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Issues: (i) Whether amounts received from persons for allotment of shares, but retained without allotment of shares, constituted deposits for the purpose of disallowance under section 40A(8) of the Income-tax Act, 1961; (ii) Whether, for computation of capital employed under section 80J of the Income-tax Act, 1961, the actual cost of depreciable assets or their written down values was to be included.
Issue (i): Whether amounts received from persons for allotment of shares, but retained without allotment of shares, constituted deposits for the purpose of disallowance under section 40A(8) of the Income-tax Act, 1961.
Analysis: The amounts were treated by the assessee itself as deposits, and interest was paid on them to the applicants. On those facts, the Tribunal's view that the sums retained by the company were deposits fell within section 40A(8), making 15 per cent of the interest expenditure disallowable.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether, for computation of capital employed under section 80J of the Income-tax Act, 1961, the actual cost of depreciable assets or their written down values was to be included.
Analysis: The question was governed by the Supreme Court's decision in Lohia Machines Ltd. v. Union of India, which settled that written down value, and not actual cost, was to be adopted for the computation in question.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Final Conclusion: Both reference questions were answered in favour of the Revenue, and the assessee obtained no relief on the merits.
Ratio Decidendi: Amounts retained by a company and treated by it as deposits for which interest is paid can be regarded as deposits for disallowance under section 40A(8), and for section 80J computation the prescribed basis is written down value rather than actual cost of depreciable assets.
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