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Interpretation of section 40A(8) of the Income-tax Act, 1961 regarding disallowance of interest paid to directors on their current running accounts with the assessee-company. Detailed Analysis: The case involved a private limited company deemed to be a public limited company due to exceeding turnover. The Income-tax Officer disallowed interest paid to four directors under section 40A(8) of the Act for the assessment years 1977-78 to 1979-80. The Commissioner of Income-tax (Appeals) upheld the disallowance, considering the directors' money with the company as deposits or borrowings. The Appellate Tribunal, however, ruled in favor of the assessee, stating that the amounts left by directors did not constitute deposits, hence section 40A(8) did not apply. The Department argued that the directors' money with the company should be considered deposits or borrowings under section 40A(8) based on a comprehensive definition of "deposit." They cited various court decisions to support their stance. On the contrary, the assessee's counsel contended that the interest deduction should be allowed under section 37 as business expenditure, emphasizing the nature of the transactions as running current accounts. They also argued that a substantial portion of the interest was on interest, not deposits or borrowings. The court analyzed the definition of "deposit" in section 40A(8) and referred to legal interpretations from Sampath Iyengar's Law of Income-tax and relevant court decisions. The court noted that the deposits made by the directors were not excluded from the definition of deposit, emphasizing that the interest paid on the directors' current accounts was disallowable under section 40A(8). They disagreed with the Tribunal's decision, stating that the interest received on the deposits was liable for disallowance under the provision. In conclusion, the court ruled in favor of the Department, holding that the deposits made by the directors with the company fell under section 40A(8) of the Act, and the interest paid thereon was subject to disallowance under the provision. The court rejected the Tribunal's decision and answered the referred question in the negative, favoring the Department.
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