Commissioner of Income Tax vs Kalani Asbestos (P.) Ltd.

G.G. Sohani, Actg. C.J.

By this reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") the Income Tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the amounts received from the directors and shareholders of the assessee private limited company does not represent ''deposits'' within the meaning of Section 40A(8) of the Income Tax Act and no disallowance of interest u/s 40A(8) of the Income Tax Act is called for ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the amount of subsidy received by the assessee from the Government would not go to reduce the cost of the assets under sections 43(1) and 43(6) for the purpose of allowing depreciation, etc. ?"

The material facts giving rise to this reference, briefly, are as follows :

While framing the assessment for the assessment year 1983-84, the Income Tax Officer held that in respect of payment of interest by the assessee to certain parties, the principal amounts were received by the assessee by way of deposits and, hence, under the provisions of Section 40A(8) of the Act, 15% of the interest paid to these persons deserved to be disallowed. The Income Tax Officer also reduced from the cost of the fixed assets of the assessee-company, the amount of capital subsidy received by it, for the purpose of allowing depreciation as per the provisions of Section 43(1) of the Act. When the matter ultimately went before the Tribunal, the Tribunal upheld the contention advanced on behalf of the assessee that interest was paid mainly to directors and shareholders on their current account and, therefore, disallowing interest u/s 40A(8) of the Act was not called for. The Tribunal also held that the amount of capital subsidy received by the assessee from the Government should not be reduced from the cost of the assets for the purpose of allowing depreciation. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid questions of law have been referred to this court for its opinion.

Having heard learned counsel for the parties, we have come to the conclusion that both the questions referred by the Tribunal must be answered in the affirmative and against the Revenue. The Tribunal having found that interest was not paid by the assessee in respect of any deposit received by it, the Tribunal was right in holding that disallowance under the provisions of Section 40A(8) of the Act was riot called for. The Tribunal was also right in holding, in view of the decision of this court in COMMISSIONER OF Income Tax Vs. BHANDARI CAPACITORS PRIVATE LTD., that on the facts and in the circumstances of the case, the amount of capital subsidy was not deductible in computing the actual cost of the asset for the purpose of calculating depreciation. Our answer to the questions referred by the Tribunal are, therefore, in the affirmative and against the Revenue.

In the circumstances of the case, parties shall bear their own costs of this reference.