Padmanabhan, J.
1. This is a reference under s. 256(1) of the Income-tax Act, 1961, hereinafter referred to as 'the Act', at the instance of the Revenue.
2. The facts found by the Tribunal, as disclosed from the statement of the case drawn up by the Tribunal, can be stated as follows :- The assessee is a private limited company incorporated on September 5, 1956, for the purpose of promoting various charitable objects. On August 11, 1958, the assessee settled the income from all its properties including the income derived from the business carried on by it in trust for carrying out certain charitable objects set out in the trust deed. The assessee was a partner in seven partnership concerns holding shares as enumerated in the statement of case. The assessee retired from the different partnerships prior to December 31, 1970. On the date the assessee retired from the partnership firms, the respective firms did not have adequate cash resources to pay the amount due to the assessee on the settlement of accounts, by way of capital contributed by it and the share of profits due to it. In those circumstances, the amounts due to the assessee were transferred to a current account. The statement of case shows the particular amounts due from the different firms to the assessee as on the date of its retirement. No interest was paid by the firms on the outstanding amounts due to the assessee.
3. Before the ITO, the assessee claimed exemption under s. 11 of the Act. The ITO came to the conclusion that the promoters of the assessee-company were the authors of the trust and they had substantial interest in the partnership concerns. Consequently, the amounts due to the assessee from the partnership concerns must be deemed to be amounts lent within the meaning of s. 13(2)(a) or amounts invested within the meaning of s. 13(2)(h) of the Act. He held that, therefore, the assessee would not be entitled to exemption under s. 11 of the Act.
4. The assessee carried the matter in appeal before the AAC. The AAC held that there was not agreement between the assessee and the partnership concerns and the sums which the assessee had become entitled to receive from the partnership firms on its retirement could not treated as money lent within the meaning of s. 13(2)(a) of the Act. The AAC also held that the said amounts could not also be treated as amounts invested with the partnership concerns within the meaning of s. 13(2)(h) of the Act. In the result, the AAC held that the assessee was entitled to the exemption under s. 11 of the Act.
5. The Revenue took up the matter in appeal before the Income-tax Appellate Tribunal, Madras. The Tribunal agreed with the views of the AAC and dismissed the appeal.
6. At the instance of the Revenue, the Tribunal has referred the following question of law for our opinion under s. 256(1) of the Act :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amounts due from the various partnership firms can neither be said to be 'lent' within the meaning of section 13(2)(a) nor can be said to be funds invested in the partnership concern within the meaning of section 13(2)(h) and, therefore, the assessee cannot be denied the exemption under section 11 of the Income-tax Act, 1961 ?'
7. The relevant provisions of the statute may be now set out. Chapter III of the Act deals with incomes which do not form part of the total income. Section 11 provides, among others, that the income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the person in receipt of the income, to the extent to which such income is applied to such purposes. Section 12, prior to the amendment by Finance Act, 1972, with effect from 1973, reads as follows :
'12. (1) Any income of a trust for charitable or religious purposes or of a charitable or religious institution derived from voluntary contributions and applicable solely to charitable or religious purposes shall not be included in the total income of the trustees or the institution, as the case may be .
(2) Notwithstanding anything contained in sub-section (1), where any such contributions as are referred to in sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be deemed to be income derived from property for the purposes of that section and the provisions of that section shall apply accordingly.'
8. Section 13 of the Act provides that s. 11 shall not be applicable to certain cases. Section 13(1)(c) provides that the income of the charitable trust shall not be excluded from the total income if any part of such income or any property of the trust or institution (whether created or established) is, during the previous year, used or applied directly or indirectly for the benefit of any person referred to in sub-s. (3). The list of persons referred in sub-s. (3) of s. 13 of the Act are, the author of the trust, the founder of the institution, a person who has made a substantial contribution to the trust or institution, any trustee of a trust or a manager of the institution, any relative of any such author, founder, person (member, trustee or manager) as aforesaid and any concern in which any of the persons above referred to has a substantial interest. Sub-section (2) of s. 13 enumerates certain categories of transactions which would be considered as tantamount to the use or application of the property of the trust of the income therefrom for the benefit of the specified persons. These transactions are specified in cls. (a) to (h) of sub-s. (2).
9. From the above, it is clear that s. 13 of the Act proceeds, inter alia, that a charitable or religious trust or institution shall not be entitled to exemption under s. 11 or s. 12, if any part of its income or property is used or applied directly or indirectly for the benefit of any persons specified in s. 13. Clause (e) of sub-s. (3) of s. 13 refers to any concerns in which, among others, the author of the trust of the founder of the institution has a substantial interest. In the instant case it is factually found that the assessee retired from the various partnership firms on or before December 30, 1970. It cannot, therefore, be said that the assessee had, during the previous year, used or applied any part of the income from its property or any part of its property directly or indirectly for the benefit of any concern in which it has interest. This will suffice to answer the reference by holding that sub-s. (2) of s. 13 is not attracted. However, in view of the nature of the question framed by the Tribunal, it is necessary to consider the question whether there is either 'lending' within the meaning of clause (a) of sub-s. (2) of s. 13 or 'investment' within the meaning of clause (h) of sub-s. (2) of s. 13.
