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TMI Blog1991 (9) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. The disallowance was made without any discussion or stating the material facts. 3. The assessee appealed to the CIT (Appeals) before whom the assessee objected to the disallowance of Rs. 12,825 under section 40A(8). It was, inter alia, contended that the deposits were not received from the public, but were received from shareholders and directors of the assessee-company and, therefore, section 40A(8) had no application in the instant case. Reliance was placed on the order of the Tribunal dated 25-10-1982 in ITA No. 3682/Del/81 and C.O. No. 360/Del/81 in the case of M/s. Bhandari Machinery Co. P. Ltd., wherein it was held by the Tribunal that loans taken from shareholders and directors did not constitute deposits for the purpose of section 40A(8). The CIT (Appeals), however, did not accept the contention advanced on behalf of the assessee. He was of the view that the use of the words, "any deposit of money" in section 40A(8) signifies that all deposits received from whatever source were liable to be treated as deposits, except those specifically exempted as provided in Explanation (b) to section 40A(8). The disallowance made under section 40A(8) was, accordingly, upheld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of meaning, everything which is logically relevant should be admissible." In support of this contention, reliance was also placed on the decision of the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70. Shri Monga then referred us to the speech of the Finance Minister made at the time of moving the Finance Bill, 1975. Reliance was placed on the following portion of the speech of the Finance Minister :- "The levy of a tax under the Interest-tax Act, 1974, on interest received by scheduled banks has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax has, therefore, made the acceptance of deposits by non-banking non-financial companies from the public all the more attractive, specialty in the context of the selective credit control measures adopted by the Reserve Bank. Some corrective by way of a disincentive to borrowings from the public by these companies seems to be indicated so that credit planning according to the priorities laid down by the Government is not defeated. I propose, therefore, that in computing the taxable income of non-bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court (Indore Bench) in the case of CIT' v. Kalani Asbestos (P.) Ltd. [1989] 180 ITR 55. This authority, according to Shri Monga, lays down the proposition that interest paid on deposits received by a company from its directors and shareholders does not attract the provisions of section 40A(8). Reliance has also been placed on the decision of the Delhi Bench 'E' in ITA No. 3682/Del/81 and C.O. No. 360/Del/81 in the case of Bhandari Machinery Co. (P.) Ltd. and some other decisions of Delhi Benches in support of the view that deposits received by a company from its directors and shareholders are exempt from the operation of section 40A(8). Copies of these decisions are included in the first paper book filed by the assessee in this case. 11. Shri Monga then referred to the decision of the Punjab Haryana High Court in CIT v. Sandika (P.) Ltd. [1989] 179 ITR 117, wherein it has been held that for the applicability of section 40A(8) it makes no distinction whether payment of interest is made to a director of the company or his relations or strangers totally unconnected with the company or their relatives. It was contended that in the case decided by the Punjab Haryana High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and shareholders of the company and that such an exclusion was provided for the first time by insertion of sub-clause (ix) in clause (b) of Rule 2 by the Companies Amendment Rules, 1975 w.e.f. 18-9-1975 and the same was further modified by the Companies Amendment Rules 1978 w.e.f. 1-4-1978. It was contended that but for the exclusion provided under cub-clause (ix), the amounts received by a company from its directors and shareholders would fall within the definition of the term "deposit" as defined under sub-clause (b) of Rule 2 and also in the Explanation to section 58A of the Companies Act. It was further submitted that the Legislature did not insert a similar exclusion in the Explanation to section 40A(8) for the purpose of excluding deposits received by a company from its directors and shareholders. 14. It was next contended that the Punjab Haryana High Court in the case of Sandika (P.) Ltd. has clearly held that the interest paid on deposits received from directors and their relations were disallowable under section 40A(8). 15. It was further submitted by the learned Sr. departmental representative that there was no ambiguity or uncertainty in the language used in sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a loan from a banking company or from a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank); (iv) as a loan from any institution or body specified in the list in the Tenth Schedule or such other institution or body as the Central Government may, having regard to the nature and objects of the institution or body, by notification in the Official Gazette, specify in this behalf ; (v) from any other company; (vi) from any employee of the company by way of security deposit; (vii) by way of security or as an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, business of the company or as advance against orders for the supply of goods or for the rendering of any service; (viii) by way of subscription to any share, stock, bond or debenture (such bond or debenture being secured by a charge or a lien on the assets of the company) pending the allotment of the said share, stock, bond or debenture, or by way of advance payment of any moneys uncalled and unpaid upon any shares in the company, if such moneys are not repayable in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid by the companies on public deposits would be allowed as expenditure for tax purposes, does not exclude the deposits received by a company from its directors and shareholders. Similarly, notes on clauses, explaining the object of enacting sub-section (8) do not exclude deposits received from directors and shareholders for the purpose of disallowance of 15 per cent of interest paid by non-banking financial companies. 