COMMISSIONER OF INCOME TAX vs COMMONWEALTH TRUST INDIA LTD.

OM PRAKASH, C.J. :

At the instance of the Revenue, the Tribunal referred the following question for the asst. yrs. 1983-84 and 1984-85 for the opinion of this Court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that s. 40A(8) of the IT Act, 1961, is not applicable to the facts of this case and that the assessee was entitled to a further deduction of Rs. 82,500?"

The CIT(A) disallowed the claim of the assessee under s. 40A(8) of the IT Act, 1961 (for short, `the Act) observing as under :

"9. Addition under s. 40A(8)

The Commonwealth Trust Ltd., (London) became amalgamation with the Indian Company Commonwealth (India) Ltd., w.e.f. 1st Oct., 1977 as a result of the scheme of amalgamation finally approved by the Hon''ble High Court of Kerala by their order dt. 5th June, 1980 w.e.f. 1st Oct., 1977. As a result of this order all the assets and liabilities became vested in the appellant-company, the Commonwealth Trust (India) Ltd. The consideration fixed for this transfer was Rs. 50,00,000. In the normal course the appellant is liable to pay this amount to the UK company. By an arrangement instead of the appellant paying it to the UK Company it issued 5,000, 11 per cent unsecured irredeemable perpetual special debentures of Rs. 1,000 each to Commonwealth Charitable Trust in part satisfaction of the consideration for vesting the business of the Commonwealth Trust Ltd., in the appellant company. This is treated as unsecured loans to the books of the appellant-company consequent to which the appellant is paying interest at the rate of 11 per cent to the Commonwealth Charitable Trust. The loan in treated as depoist in the books. Effectively the money is available in the books of the company. Therefore, to this payment of interest, in my view, provisions of s. 40A(8) of the Act is applicable. 15 per cent of the expenditure has, therefore, been rightly disallowed by the IAC (Asstt.). The disallowance of Rs. 82,500 under s. 40A(8) is therefore confirmed."

The assessee then appealed to Tribunal, who allowing the appeal, held as under :

"The learned representative of the assessee submitted that what is contemplated under s. 40A(8) is expenditure incurred by way of interest in respect of any deposit received and the deposit is explained as "any deposit of money with, and included any money borrowed by." In the instant case of the assessee, the assessee has neither incurred any interest in respect of any "deposit received" nor on any "money borrowed". What assessee paid is an interest on the mode of payment of consideration for the assets received by virtue of a scheme of amalgamation as approved by the Hon''ble High Court of Kerala. In view of the above facts, we are of the opinion that the order of the Revenue authorities, in making disallowance made under this head is without merit. We, therefore, allow the appeal by the assessee on this ground."

The only question for consideration is whether disallowance of Rs. 82,500 under s. 40A(8) of the Act is legally sustainable. Sub-s. (8) of s. 40A, which has since been deleted w.e.f. 1st April, 1986, was inserted by the Finance Act, 1975 w.e.f. 1st April, 1976. Sub-s. (8) of s. 40A provides :

"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."

Expln. (b) to sub-s. (8) defines "deposit" meaning any deposit of money with, and includes any money borrowed by a company, but does not include any amount received by the company"

(i), (ii) & (iii) not reproduced as they are not, relevant for the purpose of this case.

It is not disputed before us that the assessee-company is neither a banking company nor a financial company. It is also not disputed that there was no deposit, as defined in Expln. (b) to sub-s. (8), in this case. This is why the Tribunal held that in the instant case that the assessee has neither incurred any interest in respect of any deposit received, nor on any money borrowed. According to the Tribunal, the assessee paid interest "on the mode of payment of consideration for the assets received by virtue of a scheme of amalgamation as approved by the Hon''ble High Court of Kerala". This is how the Tribunal held that no disallowance could have been made under sub-s. (8) of s. 40A of the Act.

From the above extracted definition of the word "deposit", as contained in Expln. (b) to sub-s. (8) of s. 40A, it is amply clear that unless interest liability is incurred on the deposit of money which includes money borrowed by a company, no disallowance as envisaged by sub-s. (8), could be made.

From the above reproduced facts, as stated in the order of the CIT(A), no deposit within the meaning of Expln. (b) is established and, therefore, the Tribunal was right in holding that no interest was paid on deposit within the meaning of Expln. (b) to sub-s. (8) of s. 40A of the Act. We, therefore, agree with the view taken by the Tribunal that on the facts of this case, s. 40A(8) of the Act would not attract.

The objects and reasons for introducing sub-s. (8) of s. 40A can be taken into aid to test the correctness of the view we have taken. They are as under :

"As a result of the general policy of credit restraint and enforcement of selective control measures by the Reserve Bank of India, non-banking non-financial companies have been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. The levy of interest-tax under the Interest-tax Act, 1974, on the gross amount of interest received by scheduled banks on loans and advances made in India has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about per cent. The levy of this tax has, therefore, made the acceptance of deposits by non-banking non-financial companies from the public all the more attractive. In order to ensure that the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non-banking sector, the Bill seeks to provide that 15 per cent of the interest paid by non-banking non-financial companies on deposits received from the public will be disallowed in computing their taxable income."

[Emphasis, italicised in print, supplied]

From the above delineated (italicised portion, it is manifest that sub-s. (8) of s. 40A of the Act was inserted to curb the tendency of the non-banking and non-financial companies resorting to indiscriminate public deposits. We are, therefore, of the view that the view taken by the CIT(A) in his order, is wholly incorrect.

In the result, the abovementioned question is answered in the affirmative, that is, in favour of the assessee and against the Revenue.