the assessee-company. The Division Bench in that case also pointed out at page 696 :
'..... these deposit amounts under the rules were paid by the members as and by way of security for the performance of the obligations arising under the transactions entered into by them through the machinery provided by the said association and later on by thee assessee-company and, therefore, there could be no relationship of a lender and a borrower or of a creditor and a debtor.'
To complete the narration of facts as emerging from the record of this case, we may point out that resolution No. 5A passed by the assessee-company at its extraordinary general meeting held on November 17,1956, was in these terms :
'This extraordinary meeting of the Rajkot Seeds, Oil and Bullion Merchants Association Limited (the assessee-company) resolves that the amounts of deposit of the different members lying with the company should bear interest at six per cent. per annum from Aso Sud 1 Samvat Year 20212 and the amount of interest should bee paid to the different members of the company at the end of Diwali of each Samvat Year.'
The first question that we have to consider is whether the deposit amount lying with the association was 'borrowed capital' when the association resolved in 1945 to utilised part of thee amount of deposit for the purpose of constructing a building.
What is meant by 'borrowed money' has come up for consideration before the courts in England on several occasions. In Port of London authority v. Commissioner of Inland Revenue, one of the questions before the Court of appeal in England was regarding the interpretation of the words 'borrowed money' occurring under the taxation statutes in England. By the Port of London Act, 1908, the Port of London Authority acquired the property of the three leading dock companies of London. The consideration for the transfer was the issuing by the authority to the companies or their minims of some pounds 22,000,000 of port stock; A stock carried interest at 4 per cent. Though the stock was issued to the dock companies, the Act provided that they should divide it amongst their debenture holders and shareholders. The stocks were redeemable by the authority at its option after twenty years. The authority was to provide out of revenue, after meeting the working expenses of the port as defined in the Act, a sinking fund for thee redemption of the stock at a period not exceeding ninety years, in accordance with regulations to be made by the Board of Trade. If the revenue was not sufficient to provide the sinking fund, the Board of Trade might require the authority to increase their charges within certain maximum. the port stock did not give the holders any share in the management of the undertaking of the authority, or in the property of the authority, except that A stock and, subject thereto, all other port stocks, were a charge on the port fund, which was composed of all the receipts of the authority, but which, by section 21, was to be applied in a particular order. If the interest was in default for three months, holders of port stock of an aggregate nominal value of not less than half a million might obtain a receiver and manager of the undertaking of the authority. There was no provision as to what was to happen if the principle sum was not paid at the date fixed for redemption. It was held that this transaction was one of purchased of an asset for a consideration other than cash, namely, the issue of a certain amount of port stock, which was to be valued at the time the undertakings were acquired. It was further held that the stock could not be regarded as representing 'borrowed money' under rule (2) of Part III of Schedule IV of the Finance Act 2 of 1915. It was necessary for the calculation of tax under the said Act to consider what was the capital utilised by the port authority for its business operations and any borrowed money was to be deducted from the value of the assets. At page 613 of the report, Lord Sterndale M. R. has observed :
'I will take borrowed money first. If this be borrowed money there must be a borrower and a lender, and it seemed to me that no satisfactory answer was given to the question-who was the lender Here again the Crown relied on an alternative and said the lender was either the transferring companies or their debenture and share holders who now hold the stock, the contention being that either the company or the stockholders must be taken to have lent pounds 22,000,000., the amount of the stock of the Port of London Authority, who issued stock in return for the loan. The first answer seems to me to be the simple one, that neither the companies nor the stockholders did anything of the sort. The former transferred there undertakings, and the latter gave up all rights against the former transferred their undertakings, and the latter gave up all rights against the former in return for receiving certain rights against the Port of London authority. Some effect must be given to the ordinary use of languages and a actual facts of the case, and to my mind it is a misuse of language and a travesty of the facts to call this a descending of money, especially as the Crown are uncertain as to who is the lender. To accept this contention it seems to me would be to do away with rule 3 of the Schedule, for in every case in which there was a purchase for a consideration other than case the transferor would have to be considered as transferring for cash which he lent to the transfer to enable him to get the consideration which was in fact given, and each such transaction would become a purchase for cash with all the purchase money unpaid.'
