JUDGMENT
Rajesh Bindal, J.
1. Following question of law has been referred for opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short “the Tribunal), arising out of order passed in I.T.A. No. 253/Chandi/89 in respect of the assessment year 1985-86:
Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the provisions of Section 49A(8) are not applicable to the interest paid by the asseseecompany on the credit balances of the erstwhile partners and thereby deleting the dis-allowance of Rs. 1,75,801/?
2. Briefly the facts, as noticed by the Tribunal, are that the assessee was a partnership firm, which was dissolved on June 30, 1982. the business of the firm was taken over by the assessee company and credit balance lying in the account of partners was taken over as liabilities. With effect from July 1, 1982 interest at the rate of 20% on the outstanding balance was paid to ex-partners. The plea of the assess is that the liability had arisen on account of dissolution of the firm and the same was shown as current liability in the accounts of the company. It was a kind of contractual obligation and not a deposit in the hands of the company. Accordingly, the same was not covered under the provisions of Section 40A(8) of the Income Tax Act, 1985 (for short ‘the Act). However, the claim was rejected by the Assessing Officer which order was upheld in Appeal by Commissioner of Income Tax (Appeals) ( for short “CIT(A)). Before the Tribunal, the assessee succeeded following the view taken by different Tribunals on the issue where it was held that money existed in the current account was neither deposit nor borrowing.
3. Learned Counsel appearing on behalf of the revenue submitted that the nomenclature of the account will not determine the real nature thereof. Where the amount was lying outstanding in the accounts of the company and the company was paying interest thereon, the same would be covered under the provisions of Section 40A (8) of the Act and had to be dealt with accordingly. The Tribunal while accepting the appeal of the assessee committed an error in law.
4. On the other hand, learned Counsel appearing on behalf of the assessee submitted that liability in the books of account of the company was contractual one after the business of the firm was over by the company and the amount outstanding in the credit of the accounts of partners was shown as current liability of the company. The does not attain the character deposit or borrowing as ingredients thereof were not there.
5. We have heard learned Counsel for the parties and perused the paper book.
6. Relevant provisions of Section 40A (8) of the Act are extracted below:
(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 such expenditure shall not eb allowed as a deduction. Explanation: In this sub-section:
(a) “banking company” means a company to whichthe 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 cooperative 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 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 deposit;
(vii) by way of of security or as 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 debit 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 assets would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge for the relevant loan.
7. The issue involved in the present case has been gone into by various Courts and has been answered against the assessee. This Court, in Commisisoner of Income-Tax v. Sandika P. Ltd. , considered the issue and held that there is no distinction whether payment of interest is made to the Director of the Company or relative or stranger totally unconnected with the company. Only relevant aspect is that the company should have received some amount on which it had paid interest. This itself was sufficient to bring the same within the mischief of Section 40A(8) of the Act. The view expressed by this Court in Sandika P. Ltd.’s case was followed by Gujarat High Court in Agew Steel Manufacturers Pvt. Ltd. v. Commissioner of Income-Tax .
8. The Rajasthan High Court in Commissioner of Income-Tax v. Gandhi Metals Mills (P) Ltd. also expressed similar view holding that the amount deposited by a Director of Company in the current account on which interest had been paid by the Company was a deposit and the interest paid thereon was subject to disallowance in terms of provision of Section 40A(8) of the Act. The same view was followed in Commissioner of Income-Tax v. Jain Cables Pvt. Ltd. .
9. The judgment of Bombay High Court in Commissioner of Income-Tax v. Vockanardt Pvt. Ltd. deals with the issue in question with identical facts on record where interest was paid on account of deposit lying with the company on account of the dissolution of the firm after having been taken over by the company and it was held therein as under:
We have heard at length Mr. G.S. Jetley, learned Counsel for the Revenue. So far as the controversy in the first question is concerned, it is clear from the facts of the case that after the business of the erstwhile partnership firm was taken over by the assessee-company as a running concern with all its assets and liabilities including the amounts standing to the credit of the outgoing partners of the said firm, the amounts belonging to the partners no more retained the character of “capital’ but assumed the character of debt due. The former partners became the creditors of the assessee-company in respect of the amounts in question. The assessee-company also paid interest on the said amounts.
