2004 (8) TMI 31 - HC - Income Tax

Interest on the deposits made by the shareholders and directors of the company - Whether, the deposits received by the assessee-company from its directors and shareholders are outside the purview of section 40A(8)? - it is absolutely clear that deposits has not been qualified by any phrase limiting it to public or private deposits. The word deposit is in respect of any deposits received by it. Any deposits would definitely cover within its word all the deposits whether it is received from the public or shareholders or from the directors - Held that Tribunal was not justified in disallowing the addition of 15 per cent. of the amount of interest paid by the respondent-assessee on the deposits made by the shareholders and directors of the company.

Summary

Issues:
Interpretation of section 40A(8) of the Income-tax Act regarding deposits received by a company from its directors and shareholders.

Analysis:
The case involved the interpretation of section 40A(8) of the Income-tax Act, specifically focusing on whether deposits received by a company from its directors and shareholders fall outside the purview of the said section. The assessee, a company incorporated under the Companies Act, had received deposits from its directors, on which interest was paid. The Income-tax Officer disallowed 15% of the interest paid under section 40A(8), leading to an appeal by the assessee. The Commissioner of Income-tax (Appeals) initially ruled in favor of the assessee, stating that section 40A(8) did not apply to deposits made by directors of the company.

The matter was further escalated as the Revenue filed an appeal before the Income-tax Appellate Tribunal. The Tribunal, relying on a previous decision, held that deposits from directors and shareholders are outside the purview of section 40A(8) of the Act. The Tribunal's decision was challenged, leading to arguments from both sides. The Revenue contended that all deposits received by a company, regardless of the source, are covered by section 40A(8), citing a previous decision by the Delhi High Court. On the other hand, the respondent's counsel argued that external aids, such as the Finance Minister's speech, should be considered for interpreting the meaning of "deposit" in section 40A(8).

The High Court analyzed the provisions of section 40A(8) and the relevant case law, including decisions by the Delhi High Court, Gujarat High Court, and Rajasthan High Court. The High Court emphasized that the language of the provision was broad and unambiguous, encompassing all deposits without specifying the source. The Court concurred with the interpretations in previous cases, stating that there was no justification for disallowing the addition of interest paid on deposits made by shareholders and directors. Consequently, the High Court ruled in favor of the Revenue, holding that the interest paid on such deposits is covered by section 40A(8) of the Act.

In conclusion, the High Court answered the question referred to it in the negative, favoring the Revenue and against the assessee. The judgment provided a detailed analysis of the legislative provisions, case law, and arguments presented, ultimately clarifying the application of section 40A(8) to deposits received by a company from its directors and shareholders.