1999 (5) TMI 8 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40A(8) of the Income-tax Act, 1961.
2. Definition and scope of the term "deposit" under Section 40A(8).
3. Nature of credit balances in current accounts.
4. Exclusions under Explanation (b) to Section 40A(8).

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(8) of the Income-tax Act, 1961:
The primary issue was whether the interest paid on credit balances in current accounts of directors, shareholders, and others falls within the purview of Section 40A(8). The Assessing Officer had reduced the allowable expenditure by 15% under this section, which was contested by the assessee. The Tribunal and Commissioner of Income-tax (Appeals) held that Section 40A(8) did not apply to these credit balances, as they were not considered deposits or borrowings.

2. Definition and Scope of the Term "Deposit" under Section 40A(8):
Section 40A(8) disallows 15% of the expenditure incurred by way of interest on deposits received by a company, excluding banking and financial companies. The term "deposit" is defined broadly to include any deposit of money and any money borrowed by a company, except for specific exclusions listed in the Explanation. The court emphasized that the term "deposit" in this context is used in its widest possible meaning, encompassing all kinds of deposits of money, whether they are payable on demand, notice, or at a fixed future date.

3. Nature of Credit Balances in Current Accounts:
The Tribunal and Commissioner of Income-tax (Appeals) distinguished credit balances in current accounts from deposits. They noted that credit balances in current accounts are kept for being withdrawn at any time, unlike deposits, which are typically for a foreseeable period and generally in round figures. The court, however, disagreed with this distinction, stating that the nature of the account (current or otherwise) does not change the character of the money as a deposit under Section 40A(8).

4. Exclusions under Explanation (b) to Section 40A(8):
The court examined the specific exclusions listed in Explanation (b) to Section 40A(8), which include money received from the government, foreign entities, other companies, and certain secured loans. These exclusions are exhaustive, and any interest paid on money received by a company that does not fall within these exclusions is subject to the disallowance under Section 40A(8). The court found that the interest paid on the credit balances in question did not fall within any of these exclusions.

Conclusion:
The court concluded that the interest paid on credit balances in current accounts of directors, shareholders, and others falls within the purview of Section 40A(8). The Tribunal's decision to exclude these amounts from the disallowance was incorrect. The court answered the referred question in the negative, favoring the Revenue and against the assessee. The judgment emphasized that the broad definition of "deposit" under Section 40A(8) includes the credit balances in current accounts, and the exclusions listed are exhaustive and specific.