1992 (3) TMI 30 - HC - Income Tax

Interpretation of section 40A(8) - disallowance of interest paid to directors on their deposits in running accounts - Business Expenditure - Meaning of word deposit and current account - HELD THAT - On a correct interpretation of the provisions of section 40A(8) of the B Act the payments which are made by a director to a company in the current account of the said director on which the company is paying interest will be considered as a deposit. As a matter of fact the word deposit which has been used in the said sub-section refers to the payment by way of loan. It is an admitted fact that interest was paid by the company and 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 deposits used in the clause. Assistance cannot be taken from the Companies (Acceptance of Deposits) Rules 1975 because the said Rules came into force on February 3 1975 and clause (9) was specifically added in the definition of deposit in the said Rules with effect from September 18 1975 which excluded deposits by directors 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 directors which were excluded by the insertion of clause (9) refers to all deposits whether they are for fixed period or in their current accounts. In the Explanation referred to above by defining the word deposit no such exclusion has been made and therefore deposits by directors in their current accounts cannot be excluded. The reasoning of the Tribunal that the current account is understood under the accounting principles as an amount to meet the current expenses involving the amount brought in the form of credit and debit presenting the outgoings has no relevance to the facts of the present case. Whenever any amount is paid by a director in his current account it was not for meeting any expenses. The said amount was paid to earn interest and the company has in fact paid interest thereon after deducting the withdrawals therefrom. Simply because the period of time or the amount which could be withdrawn is not restricted the nature of the deposit will not change. We are of the opinion that the Income-tax Appellate Tribunal was not justified in coming to the conclusion that the amount deposited by the director of a company in his current account on which interest has been paid by the company does not fall within the term deposit . The reference is therefore answered in favour of the Revenue and against the assessee and it is held that the Tribunal was not legally justified in holding that the interest paid to the directors on their deposits in running account was not disallowable to the extent prescribed in section 40A(8) of the Act.

Summary

Issues:
Interpretation of section 40A(8) of the Income-tax Act regarding the disallowance of interest paid to directors on their deposits in running accounts.

Analysis:
The case involved a dispute over the disallowance of 15% interest paid to directors on their current accounts under section 40A(8) of the Income-tax Act. The Income-tax Officer disallowed the interest, but the Commissioner of Income-tax (Appeals) reversed this decision. The Tribunal held that the interest was not disallowable under section 40A(8) as the current account did not fall under the definition of "deposit" as per the Act. The Tribunal reasoned that a current account does not involve borrowing money and is not subject to withdrawal restrictions like a deposit. The definition of "deposit" in the Act includes money borrowed by a company, but the Tribunal found that current accounts do not qualify as deposits under this definition.

The court analyzed the provisions of section 40A(8) and the definition of "deposit" provided in the Act. The court noted that the definition of "deposit" includes any money borrowed by a company, but exceptions are provided which do not cover amounts deposited in current accounts. The court referred to legal dictionaries to explain the concept of a current account in banking and emphasized that payments made by directors into their current accounts should be considered as deposits. The court highlighted that the term "deposit" in the Act refers to payments made by way of loan, and interest paid on such amounts should be subject to the provisions of section 40A(8).

The court disagreed with the Tribunal's reasoning that current accounts are for meeting expenses and not for earning interest. The court clarified that even though current accounts allow unrestricted withdrawals, payments made by directors into these accounts to earn interest should be classified as deposits. The court concluded that the interest paid to directors on their deposits in running accounts should be disallowable under section 40A(8) of the Act. Therefore, the court ruled in favor of the Revenue and against the assessee, holding that the Tribunal was not legally justified in exempting the interest paid to directors from the disallowance prescribed in section 40A(8).

In conclusion, the court's decision clarified the interpretation of section 40A(8) regarding interest paid to directors on their deposits in running accounts. The court emphasized that payments made by directors into their current accounts should be considered as deposits, and the interest paid on such amounts should be subject to the provisions of the Income-tax Act.