1993 (9) TMI 31 - HC - Income Tax

Summary

Issues:
1. Whether 15% of the interest on a specific amount under section 40A(8) of the Income-tax Act should be disallowed.
2. Whether the provisions of section 40A(8) are applicable to interest paid to friends and relatives of directors and directors/shareholders on loans and borrowings from them.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, addressing the disallowance of 15% of interest under section 40A(8) and its application to interest paid to friends and relatives of directors. The key issue revolves around whether interest paid by an assessee-company on amounts received from directors, friends, and relatives can be subjected to the disallowance as per section 40A(8).

The court analyzed the definition of "deposit" under section 40A(8) and emphasized that the nature of the persons from whom the company received amounts is irrelevant. The provision focuses on whether the company incurred interest expenditure on borrowed or received amounts, without specifying the source of funds. The court differentiated a cited case where no interest was paid on amounts held in current accounts, leading to a different conclusion.

In citing a decision by the Rajasthan High Court, the court agreed that no exclusion for directors, friends, or relatives exists in defining "deposit" under section 40A(8). Therefore, interest paid on amounts held by directors in current accounts qualifies as a deposit. A similar stance was upheld by the Punjab and Haryana High Court, emphasizing that the recipient's relationship with the company is immaterial; what matters is the payment of interest on received amounts.

Ultimately, the court found the disallowance of 15% of the interest paid justifiable based on the provisions of section 40A(8. Consequently, both questions were answered in favor of the Revenue and against the assessee, leading to the disposal of the reference with no costs awarded.