Income Tax Appellate Tribunal - Jabalpur
Dalmia Cement (Bharat) Ltd. vs Income-Tax Officer on 12 February, 1986
Equivalent citations: [1986]16ITD298(JAB)
ORDER
O.P. Jain, Judicial Member
1. This is an assessee's appeal relating to the assessment year 1979-80.
2. The first ground of appeal relates to the addition of Rs. 5,954 made by the ITO in respect of expenditure incurred for advertisements in souvenirs. The assessee had claimed deduction of Rs. 59,538 on account of advertisements in small newspapers under Section 37(3A) of the Income-tax Act, 1961 ('the Act'). The ITO had disallowed the claim to the extent of Rs. 5,954 which represents the amount paid in connection with the advertisements in souvenirs. It was held by him that the souvenirs do not fall within the definition of a small newspaper. The assessee's contention that souvenirs are also small newspapers having circulation of less than 15,000 did not find favour with the Commissioner (Appeals) as well. As such, the assessee is in appeal before us.
3. Having heard the learned counsel for the appellant and the departmental representative, we are unable to accept the contention advanced on behalf of the assessee. A souvenir is neither a journal nor a periodical. We, therefore, find ourselves in agreement with the findings of the authorities below, that advertisement in a souvenir does not qualify for deduction under Section 37(3A).
3.1 The assessee has filed before us a list of the souvenirs in which the advertisements were published. Shri Hari Har Lal, the advocate for the appeallant has contended that some of the publications, e.g., Shri Krishna Sandeehar and Sanmara mentioned in the said list are published regularly at regular intervals and as such, they come within the definition of periodicals. It was also urged that the expenses incurred in connection with the advertisements in journals and periodicals should be excluded from the total advertisement expenditure while computing the amount of disallowance under Section 37(3A). This contention is undoubtedly sound. In absence of necessary material we are not in a position to find out as to which of the publications in which the advertisement had appeared are journals or periodicals. We, therefore, restore the point to the assessing officer who shall examine the details and while computing the disallowance under Section 37(3A) shall exclude the amount spent on advertisement in journals and periodicals.
4. The second ground of appeal relates to the disallowance of Rs. 35,588 made by the ITO in respect of the travelling expenses. It appears that the assessee had surrendered the said amount out of the travelling expenses incurred in the head office and its various branch offices being in excess of the limit laid down by Rule 6D of the Income-tax Rules, 1962 framed under the Act. During the course of the hearing under Section 144B of the Act before the IAC it was claimed by the assessee that addition for the said amount was not justified and the expenses incurred were not in excess of the limit laid down by the said rule. It was contended on behalf of the assessee that the time spent by an employee outside the headquarters on travel in connection with the travelling is not to be taken as identical with the period during which said employee remains on tour. It was also submitted that the expenditure incurred in connection with the travelling of the employees as far as the non-journey expenses are concerned, cover only the time spent in the journey during the period prior to the commencement of and subsequent to the days when the employee is engaged in company's work outside the headquarters. According to the assessee, when an employee is engaged on company's work outside the headquarters would fall outside the ambit of Section 37(3) and the limit prescribed by Rule 6D would not be applicable to such period. The assessee's contention was rejected by the authorities below and as such, the assessee is in appeal before us.
5. The aforesaid contentions of the assessee have been reiterated before us as well. We have given our anxious consideration to the submissions advanced before us. The assessee's contention does not appear to be in line with Rule 6D which refers to the allowance in respect of expenditure incurred by an assessee in connection with travelling by an employee or any other person. It, thus, relates to the allowance paid in respect of the expenditure incurred in connection with travelling by an employee and not to the actual period of travelling only. We are fortified, in our view, from the case of Sundaram Finance Ltd. v. IAC[1985] SOT 410 (Mad.) (SB). Since, the disallowance has been made only in respect of the travelling expenses, which are in excess of the limit laid down by Rule 6D, we find that the disallowance has to be sustained.