19. The expression "deposit" is defined under Explanation (b) to section 40A(8) to mean any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company as referred to in sub-clauses (i) to (ix) of clause (b). Thus, while defining the word "deposit" in Explanation (b) the Legislature has used the expression "any deposit". The use of the word "any" before the word "deposit" in Explanation (b) is very significant and it gives a wide amplitude to the definition of word "deposit" and does not restrict the meaning of word "deposit" only to deposits received from the public. If we put the construction on the definition of the word "deposit" as suggested by the learned counsel for the assessee and give it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even 'do some violence' to it, so as to achieve the obvious intention of the Legislature and produce a rational construction." Keeping in view the object and purpose of enacting sub-section (8) it is clear that legislative intendment was to include even deposit, received by a company from directors and shareholders for the purpose of disallowance of interest paid on such deposits. Such an interpretation advances the object for which the sub-section (8) has been enacted and does not lead to any absurdity or unjust result. 21.M/s Bhandari Machinery Co. P. Ltd. and some other decisions by various division Benches of the Tribunal, cited on behalf of the assessee. and copies whereof are included in the first paper book filed by the assessee have not correctly interpreted the provisions of section 40A(8) and the definition of deposit as given in Explanation (b). A similar issue arose for consideration before the Special Bench of the Tribunal in Kaloomal Shorimal Rang walla (P.) Ltd.'s case . In that case it was held by majority decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been so broadened as to include borrowals also. If for argument sake we exclude deposits received from the shareholders and directors, we may have still to include borrowings from them. In this case, the nature of the sums received partake the nature of borrowings as interest of substantial amount was paid, and there was no period prescribed for their return. We may mention here that while the object of enacting sections 58A and 58B of the Companies Act is to regulate the flow of deposits into non-banking and non-financial companies without having any serious impact on the regular banking companies, the object of enacting sub-section (8) of section 40A is, as stated by the Finance Minister while moving the bill in the Parliament, to provide a disincentive to offer high rates of interest which may border on usurious rates all with a view to attract deposits by companies which may not be able to sustain and support the deposits particularly the capacity to refund. 23. We now advert to the decision of the Madhya Pradesh High Court in the case of Kalani Asbestos (P.) Ltd. , cited on behalf of the assessee. In this case, while framing the assessment, for the assessment year 1983-84, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequently, proceeded to consider under section 40A(2)(a) read with sub-section (2)(b)(ii), whether the payment of interest on the deposits was excessive or unreasonable. He came to the conclusion that payment of interest to the extent of 6 per cent per annum out of 24 per cent per annum was unreasonable and disallowed the payment of interest to this extent under section 40A(2)(a) read with sub-section (2)(b)(ii). The matter finally went up before the Tribunal. On behalf of the assessee it was contended that in view of specific provisions of section 40A(8), disallowance of 15 per cent could be made and no further disallowance could be made either under section 40(c) or under section 40A(2). The Tribunal agreed with the contention of the assessee and held that disallowance of Rs. 8,691 only was justified with reference to the figure of interest paid to the extent of Rs. 57,941 and the disallowance was restricted to this figure, One of the questions referred for the opinion of the High Court was as follows:--- "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in restricting the disallowance of interest paid by the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angers totally unconnected with the company or their relatives. This authority, therefore, supports the view that deposits received by a company from its directors and shareholders fall with in the ambit of section 40A(8) and that 15 per cent of interest paid on such deposits is disallowable. 27. For the foregoing reasons, we uphold the disallowance of Rs. 12,825 under section 40A(8) out of interest paid to directors and shareholders. 28. The assessee has raised one more ground which relates to the disallowance of Rs. 5,000 out of car maintenance expenses, claimed at Rs. 11,858. The Income-tax Officer disallowed the entire claim on the ground that the car No. DHP-4525, in respect of which maintenance expenses have been claimed, was not registered in the name of the company and that it was held in the personal name of the director. On appeal, the CIT (Appeals) found that the company has no other car. He also found that the contention advanced on behalf of the assessee that the car was utilized by the Managing Director for the purpose of the company, was partly correct. He, accordingly, restricted the disallowance to Rs. 5,000. 29. We have heard learned authorised representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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