1996 (9) TMI 166 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest on advance call deposits in assessment years 1988-89 and 1992-93.
2. Interpretation of whether advance call deposits form part of share capital.
3. Applicability of Companies Act, 1956 and articles of association in accepting advance calls and paying interest.
4. Validity and legality of interest payments on advance calls.
5. Disallowance of excess interest payment beyond the authorized limit.

Detailed Analysis:
1. The company, limited by shares, claimed interest on advance call deposits totaling Rs. 73,55,110 in assessment years 1988-89 and 1992-93. The Assessing Officer disallowed the interest claims, considering the deposits as part of share capital and the interest payments akin to dividends. The CIT (A) ruled in favor of the company for 1988-89 but against for 1992-93, leading to appeals by both parties.

2. The key contention was whether advance call deposits constitute share capital. The CIT (A) for 1988-89 concluded that these deposits do not form share capital and allowed the interest claim. However, for 1992-93, the CIT (A) upheld the disallowance, citing the absence of specific authorization in the company's articles for receiving such deposits and paying interest.

3. The judgment delved into the provisions of the Companies Act, 1956, and the company's articles of association. Section 92 of the Act and Regulation 18 of Table A authorize companies to accept advance calls and pay interest thereon, subject to certain conditions. The articles of the company and a resolution from an Extraordinary General Meeting supported the legitimacy of holding advance calls and paying interest.

4. The tribunal analyzed the legality of interest payments on advance calls and found them valid under the Companies Act provisions. The interest payments, being made on borrowed funds, were deemed deductible under section 36(1)(iii) of the Income-tax Act, 1961. However, interest payments exceeding the authorized 10% limit were deemed unauthorized and required disallowance.

5. Ultimately, the tribunal partially allowed the departmental appeal for 1988-89, directing the disallowance of excess interest payment beyond 10%. For 1992-93, the tribunal allowed the entire interest payment, reversing the CIT (A)'s decision. The judgment emphasized the importance of adhering to authorized limits for interest payments on advance calls to ensure compliance with legal provisions.