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TMI Blog1999 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,886 and Rs. 47,176 for the respective years has been paid to the directors, shareholders and others. This amount, according to the Assessing Officer, required to be considered under section 40A(8) of the Income-tax Act, 1961, as interest paid on deposits and deductions on that account were liable to be reduced by 15 per cent. of the sum. He therefore reduced the allowable expenditure relating to the aforesaid two amounts by 15 per cent. by applying section 40A(8) of the Income-tax Act. The Commissioner of Income-tax (Appeals) found that the credit balances in the current accounts cannot be termed even as money borrowed, they are certainty not deposits as such. The deposits can be received by the company or can be given by the depositor and obviously there would be consciousness on the part of either or both regarding the money in question being kept as deposit for some foreseeable period and generally deposits are in round figures. Similarly, moneys can be borrowed by a company and they also may be for specified or unspecified periods, but consciousness of borrowing the same would be existing. In contradistinction to deposits and borrowings, credit balances in current accounts ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from April 1, 1986. During the assessment years in question 1978-79 and 1979-80, sub-section (8) of section 40A, as inserted by the Finance Act, 1975, with effect from April 1, 19-76, stood as under : "(8) Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent. of such expenditure shall not be allowed as a deduction. Explanation.-In this sub-section, (a) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in section 51 of that Act ; (b) 'deposit' means any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company (i) from the Central Government or any State Government or any local authority, or from any other source where the repayment of the amount is guaranteed by the Central Government or a State Government ; (ii) from the Government of a foreign State, or from a citizen of a foreign State, or from any institution, association or body (whether incorporated or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith ; (iv) a loan company, that is to say, a company [not being a company referred to in sub-clauses (i) to (iii)] which carries on, as its principal business, the business of providing finance, whether by making loans or advances or otherwise ; (v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society ; (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses". On a perusal of the aforesaid provisions, a very distinctive feature which is spelled out is that the provision is applicable to an assessee which is a company and is not a company which is a banking or a financial comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and subject to check, but deposits not subject to check, for which certificates, whether interest-bearing or not, may be issued, payable on demand, or on certain notice, or at a fixed future time." Pausing here, the above definition reveals that deposit of money in its simplest and commonest meaning is an act of placing money in the custody of another whether for safety or convenience. The fact whether such money placed in the custody of a company is payable by the custodian on demand or on certain notice or on a fixed future date does not alter its character as a deposit, nor does the fact whether it is interest bearing or not result in losing its character as a deposit. The fact whether it is a term deposit, whether it is payable on demand or on notice can have relevant bearing if a deposit is to be discerned from a loan for different purposes. As noticed above, for the purposes of section 40A(8), no distinction has been made in dealing with interest paid, whether the money is termed as deposit in the sense that it is payable on demand or is in respect of money borrowed in the sense that the borrower has an obligation to find the creditor and make the payment without makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the term deposit emphasises the nature of the exclusion clauses. Clause (viii) is exclusion of interest paid on money received by way of subscription to share, stock, bond or debenture pending allotment of the said share, stock or debenture or by way Of advance of any moneys uncalled or unpaid upon any shares in the company. That is to say, it relates to interest paid on money received by it as contribution to the share capital of the company and the last exclusion is interest paid on money received by the company as a loan from any person where the loan is secured by creation of mortgage, charge or pledge of any assets of the company and the amount of the loan together with the amount of any other prior debt or loan secured by the creation of mortgage, charge or pledge of such assets does not exceed 75 per cent. of its market value on the date of creation of such mortgage, charge or pledge for the relevant loan. The exclusion clauses being exceptions to the main definition are exhaustive and therefore, in our opinion, the conclusion is inescapable that any interest paid on any money received by the company other than a banking company or a financial company which does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras High Court in Khivaraj Motors case [1997] 227 ITR 473, following a decision of the Rajasthan High Court in CIT v. Gandhi Metals Mills (P.) Ltd. [19931 200 ITR 252, the Bombay High Court in CIT v. Jhaveri Bros. and Co. Pvt. Ltd. [19951 214 ITR 374, and the Calcutta High Court in Daga and Co. (P,) Ltd. v. CIT [ 1997] 22 7 ITR 480 (as appendices to the aforesaid Madras High Court judgment), held that the Tribunal was not correct when it came to the conclusion that section 4OA(8) is not applicable to the facts of ' the case. From a reading of the two orders, it appears that the Madras case resulted in reversing decision of the Madras Bench of the Tribunal on which the Income-tax Appellate Tribunal, while deciding the appeal of the appellant under consideration, has relied. In Daga and Co. (P.) Ltd.'s case [1997] 227 ITR 480 (Cal) (Appex.), the contention of the assessee was that the interest was paid on the current account of the directors of the company and their relatives and friends. Such payment does not fall within the mischief of section 4OA(8) of the Act. This was founded on the decision of the Madras Bench of the Tribunal in ITA Nos. 444 to 446 of 1981. S. C. Sen J. (as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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