10. Section 40A(8) of the Act refers to “expenditure by way of interest in respect of any deposit received by a company” and provides for dis-allowance of 15 per cent of such interest. “Deposit” has been defined in Explanation (b) to mean any deposit of money with the company, including any money borrowed by it. The only exclusion is on account of amounts received by the company which fall under any of the clauses thereof. The admitted position in the present case is that these amounts do not fall in any of the exclusionary clauses. In such a situation, the amounts in question, lying in deposit with the assessee-company on which interest had been paid by it, evidently fall within the meaning of Section 40A(8) and hence interest paid thereon would fall within the purview of Section 40A(8) of the Act. The method or manner in which the amounts came to be received by the assessee, in our opinion, has no relevance for the purpose of deciding whether the particular amounts belonging to others and lying with the assessee on which interest was also paid by the assessee, would fall within the expression “deposit”. In Commissioner of Income Tax v. Khivaraj Motors Ltd. , Madras High Court while quoting the following paragraphs from Sampath Iyengar’s law, 9th edition page 2826:
In legal parlance, a “general deposit” is where the money deposited itself is not returned but equivalent to the money ( i.e., a like sum) is to be returned. A perusal of Section 40A(8) of the Act, shows that the word ‘deposit’ mentioned therein has not clearly been defined. In the explanation to Section 40A(8) an inclusive definition of ‘deposit’ has been given which states that the word deposit means any deposit of money with, and includes any money borrowed by, a company. This Explanation in Clause (b) has defined the word deposit in a wider sense and besides any deposit of money with the company, the money borrowed by the company is also taken within the ambit of the word ‘deposit’. A distinction has been drawn in this definition with regard to the deposit of money and money borrowed. In the said explanation, certain exceptions have been provided which would not include the amount received by the company as deposit. Admittedly, the amount deposited by a director in the company in its current account has not been excluded therefrom. The deposits which are understood in the business of a bank may be in the current account, saving bank account and fixed deposit account. The payment in the current account cannot be excluded from the nature of deposits which are made in the bank. The only distinction between a fixed deposit and this deposit is that the term for which the payment has been made in the case of a fixed deposit is a fixed one whereas, in the case of a current account, no time is fixed therein and this distinction will not take the amount outside the purview of the deposit used in the clause. Any assistance from the Companies (Acceptance of deposits) Rules, 1975, cannot be taken because the said Rules came into force on February 3, 1975, and Clause (ix) was specifically added in the definition of deposit in the said Rules with effect from September 18, 1975, which excluded deposits by the directions from the term ‘deposit’. This specific exclusion by the amendment in the Rules makes it more clear that deposits by the directors were included in the term ‘deposit’ and it is by way of a specific provision that the same has been excluded. The words ‘deposit by the director’ which were excluded by the insertion of Clause (ix) refers to all deposits whether they are for a fixed period or in their current accounts. In the Explanation to Section 40A(8) referred to above, by defining the word deposit, no such exclusion has been made and, therefore, deposits by the directors in their current accounts cannot be excluded. On a correct interpretation of the provisions of Section 40A(8), the payments which are made by a director to the company in current account of the said director on which the company is paying interest will be considered as a deposit. Accordingly, interest paid by a company on current account of the directors was disallowable under Section 40A(8). However, a contrary view has also been taken.” held that correct interpretation of provision of Section 40A(8), the payments which are made by a Director to the company in the current account of the said Director on which the Company is paying interest will be considered as a deposit and disallowance on the interest paid thereon shall be made in terms of the provisions.
11. This judgment of Madras High Court in Khivaraj Motors Ltd.’s case(supra) followed in Commissioner of Income-Tax v. Kutty Flushdoor Furniture Co.(P) Ltd. by the Madras High Court.
12. The Kerala High Court in United Mercantile Co.(P) Ltd. v. Commissioner of Income-Tax even after considering the amendment made to Companies (Acceptance of Deposits) Rules, 1975 with effect from September 18, 1975 held as under:
We find no merit in the contention raised by the assessee. Section 58A was introduced in the Companies Act by Act 41 of 1974 with effect from February 1, 1975. The above provision was incorporated for restricting the acceptance of deposits by companies. The Companies (Acceptance of Deposits ) Rules, 1975, were issued by virtue of the power given under Section 58A and came into force with effect from February 3, 1975. The fact that an amendment had to be brought in the Companies (Acceptance of Deposits) Rules, 1975, by adding Clause (ix) for excluding deposits from directors itself, would show that prior to the amendment the term “deposit” included deposits made by the directors also. So long as no such amendment is made to the provisions of the Income -tax Act as in the case of the Companies (Acceptance of Deposits) Rules, 1975, we find no reason to hold that provisions contained under Sub-section (8) of Section 40A of the Income-tax Act would not be applicable to deposits made by directors or shareholders. A similar view was taken by the Rajasthan High Court in CIT v. Gandhi Metals Mills (P.) Ltd. . The decision of the Madhya Pradesh High Court relied on by learned Counsel for the assessee is of no help to him. On the facts of the case it is seen that the Tribunal had found that interest was not paid by the assessee in respect of any deposit received by it.
13. The Delhi High Court in Commissioner of Income-Tax v. Bhandari Machinery Co. (P) Ltd. (1998) 231 ITR 295, a well considered judgment referring to even speech of Finance Minister, Notes on Clauses and Circulars issued by the Company Law Board, answered a similar question against the assessee and in favour of the revenue.
14. A perusal of the definition of term ‘deposit’ in explanation to Section 40A(8) of the Act shows that the same is inclusive and wider in application. It provides for certain specified items which are to be excluded out of the term ‘deposit’. If we analysis the facts of the present case in the light of definition and the interpretation to the same by various Courts, in our opinion, the deposit of the kind in question does not fall in any of the exception clauses. It cannot be disputed that after the business of the firm was taken over by the company the amount lying in the capital account of the partners looses its character of being capital rather attain the character of a debt in the hands of the company on which even interest was also paid by the assessing company. Merely because the amount was lying in the current account or that the ex-partners were now shareholders of the company will not make any difference. The restrictions imposed under Section 40A(8) of the Act will be applicable.
15. In view of our above discussion, the question referred is answered in favour of the revenue and against the assessee. The Reference is disposed of accordingly.