United Mercantile Co. (P.) Ltd. vs Commissioner of Income Tax

K.K. Usha, J.—Reference made by the Income Tax Appellate Tribunal (Cochin Bench) is at the instance of the assessee. The relevant assessment year is 1982-83. The following questions are referred for the opinion of this court :

" (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in confirming the disallowance of interest on deposits received from shareholders and directors u/s 40A(8) of the Act ?

(2) Whether the Appellate Tribunal was correct in invoking Section 40A(8) of the Income Tax Act, 1961, to deposits from directors and shareholders, especially in view of the legislative background and the provisions of the Companies (Acceptance of Deposits) Rules, 1975 ?

(3) Was the Appellate Tribunal right in ignoring the principle of ''pari materia'' while interpreting the word ''deposits'' in Section 40A(8) of the Income Tax Act, with reference to that word in the Companies (Acceptance of Deposits) Rules, 1975 ?

(4) Whether the Tribunal was justified in not applying the notification G.S.R. No. 50E, dated February 1, 1977*, which exempted small scale industries, to the applicant ?"

The assessee, a private limited company, doing business in paper, board, printers, etc., was accepting loans from directors, shareholders and outsiders. Along with its returns, the assessee filed an adjustment statement disallowing 15 per cent. of interest on deposits from outside loans, but the loans from the directors and shareholders were treated as exempted deposits. While completing the assessment, the Income Tax Officer rejected the above claim and disallowed 15 per cent. of interest paid to the directors and shareholders also. On appeal, the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal (Cochin Bench) did not accept the assessee''s contention.

Sub-section (8) of Section 40A of the Income Tax Act, as it stood during the relevant time, reads as follows :

" 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."

The Explanation to the above sub-section defined "deposit" as any deposit of money with, and includes any money borrowed by, a company, but exempted amounts received by the company from certain sources. Loans taken from its directors and shareholders were not included in the exempted category. It was conceded by learned counsel appearing on behalf of the assessee that on a plain reading of the section it cannot be taken that the provisions of Sub-section (8) would not be applicable to loans from the directors and shareholders. But learned counsel invited us to look into the provisions contained under the Companies (Acceptance of Deposits) Rules, 1975, which came into force on February 3, 1975, along with its amendment by adding Clause (ix) in the definition of the term "deposit" in the said Rules with effect from September 18, 1975. Clause (ix) excluded deposits by the directors from the term "deposit". The provisions under Sub-section (8) of Section 40A of the Income Tax Act were brought into the statute under the Finance Bill, 1975, with effect from April 1, 1976, following the amendment to the Companies Act incorporating, Section 58A under which the Companies (Acceptance of Deposits) Rules, 1975, were issued. Therefore, according to learned counsel, the amendment to the provisions of the Companies (Acceptance of Deposits) Rules, 1975, by adding Clause (ix) should be read into the provisions of the Income Tax Act also. Learned counsel further pointed out that a reference to the Memorandum Explaining the Provisions in the Finance Bill, 1975, would show that Sub-section (8) was introduced to check unrestricted growth of deposits in the non-banking sector from the public and not from inside. On this ground also, he submits that the deposits from directors and shareholders should be exempted from the provisions of Sub-section (8) of Section 40A. Learned counsel relied on a decision of the Madhya Pradesh High Court in support of his contention in Commissioner of Income Tax Vs. Kalani Asbestos (P.) Ltd., .

We find no merit in the contention raised by the assessee. Section 58A was introduced in the Companies Act by Act 41 of 1974 with effect from February 1, 1975. The above provision was incorporated for restricting the acceptance of deposits by companies. The Companies (Acceptance of Deposits) Rules, 1975, were issued by virtue of the power given u/s 58A and came into force with effect from February 3, 1975. The fact that an amendment had to be brought in the Companies (Acceptance of Deposits) Rules, 1975, by adding Clause (ix) for excluding deposits from directors itself, would show that prior to the amendment the term "deposit" included deposits made by the directors also. So long as no such amendment is made to the provisions of the Income Tax Act as in the case of the Companies (Acceptance of Deposits) Rules, 1975, we find no reason to hold that provisions contained under Sub-section (8) of Section 40A of the Income Tax Act would not be applicable to deposits made by directors or shareholders. A similar view was taken by the Rajasthan High Court in Commissioner of Income Tax Vs. Gandhi Metals Mills (P) Ltd., The decision of the Madhya Pradesh High Court relied on by learned counsel for the assessee is of no help to him. On the facts of the case it is seen that the Tribunal had found that interest was not paid by the assessee in respect of any deposit received by it.

In the light of the above discussion, we hold that the authorities below were justified in disallowing 15 per cent. of interest paid to direc tors and shareholders.

We, therefore, answer the questions referred in the affirmative, in favour of the Revenue and against the assessee.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-lax Appellate Tribunal (Cochin Bench).