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Issues Involved:
Allowance or disallowance of interest paid to directors, shareholders, and their relatives by the assessee-appellants on their current accounts under Section 40A(8) of the Income Tax Act, 1961. Detailed Analysis: 1. Background and Facts: The appeals were directed against the orders passed by the Commissioner of Income Tax, Baroda under Section 263 of the Income Tax Act, 1961. The common dispute involved the allowance or disallowance of interest paid to the directors, shareholders, and their relatives by the assessee-appellants on their current accounts. The Income Tax Officer (ITO) had allowed deductions for interest paid to these parties during the assessment year 1982-83. 2. Commissioner's Opinion and Action: The Commissioner opined that the assessments were erroneous and prejudicial to the interest of Revenue because the interest paid was not allowable under Section 40A(8) of the Act. The Commissioner issued notices to the appellants to show cause why the amounts should not be disallowed. The appellants contended that the balances in the current accounts did not fall within the definition of 'deposit' under Section 40A(8). However, the Commissioner rejected this contention and directed the ITO to re-do the assessments after disallowing the interest paid on such deposits. 3. Tribunal's Consideration and Reference to Precedents: During the appeals, it was highlighted that the Special Bench of the Tribunal in the case of KALOOMAL SHORIMAL SACHDEV RANGWALLA P. LTD. vs. FIRST ITO had held that current accounts were covered by the definition of 'deposit' under Section 40A(8). However, the Madhya Pradesh High Court in CIT vs. KALANI ASBESTOS PVT. LTD. held that interest paid to directors and shareholders on current accounts could not be disallowed under Section 40A(8). 4. Arguments Presented: The appellants argued that the Madhya Pradesh High Court's decision should be followed as it was directly on point. The Senior Departmental Representative contended that the Tribunal should follow the Special Bench decision, as it was not bound by the Madhya Pradesh High Court's decision, which was not from the jurisdictional High Court. 5. Tribunal's Decision: The Tribunal decided to follow the Madhya Pradesh High Court's decision, emphasizing that there is a clear distinction between deposits and current account balances. The Tribunal noted that the purpose of Section 40A(8) was to discourage deposits from the public by non-banking companies, not to disallow interest on current account balances. 6. Analysis of the Special Bench Decision: The Tribunal observed that the Special Bench's minority view recognized the distinction between current accounts and deposits. The majority view did not dispute this but noted that certain accounts treated as deposits by the assessee attracted Section 40A(8). The Tribunal found that the accounts in question were indeed current accounts with regular debit and credit entries, and thus, the Special Bench decision did not go against the appellants. 7. Binding Nature of High Court Decisions: The Tribunal highlighted that in the absence of any contrary decision from another High Court, it was bound to follow the Madhya Pradesh High Court's decision. The Bombay High Court in CIT vs. SMT. GODAVARIDEVI SARAF had held that the Tribunal must respect the law laid down by any High Court unless there is a contrary decision. 8. Conclusion: The Tribunal concluded that the interest payments to directors and shareholders on current account balances could not be disallowed under Section 40A(8). Consequently, the assessments made by the ITO were not erroneous or prejudicial to the interest of Revenue. The orders of the Commissioner were set aside, and the appeals were allowed. Summary: The Tribunal allowed the appeals, setting aside the Commissioner's orders, and held that interest paid to directors and shareholders on current accounts cannot be disallowed under Section 40A(8) of the Income Tax Act, 1961, following the Madhya Pradesh High Court's decision in CIT vs. KALANI ASBESTOS PVT. LTD.
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