Against the decision of the Court of Appeal the revenue took the matter by way of appeal to the House of Lords and the decision of the House of Lords is reported in Commissioners of Inland Revenue v. Port of London Authority. The decision of the Court of Appeal was confirmed by a majority of the learned law Lords who heard the appeal and the learned law Lords made observations in their respective speeches regarding this aspect of 'borrowed money'. At page 514 Viscount Finally observed :
'The second ground urged by the appellants was that the amount of the stock must be taken to have been money borrowed by the port authority from the holders of the stock in respect of which they paid interest. When in the second paragraph of Part III of the Fourth Schedule borrowed money is spoken of, what is referred to is a real borrowing and a real lending. Here, there was nothing of the kind. All that can be said is that the issue of the stock as the consideration for the purchase was attended with incidents in some respects similar to those which would have ensued if there had been a borrowing. It is impossible to construe in this way any Act of Parliament, and more particularly a taxing Act. To bring the provision as to borrowing. The suggested construction would involve putting upon a taxing Act a strained meaning which its words do not bear.'
Lord Atkinson observed at page 518 :
'I also concur with the Court of Appeal in the opinion that the transaction was not one carried out to a extent by borrowed money. The old duck companies, transferred their respective undertakings in consideration of port stock issued to them by the respondents, and those companies distributed this stock amongst their own stockholders according to certain authorized scales. This stock was taken in substitution for the stock they formerly held, on the certificates for the latter being cancelled. No money passed directly or indirectly between the parties to the transaction; neither did any party borrow money or lend it.'
Lord Sumner observed at page 520 :
'It is not borrowed money, for there was no borrowing by the Port of London Authority and if, by an unlicensed stretch of the imagination, a purchase on credit is a purchase, in which the buyer pays to the seller cash on delivery, which he has borrowed form the seller himself for that purpose, the holders of the port stock, at any rate, sold nothing and, therefore, did not even fact in all lend anything.'
At page 526, Lord Phillimore who gave a dissenting opinion but who agreed with the rest of the learned law Lords regarding the construction of the words 'borrowed money' observed :
'It is said that the particular liability is neither unpaid purchase money nor borrowed moneys nor debt, and that it must come under one of the three if it is to be taken as a deduction from capital. I agree with the Court of Appeal that it is not unpaid purchase money or borrowed moneys, but I stick at the word debt.'
Thus, it is obvious, according to the decision of the Court of Appeal and the decision of the House of Lords affirming the decision of the Court of appeal, that when the legislature in the context of the taxation statute uses the words 'borrowed moneys', there must be real borrowing and a real lending and the must be a real loan, a real borrowing and a real landing and there must be a real borrowing and in a transaction of the kind which was before the Court of Appeal and the House of Lords where the entire undertakings of the three dock companies were taken over by the Port of London Authority, there was no borrowing whatsoever because what was done was that the compensation amount was paid in the form of stock and consideration other than case passed in respect of taking over of the assets of the three companies. It was pointed out that' no money passed directly or indirectly between the parties to the transaction; neither did any party borrow money or lend it'.
In Inland Revenue Commissioners v. Rowntree & Co. Ltd. the question before the Court of Appeal was again with respect to calculation of capital employed in a trade or business and any 'borrowed money' was to be deducted for the purpose of computing the average amount of capital employed in the business in the standard period or any chargeable accounting period under the provisions of the taxation statute in England. In that particular case in presence of arrangements covering a period of years, a company raised money for the purpose of its business by drawing sight bills, payable at four and six months, on an acceptance house, who accepted the bills in consideration of a commission paid to them by the company, and then, as agents for the company, discounted them on the market and remitted the proceeds to the company. Under the arrangement the company was bound to put the acceptance house in funds shortly before the maturity dates of the respective bills. Money was raised in this way during the companys standard period. The Special Commissioners were of the opinion that the words 'borrowed money' should not be given a strained meaning and that in ordinary commercial usage, the relationship between the company, the acceptance house, and the holders of the bills was not that of borrower and lender nor were the transactions ones of loan. It was held by the Court of Appeal that the words 'borrowed money' in law required the relationship which did not exist in that particular cases, but, even if the words were to be given some wider interpretation, the finding of the Commissioners the in ordinary commercial usage the relationship between the parties was not that of borrower and lender ought not to be disturbed. The dicta in Port of London Authoritys case (supra) were applied by the Court of Appeal. At page 486 of the report, Tucker L. J. has observed :
'I think the speeches in the Port of London case in the House of Lords indicate that proper approach to this case is to construe these words borrowed money as words which require the existence of a borrower and lender, and that there must be a real borrowing in the legal sense of the word. I find it difficult, if not impossible, to appreciate how there can be borrowed money unless the legal relationship of lender and borrower exists between A and B. After all, the words borrow and land are not words of narrow legal meaning. They represent a transaction well-known to business people which has taken its place in the law as a result of commercial transactions among the merchants of this country, and when the law, under the Bills of Exchange Act in elsewhere, has to deal with matters of this kind, it is dealing with commercial transactions. As Somervell L. J. put it during the argument, whether the words are to be looked at form the point of view of Bullen and Leake or whether they are to be looked at from the point of view of a commercial transaction in the city of London, one arrives at the same result, that for there to be borrowed money there must be a legal relationship of lender and borrower, and I find it impossible to discover that there was such a relationship existing either between the company and Erlangers or between the company and the discount houses.'
