COMMISSIONER OF INCOME-TAX VS COMMONWEALTH TRUST INDIA LTD., 2001 PTD-KERALA-HIGH-COURT-INDIA 3598 (1998)

Income-tax--

‑‑‑‑Expenses or payments not deductible‑"Deposit", meaning of‑‑‑Foreign company amalgamated with Indian company under scheme of amalgamation approved by High Court‑‑‑All assets and liabilities of foreign company vesting with Indian company‑‑‑Indian company issuing debentures to foreign company in part satisfaction of consideration for vesting the business in Indian company‑‑‑Debentures treated as unsecured loans in books of Indian company and Indian company paying interest to foreign company on such loans‑‑‑Indian company paid interest "on the mode of payment of consideration for assets received 'by virtue of scheme of amalgamation'".‑‑ Loan does not amount to "deposit" as defined in Expln. (b) to subsection (8) of S.40A‑‑‑15 per cent. of such interest cannot be disallowed‑‑‑Indian Income Tax Act, 1961, S. 40A(8), Expln. (b) [before deletion by Finance Act, 1985, with effect from April 1, 1986].

A foreign company (Commonwealth Trust Ltd., London) was amalgamated with the Indian Company (Commonwealth Trust (India) Ltd.) with effect from October 1, 1977, as a result of a scheme of the amalgamation approved by the High Court. As a result of the amalgamation all the assets and liabilities of the foreign company vested in the Indian Company. The consideration fixed for the transfer was Rs.50,00,000 and towards the consideration the Indian company issued debentures to the foreign company in part satisfaction of the consideration for vesting the business in the Indian company. The, debentures were treated as unsecured loans in the books of the Indian company consequent of which the Indian company was paying interest to the foreign company. For the assessment years 1983‑84 and 1984‑85, the Inspecting Assistant Commissioner (Assessment) held that the loan amounted to a "deposit" within the meaning of Explanation (b) to subsection (8) of section 40A of the Income Tax Act, 1961, and hence disallowed 15 per cent. of such interest amounting to Rs.82,500. On appeal, the Commissioner of Income‑tax (Appeals) confirmed the order of the Inspecting Assistant Commissioner (Assessment). On further appeal, the Tribunal held that what the assessee paid was interest on the mode of payment of consideration for the assets received by virtue of the scheme of amalgamation and hence no disallowance could be made under subsection (8) of section 40A of the Act. On a reference:

Held, affirming, the decision of the Tribunal, that from the definition of the word "deposit" as contained in Explanation (b) to sub section (8) of section 40A of the Act, it is amply clear that unless interest liability is incurred on the deposit of money which includes money borrowed by a company, no disallowance as envisaged by subsection (8) of section 40A could be made. The Indian company was neither a banking company nor a financial company and no "deposit" as defined in Explana tion (b) to subsection (8) of section 40A was received by the Indian company. The Indian company paid interest 'on the mode of payment of consideration for the assets received by virtue of the scheme of amalgamation". Therefore, the 'Tribunal was right in holding that no disallowance of interest could be made under subsection (8) of section 40A of the Act.

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

P. Balachandran for the Assessee.

JUDGMENT

OM PRAKASH, C.J.‑‑‑At the instance of the Revenue, the Income- tax Appellate Tribunal referred the following question for the assessment years 1983‑84 and 1984‑85 for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that section 40A(8) of the Income Tax Act, 1961, is not applicable to the facts of this case and that the assessee was entitled to a further deduction of Rs.82,500?"

The Commissioner of Income‑tax (Appeals) disallowed the claim of the assessee under section 40A(8) of the Income Tax Act, 1961 (for short, "the Act"), observing as under:

"(9) Addition under section 40A(8):

The Commonwealth Trust Ltd. (London), became amalgamated with the Indian Company Commonwealth Trust (India) Ltd., with effect from October 1, 1977, as a result of the scheme of amalgamation finally approved by the High Court of Kerala by their order, dated June 5, 1980, with effect from October 1, 1977. As a result of this order all the assets and liabilities became vested in the appellant company, the Commonwealth Trust (India) Ltd. The consideration fixed for this transfer was Rs.50.00.000. In the normal course, the appellant is liable to pay this amount to the U.K. company. By an arrangement instead of the appellant paying it to the U.K. company it issued 5,000, 11 per cent. unsecured irredeemable perpetual special debentures of Rs.1,000 each to the Commonwealth Charitable Trust in part satisfaction of the consideration for vesting the business of the Commonwealth Trust Ltd, in the appellant company. This is treated as unsecured loans in the books of the appellant‑company consequent to which the appellant is paying interest at the rate of 11 per cent. to the Commonwealth Charitable Trust. The loan is treated as deposit in the books. Effectively the money is available in the books of the company. Therefore, to, this payment of interest, in my view, the provisions of section 40A(8) of the Act is applicable. 15 per cent. of the expenditure has, therefore, been rightly disallowed by the Inspecting Assistant Commissioner (Assessment). The disallowance of Rs.82,500 under section 40A(8) is, therefore, confirmed".

