9911796707
TMI Blog1996 (9) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,55,110 is being shown in the balance sheet of the assessee as part of the shareholders' fund. The assessee, however, has all along been contending that the amounts received from the shareholders by way of advance call deposits do not form part of the share capital and that the amount would become share capital only when the call is made by the board of directors by passing appropriate resolution. For both the years, the claims for interests were disallowed by the Assessing Officer in the assessments on the grounds that the aforesaid advance call deposits actually partake of the character of share capital and that the interest payments are nothing but payments out of the profit of the company and thus they are of the nature of dividend pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce call '. Before us, the learned counsel for the assessee has pleaded very strongly, by relying on the discussions made at pages 428,429,976 and 977 of Palmer's Company Law, Vol.1 (23rd Edition) that it is perfectly in order for a company to receive payments from the shareholders of the nature of advance of calls and also to pay interest thereon. Although the said discussions relate to the position of Companies Law as prevalent in England, yet it would not be quite out of place to have an examination of the said discussions and to seek guidance therefrom. The following extracts from the said discussions seem to be having bearing on the present issue : " 35-16. Payment in advance of calls.---The articles of a company usually contain a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch payment, become presently payable. " Now, let us examine Table A of Schedule I to the Companies Act, 1956. Regulation 18 thereof reads as below : " 18. The Board--- (a) may, if it thinks fit, receive from any member willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him ; and (b) upon all or any of the moneys so advanced may (until the same would, but for such advance become presently payable) pay interest at such rate not exceeding, unless the company in general meeting shall otherwise direct, six per cent per annum, as may be agreed upon between the Board and the member paying the sum in advance." 7. Thus, it is clear from the above recitals that section 92 of the Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation No. 18, the assessee-company is authorised, even by its articles of association to accept advance calls and to pay interest thereon. The learned counsel for the assessee has brought our notice to the resolution passed in the Extraordinary General Meeting held on 31-8-1972, the relevant portions from which are being extracted below : " Resolved that out of Rs. 1,00,00,000 authorised capital of the Company 2,50,000 ' B ' Equity shares of Rs. 10 each be issued at a premium of Rs. 5 per share ranking in all respects. Pari passu with the existing ' B ' Equity shares, save and except that the new ' B ' Equity shares shall not rank for any dividend that may be declared in respect of the Company's financial year ending 31st December, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Schedule I to the said Act and also by the articles of association of the company followed by a Resolution passed in the Extra-ordinary General Meeting of the shareholders of the Company. Even interest payment on the said advance calls at the rate of 10% per annum is also authorised by the aforesaid Resolution. In this connection, it is required to be noted that inasmuch as the market rate of interest is much higher, payment of interest to the shareholders at the rate of 10% per annum has got to be considered to be in the interests of the company itself and not in the interests of the shareholders themselves. Furthermore since this practice is being followed since 1972, and the Department has also accepted this practice in the earlier a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be authorised by the General Meeting. The interest payment to that extent is, therefore, required to be disallowed. Ultimately, For assessment year 1988-89, we uphold the action of the CIT(A) in allowing the interest payment to the extent of 10 only of the advance call amount of Rs. 73,55,110. Excess payment to the extent of 2 1/2% is, therefore, required to be disallowed. The Assessing Officer being directed to modify the assessment accordingly, So far as, however, assessment year 1992-93 is concerned, since the interest payment has been claimed at 10% per annum only, the entire interest payment is allowable. We, therefore, reverse the decision of the CIT(A) and direct that the entire interest payment be allowed in this ye ..... X X X X Extracts X X X X X X X X Extracts X X X X
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