Arijit Pasayat, C.J.@mdashThese two cases involve identical disputes and shall be governed by the common judgment.
2. On being moved by the Revenue, the following questions have been referred for opinion of this court, by the Income Tax Appellate Tribunal,
New Delhi (in short, ""the Tribunal""), u/s 256(1) of the Income Tax Act, 1961 (in short, ""the Act"") :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of salaries due to the
directors of the company, but not paid to them and utilised by the company for the purposes of its business, constituted capital borrowed for the
purposes of its business within the meaning of Section 36(1)(iii) of the Income Tax Act, 1961 ?''
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest paid by the assessed to the
directors on such undisbursed salaries constituted interest on capital borrowed for the purposes of the business within the meaning of Section 36(1)
(iii) of the Act ?
3. A brief reference to the factual position, as indicated in the statement of case, would suffice.
4. The assessed, a private limited company, credited interest totalling Rs. 4,905 and Rs. 5,866 for two assessment years, i.e., 1974-75 and 1975-
76, with which we are concerned, to the accounts of its directors, which showed the credit balances on account of salaries due to them but not
paid. These interests in question were claimed as deduction u/s 36(1)(iii) of the Act. The Income Tax Officer disallowed the claim on the ground
that the conditions required to bring in application of Section 36(1)(iii) were absent. The assessed filed appeals before the Appellate Assistant
Commissioner (in short, ""the AAC""), and contended that the Income Tax Officer was wrong in disallowing the claim. The Appellate Assistant
Commissioner accepted the claims and held that the Income Tax Officer erred in disallowing them.
5. The matter was carried in appeal by the Revenue before the Tribunal. It was contended that there was no capital borrowed, which was the
fundamental requirement for bringing in application of Section 36(1)(iii) of the Act. The Tribunal did not accept the plea and held that had the
payments been made to the directors, the assessed would have been required to borrow funds to pay interest. Therefore, the funds, which were
utilised by the assessed for the purpose of its business had a clear link with the amounts which would, otherwise, have been required to be
borrowed for the purpose to carry on its business. Accordingly, it was held that the amounts in question were allowable in terms of Section 36(1)
(iii) of the Act.
6. On being moved for a reference, the questions, as set out above, have been referred for the opinion of this court.
7. We have heard learned counsel fur the Revenue. There is no appearance on behalf of the assessed in spite of notice. The only question that
needs adjudication according to us is whether the Tribunal was justified in holding that the amounts, which were due to (he directors and had not
been paid but utilised in the manner described by the Tribunal, constituted capita! borrowed for the purpose of its business within the meaning of
Section 56(1)(iii) of the Act. Section 36(1)(iii) of the Act reads as follows :
36. (1)(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :
Explanation.--Recurring subscriptions paid .periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as
may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause ;
8. The provision is almost in pari materia with the provision of Section 10(2)(iii) of the Indian Income Tax Act, 1922 (in short, the ""old Act""). What
constitutes ""capital borrowed"" has been dealt with by the apex court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1065] 5 ITR 52.
The expression ""capital borrowed"" used in Section 36(1)(iii) of the Act in the context in which it is placed in the provision means money and not
any other asset. By clause (iii) of Sub-Section (1) of Section 36, interest paid in respect of capital borrowed for the purpose of the business or
professional act is a permissible allowance in the computation of profits or gains. Interest paid need not, however, bear the character of a revenue
outgoing. To be admissible as an allowance under the concerned provision, interest must be paid in respect of the capital borrowed. However,
interest paid but not in respect of the capital borrowed cannot be allowed. Interest payable on capital borrowed means interest which actually
becomes payable on an amount of money and not on any other asset. An amount due under a statute cannot be regarded as borrowed capital for
the expression ""capital"" predicates the relationship of a borrower arid a lender, which relationship has to be found as a matter of fact.
Conceptually, for the purpose of Section 36(1)(iii) ""interest"" is relatable only to money borrowed and not on debt incurred. The word ""interest"" has
a basic meaning of advantage or profit and with reference to a loan it means the profit or advantage of the creditor which he gets by giving to
another the use of his money. Interest can be described as consideration paid either for use of money or for forbearance in demanding it after it has
fallen due. It is a compensation allowed by law or fixed by parties or permitted by custom or usage, for use of money belonging to another or for
delay in paying the money after it has become payable. Both, the Appellate Assistant Commissioner and the Tribunal, accepted that the amounts,
which were due to the directors by way of salaries were not disbursed during the years. The further finding that they would have been required to
borrow capital to disburse other obligations cannot per so make the amount, which was in fact a liability, a capital borrowed for the purpose of the
business. That is only a hypothetical conclusion.
9. The above being the position, the Appellate Assistant Commissioner and the Tribunal were not justified in their respective conclusions about the
amount involved being capital borrowed. Therefore, both the questions referred are answered in the negative, in favor of the Revenue and against
the assessed.