1985 (8) TMI 100 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40A(8) of the Income Tax Act.
2. Definition and scope of the term "deposit" under Section 40A(8).
3. Distinction between current accounts and deposit accounts.
4. Interpretation of legislative intent and statutory provisions.

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(8) of the Income Tax Act:
The core issue revolves around whether the interest paid by the assessee company to its directors and their relatives on their credit balances should be disallowed under Section 40A(8) of the Income Tax Act. The assessee contended that Section 40A(8) was not applicable as the accounts in question were current accounts, not deposits. The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that Section 40A(8) applied, leading to a disallowance of 15% of the interest paid.

2. Definition and Scope of the Term "Deposit" under Section 40A(8):
The Tribunal examined the definition of "deposit" as provided in the Explanation to Section 40A(8). The Explanation includes "any money borrowed by a company" but excludes certain specified amounts. The assessee argued that the amounts in question were current accounts and not deposits, as they did not fit the definition provided. The Tribunal noted that the legislative definition of "deposit" is broad and inclusive of borrowed money, emphasizing that the term should be interpreted in its statutory context without external aids unless ambiguity exists.

3. Distinction Between Current Accounts and Deposit Accounts:
The Tribunal delved into the distinction between current accounts and deposit accounts. It was argued that current accounts, characterized by frequent transactions and fluctuating balances, do not constitute deposits. The Tribunal referred to various legal and accountancy principles, noting that a current account is a running account with no fixed term for deposits and withdrawals. The Tribunal concluded that current accounts should not be considered deposits for the purpose of Section 40A(8).

4. Interpretation of Legislative Intent and Statutory Provisions:
The Tribunal considered the legislative intent behind Section 40A(8), which aimed to prevent non-banking companies from diverting deposits away from banks by offering attractive interest rates. The Tribunal emphasized that the purpose of the legislation was to impose a countervailing liability on non-banking companies to offset the increased cost of bank borrowing due to the Interest Act. The Tribunal found that the accounts in question, being current accounts, did not fall within the mischief intended to be remedied by the legislation.

Separate Judgments:

Majority Decision:
The majority of the Tribunal held that the accounts in question were current accounts and not deposits. Consequently, Section 40A(8) was not applicable, and the assessee's appeals were allowed while the Department's appeals were dismissed.

Dissenting Opinion:
One member of the Tribunal dissented, arguing that the definition of "deposit" under Section 40A(8) is broad and inclusive, covering the amounts in question. The dissenting member emphasized that the statutory definition should be applied as it is, without resorting to external aids for interpretation. Consequently, the dissenting opinion held that the amounts in question were deposits, and the disallowance under Section 40A(8) was justified.

Final Order:
In view of the majority decision, the appeals by the assessee for the assessment years 1979-80 and 1980-81 were dismissed.