COMMISSIONER OF INCOME-TAX VS KHIVARAJ MOTORS LTD.
1999 P T D 1745
[227 I T R 473]
[Madras High Court (India)]
Before K.A. Thanikkachalam and S.M. Sidickk, JJ
COMMISSIONER OF INCOME-TAX versus
KHIVARAJ MOTORS LTD.
Tax Cases Nos.957 to 959 of 1983 (References Nos.513 to 515 of 1983), decided on 19/02/1997.
Income-tax---
----Business expenditure---Disallowance---Interest on deposits---" Deposit", definition of---Interest paid to directors on their current running accounts with company in which they are interested---Fifteen per cent. of such interest is to be disallowed---Indian Income Tax Act, 1961, S.40-A(8)---Indian Companies (Acceptance of Deposits) Rules, 1975.
The expression "deposits" had been defined in Explanation (b) to section 40-A(8) of the Income Tax Act, 1961, and it means any deposit of money, which includes any money borrowed by a company, but does not include any amount received by the company mentioned in sub-clauses (i) to (ix). The deposits made by directors in a company in their current account do not form part of any of the exempted categories.
Deposits which are understood in the business of a bank may be in the current account, savings bank account and fixed deposit account. Payment into the current account cannot be excluded from the nature of deposits which are made in the bank. The only distinction between a fixed deposit and this deposit is that the term for which the payment has been made in the case of a fixed deposit is a fixed one whereas, in the case of a current account, no time is fixed therein and this distinction will not take the amount outside the purview of "deposit' used. in the clause. Any assistance from the Companies (Acceptance of Deposit) Rules, 1975, cannot be taken because the said rules came into force on February 3, 1975, and clause (ix) was specifically added in the definition of "deposit" in the said Rules with effect from September 18, 1975, which excluded deposits by the directors from the term 'deposit'. This specific exclusion by the amendment in the 1975 Rules makes it more clear that deposits by the directors were included in the term 'deposit' and it is by way of a specific provision that the same has been excluded. The words ' deposit by the directors' which were excluded by the insertion of clause (ix) of the definition in the 1975 Rules, refers to all deposits whether they are for a fixed period or in their current accounts. In Explanation (b) to section 40-A(8) of the Income Tax Act', by defining the word ".'deposit", no such exclusion has been made and, therefore, deposits by the directors in their current accounts cannot be excluded. On a correct interpretation of the provisions of section 40-A(8) the payments which are made by a director to the company in the current account of the said director on which the company is paying interest will be considered as a deposit. Accordingly, interest paid by a company on current accounts of the directors is to be disallowed to the extent of fifteen per cent. of such interest under section 40-A(8) of the Act.
Agew Steel Manufacturers (Pvt.) Ltd. v. CIT (1994) 209 ITR 77 (Guj.); CIT v. Bazpur Cooperative Sugar Factory Ltd. (1989) 177 ITR 469 (SC); CIT v. Gandhi Metals Mills (P.) Ltd. (1993) 200 ITR 252 (Raj.); CIT v. Jhaveri Bros. & Co. (Pvt.) Ltd. (1995) 214 ITR 374 (Bom.); CIT v. Kalani Asbestos (P.) Ltd. (1989) 180 ITR 55 (MP); Daga & Co. (P.) Ltd. v. CIT (1997) 227 ITR 480 (Cal.) (Appex.) and Lakshmanier (K.M.S.) & Sons v. CIT (1953) 23 ITR 202 (SC) ref.
C.V. Rajan for the Commissioner.
K. Mani for the Assessee.
JUDGMENT
K.A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following common question for the assessment years 1977-78 to 1979-80 for the opinion of this Court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):
"Whether, on the facts and in the circumstances of the case and having regard to the provision of section 40-A(8) read with Explanation (b) to the said section, the Appellate Tribunal was right in holding that the Income-tax Officer was not justified in disallowing the interest paid to the directors on their current running accounts with the assessee-company under section 40-A(8) of the Act?"