6. The last ground relates to the addition of Rs. 1,23,775 made by the ITO under Section 40A(8) of the Act in respect of the interest paid on deposits received from members of the public which, according to the assessee, are secured by a floating charge on certain movable assets of the assessee-company. The ITO had disallowed the claim of Rs. 1,47,018 out of the interest paid on deposits. In the appeal, we are concerned only with the amount of Rs. 1,23,775, which forms part of the said disallowance. The brief facts giving rise to the appeal on the point are these. The assessee is a public limited company. It had obtained loans by way of deposits from members of the public. The aggregate of the unsecured loans as on 31-12-1977 was Rs. 66,26,924. The assessee was in need of further funds. On 30-12-1977, a deed described as declaration of trust was executed by the assessee on a stamp paper of Rs. 35. According to the assessee, the said deed of trust was executed with the intention to secure the existing loans and the deposits to be received in future. Three persons, namely, Shri Om Prakash Khaitan, Shri Sukhvinder Lal Gupta and Shri Balai Lal Chatterjee were named trustees on behalf of the depositors. Charge was proposed to be created in respect of certain movable assets of the assessee-company. On 1-3-1978, a letter was addressed by the assessee-company to the above named three trustees confirming that they would have a second charge on the stocks of raw materials, store, spare parts, coal and coke, etc., pertaining to the assessee's work at Dalmiapuram and Salem, from the date of the letter. The first charge on the said assets was already existing in favour of the Punjab National Bank. On 25-2-1978, the Deputy Controller of Capital Issues, Government of India, had conveyed to the assessee, the Central Government's assent for creation of the second charge under the Capital Issues (Control) Act, 1947. The Assistant Registrar of Companies had issued a certificate of registration of the said charge on 26-10-1978. On the strength of these facts, it was contended on behalf of the assessee that the deposits held by it should be deemed as secured loans, and, therefore, disallowance of 15 per cent interest due on them could not be made under Section 40A(8). The contention did not find favour with the authorities below and as such, the assessee is in appeal before us.
7. We have heard the learned counsel for the appellant and the learned departmental representative at length. The departmental representative has supported the orders of the authorities below but Shri Hari Har Lal, the advocate for the appellant, has vehemently argued that floating charge on the assets of the assessee-company had been created in accordance with the provisions of the Companies Act, 1956, and as such, the deposits held by it should be treated as secured loans, and the authorities below have wrongly disallowed 15 per cent of the interest paid on such deposits. Shri Hari Har Lal has urged that the trust was declared for the benefit of the depositors by a deed of trust dated 30-12-1977. The authorities below have held that no valid trust came into existence. Therefore, we have to examine whether any valid trust had come into being.
8. Section 6 of the Indian Trusts Act, 1882, provides the manner for the creation of a trust. It reads as follows :
Subject to the provisions of Section 5, a trust is created when the author of the trust indicates with reasonable certainty by any words or act (a) an intention on his part to create thereby a trust, (b) the purposes of the trust, (c) the beneficiary, and (d) the trust property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee.
The said section makes it clear that in order to constitute a valid trust its author must indicate with reasonable certainty by his words or acts, (1) an intention on his part to create thereby a trust, (2) the purpose of the trust, (3) the beneficiary, (4) the trust property, and (5) he must (unless the trust is created by will or he himself is to be the trustee), transfer the trust-property to the trustee. Paper No. 102 of the assessee's paper book is the copy of the deed of trust relied on by the assessee. The said deed recites, inter alia, that the company is desirous of securing the deposits/loans already accepted or hereinafter to be accepted by hypothecating certain movable assets in favour of the assessees. It further recites that the trustees, already referred to above, have consented to act as trustees for the depositors in respect of the hypothecation proposed to be created for such deposits. These averments in the said deed go to suggest that no charge was created by the said deed of trust but the executants of the deed had only expressed the desire of securing deposits by hypothecating certain movable assets. A perusal of its Clause Nos. 3,7 and 8 also lead to the suggestion that no charge was created by the said deed but only an intention was declared that charge is proposed to be created. The trust property has not been specified in this deed. Nor there had been a transfer of any property. As such the necessary ingredients for the creation of a trust are wanting. We are, therefore, constrained to hold that no valid trust came into existence by execution of the said deed, which has been described as the declaration of trust.