The assessee then appealed to Appellate Tribunal, who allowing the appeal, held as under:

"The learned representative of the assessee submitted that what is contemplated under section 40A(8) is expenditure incurred by way of interest in respect of any deposit received and the deposit is explained as 'any deposit of money, with, and included any money borrowed by 'In the instant case of the assessee, the assessee has neither incurred any interest in respect of any 'deposit received' nor on any 'money borrowed'. What the assessee paid is an interest on the mode of payment of consideration for the assets received by virtue of a scheme of amalgamation as approved by the High Court of Kerala. In view of the above facts, we are of the opinion that the order of the Revenue Authorities, in making disallowance made under this head is without merit. We, therefore, allow the appeal by the assessee on this ground. "

The only question for consideration is whether disallowance of Rs.82,500 under section 40A(8) of the Act is legally sustainable. Sub section (8) of section 40A, which has since been deleted with effect from April 1, 1986, was inserted by the Finance Act, 1975, with effect from April 1, 1976, subsection (8) of section 40A provides:

"Where the assessee‑company (other than a banking company or a financial company), incurs any expenditure by way of interest;

in respect of any deposit received by it;

then fifteen per cent. of such expenditure shall not be allowed as a deduction.

Explanation (b) to subsection (8) defines 'deposit' as meaning any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company.

(i) .......

(ii) ...........

(iii) ...not reproduced as they ace not relevant for the purpose of this case."

It is not disputed before us that the assessee‑company in, neither a banking company nor a financial company. It is also not disputed that there was no deposit, as defined in Explanation (b) to subsection (8), in this case. This is why the Tribunal held that in the instant case the assessee has neither incurred any interest in respect of any deposit received, nor on any money borrowed. According to the Tribunal, the assessee paid interest "on the mode of payment of consideration for the assets received by virtue of a scheme of amalgamation as approved by the High Court of Kerala". This is how the Tribunal held that no disallowance could have been made under subsection (8) of section 40A of the Act.

From the above extracted definition of the word "deposit" as contained in Explanation (b) of subsection (8) of section 40A, it is amply clear that unless interest liability is incurred on the deposit of money which includes money borrowed by a company, no disallowance as envisaged by subsection (8) could be made.

From the above reproduced facts, as stated in the order of the Commissioner of Income‑tax (Appeals), no deposit within the meaning of Explanation (b) is established and, therefore, the Tribunal was right in holding that no interest was paid on deposit within the meaning of Explanation (b) to subsection (8) of section 40A of the Act. We, therefore, agree with the view taken by the Appellate Tribunal that on the facts of this case, section 40A(8) of the Act would not attract.

The objects and reasons for introducing subsection (8) of section 40A can be taken into aid to test the correctness of the view we have taken. They are as under (see (1975) 98 ITR (St.) 84):

"As a result of the general policy of credit restraint and enforcement of selective control measures by the Reserve Bank of India, non -banking non‑financial companies have been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. The levy of interest tax under the Interest‑tax Act, 1974. on the gross amount of interest received by scheduled banks on loans and advances made in India has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about 1 per cent. The levy of this tax has, therefore, made the acceptance of deposits by non‑banking non‑financial companies from the public all the more attractive. In order to ensure that the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non‑banking sector the Bill seeks to provide that 15 per cent. of the interest aid b non-banking non‑financial companies on deposits received from the public will be disallowed in computing their taxable income." (Emphasis supplied)

From the above delineated portion, it is manifest that subsection (8) of section 40A of the Act was inserted to curb the tendency of the non‑banking and non‑‑finance' companies resorting to indiscriminate public deposits. We are, therefore, of the view that the view taken by the Commissioner of Income‑tax (Appeals) in his order, is wholly incorrect.

In the result, the abovementioned question is answered in the affirmative, that is, in favour of the assessee and against the Revenue.

M.B.A./373/FC

Reference answered.