Madras High Court
Commissioner Of Income-Tax vs Kutty Flushdoor Furniture Co. (P.) Ltd. on 31 March, 1998
Equivalent citations: [2000]243ITR174(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. At the instance of the Revenue, the following question of law has been referred to us. The question so referred to us arises out of the assessment of the respondent's income for the assessment years 1980-81 to 1982-83, and is as to whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amounts left with the company by the directors and shareholders cannot be considered as deposits so as to be brought within the meaning of Explanation (b)(i) to Sub-section (8) of Section 40A ?
2. The Tribunal's decision was based upon the earlier decision of the Tribunal in the case of Khivraj Motors Ltd. A reference has been brought to this court arising out of that decision in the case of Kkivaraj Motors Ltd. The question is as to whether the amount left with the company by the directors and shareholders constitutes deposit. The decision of this court is reported in CIT v. Khivaraj Motors Ltd. [1997] 227 ITR 473. This court held that the deposits made by the directors in a company in current account cannot be excluded and that the payments made by the directors to the company in the current account of the director on which the company pays interest is to be considered as deposit, attracting Section 40A(8) of the Act.
3. That decision applies to the facts of this case as well.
4. It was not the case of the assessee before the authorities that the directors and shareholders concerned had not made any deposit. The argument that was put forth was that no fresh deposit had been made during the previous year relevant to the year of assessment and, therefore, interest paid on the opening balance which stood to the credit of the shareholders and directors could not be subjected to restriction imposed by Section 40A(8) of the Act.
5. Section 40A(8) deals with expenditure incurred by way of interest in respect of deposits received by the company. The section does not require that the deposit should have been made during the relevant previous year. What is material is the expenditure incurred during the relevant year and such expenditure may relate to deposits made in the earlier years as well. It is well known that the deposits are received by the company for the purpose of utilising the same as a part of their working capital, and deposits are in the normal course retained for some length of time, in many cases exceeding one year, The ambit of Section 40A(8) of the Act cannot therefore be restricted only to interest paid on the deposits received during the year of account. It applies to all expenditure incurred by way of interest, in the relevant year of account in respect of all deposits received by the company irrespective of the year in which the deposit was received.
6. Learned counsel for the assessee, however, contended that the earlier decision of this court had omitted to refer to the relevant decision of the apex court in the case of S. Srinivasan v. CIT [1967] 63 ITR 273. The court therein was concerned with the taxability of the interest paid by the firm to a partner on the amount allowed by the partner to be accumulated in the firm. The court therein held that interest so received by a partner was indirectly connected with the position of that person as a partner in the firm. The observations made by the court in that judgment that interest earned on the deposit or on the loan differs from a case of the type considered in that section, is not of any assistance to the assessee in this case. Section 40A(8) deals with expenditure incurred by the company by way of interest on deposits. The amount left with the company by the share holders and directors for the use of the company and on which interest is paid by the company has been held to be deposit by this court in the case of Khivaraj Motors Ltd. [1997] 227 ITR 475. We do not see any reason to take a different view. The assessee has not placed any material before the authorities ,to show that the amount left with the company by the directors and shareholders was not meant for the use of the company. The very fact that the directors and shareholders allowed that amount to remain with the company for the whole year and chose to receive interest, would indicate that they did intend to leave the amount with the company as deposit in respect of which they expected to, and did receive interest.
7. Our answer to the question referred to us is, therefore, in the negative in favour of the Revenue and against the assessee. The Revenue shall be entitled to costs in the sum of Rs. 750 (Rupees seven hundred and fifty only).