In In re H. P. C. Productions Ltd., the question before Plowman J., sitting singly, was regarding the interpretation of the words 'borrow' and 'lend' inspection 1 of Exchange Control Act, 1947. In that case in the winding up of H. Ltd., a company in voluntary liquidation, the executors of K., deceased, who at all material times had been resident in England, lodged a proof for moneys advanced to the company by K. The liquidator rejected that proof on the ground that the company was entitled to set off sums owed by K to T. V. company of Switzerland which had assigned those debts to H. Ltd. Those debts were alleged by the liquidator to has arisen from payments in foreign currency made by T. V. outside the United Kingdom to third parties at the request outside the United Kingdom of K in respect of deals for Ks benefit. T. V. was not an 'authorised dealer' within the meaning of the Exchange Control Act, 1947. It was held by Plowman J. that giving the words 'borrow' and 'lend' as used in section 1(1) of the Act of 1947 their natural meaning, the deceased did not 'borrow' money within the meaning of the section, since the money in question never reached him but was paid to the third parties, who were not accountable to him, but were entitled to retain it as their own. There the observations of Tucker L. J. which we have referred to above were cited at page 486 and at page 487 it was observed that the payments made by T. V. which were set out in paragraphs 3 and 4 of the points of defense were not payment to Sir Alexander Korda by way of loan, and from this, 'in my judgment, it follows that Sir Alexander Korda did not borrow the money'.
It is clear, therefore, following these three English decisions that the relationship of borrower and lender must come into existence before it can be said that any amount, capital or any other money, is borrowed by one person from another and there must be a real transaction of borrowing and lending in order to amount to any borrowing. It is in the light of these cases two of which were decided in the context of taxation statutes that we will now consider whether the amount of Rs. 2,29,015 was borrowed capital so for as the association was concerned.
It is true that he resolution of November 20, 1945, speaks of lending money from the amount of the deposits of members to the building account and it was also mentioned in the resolution that interest was to be paid on these amounts at the rate of three per cent. per annum. But it must be borne in mind that this association before its incorporation in 1951 was an unregistered association. The members of the association, therefore, in a body passed this resolution to utilised part of the amount lying as and by way of deposit with the association for the purpose of construction the building. The association being an unregistered association, it could not be said that the association was lending money to itself by utilising part of the deposit money for construction of the building. It must not be forgotten that when the members paid the deposits to the association, they did so as and by way of security for the purpose of the obligations arising under the transactions entered into by them through the machinery arising under the transactions entered into by them through the machinery arising under the transactions entered into by them through the machinery arising under the said association. Therefore prior to November 20,1945 there was no relationship of borrower and lender nor was there any real borrowing or lending between the association and the members so far as the deposit amount was concerned. Secondly, the resolution of November 20, 1945, made a distinction between loans taken from members at the rate of Rs. 1,500 from each member for meeting the deficit required for constructing the building and the amount which was being transferred form the deposit account to the building account. In our opinion, by this resolution of November 20, 1945, there was no real transaction of borrowing and landing between the association and its members. The character of the deposits was not changed as a result of this resolution of November 20, 1945. It may be emphasised once again that it is doubtful whether an unregistered association which had no legal entity and which was merely a conglomeration of the members constituting it could have lent to itself any money or could have entered into a transaction of borrowing and lending between itself and the members by this resolution of November 20, 1945.
