Madras High Court
L.G. Balakrishnan And Brothers Limited vs Commissioner Of Income-Tax on 30 April, 1998
Equivalent citations: [2000]245ITR743(MAD)
JUDGMENT
1. The assessee is a company. The years of assessment under consideration are 1982-83 and 1983-84. The assessee had invited deposits from the public. The assessee-company accepted deposits from the public in accordance with the provisions of Section 58A of the Companies Act, 1956 (hereinafter to be referred to as "the Companies Act"). The deposits to the amount of Rs. 5,45,000 were secured by the creation of a floating' charge on the fixed assets of the assessee-company. The assessee-company executed a second hypothecation deed called second hypothecation trust on August 1, 1981, in favour of some of its directors who are called the trustees. The deed was executed with a view to create security for repayment of the deposits and the loan and interest thereon and the assessee-company offered to appoint its directors as trustees in favour of whom the second charge was agreed to be created by the company. It is relevant to notice that the first charge was created in favour of the Karnataka State Financial Corporation, Bangalore. The assessee created a second charge by way of hypothecation of the fixed assets of the company belonging to the assessee and also on the assets which may thereafter be acquired or brought about by the company for a sum of Rs. 5,45,000, subject, however, to the existing first charge. The hypothecation deed was not registered under the provisions of the Indian Registration Act, but it was registered under the Companies Act with the Registrar of Companies, Chen-nai, to satisfy the requirements of the Companies Act. The assessee-company during the course of the assessment proceedings for the assessment years 1982-83 and 1983-84 claimed deduction of the interest relatable to the deposits. The Inspecting Assistant Commissioner of Income-tax (Assessment) rejected the claim of the assessee on the ground that the trustees were the directors of the assessee-company and the hypothecation deed would not fully secure the interest of the depositors. He, therefore, held that the interest claimed by the assessee is liable to be disallowed under Section 40A(8) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"). The Commissioner of Income-tax (Appeals) following the earlier order of his own passed in the case of another company, Elgi Equipment Ltd., dated January 10, 1985, held that the charge was created in favour of a forum of the board of trustees and it was a floating charge and it was not possible to create a charge in favour of the large body of members involved in the transaction and the trustees were answerable to the general body of the creditors, debenture holders or depositors. According to him, since the charge was registered with the Registrar of Companies as required by the company law, there was a valid and proper charge. He also held that the registration with the Registrar of Companies would be noticed by the persons dealing with depositing the money and -the assessee was entitled to exemption on the basis of sub-Clause (ix) of Section 40A(8)(b) of the Act and allowed the appeals preferred by the assessee.
2. The Department filed appeals before the Income-tax Appellate Tribunal challenging the order of the Commissioner on the ground that there was no registered document under the Indian Registration Act and, therefore, there was no charge. The Appellate Tribunal held that the second charge could not be created without registration. The Tribunal held that the second charge cannot be created by deposit of title deeds since they were already deposited in creation of the charge and, therefore, it cannot be held that the loan was secured by creation of a mortgage or charge of fixed assets of the company and in that view of the matter, the Tribunal held that the disallowance made by the Inspecting Assistant Commissioner (Assessment) for each of the years under appeal was justified and allowed the appeals preferred by the Department. On application preferred by the assessee, the Tribunal referred the following questions of law for our consideration.
"1. Whether, on the facts and in the circumstances of the case, a valid charge or mortgage was created by the deed of hypothecation trust dated August 1, 1981 ?
2. Whether, on the facts and in the circumstances of the case, part of the interest of fixed deposits from the public was liable to be disallowed under Section 40A(8) of the Income-tax Act, 1961 ?"
3. During the pendency of the tax case reference, the company merged with another company and accordingly the cause title was ordered to be amended in T. C. M. P. Nos. 2 and 3 of 1998 by order dated January 27, 1998.
4. Mr. Philip George, learned counsel for the assessee, submitted that the Tribunal was not correct in holding that the amounts received by the assessee by way of deposit are not secured by way of creation of a charge on the fixed assets of the company and it would fall under Sub-clause (ix) of Section 40A(8)(b) of the Act as the loan is to be secured by creation of a charge on the fixed assets of the company. According" to learned counsel for the assessee, Section 40A{8) deals with companies and companies' deposits and when there was a valid charge created under the provisions of the Companies Act that would be sufficient to take the case out of the provisions of Section 40A(8) of the Act, notwithstanding the fact that the deed of hypothecation was not registered under the provisions of the Indian Registration Act.