The assessee-company was a private limited company, but because its turnover had exceeded rupees one crore, it is deemed to be a public limited company. During the assessment year 1977-78, interest accrued and became due to the four directors, Khivaraji Chordia, Devarajji Chordia, Prafulchand Chordia and Sainikraj Chordia, to the extent of Rs.4,41,450. For the assessment year 1978-79 interest accrued and became due to the four directors to the extent of Rs.13,02,944.67. Similarly, for the assessment year 1979-80, interest accrued and became due to the four directors on moneys left with the company to the extent of Rs.11,23,785.50. For the assessment year 1977-78, by order, dated January 24, 1978, the Income-tax Officer without giving any reason, disallowed under section 40-A(8) of the Act, interest of 15 per cent. on Rs.7,09,938. But a rectification order was passed on April 5, 1978 - restricting the disallowance at 15 per cent. on interest of Rs.4,41,450. For the assessment year 1978-79, by order, dated April 17, 1979, the Income-tax Officer disallowed interest under' section 40-A(8) of the Act of Rs.1,95,541. Similarly, for the assessment year 1979-80, the 15 per cent. disallowance of interest under section 40-A(8) came to Rs.1,68,567. The assessee filed appeals to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the moneys of the directors with the company amount to a deposit or borrowing by the company and hence he held that section 40-A(8) of the Act applied and confirmed the disallowance of 15 per cent. interest accrued due to the directors in the company. As against such order, the assessee filed appeals before the Appellate Tribunal. The Tribunal had gone through the rationale behind the introduction of section 40-A(8) of the Act by the Finance Act, 1975, with effect from April 1, 1976, and had also considered the Finance Minister's Speech at page 113 (St.) of 98 ITR. The Tribunal was of the view that the amounts left by the directors with the assessee could not be considered as a deposit. The Tribunal, for the reasons given by it, held that the provisions of section 40-A(8) of the Act did not apply and the disallowance of 15 per cent. of the accused interest due to the directors for the three years was not warranted. Regarding the alternative plea about the non-applicability of section 40-A(8) of the Act on the ground that a substantial portion of the interest amounts were only interest on interest, the Tribunal observed that no elaboration was necessary on this point in view of its finding in the assessee's favour on the main question. Thus, the Tribunal allowed the assessee's appeal.
Learned standing counsel appearing for the Department submitted that the definition of the term 'deposit' as per Explanation (b) to section 40-A(8) is very comprehensive, in that it means any deposit of money and includes any money borrowed by a company. Such definition does not include any amount received by the company in respect of nine items mentioned. therein. According to learned standing counsel, the interest has been allowed to the assessee as a deduction only as interest on the capital borrowed by the company and was allowable under section 36(1)(iii) of the Act. Therefore, according to learned standing counsel, the moneys of the directors with the company amount to a deposit or borrowing by the company and hence section 40-A(8) of the Act applies and disallowance of 15 per cent. of interest accrued due to the directors in the company is warranted. According to learned standing counsel even the current account of the directors with the company would fall under section 40-A(8) of the Act. In order to support his contention, learned standing counsel for the Department relied upon the following decisions:
(1) CIT v. Gandhi Metals Mills (P.) Ltd. (1993) 200 ITR 252 (Raj).
(2) Agew Steel Manufacturers (P.) Ltd. v. CIT (1994) 209 ITR 77 (Guj).
(3) CIT v. Jhaveri Bros. & Co. (Pvt.) Ltd. (1995) 214 ITR 374 (Bom).
(4) Daga & Co. (P.) Ltd. v. CIT (1997) 227 ITR 480 (Cal) (Apex.) (infra). .
Learned standing counsel also drew our attention to a passage occurring in Sampath Iyengars Law of Income-tax 9th edition, at pages 2826 and 2827.
