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Issues Involved:
1. Validity of the charge or mortgage created by the deed of hypothecation trust dated August 1, 1981. 2. Disallowance of part of the interest on fixed deposits from the public under section 40A(8) of the Income-tax Act, 1961. Detailed Analysis: 1. Validity of the Charge or Mortgage Created by the Deed of Hypothecation Trust: The assessee company executed a second hypothecation deed on August 1, 1981, to secure deposits amounting to Rs. 5,45,000 by creating a floating charge on its fixed assets. This deed was registered under the Companies Act but not under the Indian Registration Act. The Tribunal held that the second charge could not be created without registration under the Indian Registration Act, rendering the loan unsecured. The Department argued that the trust deed must be registered under section 17 of the Indian Registration Act to be valid. They cited several cases, including *Viswanadham v. M. S. Menon* and *State of Madras v. Madras Electric Tramways (1904) Ltd.*, to support their claim that registration under both the Companies Act and the Indian Registration Act is necessary. The court, however, noted that the Supreme Court in *M. L. Abdul Jabbar Sahib v. H. Venkata Sastri and Sons* held that a charge can be created without writing, and registration under the Indian Registration Act is not always necessary. The court also referenced the Delhi High Court's decision in *Sushil Prasad v. Official Liquidator, Vinod Motors Pvt. Ltd.*, which stated that a charge could be created orally and that the conduct of the parties could indicate a valid charge. The court concluded that even if the hypothecation deed was unregistered, the resolution of the company, the conduct of the parties, and the registration under the Companies Act indicated a valid charge. Therefore, the court held that a valid charge was created over the company's properties. 2. Disallowance of Part of the Interest on Fixed Deposits from the Public under Section 40A(8) of the Income-tax Act, 1961: Section 40A(8) of the Income-tax Act stipulates that 15% of the expenditure by way of interest on deposits received by a company (other than a banking or financial company) shall not be allowed as a deduction unless the loan is secured by a mortgage, charge, or pledge of the company's assets. The court examined whether the loan was secured by a valid charge. Given the conclusion that a valid charge was created over the company's properties, the court held that the requirements of sub-clause (ix) of clause (b) of section 40A(8) were satisfied. Consequently, the interest on the deposits could not be disallowed. Conclusion: The court answered both questions of law in favor of the assessee: - There was a valid charge created by the deed of hypothecation trust. - No part of the interest on fixed deposits from the public was disallowable under section 40A(8) of the Income-tax Act, 1961. In the circumstances of the case, there was no order as to costs.
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