10. As already stated, sub-s. (2) of s. 13 enumerates certain categories of transactions which would be considered as tantamount to the use or application of the income or the property of the trust for the benefit of specified persons. One of the transactions referred to in clause (a) of sub-s. (2) of s. 13 is lending of the income or property of the trust or institution to any of the specified persons without either adequate security or adequate interest or both. It reads as under :
' 13. (2) Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), -
(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both.'
11. It is argued on behalf of the Revenue that the amounts that remain with the various partnership firms as due and outstanding to the assessee must be deemed to be property of the assessee 'lent ' to the said partnerships for the period during the previous year without any adequate security or adequate interest or both. Mr. Jayaraman, learned standing counsel for the Revenue, argued that the very fact that the monies are shown in the current account of the partnership firms as due to the assessee would show that the character of the amount was a loan from the assessee to the various partnership firms. We are not inclined to accept the contention of the learned standing counsel. On retirement of the assessee from the partnership firms, there was a settlement of accounts and the capital contributed by the assessee and its share of profits were transferred to the current account. As the partnership firms had no adequate cash resources, the amounts were shown as outstanding in the books of the partnership concerns. As rightly pointed out by the Tribunal, the fact that the amounts were shown as outstanding in the books of the partnership concerns. As rightly pointed out by the Tribunal, the fact that the amounts were shown as due to the assessee from the partnership concerns on settlement of accounts cannot convert the nature of the amount into that of a loan. For the purpose of creating a loan, there must be an agreement or contract between the parties to the effect that one of them should treat the amount due to the other as having been advanced by the other. This should be the position where there is no physical handing over of the money by one to the other. In Ramanatha Aiyar's Law Lexicon, the meaning of the word 'lent' is given as 'to deliver to another for use on condition that the thing loaned or an equivalent of the kind shall be returned either with or without compensation'. In Hamlyn Encyclopaedic World Dictionary, which is quoted by the Tribunal, the word 'lend' is defined as 'to give the temporary use of money, etc., for a consideration, to grant the use of something with the understanding that it (or its equivalent kind) shall be returned'.
12. The Privy Council had to consider the scope and the meaning of 'loan' in Beninson v. Shiber, AIR 1946 PC 145. Lord Du Parcq, in his speech, delivered as follows :
'If a man finds money for another and expends it on that other's behalf and in accordance with his request, he is lending it although he never physically transfers it to the borrower. This may be true even where, as here, some of the money is due to the lender himself for his services. It is not necessary in such a case, in order to constitute a loan, that money should be handed over by the lender to the borrower and by him returned to the lender as the reward for his services. The same result is arrived at if the parties, by the terms of their contract and by their course of dealing, have shown an intention that the moneys payable by the debtor should be provided or 'found' by the creditor and treated as having been advanced by him.'
13. In Shree Ram Mills Ltd. v. CEPT : [1953]23ITR120(SC) , the managing agents of the assessee-company left lying with the assessee-company the commission which was due to them on the 31st December of every year and payable to them after the annual accounts of the assessee-company had been passed by the shareholders of the assessee-company. The assessee-company contended that this constituted a 'borrowing' within the meaning of r. 2A of Sch. II of the Excess Profits Tax Act (15 of 1940). Bose J., speaking for the court, held that it was a debt and not a borrowing. The learned judge further observed as follows (p. 123) :
'Of course, money so left could, by a proper agreement between the parties, be converted into loan, but in the absence of an agreement mere inaction on the part of the managing agents cannot convert the money due to them, and not withdrawn, into a loan. A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender cannot ordinarily come about by mere inaction.'
14. From the above it is clear that for an amount to fall within the mischief of s. 13(2)(a), there must be a loan. To constitute a loan, there must be a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender must come into existence by the act of parties. The mere circumstance that a partnership concern was not in a position to pay the amounts due to the assessee on the date of his retirement from the partnership and the fact that the amounts were shown in the books of account as due to the assessee cannot convert the amounts due as an amount advanced by the assessee to the partnership. We, therefore, hold that the amounts which remained with the partnership firm as payable to the assessee on its retirement cannot amount to 'monies of the trust lent to the firm' within the meaning of s. 13(2)(a).
15. In view of our finding that by its retirement, the assessee has ceased to have any interest any interest, must less substantial interest in the partnership concerns, clause (a) of sub-s. (2) of s. 13 will not be attracted, even if it is assumed for the sake of argument that an element of lending is involved in the assessee allowing the amounts due to it to remain in the hands of the partnership firms.