On the other hand, learned counsel appearing for the assessee submitted that the amounts left by the directors in the company are not capital borrowed by the company and the interest deduction in the case of the assessee is allowable under section 37 of the Act as expenditure laid out or expended wholly and exclusively for the purpose of the business. A perusal of the account entries would go to show that the directors had left their moneys in the. company and the company had maintained a running account and on different dates moneys were withdrawn by the directors or paid by the directors of the company. This would show that the nature of the transaction was only a running current account. It was further submitted that a substantial portion of interest for the three years in respect of the directors related to interest on interest and hence such interest on interest amounts cannot be treated as deposits or borrowing to attract section 40-A(8) of the Act. Therefore, according to learned counsel appearing for the assessee, the disallowance of 15 per cent. of the interest payment under section 40-A(8) was incorrect and the Tribunal was correct in deleting the disallowance. In order to support his contention, learned counsel appearing for the assessee relied upon the decision in K.M.S. Lakshmanier & Sons v. CIT (1953) 23 ITR 202 (SC) and CIT v. Bazpur Cooperative, Sugar Factory Ltd.(1989) 177 ITR 469 (SC).
We have already set out the facts in detail. Four of the company directors made deposits with the company. The point for consideration is, whether such deposits made by the company's directors are hit by section 40-A(8) of the Income Tax Act, 1961. The expression "deposit" has been defined in Explanation (b) to section 40-A(8) of the Act. It means any deposit of money, which includes any money borrowed by a company, but does not include any amount received by the company mentioned in sub clauses (i) to (ix). The deposits made by the directors do not form part of any of the exempted categories.
The passage occurring in Sampath Iyengar's Law of Income-tax, 9th edition, page 2826, is stated as under:
"In legal parlance, a 'general deposit' is where the money deposited itself is not returned but equivalent to the money (i.e., a like sum) is to be returned. A perusal of section 40-A(8) of the Act, shows that the word 'deposit' mentioned therein has not clearly been defined. In the Explanation to section 40-A(8), an inclusive definition of 'deposit' has been given which states that the word deposit means any deposit of money with, and includes any money borrowed by, a company. This Explanation in clause (b) has defined the word deposit in a wider sense and besides any deposit of money with the company, the money borrowed by the company is also taken within the ambit of the word 'deposit'. A distinction has been drawn in this definition with regard to the deposit of money and money borrowed.
In the said Explanation, certain exceptions have been provided which would not include the amount received by the company as deposit.
Admittedly, the amount deposited by a director in the company in its current account has not been excluded there from. The deposits which are understood in the business of a bank may be in the current account, savings bank account and fixed deposit account. The payment in the current account cannot be excluded from the nature of deposits which are made in the bank. The only distinction between a fixed deposit and this deposit is that the term for which the payment has been made in the case of a fixed deposit is a fixed one whereas, in the case of a current account, no time is fixed therein and this distinction will not take the amount outside the purview of the deposit used in the clause. Any assistance from the Companies (Acceptance of Deposits) Rules, 1975, cannot be taken because the said Rules came into force on February 3, 1975, and clause (ix) was specifically added in the definition of deposit in the said Rules with effect from September 18, 1975, which excluded deposits by the directors from the term 'deposit'. This specific exclusion by the amendment in the Rules makes it more clear that deposits by the directors were included in the term 'deposit' and it is by way of a specific provision that the same has been excluded. The words 'deposit by the director' which were excluded by the insertion to clause (ix) refers to all deposits whether they are for a fixed period or in their current accounts. In the Explanation to section 40-A(8) referred to above, by defining the word deposit, no such exclusion has been made and, therefore, deposits by the directors in their current accounts cannot be excluded. On a correct interpretation of the provisions of section 40-A(8), the payments which are made by a director to the company in the current account of the said director on which the company is paying interest will be considered as a deposit. Accordingly, interest paid by a company on current account of the directors was disallowable under section 40-A(8). However, a contrary view has also been taken."
