Gujarat High Court
Agew Steel Manufacturers Pvt. Ltd. vs Commissioner Of Income-Tax on 1 September, 1993
Equivalent citations: [1994]209ITR77(GUJ)
JUDGMENT Y.B. Bhatt, J.
1. The present reference under section 256(1) of the Income-tax Act, 1961, raises the following questions for our opinion :
"1. Whether, on the facts and circumstances of the case, the Tribunal was right in upholding the order of the Commissioner of Income-tax (Appeals) that 15% of the interest on Rs. 5,01,290 under section 40A(8) of the Income-tax Act requires to be disallowed ?
2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of section 40A(8) are also applicable to interest paid to friends and relatives of the directors and directors/shareholders on loans and borrowings from them ?"
2. The short question which arises here in the context of section 40A(8) is whether the interest paid by the assessee-company on amounts received from its directors, their friends and relatives can be subjected to a disallowance of 15 per cent. as contemplated by the said section.
3. The main controversy is whether the amounts which have been received by the assessee-company from friends and relatives of directors and directors of the company can be included within the definition of "deposit" as contemplated by Explanation (b) to section 40A(8).
4. A plain reading of the said provision indicates that 15 per cent. of the expenditure incurred by an assessee-company (other than a banking company or a financial company) incurred by way of interest in respect of any deposit received by it is to be disallowed. Explanation (b) defines the word "deposit" in the context of this section and sub-section. It is clear and an admitted fact that the amounts received by the assessee-company are not amounts contemplated by clauses (i) to (v) of Explanation (b) which provide for exceptions to the definition.
5. On a plain reading of this provision it appears to us that what is material is whether the assessee-company has made payment of any interest by way of expenditure on an amount which may have been borrowed by the company or on an amount received by the company. This specific definition of the word "deposit" does not in any manner contemplate which persons, and/or the nature or character of the persons, from whom the assessee-company may have received such amounts. Thus the fact that the amount was received by the company from directors, their friends or relatives, etc., is totally irrelevant for the purposes of this provision.
6. Learned counsel for the assessee sought to rely upon a decision of the High Court of Madhya Pradesh in the case of CIT v. Kalani Asbestos (P.) Ltd. [1989] 180 ITR 55. On a perusal of this decision we find that the facts upon which that case was decided were entirely different, and the facts in the present case would not justify the same conclusion. In the cited case, we find that the assessee-company was holding the amount in question in the current account of the directors, and that no interest was payable or had been paid by the assessee-company on the amounts standing in such current accounts. Thus, when no interest had been paid at all, to our mind, the question of making any disallowance did not and could not arise.
7. On the other hand, learned counsel for the Revenue relied upon a decision of the Rajasthan High Court in the case of CIT v. Gandhi Metals Mills (P.) Ltd. [1993] 200 ITR 252. We are in respectful agreement with this decision and in particular the interpretation of the Explanation to section 40A(8). This decision clearly lays down that while defining the word "deposit", no such exclusion (in favour of directors, friends, relatives, etc.) has been made and, therefore, deposits by such persons in their current accounts cannot be excluded. Thus, on a correct interpretation of the provisions of section 40A(8), when the company pays interest on the amount held by a director in the current account with the said company, such amount will be considered as a deposit within the meaning of the said provision.
8. A similar view has been taken by the Punjab and Haryana High Court in the case of CIT v. Sandika P. Ltd. [1989] 179 ITR 117. As already observed by us hereinabove, this decision notes that there is no distinction whether payment of interest is made to a director of the company or his relatives or strangers totally unconnected with the company or their relatives. The only relevant aspect is that the company should have received some amount upon which it has paid interest.
9. Thus, on the facts and circumstances of the case, we find that the disallowance of 15 per cent. of the interest paid by the company was justifiable. Accordingly, we answer both the question in the affirmative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs.