1982 (2) TMI 156 - AT - Income Tax

Summary

Issues:
- Applicability of provisions in s. 40A(8) of the IT Act, 1961 to monies received by a company from its directors.

Analysis:
1. The appeals involved the question of whether the provisions of s. 40A(8) of the IT Act, 1961 applied to monies received by a company from its directors for the assessment years 1977-78 to 1979-80. The company, initially a Pvt. Ltd. Co., was deemed a Public Ltd. Co. due to exceeding turnover. Interest accrued to four directors, and the Income Tax Officer (ITO) disallowed 15% of the interest under s. 40A(8). The CIT (Appeals) confirmed the disallowance, stating the monies of directors with the company constituted a deposit or borrowing by the company.

2. The counsel for the assessee argued that the interest paid on monies left by directors, used for business purposes, was not subject to s. 40A(8). They cited a Bombay Tribunal decision and a Ministry press note to support their contention. The Departmental Representative argued that the interest was allowed as a deduction under s. 36(1)(iii) for capital borrowed by the company.

3. After considering both sides, the Tribunal concluded that the interest accrued to directors did not constitute a deposit or borrowing by the company. The Tribunal reviewed the accounting entries of the directors' monies with the company and referenced a Bombay Tribunal decision, agreeing with its reasoning that such transactions did not fall under s. 40A(8) as they were akin to running current accounts.

4. The Tribunal further referred to a book on company deposits, highlighting that under the Companies Act, amounts received from directors were not considered deposits. The Tribunal found that the directors' monies were maintained as running current accounts and not borrowed capital, thus not subject to s. 40A(8). The interest on interest was also deemed not to qualify as a deposit or borrowing.

5. Ultimately, the Tribunal allowed all three appeals of the assessee, ruling that the disallowance of 15% interest under s. 40A(8) for the three years was improper based on the nature of transactions between the company and its directors.