9. It was next argued on behalf of the assessee that floating charge was created by the assessee-company with a view to secure the deposits received by it. According to the assessee, the charge was created in accordance with the Companies Act. In that connection, reliance has been placed on the assessee's letter dated 1-3-1978, which was addressed to the trustees mentioned in the aforesaid deed of trust. Paper No. 100 of the assessee's paper book is the copy of that letter. It has been pointed out that the Central Government had accorded sanction for creation of the charge with a view to securing deposits to the extent of Rs. 80 lakhs. Paper No. 98 of the paper book is the copy of the Government's letter to that effect. Our attention has also been invited towards the copy of the certificate of registration dated 26-10-1978, which is paper No. 94 of the assessee's paper book, which indicates that the charge was registered by the Registrar of Companies to the extent of Rs. 80 lakhs. It has, therefore, been argued on behalf of the appellant that a valid charge was created and as such, the deposits made by the public are backed by a valid security and as such, the disallowance has been wrongly upheld by the Commissioner (Appeals). On the other hand, Shri Gujjar Mal, the learned departmental representative, has argued that the charge has been unilaterally created and since it has not been made in respect of any specific property the same is invalid and ineffective.
10. We have given our anxious consideration to the rival contentions advanced before us. Having gone through various provisions of the Indian Companies Act we are of the view that the charge or a floating charge cannot be held to be invalid, inoperative or ineffective simply because no specific property has been made the subject-matter of the charge. The floating charge, as a type of security, is peculiar to companies as borrowers. In the case of Government Stock Co. v. Manila Rly. [1897] AC 81, Lord Macnaghton had made the following observations relating to the floating security :
A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases after default.
11. It is, thus, evident that a floating charge is an equitable charge which does not fasten upon any specific or definite property, but is a charge upon property, which may be constantly varying. In the case of a floating charge, the company may, in the ordinary course of its business, deal with the property covered by the charge, mortgaging, selling, disposing it of or using it up, as the business requires, at any time before the charge attaches.
12. We, therefore, find that it was open to the assessee-company to create a floating charge. In the instant case, floating charge has been created by letter dated 1-3-1978, which was issued in furtherance of the deed dated 30-12-1977. As already observed earlier sanction for creation of the charge had been accorded by the Central Government and the Assistant Registrar of Companies had issued a certificate for registration of the charge. Section 132 of the Indian Companies Act provides that the Registrar shall give a certificate under his hand and the registration of any charge stating the amount thereby secured and the certificate shall be conclusive evidence that the requirements of that part of the Act as to registration have been complied with. In the instant case, it has been established that certificate of registration had been issued. That certificate is conclusive evidence that all requirements of Part 5 of the said Act relating to registration had been complied with. When the aforesaid deed of trust is read with the assessee's letter dated 1-3-1978 we are driven to conclude the floating charge was created by the assessee in favour of the depositors and the same was duly registered with the Registrar of Companies.
13. The learned counsel for the assessee has argued that the deed of trust, already referred to above, recites that the charge would enure for the benefit of the deposits already accepted or hereinafter to be accepted, and as such no disallowance should be made in respect of the interest which became payable on such deposits. In that connection, reliance has been placed on Section 40A(8)(ix). Sub-section (8) of the said section provides that 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, 15 per cent of such expenditure shall not be allowed as a deduction.
