Income Tax Appellate Tribunal - Delhi
Fedders Lloyd Corpn. (P.) Ltd. vs Income-Tax Officer on 25 March, 1988
Equivalent citations: [1988]27ITD437(DELHI)
ORDER
A. Kalyanasundharam, AM
1. In this appeal, by the assessee, a Ltd. company, the issue is whether the loan received from M/s. Pandit Kanhaiya Lal Punj by the assessee-company is in the nature of deposit within the meaning of Section 40A(8) and whether interest at 15 per cent needs to be disallowed or not.
2. Brief facts of the case are the assessee a limited company is a manufacturer of air-conditioners, refrigerators, etc., and had been borrowing money from M/s. Pandit Kanhaiya Lal Punj in which concern the Directors/relatives are partners. As on 1-4-1978 the assessee-company was to receive over 25 lakhs of rupees from the said partnership firm which over the years has become an advance taken by the company from the said concern. During the course of assessment proceedings, enquiries were made on the said loan taken by the company and also why Section 40A(8) should not be held to be attracted and why 15 per cent should not be disallowed on the interest paid. The plea of the assessee was that the provisions of Section 40A(8) are not attracted as the loan is a trading loan taken from time to time since 1957 as the said concern is a financial firm. Further, the said loan was secured earlier by the personal guarantee of the Directors and later by the hypothecation of stocks. In support of this claim, the Board's resolution dated 7th Nov., 1980 as also the letter from Hongkong and Shangai Bank that they had no objection for creation of second charge and also that letter from the auditor for the reason of depicting the loan as unsecured on the balance-sheet.
2.1 The claim of the assessee was rejected primarily for the reason that the said concern was not a company and secondly, since in the balance-sheet, it was shown as unsecured.
3. In the appeal before the CIT (Appeals), the assessee pleaded the same arguments but not with failure as, according to the CIT (Appeals), that since two of the Directors were authorised to complete documentation for creation of charge and its registration with the concerned authorities, he concluded that no charge, in fact, was created. He was also impressed by the letter of the auditor that certain documentation work in regard to creation of the charge was in the process. The CIT (Appeals) was of the view that by passing of a resolution itself would not create a charge and that creation of a charge has to be a formal legal affair involving certain documentation on both sides and even possibly registration of the charge with appropriate authorities. Since no such evidence was available, according to him, which are necessary he came to the conclusion that there was no charge created and that the loan taken from the said concern was in the shape of a current account, the provisions of Section 40A(8) are attracted and thus, 15 per cent interest was upheld to have been rightly disallowed. The assessee's main thrust before us was that the said arrangement of finances from the said concern was fully covered by Section 40A(8) Explanation (b)(ix). He submitted that the assessee's loan requirement was increasing and the said cpn-cern was apprehensive and therefore asked the company to create a second charge in their favour of various movable assets of the company. It was, accordingly, that the Board of Directors passed a resolution in their meeting of 7th November, 1981, by which resolution they had agreed to create a second charge on the assets in respect of the loan taken from the said concern. As per practice two of the Directors of the Board were authorised to fulfil the requirements in regard to the charge as per the provisions of the Companies Acter, 1956. The requirements of the Companies Act as submitted by the assessee are contained in Section 125 of the Companies Act which only requires the filing of the particulars of the charge created by the company in Form No. 8 giving full particulars of the assets of the company which are so charged along with the resolution of the Board creating the charge and this needs to be filed within 30 days of the passing of the said resolution. The assessee-company duly complied with the provisions of the Companies Act and the said Form No. 8 along with a copy of the resolution was filed with the Registrar of Companies on 27th of Nov., 1981, which it was submitted that it was about 20 days from the date of passing of the resolution. The plea of the assessee was that this was the only requirement to be complied with and the auditor was under a misconception that certain documentation needed to be done, while in fact the Act does not require or call upon the assessee to do more than but file the Form No. 8 along with the resolution within 30 days of passing of the resolution.
3.1 Since the company's assets stood hypothecated with Mercantile Bank Ltd., which is now known as Hongkong and Shanghai Bank, a no objection certificate was also issued by them which is dated 24th of January, 1984.
