Income-tax---

----Business expenditure---Company---Interest payment on deposits---Disallowance of 15 per cent. of expenditure---Interest paid to Directors and shareholders on their current accounts could not be disallowed---Indian Income Tax Act, 1961, S.40-A(8)---Indian Companies Act, 1956, S.58-A.

The assessee was a private limited company. During the course of assessment, the Income-tax Officer noticed that for the assessment years 1980-81 to 1983-84, the assessee had claimed various amounts of interest paid. The Income-tax Officer was of the opinion that the amounts on which interest was paid were received by the assessee by way of deposits, and that as such, in terms of section 40-A(8) of the Income Tax Act, 1961 15 per cent. of the interest paid to such persons had to be disallowed. On appeal, the assessee contended that the interest paid to the Directors and shareholders was on their current accounts and, therefore, no disallowance was called for. The Commissioner of Income-tax (Appeals) gave partial relief. However, the Tribunal accepted the assessee's claim that the monies kept with the company were in the nature of running current accounts. On a reference:

Held, that in view of the provisions of the Companies Act, 1956, the Press Note issued by the Central Government. the nature of the accounts, and the position of the deposits the sum received from the Directors and shareholders of the assessee did not amount to "deposits" within the meaning of section 40-A(8) of the Act, and interest on such sums could not be' disallowed.

CIT v. Ashoka Marketing Ltd. (1976)103 ITR 543 (SC) and CIT v. Kotrika Venkataswamy & Sons (1971) 79 ITR 499 (SC) ref.

D.D. Vyas for the Commissioner.

S.C Bagadiya for the Assessee.

JUDGMENT

A.R. TIWARI, J. ---In compliance with the directions, dated September 22, 1988, issued by this Court in Miscellaneous Civil Case No. 141 of 1986, the Tribunal stated the case and referred the undernoted question of law arising out of the order, dated June 27, 1985, passed by the Tribunal in I.T.A. Nos.52 to 55/(Ind) of 1984 for the assessment years 1980-81 to 1983-84 connectible with applications registered as R.A. Nos. 86 to 89/(Ind) of 1985, for our opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums received from the directors and shareholders of the assessee did not amount to 'deposits' within the meaning of section 40-A(8) of the Act and that no disallowance of interest under section 40-A(8) of the Act was called for?"

The facts lie in a narrow compass. The assessee is a private limited company known as Kalani Asbestos Cement Private Limited, Indore, During the course of assessment, the Income-tax Officer noticed that for each of the assessment years under appeal the assessee had claimed various amounts of interest paid. The Income-tax Officer was of the opinion that the amounts on which interest was paid were received by the assessee by way of deposits. As such in terms of section 40-A(8) of the Income Tax Act, 1961 ( for short, "the Act"), 15 per cent. of the interest paid to such persons was disallowable. Accordingly, the Income-tax Officer made the disallowance for each of the four assessment years quantified at Rs.51,600. The assessee felt aggrieved by the order of disallowances (Annexures "A", "A/1", "A/2" and "A/3") and filed appeals before the Commissioner of Income-tax (Appeals) on the contention that the interest paid to the directors and shareholders was on their current accounts and, therefore, no disallowance. was called for. The Commissioner of Income-tax. (Appeals) reduced the quantum of liability with reference to certain parties, as particularised in the statement of the case (Annexures "B", "B/1", "B/2" and "B/3"). The assessee still felt dissatisfied and filed appeals before the Tribunal which were registered as 52 to 55/(Ind) of 1984. The Tribunal took into consideration the position of deposits under the Companies Act, 1956, the Press Note issued by the Ministry of Law, Justice and Company Affairs and the provisions of law and accepted the claim of the assessee that such moneys were kept with the company by the directors and shareholders and were in the nature of running current accounts (Annexure "C"). The Department felt dissatisfied by the order passed by the Tribunal and presented applications under section 256(1) of the Act which were registered as R.A. Nos.86 to 88/(Ind) of 1985. These applications were rejected by the Tribunal on December 6, 1985 (Annexure "D"). The Department then filed an application before this Court under section 256(2) of the Act which was registered as Miscellaneous Civil Case No-141 of 1986. This Court directed the Tribunal on September 22, 1988, to state the case and refer the question as proposed in the aforesaid case. The Tribunal has stated the case and referred the aforesaid question.

We have heard Shri . D.D. Vyas, learned counsel for the applicant/Department, and Shri S.C. Bagdiya, learned counsel for the non?-applicant/assessee.

Earlier the Tribunal had declined to state the case on the conclusion that the finding of the Tribunal was based on appreciation of the facts and on reliance on circular and the provisions of law. Section 40-A(8) now stands omitted by the Finance Act, 1985, with effect from April 1, 1986. Earlier this provision was inserted by the Finance Act, 1975, with effect from April 1, 1976. According to this provision as it was in force at the relevant time, it was provided that if the assessee, being a company, incurs any expenditure by way of interest in respect of any deposit received by it, fifteen percent of such expenditure shall not be allowed as a deduction. The contest between the parties, i.e., the assessee and the Department, was as to whether the accounts standing in the name of the directors and shareholders were in the nature of current accounts or were in the nature of deposits as envisaged by section 40-A(8) as was in force at the relevant time. On appreciation of the facts, the Tribunal found that the same were in the nature of current accounts and not in the nature of deposits and as such there was, no question of invoking section 40-A(8) of the Act.

A finding reached on appreciation of facts does not give rise to any question of law. In CIT v. Ashoka Marketing Ltd. (1976) 103 ITR 543 (SC) and in CIT v. Kotrika Venkataswamy & Sons (1971) 79 ITP, 499 (SC), it is held that the conclusion based on question of fact does not give rise to any question of law. However, as the question is submitted in compliance with the directions issued by this Court, we heard the parties at length. Counsel for the applicant was unable to show to us as to how the sums received from the directors and shareholders of the assessee amounted to deposits within the meaning of section 40-A(8) of the Act. This provision has now been omitted with effect from April 1, 1986.

This aspect was earlier considered by the Union of India. The Press Note took into account section 58-A of the Companies Act, 1956, and the Press Note issued on that linchpin by the Ministry of Law, Justice and Company Affairs, indicated that the amount received from the directors and shareholders of a private limited company did not represent deposits but such amounts were kept with the company only in the nature of running current accounts allowing the directors and shareholders to withdraw the same as and when required.

In view of the provisions of the Companies Act, the press note, the nature of the accounts, the position of the deposits we are satisfied that the Tribunal committed no error in holding that such amounts were in the nature of running current accounts and not in the nature of deposits so as to attract the erstwhile provision under section 40-A(8) of the Act.

On consideration, we, therefore, answer the question in the affirmative, i.e., in favour of the assessee and against the Department.

This case is thus decided in the terms indicated above but with no order as to costs.

Counsel fee for each side is allowed at Rs.750, if certified.

A copy of this order shall be sent to the Tribunal for information.

M.B.A./1427/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly.