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cit v. M/s Nath Roller Flour Mills - INCOME TAX REFERENCE No. 51 of 1984 [2004] RD-AH 472 (5 August 2004)


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I.T.R. No.51 OF 1984

The Commissioner of Income-tax               ...............Applicant


M/s.  The Commissioner  of Income-tax,

Meerut                                                      ............Respondent


Hon'ble R.K. Agarwal, J.

Hon'ble K.N. Ojha, J.

The Income Tax Appellate Tribunal, Delhi has referred the following question of  law under Section 256(1) of the Income Tax Act, hereinafter referred to as Act for opinion of this Court.

Whether on the facts and in the circumstances of the case, the deposits received by the assessee company from its directors and share-holders are outside the purview of section. 40-A (8) of the Income tax Act, 1961."?

The assessee  M/s. Nath Roller Flour Mills (P) Ltd., Muzaffarnagar, is a company incorporated under the Companies Act.  The  assessment year involved is 1978-79 for which the previous year ended on 30.9.1977.

During the course of the assessment proceedings  for the assessment year 1978-79, the Income-tax Officer found that the assessee paid interest of Rs.64,600/- to its Directors on their deposits totaling Rs.3,40,000/-.  The Income-tax Officer invoked the provisions of sec.40-A(8) of the Act, and disallowed 15% of the interest paid to the Directors i.e. a sum of Rs.9,690/-.

The assessee went in appeal and the Commissioner of Income-tax (Appeals) deleted the addition of Rs.9,690/- made by the Income-tax Officer by holding that the provisions of sec.40-A(8) of the Act are not applicable in respect of deposits made by the Directors of the company.

The Revenue took-up the matter further by filing an appeal before the Income Tax Appellate Tribunal.  The Income Tax Appellate Tribunal followed its decision in I.T.A No.3682 (DEL)/81 and CO No.360/81 in the case of M/s. Bhandari Machinery Company Pvt. Ltd., Delhi Versus I.T.A company circle (v), New Delhi dated 25.10.82 and held that the deposits from directors and share holders fall outside the purview of Section

40-A (8) of the Act.  

We have heard Shri A.N. Mahajan, learned Standing Counsel appearing for the Revenue and Shri B. Dayal, learned counsel appearing for the respondent assessee.

Shri Mahajan submitted that under Section 40-A(8) of the Act, 15% of interest paid by the company other than banking company or financial company in respect of any deposit is  to be disallowed.  The word deposit has not been qualified by any specific terms.  It refers to all the deposits received by a company whether it is from public or share holders or directors and only those deposits which are specified in clauses 1 to 9 of sub-clause (b) are excluded from the purview of Section 40-A of the Act.  He further submitted that the decision in the case of Bhandari Machinery Company (P) Ltd., Delhi, which has been relied upon by the Tribunal have been subject matter of reference before Delhi High Court in the case of Commissioner of Income Tax Vs. Bhandari Machinery Company (P) Ltd. (1998)231 ITR 294 and the Delhi High Court has held that the deposits received from share holders and directors are not exempted from the purview of Section 40-A (8) of the Act and, therefore, the interest paid on such deposits is also covered by the said provision.  Shri B. Dayal, learned counsel however submitted that speech delivered by the Finance Minister in the Parliament while moving the Bill introducing Section 40-A (8) of the Act is a relevant consideration for interpretation of the meaning where deposit used in Section 40-A (8) of the Act and, therefore, the Tribunal had rightly applied the principles and disallowed the addition.

Section 40-A (8) of the Act provides as follows. :-

40 A. "Expenses or payments not deductible in certain circumstances (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)

established outside India;

(iii) as 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 or 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 an employee of the company by way of security deposits ;

(vii) by way of security or an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, the 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 accordance with the articles of association of the company;

(ix) as a loan from any person where the loan is secured by the creation of a mortgage, charge or pledge of any assets of the company (such loan being hereafter in this sub-clause referred to as the relevant loan) and the amount of the relevant loan, together with the amount of any other prior debt or loan secured by the creation of a mortgage, charge or pledge of such assets, is not more than seventy-five per cent of the price that such would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge for the relevant loan..."

From the reading of the aforesaid provision, it is

absolutely clear that the deposits has not been qualified by any phrase limiting it to public or private deposits.  The word ''deposit' is in respect of any deposits received by it.  Any deposits would definitely cover within its word all the deposits whether it is received from the public or shareholders or from the Directors. The Delhi High Court in the case of Bhandari Machinery Company (Supra) has held as follows.:-

"What are relied on by learned counsel for the assessee for interpreting the provisions of section 40A(8) - (i) the speech of the Finance Minister, (ii) the Notes on Clauses, and (iii) a circular issued by the Company Law Board under the Companies Act are all external aids to interpretation which cannot be resorted to when the language of enactment is plain and unambiguous just as the language of the provision under scrutiny is.  The opening clause speaks of any deposit received by a company (other than a banking company or a financial company).  The language used is wide and sweeping, so as to embrace within its ken any deposit without any reservation or qualification as to the source from which it originates.  The term "deposit" as defined by the Explanation to section 40A (8) also means any deposit of money and includes any money borrowed by the company.  Here also the phraseology used is wide and sweeping.  Then there are nine exclusionary clauses.  Had it been the intention of the Legislature to exclude deposits made by or money borrowed from either a director or a shareholder then the Legislature could have added that category in the exclusionary clause which it has chosen not to do.  There is, therefore, no occasion for drawing a difference between deposits made by directors and shareholders and deposits made by public other than directors and shareholders of the company.  The Company Law Board circular deals with deposits dealt with by the Companies Act and for the purpose of that Act.  It cannot be pressed into service for the purpose of interpreting the provision of Section 40A(8) of the Income-tax Act.  Strictly speaking, even the speech of the Finance Minister and Notes on Clauses do not lend support to the view taken by the Tribunal.  The Tribunal went completely amiss in taking the view which it has done."

Similar view has been taken by the Gujarat High Court in the case of  Agew Steel Manufacturers Pvt. Ltd., Vs. C.I.T., (1994) 209 ITR 77 and Rajasthan High Court in the case of C.I.T. Vs. Gandhi Metal Works Pvt. Ltd., (1993) 200 I.T.R. 252 and CIT Vs. Jain Cable Pvt. Ltd.,  (1995) 214 I.T.R. 190. We are in respectful agreement with the view taken in the aforementioned cases.  In our considered opinion, the Tribunal was not justified in disallowing the addition of 15% of the amount of interest paid by the respondent assessee on the deposits made by the share holders and directors of the company.  

In view of the foregoing discussions, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.  However, there shall be no order as to costs.

Dated : 5/8/04



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