3.2 The plea of the assessee was that as regards the company, the charge becomes effective from the date of passing of the resolution and gets further confirmed from the day of filing of Form No. 8 with the Registrar of Companies. He accordingly pleaded that in addition to all this the assessee was not expected to do anything else and it is bound by its resolution. Referring to the decision of Punjab & Haryana High Court in the case of State Bank of India v. Haryana Rubber Industries (P.) Ltd. (sic) which order is dated 14th December, 1984, he submitted that the failure of the Registrar not to register the charge created by the assessee by filing of Form No. 8, does not affect the charge so created and its validity and it is deemed that the charge is registered. Referring to the Delhi High Court's judgment in the case of Sushil Prasad v. Official Liquidator, Vinod Motors (P.) Ltd. (sic) dated Feb. 20, 1981, he submitted that even an oral agreement creating a charge can be given effect to and that the person who accepts a charge having been created on his assets cannot turn back and say that no charge was created. It was, therefore, pleaded that as regards a company is concerned, the charge remains effective and, therefore, the said loan is secured by the creation of a charge on the assets of the company, which is fully covered by the exception provided in Sub-clause (b) of Section 40A(8) and accordingly, the nature would not be a deposit when it is not in the nature of a deposit then the question of disallowing any interest under Section. 40A(8) does not arise.
4. The learned D.R.'s emphasis was that the letter from Mercantile Bank allowing the second charge to be created on the movable assets cannot be accepted for the reason that it has allowed the company to create a charge retrospectively from 1957. According to the learned D.R. the passing of the resolution by the company is a unilateral action and a charge cannot be created without there being a mutual agreement between the two parties, which in the instant case is absent. Further it is an accepted fact that it required certain documentation work for complying with the provisions of the Companies Act which even before the CIT (Appeals) was not produced by the assessee. Reference was also made to the Transfer of Property Act by H.R. Khanna and P.M. Bagchi, 7th Edition, page 610 for laying emphasis on the fact that charge becomes effective only when it is registered especially if the assets are of value of Rs. 100 and above. In the instant case, there is no evidence that the charge was ever registered by the Registrar of the Companies under the Companies Act and, therefore, the requirements for registration having not been complied with the charge cannot be said to be effective.
5. The submissions of the parties have been heard at length and careful consideration given thereto.
6. The entire issue in the instant case is centered towards non-applicability of Section. 40A(8) on the interest paid to M/s. Pandit Kanhaiya Lal Punj on the loan taken from them. The company is claiming that it had created a charge on its assets in favour of M/s. Pandit Kanhaiya Lal Punj and therefore the loan so obtained would not be termed as a 'deposit' within the meaning of Sub-clause (ix) to Explanation (b) of Section. 40A(8). With this background we would examine the provisions of Section. 40A(8). This section provides for disallowing of interest in respect of any deposit received by it to the extent of 15 per cent of such interest. The term 'deposit' has been denned in Explanation (b) to means any deposit of money with, and includes, any money borrowed by, a company, but does not include any amount received by the company, Sub-clause (ix) of this Explanation reads as under:
(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 of such debts, 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;
It would, therefore, be necessary to satisfy the requirements of Sub-clause (ix) to Explanation (b) to Section 40A(8) that the loan obtained should be secured on the assets of the company and after that, the aggregate of the loans, taken from all the sources as on the day of creation of the se curity, should not exceed 75 per cent of the market value of the assets which are the subject-matter of the charge.
6.1 Section 40A(8) is applicable to a company is not recognised/ registered under the Companies Acter, 1956. The words, 'charge', 'mortgage' and 'pledge' are not specifically defined in this section or in the Income-tax Act and it would be, therefore, only proper to fall back upon the provisions of the Companies Act as regards the charge, etc., and to examine whether the requirements in relation to the charge are being satisfied as per that Act. It is in this light that we propose to examine the salient provisions of the Companies Act relating to the charge.
6.2 The relevant Sections are 125 to 139 of the Companies Act, which deal with the charges, modifications, registrations, certifications thereof, etc., relating to a company, the procedures to be followed by the company on whose assets the charges are created, the duty of the Registrar of Companies vis-a-vis the charges so created on the assets of the company.
6.3 The provisions of Sections. 125, 132 and 134 are reproduced below so as to appreciate the procedures involved in relation to creation of a charge and its registration:
125--Certain charges to be void against liquidator or creditors unless registered (1) Subject to the provisions of this part, every charge created on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge together with the instrument, if any, by which the charge is created or evidenced or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within thirty days after the date of its creation:
Provided that the Registrar may allow the particulars and instrument or copy as aforesaid to be filed within seven days next following the expiry of the said period of thirty days if the company satisfies the Registrar that it had sufficient cause for not filing the particulars and instrument or copy within that period.
(2) Nothing in Sub-section (1) shall prejudice any contract or obligation for the repayment of the money secured by the charge.
(3) When a charge becomes void under this section, the money secured thereby shall immediately become payable.
