Commissioner of Income Tax vs Commonwealth Trust India Ltd.

Om Prakash, C.J.—At the instance of the Revenue, the Income Tax Appellate Tribunal referred the following question for the assessment years 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 Section 40A(8) of the Income Tax 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 Commissioner of Income Tax (Appeals) disallowed the claim of the assessee u/s 40A(8) of the Income Tax Act, 1961 (for short, "the Act"), observing as under :

"9. Addition u/s 40A(8) :

The Commonwealth Trust Ltd. (London), became amalgamated with the Indian company Commonwealth Trust (India) Ltd., with effect from October 1, 1977, as a result of the scheme of amalgamation finally approved by the High Court of Kerala by their order dated June 5, 1980, with effect from October 1, 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 U. K. company. By an arrangement instead of the appellant paying it to the U.K. company it issued 5,000, 11 percent. unsecured irredeemable perpetual special debentures of Rs. 1,000 each to the 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 in the books of the appellant-company consequent to which the appellant is paying interest at the rate of 11 percent. to the Commonwealth Charitable Trust. The loan is treated as deposit in the books. Effectively the money is available in the books of the company. Therefore, to this payment of interest, in my view, the provisions of Section 40A(8) of the Act is applicable. 15 percent. of the expenditure has, therefore, been rightly disallowed by the Inspecting Assistant Commissioner (Assessment). The disallowance of Rs. 82,500 u/s 40A(8) is therefore confirmed."

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

"The learned representative of the assessee submitted that what is contemplated u/s 40A(8) is expenditure incurred by way of interest in respect of any deposit-rewired 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 the 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 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 u/s 40A(8) of the Act is legally sustainable. Sub-section (8) of Section 40A, which has since been deleted with effect from April 1, 1986, was inserted by the Finance Act, 1975, with effect from April 1, 1976. Sub-section (8) of Section 40A provides :

"Where the assessee-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 ;

then fifteen percent. of such expenditure shall not be allowed as a deduction."

Explanation (h) to Sub-section (8) defines ''deposit'' as 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 Explanation (b) to Sub-section (8), in this case. This is why the Tribunal held that in the instant case 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 High Court of Kerala". This is how the Tribunal held that no disallowance could have been made under Sub-section (8) of Section 40A of the Act.

From the above extracted definition of the word "deposit" as contained in Explanation (b) of Sub-section (8) of Section 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-section (8) could be made.

From the above reproduced facts, as stated in the order of the Commissioner of Income-lax (Appeals), no deposit within the meaning of Explanation (b) is established and, therefore, the Tribunal was right in holding that no interest was paid on deposit within the meaning of Explanation (b) to Sub-section (8) of Section 40A of the Act. We, therefore, agree with the view taken by the Appellate Tribunal that on the facts of this case, Section 40A(8) of the Act would not attract.

The objects and reasons for introducing Sub-section (8) of Section 40A can be taken into aid to test the correctness of the view we have taken. They are as under (see [1975] 98 ITR 184) :

"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 1 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 percent of the interest paid by non-banking non-financial companies on deposits received from the public will be disallowed in computing their taxable income."

From the above delineated portion, it is manifest that Sub-section (8) of Section 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 Commissioner of Income Tax (Appeals) in his order, is wholly incorrect.

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