Deposit characterization of director running accounts sustained, making interest disallowable under income-tax law.

Interest paid to directors on balances in running accounts was treated as interest on deposits for disallowance under the Income-tax Act because the court construed "deposit" broadly to include amounts placed in current or running accounts with the company. The absence of a fixed term did not remove such balances from the statutory expression, and the exclusion in the Companies (Acceptance of Deposits) Rules, 1975 was read as confirming that director-related amounts otherwise fall within the ordinary meaning of deposit unless specifically exempted. The interest was therefore disallowable, and the reference was answered in favour of the Revenue.

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Issues: Whether interest paid to directors on amounts lying in running accounts constituted interest on deposits so as to attract disallowance under section 40A(8) of the Income-tax Act, 1961.

Analysis: The question turned on the meaning of the word "deposit" in section 40A(8). The Court applied its earlier construction that amounts placed by directors in their current or running accounts with the company are deposits for the purpose of the provision, and that the absence of a fixed term does not take the amount outside the statutory expression. The exclusion introduced in the Companies (Acceptance of Deposits) Rules, 1975 was treated as supporting the view that director-related deposits were otherwise within the ordinary meaning of deposit unless specifically exempted.

Conclusion: The interest paid to directors on their running account balances was disallowable under section 40A(8) of the Income-tax Act, 1961, and the reference was answered in favour of the Revenue and against the assessee.

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