This passage is based upon the following decisions:
(1) CIT v. Gandhi Metals Mills (P.) Ltd. (1993) 200 ITR 252 (Raj).
(2) Agew Steel Manufacturers (P.) Ltd. v. CIT (1994) 209 ITR 77 .(Guj).
(3) Daga & Co. (P.) Ltd. v. CIT (1997) 227 ITR 480 (Cal) (Appex.) (infra).
(4) CIT v. Jhaveri Bros. & Co. (Pvt.) Ltd. (1995) 214 ITR 374 (Bom).
A contrary view was taken by the Madhya Pradesh High Court in CIT v. Kalani Asbestos (P.) Ltd. (1989) 18 ITR 55. According to the Madhya Pradesh High Court interest paid to directors and shareholders on current accounts with the company on which 15 per cent of the interest cannot be disallowed under section 40-A(8) of the Act.
Learned counsel appearing for the assessee relied upon the decision in K.M.S. Lakshmanier & Sons v. CIT (1953) 23 ITR 202 (SC). According to the facts arising in the abovesaid decision, the assessees were the sole selling agents for yarn manufactured by a textile mill and they distributed yarn to customers under forward contracts in respect of which they obtained from their customers advances of moneys which were adjusted towards the final payment of purchase price at the time of delivery of goods. They treated the amounts as advance payments in relation to each "contract" number and kept them under the heading "contracts advance fixed deposit account Under this arrangement a customer had to pay the price of the bales in full and the deposit would be returned to him on the completion of the delivery under the contract, On these facts, the Supreme Court held that the transaction between the assessees and the customer after February 14, 1945, had all the essentials of a contract of loan and, therefore, the deposits received after that date, constituted borrowed money for the purpose of Rule 2-A. It was further held that the deposits received by the assessees from May 5, 1944, to February 14, 1945, partook more of the nature of trading receipts than of security deposits, and, therefore, the sums received during this period could not be regarded as borrowed money for the purposes of rule 2-A. Therefore, this decision was rendered on the facts arising in that case.
The provisions of section 40-A(8) of the Act were not the subject matter in the abovesaid decision.
Reliance was also placed upon the decision in CIT v. Bazpur Cooperative Sugar Factory Ltd. (1989) 177 ITR 469 (SC). In this decision the Supreme Court held that the moneys deposited represented contribution by the members for converting the partly paid-up shares into fully paid-up shares and thereafter, for defraying the loan taken from the Industrial Finance Corporation of India. Any balance remaining was to be refunded to the members. The circumstance that there was no certainty that any balance would remain for refund to the members in itself indicated that the deposits could not be regarded as loans. A loan necessarily supposed a return of the money loaned. There was never any intention on the part of the society or its members to treat the deposits as loans or that the relationship between the society and the members should be that of borrower and lender. The interest paid by the society to its members was not admissible as a deduction under section 36(1)(iii) of the Act. A plain reading of this decision would also go to show that it was rendered in a different context. Here also the provision of section 40-A(8) of the Act was not the subject-matter.
Learned counsel appearing for the assessee submitted that a substantial portion of the interest amounts were only interest on interest, and, therefore, the provisions of section 40-A(8) of the Act would not apply to the facts 'of this case. It remains to be seen that the deposits were made. as cumulative deposits with compound interest. In such a case, it is not possible to say that the major portion of the deposit amount was interest on interest. In view of the majority of judgments of the various High Courts cited supra, we hold that the Tribunal was not correct in coming to the conclusion that section 40-A(8) of the Act is not applicable to the facts of this case. On the other hand, the deposits made by the directors with the company are deposits under section 40-A(8) of the Act and the interest received thereon is liable to be disallowed under the abovesaid provision.
In the result, we answer the question referred to us in the negative and in favour of the Department. No costs.
M.B.A./2017/FC Reference answered.