Assuming, however, that as a result of this resolution of November 20,1945, there was a borrowing of Rs. 2,29,015 by the association from the members, the main question that we have consider is whether when the assessee-company was formed in April, 1951, and when thereafter by the resolution of May 12,1951, the assessee-company took over the assets and liabilities of the unregistered association with effect from May 7, 1951, it borrowed any money form the members and whether it acquired the house property under consideration by utilising such borrowed capital In our opinion, the assessee-company no doubt took over all the assets and all the liabilities of the unregistered association. As part of the assets, it got the house property under consideration. As part of the liabilities it became liable to refund the amount of the deposits to its members in accordance with the articles of association and memorandum of association of the assessee-company. But even under the articles of association of the assessee-company the amount of deposit of the members was by way of security association and towards other members in respect of these deposits of the member of his obligation towards the through the machinery provided by the assessee-company. It is difficult therefore, to accept the contention on behalf of the assessee-company that by taking over the liability in respect of these deposit amounts the assesee-company borrowed any money from the members or that there was any real transactions of lending and borrowing between the assessee-company and the members. Neither was there any borrowing by the company nor was there any lending by the members to utilised the words of the House of Lords in Port of London Authoritys case.
Even if this conclusion of our is wrong, there is still a further difficult in the way of the assessee-company and it is this. Out of the total assets of the company it is very difficult to say that the assessee-company acquired this particular asset, the house property under consideration with the aid of the borrowed capital, namely, the amount of deposits, the liability for which was taken over by the assessee-company with effect from May 7, 1951. The company, as we have pointed out earlier, was formed with one of its object to take over the existing assets and liabilities of Rajkot Seeds Oil and Bullion Merchants Association Ltd. (unregistered association) Therefore, when all the assets and all the liabilities were taken over, it cannot be said that one particular asset out of the total assets of the unregistered association was taken over with the aid of a particular specific liability. Moreover, as the accounts show, the amount of deposits which the assessee-company took over from the unregistered association was much higher than the amount of Rs. 2,29,015. The paper book which has been filed in this case show in its enclosures that the liability for the deposits taken over by the assessee-company was more than Rs. 3,49,000 and out of this amount, if the argument on behalf of the assessee-company were to be accepted, only Rs. 2,29,015 was, according to the contention of Mr. Kaji, borrowed capital. When as a package deal all the assets and the liabilities are taken over for consideration other than cash because there is nothing on the record to show that any cash was paid by the assessee-company to the unregistered association, it is difficult to say that by merely taking over the liabilities to refund the deposits to the members in accordance with the articles of association of the assessee-company, Rs. 2,29,015 out of the total amount of more than Rs. 3,49,000 was borrowed by the assessee-company from its members and, secondly, this amount was borrowed in order to acquire this house property. It is thus difficult to say that the house property under consideration was acquired with borrowed capital. Under these circumstances, question No. (1) referred to us for our opinion must be decided against the assesses and in favour of the revenue and we must answer that question in order to acquire this house property. It is thus difficult to say that the house property under consideration was acquired with borrowed capital. Under these circumstances, question No. (1) referred to us for our opinion must be decided against the negative by stating the revenue and we must answer that question in the assessee and in favour of the revenue and we must answer that question in the negative by stating that the amount Rs. 2,29,015 did not amount to 'borrowed capital' in the hands of the assessee-company. Since we answer question No. (1) in the negative, question No. (2) does not arise. But if necessary, we will decide it in favour of the revenue and against the assessee. It, therefore, follows that the assessee-company would not be entitled to deduction of interest at the rate of six per cent. per annum or any other rate either under section 9(1)(iv) of the Act of 1922 or under section 24(1)(vi) of the Act of 1961.
We, therefore, answer the questions referred to us as follows :
Question No. (1). In the negative and against the assess-company.
Question No. (2). In the negative and against the assess-company.
Question No. (3). In the affirmative and against the assessee-company.
The assessee-company must pay the costs of this reference to the Commissioner.
Mr. Kaji on behalf of the assessee-company applies orally for a certificate under section 66A(2) for a certificate for leave to appeal to the Supreme Court. In our opinion the questions arising in this case are substantial questions of law regarding the interpretation of the provisions of section 9(1)(iv) of the Act of 1922, and, therefore, certificate under section 66A(2) is granted. He also applies for a certificate under section 261 is also granted so far as the question of interpretation of provisions of section 24(1)(vi) of the Act of 1961 is involved.