16. We now turn to clause (h) of sub-s. (2) of s. 13 which deals with any concern in which any of the specified persons has a substantial interest.
17. The said clause read as under :
'13(2) Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), - ...
(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest.'
18. The above sub-section specifically provides that the investment of a trust fund in any concern in which any of the specified persons has a substantial interest, would result in forfeiture of exemption from tax, where such investment is made after 31st December, 1970, or having been made before 1st January, 1971, the funds continue to remain so invested after 31st December, 1970. The question, therefore, arises whether the circumstance in which the assessee has allowed the amounts due to it by way of its share of contribution and profits with the various partnership firms in view of the difficulty of the said firms to find cash to make immediate repayment, would constitute an 'investment' in any of the partnership firms from the date of its retirement. Therefore, one of the main ingredients of clause (h) of sub-s. (2) of s. 13 has not been satisfied.
19. The word 'investment' has come up for interpretation before courts both in England and in India. In IRC v. Brodway Car Co. (Wimbledon) Ltd. [1946] 29 TC 214, the Court of Appeal, while construing the expression 'income received from investments', occurring in the Finance (No. 2) Act, 1939, held that the word 'investment' must be construed in the ordinary popular sense of the word, as judged by businessmen, and not as a term of art having a defined or technical meaning. It was observed that rents from leases or underleases could properly, in suitable circumstances, be comprised within the phrase 'income from investment'.
20. In IRC v. Tootal Broadhurst Lee Co. Ltd. [1949] 29 TC 352, the House of Lords had to consider the question whether the royalties received by a company in three groups of patents constituted 'investments' within the meaning of para. 6 of Pt. I of the Seventh Schedule to the Finance (No. 2) Act, 1939. Lord Simonds, in his speech, observed as follows at p. 372 :
'It appears to me that the problem may be solved in this way. I would take a schedule of the assets of the trading company concerned and, omitting assets such as stocks and shares to which in view of the decision in Gas Lighting Improvement Co. case [1923] 12 TC 503 the title of investments can in no circumstances be denied, would ask of each other asset : 'Is this an asset which the company has acquired and holds for the purpose of earning profits in, or otherwise for the promotion of, its particular trade or business'. There might be borderline cases in which the answer would be uncertain, but I do not doubt that in the vast majority of cases the answer would be clear cut. If it was in the affirmative the asset would not be an investment within the Paragraph. It is possible, as was pointed out in the Desoutter case [1945] 29 TC 155, by Lord Greene M. R., that a particular kind of asset might in the hands of one trader be, and in the hands of another not be, an investment, though a less likely form of investment for any trader to make than a patent cannot readily be imagined.'
21. Lord Normand explained the meaning of the word 'investment' thus in the same case above referred to, viz., IRC v. Tootal Broadhurst Lee Co. Ltd. [1949] 29 TC 352 at p. 373 :
'The meaning of investment is not its meaning in the vernacular of the main in the street but in the vernacular of the businessman. It is a form of income-yielding property which the businessman looking at the total assets of the company would single out as an investment.......The businessman would not limit income from investments to income from the kinds of securities which are quoted on the Stock Exchange, and he would I think, regard as income from investment a profitable rent from a sub-lease of office premises, or the like, surplus to the company's requirements'.
22. Again, Macnaghten J. spoke this in IRC v. Rolls-Royce Ltd. (No. 2) [1944] 29 TC 137 :
'The word 'investment', though it primarily means the act of investing, is in common use as meaning that which is thereby acquired; and the primary meaning of the transitive verb 'to invest' is to lay out money in the acquisition of some species of property......'
23. In CIT v. Aloo Investment Co. P. Ltd. : [1980]123ITR132(Bom) , the Bombay High Court, Speaking through Chandurkar J., held that the moneys lent by way of loans cannot be said to result in the acquisition of any property in specie and the mere fact that a large part of that income of the assessee-company consisted of interest from the loans would not, therefore, lead to the conclusion that income arose from investments as contemplated by s. 109(11) of the Act, prior to 1966 amendment. The learned judge further observed that since no income-yielding property can be said to have been acquired as a result of the loans advanced by the assessee-company, the company cannot be classified as an investment company. The Bombay High Court followed the English cases referred to above.
24. From the above, it is clear that in order to constitute an investment, the moneys must be laid out in such a manner as to acquire some species of properties which would bring an income to the investor. Viewed in that sense, we are unable to conclude that there has been an investment of any moneys by the assessee with any of the partnership firms. The various partnership firms are bound to return the moneys due and payable to the assessee-firm as and when demanded. It has not been found either by the Tribunal or by the lower authorities that the said moneys have been interested by the assessee-firm as understood in business parlance with a view to obtain any profit. It necessarily follows that clause (h) of sub-s. (2) of s. 13 is equally not attracted.
25. We agree with the findings entered by the Tribunal. We therefore, answer the question in the affirmative and against the Revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 500.