1985 (3) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest under section 40A(8) of the Income-tax Act, 1961.
2. Disallowance of irrecoverable amount due to embezzlement.
3. Disallowance of bad debt claim.

Detailed Analysis:

1. Disallowance of Interest under Section 40A(8):

The first issue pertains to the disallowance of interest amounting to Rs. 17,744 under section 40A(8) of the Income-tax Act, 1961. The assessee, a limited company, argued that the interest paid on the credit balances in the current accounts of its managing director, directors, shareholders, and two other individuals should not fall within the purview of section 40A(8). The assessee contended that these were not fixed deposits and could be withdrawn at any time, thus not constituting 'deposits' under section 40A(8).

However, the Tribunal held that the term 'deposit' as defined in Explanation (b) to section 40A(8) includes any deposit of money with a company and is not restricted to fixed deposits or long-term deposits. The Tribunal emphasized that the language used by the Legislature is plain and unambiguous, and the term 'any deposit' should be given its widest possible meaning. The Tribunal disagreed with the decisions of the Tribunal, Bombay Bench 'B' and Madras Bench 'C', which had interpreted the provisions of section 40A(8) differently. Consequently, the disallowance of interest amounting to Rs. 17,744 under section 40A(8) was upheld.

2. Disallowance of Irrecoverable Amount due to Embezzlement:

The second issue involved the disallowance of an irrecoverable amount of Rs. 35,929 misappropriated by Ashok D. Paul, the regional manager of the assessee-company's Madras branch. The assessee argued that the embezzled amount should be allowed as a deduction since it became irrecoverable during the accounting period.

The Tribunal noted that the embezzlement was discovered and established through an enquiry report submitted on 19-9-1977, which was after the accounting year ended on 30-6-1977. The Tribunal referred to the Supreme Court's decision in Associated Banking Corpn. of India Ltd. v. CIT, which held that a loss due to embezzlement can only be claimed when it is realized that the amount is irrecoverable. Since the assessee realized the irrecoverability of the embezzled amount after the accounting year, the Tribunal concluded that the loss could not be claimed as a deduction for the assessment year under consideration.

3. Disallowance of Bad Debt Claim:

The third issue concerned the disallowance of a bad debt claim of Rs. 5,798. The assessee had advanced a sum of Rs. 10,550 to a small-scale co-operative unit formed by its workers, which was partially adjusted, leaving a balance of Rs. 5,798. This balance was written off as irrecoverable during the accounting year.

The Tribunal considered the facts that the co-operative unit had ceased operations, and its members had left the service of the assessee-company. Given that the original members had no considerable assets and the balance remained due for several years, the Tribunal was convinced that the debt became bad during the year of account. Therefore, the Tribunal allowed the claim for bad debt of Rs. 5,798.

Conclusion:

The appeal was allowed partly, with the Tribunal upholding the disallowance of interest under section 40A(8) and the disallowance of the irrecoverable amount due to embezzlement, but allowing the bad debt claim of Rs. 5,798.