(4) This section applies to the following charges:
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate, or any interest therein;
(d) a charge on any book debts of the company;
(e) a charge, not being a pledge, on any movable property of the company;
(f) a floating charge on the undertaking or any property of the company including stock-in-trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright, or a licence under a copyright.
(5) In the case of a charge created out of India, and comprising solely property situate outside India, thirty days after the date on which the instrument creating or evidencing the charge or a copy thereof could, in due course of post and if despatched with due diligence, have been received in India, shall be substituted for thirty days after the date of the creation of the charge, at the time within which the particulars and instrument or copy are to be filed with the Registrar.
(6) Where a charge is created in India but comprises property outside India, the instrument creating or purporting to create the charge under this section or a copy thereof verified in the prescribed manner may be filed for registration, notwithstanding that further proceedings may be necessary to make the charge valid or effectual according to the law of the country in which the property is situate.
(7) Where a negotiable instrument has been given to secure the payment of any book debts of a company, the deposit of the instrument for the purpose of securing an advance to the company shall not, for the purposes of this section be treated as a charge on those book debts.
(8) The holding of debentures entitling the holder to a charge on immovable property shall not, for the purposes of this section, be deemed to be an interest in immovable property.
132-Certificate of registration.-The Registrar shall give a certi-ficate under his hand of the registration of any charge registered in pursuance of this part, stating the amounts thereby secured; and the certificate shall be conclusive evidence that the requirements of this part as to registration have been complied with,
134.-Duty of company as regards registration and right of interested party. - (1) It shall be the duty of a company to file with the Registrar for registration the particulars of every charge created by the company, and of every issue of debentures of a series, requiring registration under this part, but registration of any such charge may also be effected on the application of any person interested therein.
(2) Where registration is effected on the application of some person other than the company, that person shall be entitled to recover from the company the amount of any fee properly paid by him to the Registrar on the registration.
6.4 The reading of Section 125 clearly implies that this section deals with charges that are created by agreement and does not deal with the charge raised by operation of law. Since it talks of creation of a charge by an agreement, therefore, it implies that the provisions of the agreement between any two parties would be basically governed by the provisions of law of contract. This means that the party requesting for the charge makes an offer to the company whose assets are the subject-matter of the charge, and such offer when accepted by the company, the contract would get concluded. Once the contract gets so concluded, both the parties would be governed by the provisions of such an agreement.
6.5 This section further requires the evidence in regard to creation of a charge. This would mean, the request on the company followed by its acceptance, which evidence is the ratification of the contract by the company in the shape of resolution passed by the Board of Directors. It also requires that the evidence, such as the resolution should clearly specify the subject-matter of the charge, the extent of the charge, the purpose for which the charge is created and in whose favour the charge is so created. All these evidences have to be so incorporated in the resolution passed by the Board of Directors and a copy of the resolution is to be filed with the Registrar of Companies within a period of thirty days of the date of passing of the resolution. The resolution so passed has to accompany Form No. 8, prescribed in the Act in which full particulars of the contract of charge has to be spelt out. This Form No. 8, which is prescribed in the Act, covers Sections 125, 127 and 135. Section 127 is in respect of properties acquired subject to charge and Section. 135 deals with modification of the charges. To appreciate the requirements of Form No. 8, the same is reproduced below:
FORM NO. 8THE COMPANIES ACTER, 1956 Registration No. Nominal Capital Rs. Created by a company registered in India Particulars of charges Subject to which property has been acquired by a company registered in India.
Modification of charges (Pursuant to Section 125/127/135) Name of the company Presented by
1. Date and description of the instrument creating charge.
2. Amount secured by the charge amount owing on security of the charge.
3. Short particulars of the property charged. If the property acquired is subject to charge, date of acquisition of property should be given.
4. List of the terms and conditions and extent and operation of the charge.
5. Names, addresses and description of the persons entitled to charge.
6. Date and brief description of instrument modifying the charge.
7. Particulars of modification specifying the terms and conditions or the extent or operation of the charge in which modification is made, and the details of the modification.
Signature Name (In Block Capitals) Designation. Dated the day of 19 N. B.: 1. 'Charge' includes mortgage - See Section 124. A description of the instrument, that is to say, whether trust deed, mortgage or debenture should also be given.
2. Persons entitled to the charge will include mortgagee.
3. Amount or rate of per cent of the commission allowance of discount (if any) paid or made either directly or indirectly by the company to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any of the debentures included in this return, should be given in item no. 4.
