Current account balances in directors' books are not deposits under section 40A(8) where they function as running accounts.

Current accounts maintained by directors and relatives in a company's books are not necessarily "deposits" for section 40A(8) purposes. The majority treated the provision as covering money placed with the company but not confined to formal term deposits, and held that recurring credits, withdrawals, interest postings and fluctuating balances indicated running accounts rather than deposits; the resulting interest disallowance was therefore unsustainable. The dissent read the statutory definition more broadly and considered current account balances to fall within "deposit," which would have supported disallowance. The discussion turns on the statutory meaning of deposit and the legal distinction between current accounts and deposit accounts.

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Issues: Whether credit balances maintained by directors and their relatives in the assessee-company's books, described as current accounts, constituted "deposits" within the meaning of section 40A(8) of the Income-tax Act, 1961, so as to attract disallowance of interest.

Analysis: The majority held that the statutory definition in section 40A(8), read with Explanation (b), was wide enough to include money borrowed by a company and to exclude only the specifically enumerated categories of receipts. The provision was treated as focusing on deposits of money with the company, but not as confined to formal term deposits. On the facts, the accounts of the directors and relatives showed recurring credits, withdrawals, interest credits, and fluctuating balances, which were held to be characteristic of running or current accounts rather than fixed deposits. The majority further held that a current account, both in law and in accountancy, is materially distinct from a deposit account, and that the legislative purpose behind section 40A(8) did not support treating such running balances as deposits.

Conclusion: The balances in the directors' and relatives' accounts were not deposits within section 40A(8), and the disallowance of 15 per cent of interest was unsustainable. The issue was decided in favour of the assessee.

Dissenting Opinion: B. S. Ahuja, J.M., held that the definition of "deposit" in section 40A(8) was explicit and unambiguous, that current accounts also fell within it, and that external aids such as the Finance Minister's speech and the mischief rule could not be used to narrow the statutory language. On that view, all the credits in the impugned accounts were liable to be treated as deposits, and the disallowance was justified.

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