1982 (8) TMI 75 - AT - Income Tax

Appellate Tribunal Upholds Disallowance of Interest on Company Loan (8)

The Appellate Tribunal upheld the decision to disallow Rs. 5,175 under section 40A(8) of the Income-tax Act, 1961, ruling against the assessee's appeal. ... Disallowance under section 40A(8) - definition of 'deposit' in Explanation (b) to section 40A(8) - plain meaning of statutory provision - current account versus deposit - taxing consequences of deemed income under section 40A(8)Definition of 'deposit' in Explanation (b) to section 40A(8) - disallowance under section 40A(8) - plain meaning of statutory provision - current account versus deposit - Whether amounts received from directors/shareholders (and similar standing balances) fall within the definition of 'deposit' in Explanation (b) to section 40A(8) so as to attract a mandatory disallowance of 15% of interest paid. - HELD THAT: - The Court examined the language of Explanation (b) to section 40A(8) and applied its plain meaning. The definition there covers 'any deposit of money with, and includes any money borrowed by, a company' subject only to the specified nine exclusions; it does not limit 'deposit' to public deposits, time deposits, or to those falling within the Companies Act or RBI definitions. Section 40A(8) is mandatory: where a company (other than a banking or financial company) incurs interest in respect of any deposit received by it, 15% of such interest is disallowed. Therefore sums received from directors, shareholders or others in the form of loans or standing balances are capable of being treated as 'deposits' within the meaning of Explanation (b) and attract the statutory disallowance unless they fall within one of the expressly stated exclusions (which the assessee did not invoke). Reliance on external enactments (Companies Act, RBI Act, or rules framed thereunder) or on the legislative memorandum cannot alter the plain statutory text in section 40A(8). The Tribunal also found that the Bombay Bench decision relied upon by the assessee was not factually apposite because the present case did not establish that the amounts were current accounts; additionally, the assessee's prior inclusion of the amount as income in the return did not affect the statutory applicability of section 40A(8).The amounts in question are treatable as 'deposits' within Explanation (b) to section 40A(8) and the disallowance of 15% of the interest (Rs. 5,175) is justified and upheld.Final Conclusion: The appeal is dismissed; the income-tax authorities' disallowance under section 40A(8) for the assessment year 1978-79 is upheld. Issues:- Disallowance of interest under section 40A(8) of the Income-tax Act, 1961.- Interpretation of the term 'deposits' under section 40A(8).- Applicability of the decision of the Tribunal, Bombay Bench, in a similar case.- Arguments regarding the treatment of amounts as income and taxability.- Challenge to the disallowance of Rs. 5,175 under section 40A(8).Analysis:The appeal pertains to the disallowance of interest by the Income Tax Officer (ITO) under section 40A(8) of the Income-tax Act, 1961 for the assessment year 1978-79. The assessee, a private limited company engaged in the manufacture of drugs and medicines, contested the disallowance of Rs. 5,175 representing 15% of the interest on deposits. The Commissioner (Appeals) upheld the disallowance, rejecting the assessee's contention that the amounts received from directors/shareholders did not qualify as 'deposits' under section 40A(8). The Commissioner distinguished a previous Tribunal decision, stating that the accounts in the present case were not akin to current accounts.The assessee, still aggrieved, appealed to the Appellate Tribunal, arguing that the amounts were standing balances of directors/shareholders and not deposits falling under section 40A(8). The assessee's counsel referenced sections 58A and 58B of the Companies Act, 1956, to support the argument that the amounts did not meet the criteria for 'deposits.' The departmental representative, on the other hand, contended that the amounts in question were covered by the definition of 'deposit' in Explanation (b) to section 40A(8) and were not excluded under any clauses.The Tribunal analyzed the provisions of section 40A(8) and emphasized the mandatory nature of the disallowance of interest on deposits received by companies. It clarified that the definition of 'deposits' under section 40A(8) did not differentiate based on the source or nature of the deposit. The Tribunal held that any loan taken by a company from a private party would be considered a deposit, subject to the 15% disallowance of interest. The Tribunal dismissed arguments related to the timing of deposits, absence of public invitations, or treatment of amounts as income, emphasizing the automatic tax implications once amounts qualified as 'deposits' under section 40A(8).Ultimately, the Tribunal upheld the decision of the income-tax authorities to disallow Rs. 5,175 under section 40A(8), ruling against the assessee's appeal. The Tribunal concluded that the disallowance was justified based on the provisions of the Income-tax Act and the definition of 'deposits,' disregarding the treatment of the amount as income by the assessee. Consequently, the appeal filed by the assessee was dismissed, affirming the disallowance of interest under section 40A(8).