Bombay High Court
Commissioner Of Income-Tax vs Jhaveri Bros. And Co. Pvt. Ltd. on 30 November, 1994
Equivalent citations: [1995]214ITR374(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal, Bombay Bench "A", Bombay, has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 40A(8) of the Income-tax Act, 1961, were not applicable in respect of the payments of interest aggregating to Rs. 1,92,668 made to the current accounts of the directors and their family members and friends during the previous year relevant to the assessment year 1977-78 ?"
2. The assessee is a private limited company. The books of account of the assessee carried current accounts of the directors, other shareholders and their family members and friends. The assessee credited interest to these accounts. For the assessment year concerned, such interest amounted to Rs. 1,92,668. The Income-tax Officer was of the opinion that the interest credited to these accounts was interest paid on deposits received by the assessee and, hence, subject to the provisions of section 40A(8) of the Income-tax Act, 1961 ("the Act"). He, therefore, disallowed 15 per cent. of the amount of such interest amounting to Rs. 28,900.
3. The assessee appealed to the Commissioner of Income-tax (Appeals) against the above disallowance. The contention of the assessee before the Commissioner was that interest paid by the assessee-company to its directors, other shareholders and their family members in the current accounts maintained by it did not fall within the purview of section 40A(8) of the Act. The Commissioner of Income-tax (Appeals) accepted this contention of the assessee and allowed the appeal. Against the order of the Commissioner of Income-tax (Appeals), the Revenue appealed to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal agreed with the Commissioner (Appeals) and dismissed the appeal of the Revenue. Hence, this reference under section 256(1) of the Act at the instance of the Revenue.
4. The controversy is in a very narrow compass. The admitted position is that certain amounts were credited to the accounts of directors, shareholders and their family members in the accounts of the assessee-company and interest was credited to these accounts. The amount of interest credited to these accounts for the accounting year corresponding of the relevant assessment year was Rs. 1,92,668. The assessee-company claimed deduction of this amount of interest. The Income-tax Officer held that the interest paid by the assessee was interest paid on deposits. He, therefore, applied the provisions of section 40A(8) of the Act and did not allow 15 per cent. of the above expenditure as a deduction. The assessee challenged this action of the Income-tax Officer, as according to it, the current amount standing to the credit of its directors, shareholders and their family members in its accounts were not "deposits" within the meaning of section 40A(8) of the Act. This contention of the assessee found favour with the Commissioner (Appeals) and the Tribunal, who accepted the same and held that section 40A(8) of the Act was not applicable to interest paid to directors, shareholders and their family members.
5. Under section 40A(8), 15 per cent. of the interest paid by the companies (other than banking companies and financial companies) on deposit received by them had to be disallowed in computation of their total income. This provision was inserted by the Finance Act, 1975, and was operative for and from the assessment year 1976-77. It was omitted by the Finance Act, 1985, with effect from April 1, 1986. It thus remained operative for the assessment years 1976-77 to 1985-86. This section, as it stood at the material time, so far as relevant, read :
"(8) 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."
6. It is clear from a reading of the above sub-section that it applies to a case where (i) the assessee is a company (other than a banking company or a financial company); (ii) it incurs an expenditure by way of interest in respect of any deposit received by it. There is no controversy that the first condition is fulfilled in this case. There is also no dispute about the fact that it has incurred an expenditure of Rs. 1,92,668 by way of interest in respect of the amounts standing to the credit of its directors, shareholders and their family members. The only controversy that falls for our determination is whether the amounts standing to the credit of the directors, shareholders and the family members of the assessee-company in its accounts in respect of which interest was paid or credited by the assessee amounted to "deposits" within the meaning of sub-section (8) of section 40A of the Act, particularly in view of the fact that the said accounts were current accounts. It is an accepted position that if these amounts are held to be "deposits", section 40A(8) would be attracted as it does not fall in any of the exclusionary provisions contained in clause (b) of the Explanation. The point for determination, therefore, is whether the amounts standing to the credit of the shareholders and their families and friends in the current accounts of a company amount to "deposit" within the meaning of sub-section (8) of section 40A of the Act or not.
7. On a careful perusal of the provisions of section 40A(8) of the Act and the definition of "deposit" contained in clause (b) of the Explanation thereto, we find it difficult to hold that the amounts belonging to the directors, their families and friends, lying in deposit with the assessee-company will cease to be "deposits" merely because they were held by the company in current accounts. The term "deposit" has been defined in clause (b) of the Explanation to mean "any deposit of money with a company". This definition is couched very widely which is evident from the word "any" that precedes "deposit". We fail to understand how the tenure or nature of the deposits is relevant in finding out whether it is a deposit or not. In our opinion, the nature of deposit, viz., fixed deposit, call deposit, deposit in current account or savings account, is immaterial and irrelevant for determining whether it is a "deposit" within the meaning of section 40A(8) of the Act or not. The decisive factor is the true relationship between the assessee-company and its creditors. There is no dispute in the present case about the fact that it is the assessee-company which had full domain over the amounts standing to the credit of its directors, shareholders or their family members like all other depositors. These amounts were used by the assessee-company for its own business and it is on that account that interest paid by the assessee-company to such account holders on the amounts belonging to them and lying with the assessee was claimed as a deduction in the computation of its income. In such a situation, the amounts in question cannot be said to be anything else than "deposit". As already indicated above, the term or tenure of deposit and the nature of the account in which the amount is kept by the company are not relevant for deciding whether it is a "deposit" or not. A deposit would not cease to be so merely because of the fact that it is kept in a current account if it does not fall in any of the exclusions contained in clause (b) of the Explanation to section 40A(8) of the Act.
8. We are, therefore, of the clear opinion that the amounts standing to the credit of its directors, shareholders and their family members and friends would amount to "deposit" within the meaning of section 40A(8) of the Act. As these amounts did not fall in any of the exclusionary provisions of clause (b) of the Explanation thereto, the Income-tax Officer was correct in disallowing 15 per cent. of the expenditure incurred by the assessee by way of interest in respect of such deposits. The Commissioner (Appeals) and the Tribunal were not justified in holding to the contrary.
9. In view of the above, the question referred to us is answered in the negative and in favour of the Revenue. In the facts and circumstances of the case, there shall be no order as to costs.