14. The word 'deposit' has been defined in Explanation (b) to Sub-section (8). The said definition reads as follows :
(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
(i) to (VIII) ** ** **
(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 ;
15. The departmental representative has argued that Explanation (b)(ix) of the aforesaid section refers to a loan and since, the assessee had invited fixed deposits he cannot avail benefit of the aforesaid exception. In any case, it was stressed that the benefit cannot be allowed in respect of the loans which were, at the time of receipt were not secured. The contention that the loan does not include deposits cannot be accepted. The definition of the word 'deposit' quoted above refers to any deposit of money, which includes any money borrowed by a company but does not include the amounts received by the company described in the exceptions mentioned therein. The fact that the borrowings are also included in the deposit is indicative of the fact that the loans are not excluded because every loan is a borrowing. We are fortified, in our view, from a decision of another Bench of this Tribunal in Kaloomal Shorimal Sachdev Rangwalla (P.) Ltd. v. First ITO [1985] 14 1TD 248 (Bom.) (SB).
16. Once it is found that a charge was created by the assessee-company and the deposits are included in the word 'loan', the question that crops up for consideration is as to from what date the charge would become effective and whether the deposits received by the company before creation of the charge would come within the category of secured loans and would be covered by Explanation (b)(ix) to Section 40A(8). The contention of the assessee that due to recitals in the deed of trust, the past deposits would be deemed to be backed by the security of the floating charge created on 1-3-1978 does not appear to be sound. The words 'any amount received by the company', occurring in the definition of the word 'deposit' given in the Act, go to suggest that the loan must be backed by a security at the time of its receipt and only then it can be treated as a secured loan. It is not in dispute that the deposits received by the assessee-company before 1-3-1978 were not secured when they were received. In the case of I.D.L. Chemicals Ltd. v. ITO [1984] 9 ITD 422 (Hyd.) the Tribunal had observed that creating charge with retrospective effect and that too unilaterally is unknown to law and, in our opinion, such a document has no legal effect. We are in respectful agreement with the said view. There are other reasons as well for coming to the conclusion that the deposits received before 1-3-1978 cannot be treated as secured deposits.
17. A perusal of the Government's sanction for creation of the charge, which was conveyed to the assessee by its letter dated 25-2-1978 (paper No. 98 of the paper book) reads that the sanction was accorded with a view to securing deposits to the extent of Rs. 80 lakhs to be accepted from the public. The sanction was accorded in accordance with the provisions of the Capital Issues (Control) Act. This sanction is indicative of the fact that it was granted in respect of the deposits to be accepted from the public and not in respect of the deposits already accepted or received. That apart the opening sentence of the assessee's letter dated 1-3-1978, which was addressed to the trustees reads as follows :
In terms of the declaration of trust dated 30-12-1977, and as security for repayment of the deposits and interest thereon as mentioned in the said declaration of trust, we confirm that as trustees, you would have a second charge on stocks of raw materials, stores spare parts, coal, coke, loose tools, gunny bags, finished and semi-finished goods pertaining to our works situated at Dalmiapuram and Salem (on hand and in transit) from the date hereof.
18. The aforesaid averment in the assessee's letter addressed to the trustees categorically states that a charge was created from the date of the letter. As such it cannot relate to a date or period prior to the date of the said letter.
19. It is undisputed that the assessee-company had invited deposits in accordance with the Companies (Acceptance of Deposits) Rules, 1975. The term 'deposit' has been defined in the said rules under Rule 2(b). An Explanation is appended to the said rule and the same is important for our purpose. It reads as follows :
For the removal of doubts, it is hereby declared that any deposit received or renewed by a company before the commencement of the Companies (Acceptance of Deposits) Amendment Rules, 1978, shall continue to be governed by the rules applicable at the time of such deposit or renewal as the case may be.
20. According to the abovesaid Explanation, the terms of the deposit received before coming into force of the said rules are to be governed by the terms and conditions settled at the time of deposit or at the time of renewal, as the case may be. Since no security was furnished or offered for the deposits received before 1-3-1978, the deposits received before that date, i.e., before the creation of the charge cannot be treated as secured loans within the meaning of Explanation (b)(ix) to Sub-section (8).
21. In view of the above findings deposits received before 1-3-1978, are to be treated as unsecured deposits and the deposits received after creation of the charge are to be treated as secured deposits. Thus, the disallowance has to be recalculated and, therefore, we send back the case to the ITO for the purpose.
22. In the result, the appeal stands partly allowed.