6.6 A reading of the above is indicative of the fact that the company which is creating a charge, should establish that the said charge was created as per the agreement that was reached with the party to whom the assets of the company would be undercharged. It would also specify the instrument by which the charge is created, the amount secured by the charge and the amount owing on the security of the charge along with the particulars of various properties so charged. It has also to specify the extent to which the charge shall be operative.
6.7 Section 125 specifies that a charge which is in the shape of security of company's properties or undertaking which is conferred on another party, shall be void against the liquidator and any creditor of the company unless the prescribed particulars of the charge together with the instrument creating the charge are duly verified or filed with the Registrar of Companies within thirty days from the date of creation of such charge. Section 134 specifies the duties that is cast on the company in relation to charge so created which has to file the particulars of the charge along with the evidence thereof in the prescribed forms within thirty days of the creation of such charge. Thereafter the duty shifts to the Registrar of Companies to issue the certificate of registration on the basis of the particulars so filed. Thus it can be seen that as soon as the company complies with the provisions of Section. 125 as well as Section. 134 of the Companies Act, then as far as the company is concerned, it would be bound by the charge so accepted on its assets notwithstanding the fact that the certificate of registration was not received from the Registrar of Companies. This is amply clear from the wordings of Section. 125, which only states that the charge created, shall be void against a liquidator and the creditor only if the company does not provide the necessary particulars of the charge and seek for registration within a period of thirty days.
7. In the light of the above legal situation we have examined the issue arising in this appeal. According to the assessee the evidence regarding the agreement between the parties is in the shape of resolution passed by the Board of Directors on 7th of November, 1981. This is reproduced below:
Mr. S.N.P. Punj brought to the notice of the Board that the company has been taking loans from M/s Pandit Kanahya Lal Punj from time to time since 1957 to meet with their requirements of short term financial needs.
The loan amount has now become large and M/s Pandit Kanahya Lal Punj have requested that second charge on the assets and stocks be created in their favour. The charge is held by the Mercantile Bank Limited and also registered.
'Resolved that second charge over the assets and stock of the company be created in favour of M/s Pandit Kanahya Lal Punj, New Delhi for the loan taken from them from time to time. The charge would be a second charge over the assets as hypothecated to the Mercantile Bank Limited, New Delhi.' 'Further resolved that Mr. S.N.P. Punj and/or Mr. R.P. Punj was authorised to complete the documentation for creation of charge and its registration with the concerned authorities'.
8. In view of the assets being already charged in favour of the Hongkong and Shanghai Banking Corporation, the assessee requested the Bank if he had any objection and had sought for allowing the creation of a second charge. This was so allowed by the Bank vide its letter of 24th January, 1984. This letter reads as under:
We are one of the financing bankers of M/s. Fedders Lloyd Corporation Pvt. Ltd., New Delhi.
All their stocks of raw materials, semi finished components, finished components, parts of airconditioners, complete aircon-ditioners and all movable machinery, plants, instruments, book debts are all hypothecated to us. In November 1981 in order to secure loans taken by Fedders Lloyd Corporation Pvt. Ltd. from M/s Pandit Kanahya Lal Punj, the Company desired to create a second charge in favour of M/s. Pandit Kanahya Lal Punj.
On an assessment of assets including stocks, the Bank had expressed no objection to the creation of a second charge on the assets and stocks in favour of M/s Pandit Kanahya Lal Punj.
This is to inform that the Bank shall have no objection to the second charge being created in favour of M/s. Pandit Kanahya Lal Punj retrospectively with effect from 1957.
The reading of the above indicates-
(a) M/s Pandit Kanahya Lal Punj, who had advanced a loan, had requested for the creation of a charge on the assets of the assessee-company in its favour;
(b) the assessee-company had accepted the offer which is eviden-ded by the resolution of the Board of Directors dated 7th of November, 1981;
(c) the fact of second charge on the assets also bears the approval of the Bank which is evidenced by the letter dated 24th January, 1984.
9. As required under the Companies Act, the company had filed the particulars of the charge in Form No. 8 vide its letter dated 27-11-1981 with the Registrar of Companies. The said letter reads as under:
We are filing herewith Form 8, duly filled in, along with a certified true copy of agreement of hypothecation, duly affirmed with a court fee stamp of Rs. 1.50 and executed in favour of M/s Pandit Kanahya Lal Punj by creating a second charge on the assets of the company. This may please be registered. Requisite filing fee is also being sent herewith.
9.1 The above implies that as required for in secs. 125 and 134 of the Companies Act, the company had discharged its duties by filing the required particulars of the charge along with the resolution of the Board of Directors within thirty days from the date of creation of the charge, which in the instant case is 7th of November, 1981.