5. Mr. C. V. Rajan, learned counsel for the Department, submitted that under the Indian Registration Act, the trust deed has to be registered under the provisions of Section 17 of the Indian Registration Act and, therefore, without the valid registration under the Indian Registration Act, the assessee is not entitled to claim that his case would fall under Section 40A(8)(b)(ix) of the Act. In support of his submission, learned counsel for the Department relied upon the decision of this court in Viswanadhuni v. M. S. Menon, AIR 1939 Mad 202. He also referred to the decision in the case of Suskil Prasad v. Official Liquidator, Vinod Motors P. Ltd. [1984] 55 Comp Cas 52 (Delhi). Strong" reliance was placed on the decision of State of Madras v. Madras Electric Tramways (1904) Ltd. [1956] 26 Comp Cas 398, wherein a Bench of this court held that for an effective charge on the immovable properties, the security should be registered under the Registration Act as well as under Section 109 of the Companies Act, 1913, which came into force after January 15, 1937, and he also referred to the decision of the Supreme Court in M. L. Abdul Jabar Sahib v. H. Venkata Sastri and Sons, . Finally, he drew our attention to the decision of the Calcutta High Court in the case of K. Roy and Bros. v. Ramanath Das [1945] 15 Comp Cas 69, and submitted that though the trust deed was required to be registered, the debentures issued by the trustees were not registered.
6. We have carefully considered the submissions of learned counsel for the parties. Section 40A(8) of the Income-tax Act, 1961, in so far as it is relevant for the purpose of the case reads as under :
"Where the assessee, being a 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, fifteen per cent, of such expenditure shall not be allowed as a deduction.
Explanation.--In this Sub-section,--
(a) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in Section 51 of that Act ;
(b) 'deposit' means any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company --. . .
(ix) as a loan from any person where the loan is secured by the creation of a mortgage, charge or pledge of any assets of the company (such loan being hereafter in this Sub-clause referred to as the relevant loan) and the amount of the relevant loan, together with the amount of any other prior debt or loan secured by the creation of a mortgage, charge or pledge of such assets, is not more than seventy-five per cent, of the price that such assets would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge for the relevant loan ;"
7. A careful study of the provisions of Section 40A(8) indicates that the provision deals with companies other than a banking company or a financial company. It deals with the allowance of expenditure by way of interest in respect of any deposit received by the company of an extent of 15 per cent. on such expenditure and to that extent it shall not be allowed as a deduction. Clause (b) of Section 40A(8) deals with the definition of the term, "deposit" and Clause (a) excludes certain loans from the scope of the deposit. Under Sub-clause fix), if any loan is secured by the creation of mortgage, charge or pledge of any assets of the company and the amount of the relevant loan together with the amount of any other prior debt or loan secured by the creation of a mortgage, is not more than 75 per cent, of the mortgage value of the assets on the date of the creation of the charge for the relevant loan, then the loan is not regarded as a deposit. There is no dispute on the facts of the case that all other requirements of the provisions of Section 40A(8) of the Act are satisfied, except the only condition that the loan obtained by the company was not secured by the creation of a charge on the fixed assets of the company under the Indian Registration Act.
8. Now let us consider the various case law cited by learned counsel for the Revenue. In K. Roy and Bros. v. Ramanath Das [1945] 15 Comp Cas 69, the Calcutta High Court noticed the purpose of the registration under the Indian Registration Act and the Indian Companies Act and came to the conclusion that registration under both the Acts is necessary and the reasoning of the Calcutta High Court reads as under (page 75) :
"In my opinion for the reasons I have given it is necessary that a debenture creating a charge whether floating or fixed over any immovable property should be registered according to the provisions of law laid down in Section 17 of the Registration Act, in addition to the provisions of the Companies Act. The provisions of the Companies Act are intended to protect people who have business dealings with companies and to warn them to the extent to which the companies have created obligations over their property. The provisions of the Registration Act are intended to protect all who may have dealings with land so that those persons, particularly those local persons, may have knowledge of the obligations which have been created over and in respect of the land."
9. Learned counsel relied upon the decision of this court in the case of Vis-wanadham v. M. S. Menon, AIR 1939 Mad 202, to contend that the charge under Section 100 of the Transfer of Property Act attracts Section 59 of the Transfer of Property Act and a charge can be created only by a registered document signed, registered and attested by two witnesses in accordance with Section 59 where the principal money secured is Rs. 100 or above. The above decision was not accepted by the Supreme Court in the case of M. L. Abdul Jabbar Sahib v. H. Venkata Sastri and Sons, .