10. The objection of the revenue was that the auditors had observed that the loan has been treated as unsecured in the balance-sheet as according to the auditor, certain documentation work remained to be completed and therefore the charge was not yet created by the company on its assets in favour of M/s Pandit Kanhaya Lal Punj. We had, therefore, brought out the observations of the auditor vide letter dated 12-1-1984, which is given below:
During the course of discussion of the balance sheet and Profit and Loss Account for the year ending 31st December, 1981, it was explained that the loan of M/s Pandit Kanhaya Lal Punj will be secured by a second charge on the fixed assets and stocks as per the Board Resolution passed in November 1981 and the documents were in the process of creating such charge. As the documentation work was in the process, the loan of Pt. Kanhaya Lal Punj continued to be shown as 'Unsecured'.
10.1 This observation of the auditor read with the resolution dated 7-11-1981 of the Board of Directors, wherein they had authorised Mr. S.N. Punj and R.P. Punj to complete the documentation for the creation of the charge and its registration with the concerned authorities in the normal procedure followed by a company in any resolution, but when read with the letter of the company addressed to the Registrar of Companies dated the 27th of November, 1981 it clearly goes to belie the view taken by the revenue. The reason is that, Section. 125 requires only the filing of the particulars of the charge in Form No. 8 which has been so filed by the company before the expiry of the time limit prescribed under the Companies Act and the Act does not prescribe for any other documentation. Therefore, as far as the company is concerned, it had complied fully with the provisions of the Companies Act and there remained nothing to be done by the company in regard to the creation of the charge on its assets in favour of M/s Pandit Kanhaya Lal Punj.
11. We have already observed the effect of non-registration by the Registrar in the shape of non-issue of certificate of registration in favour of the assessee-company. According to the requirements of Section. 125, once the required particulars of a charge are filed with the Registrar of Companies, as contained in Section. 125, the company would be totally bound by its own action, which is on the basis of the request made on it by M/s Pt. Kanhaya Lal Punj and so accepted by it. As per Section. 125, the charge does not become void or that the debt does not become irrecoverable except for the probable consequence of security becoming void as against the liquidator and any creditor which would also happen only if the prescribed particulars are not filed with the Registrar of Companies. Therefore, as far as the company is concerned, the charge so created could and may be enforced against the company. The company by itself cannot have the cause of action arising out of such non-registration. This is further confirmed in view of no time limit being prescribed under the Companies Act for issue of the certificate of registration in favour of the company by the Registrar of Companies. The company is totally restrained from taking the benefit of non-issue of the certificate and under no circumstances can claim that there was no charge. Creation of a charge is an act for securing a loan to be taken by the company, giving assurance to the party from whom the loans are taken that he shall have the prior claim over the assets of the company. Therefore, once a charge has been so created and acted upon by the company, merely for want of certificate of registration the company cannot go back on its words and claim that the property, which was the subject-matter of the charge, is free from the charge. Therefore, the obvious conclusion in the instant case would be that the company is bound by its own resolution dated 7-11-1981 of having created the charge on its assets for the second time in favour of Pt. Kanhaya Lal Punj and it has only to be concluded with the loan so obtained from M/s Pt. Kanhaya Lal Punj, would be loan secured by means of a charge on the assets of the assessee-company.
12. When the entire facts are reviewed along with the Explanation (b) to Section. 40A(8) the only probable conclusion that could be arrived at is that the loan so taken from M/s Pt. Kanhaya Lal Punj would not rank as a deposit and would therefore be covered by the exception provided for in Sub-clause (ix) of Explanation (b) to Section. 40A(8). However, Sub-clause (ix) of Explanation (b) has a further provision, according to which the loan taken by a company by creation of the charge on its assets from the bank as well as from any other person shall not exceed 75 per cent of the price of such assets which price it would fetch on sale in the open market, under ordinary circumstances, on the date of creation of the charge for the relevant loan. This aspect of the matter has not been examined by any of the authorities below. We have, therefore, necessarily to remand the issue back to the ITO for the limited purpose of examining whether as on 7th of November, 1981, the loan taken by the company together with the loan obtained from the Bank did not exceed 75 per cent of the market value of the assets which are the subject-matter of the charge. If the loan so taken does not exceed 75 per cent, then Sub-clause (ix) of Expla-nation (b) to Section. 40A(8) would be operative and no disallowance at 15 per cent would be necessary. If it is found that the loan so taken is more than 75 per cent of the market value of the assets, so charged, then Sub-clause (ix) of Explanation (b) to Section. 40A(8) would be inoperative and accordingly the disallowance would have to be made.
13. In the result the appeal shall be treated as allowed for statistical purposes only.