10. The Supreme Court held as under (page 1152) :
"If a charge can be made by a registered instrument only in accordance with Section 59, the subsequent transferee will always have notice of the charge in view of Section 3 under which registration of the instrument operates as such a notice. But the basic assumption of the doctrine of notice enunciated in the second paragraph is that there may be cases where the subsequent transferee may not have notice of the charge. The plain implication of this paragraph is that a charge can be made without any writing'."
11. Learned counsel for the Revenue also relied on the decision in the case of State of Madras v. Madras Electric Tramways (1904) Ltd, [1956] 26 Comp Cas 398 (Mad) where a Division Bench of this court held that the debenture creates a charge, whether floating or fixed over any immovable property, should be registered according to the provision of law laid down under Section 17 of the Registration Act. This court also noticed that the registration under the Registration Act is essential to make a charge in respect of immovable properties in favour of the debenture holder valid and enforceable, but it would not affect the right of the debenture holder over the movable property.
12. The Delhi High Court in the case of Sushil Prasad v. Official Liquidator, Vinod Motors Pvt. Ltd. [1984] 55 Comp Cas 52 has taken the view that a charge over the property can be created orally as well as by the written document. However, if a charge is created by a written document, then the provisions of the Registration Act should be complied with and the document should be registered. However, if the conduct of the parties shows that de hors the written document a charge was created, the charge created can be regarded as a valid charge. The Delhi High Court in the above case referred to the decision of the Supreme Court in the case of M. L Abdul Jabbar Sahib v. H. Venhata Sastri and Sons, , and held that the charge can be created orally. It is no doubt true that if the charge is created by a document, the document would be inadmissible in evidence unless it is registered. In the present case the conduct of the parties clearly shows that the charge was created over the company's properties. The resolution of the company authorising the director to create subsequent charge on the hypothecation of the fixed assets belonging to the assessee-company and the conduct of the parties creating a charge and the registration under the Companies Act all can be taken into consideration to show that there was a prior oral agreement for creating a charge. Even if the document dated August 1, 1991 is ignored, the resolution and the registration under the Companies Act cannot be ignored and they can be taken into consideration to show that a valid charge was created over the company's properties. The Delhi High Court in the case cited supra has taken the view that the resolution of the company as well as the registration under the Registration Act can be relied upon to indicate that a charge was validly created and the written document creating a charge can be ignored. Therefore, even if we ignore the second hypothecation deed on the ground that it is unregistered, the conduct of the parties, the passing" of the resolution and the oral agreement prior to the execution of the second hypothecation deed and the act of registration with the Registrar of the Companies under Section 125 of the Companies Act should be taken into consideration which would prove the creation of a valid charge over the immovable properties and once there is a valid charge which was registered under the relevant provision of the Companies Act, the assessee-company would be satisfying the requirements of Sub-clause (ix) of Clause (b) of Section 40A(8) of the Act.
13. Therefore, we hold that it is not open to the Income-tax Officer to include the interest by invoking the provisions of Section 40A(8) of the Act. It is significant to notice that a floating charge was created and for creation of floating charge there is no requirement that a document of title should be delivered to the charge holder as in the case of equitable mortgage. If the document has been delivered, that itself would be evidence for the creation of the charge over the company properties. However, even from the conduct of the parties, it can be inferred that there was a valid charge over the company's assets. Hence, we are not able to agree with the view endorsed by the Andhra Pradesh High Court in the case of CIT v. Kohmoor Glass Factory P. Ltd. [1989] 175 ITR 237 that there must be a clear evidence to show that there was a delivery of title deeds to create a valid charge. In the case of a floating charge, we are of the view that a charge can be created orally as held by the Supreme Court in the case of M. L Abdul Jabbar Sahib v. H. Venkata Sastri and Sons, , and the case of M. C. Chacko v. State Bank of Travancore, and by the conduct of the parties, the creation of a valid charge can be inferred. Hence, we are not able to agree with the conclusion of the Appellate Tribunal that there was no valid charge and, consequently, we hold that no part of the interest is disallowable under Section 40A(8) of the Act.
14. Hence, our answer to both the questions of law referred to us is as under:
First question : There was a valid charge and hence this question is answered in the affirmative and in favour of the assessee.
Second question : It is answered in the negative and in favour of the assessee.
15. In the circumstances of the case, there will be no order as to costs.