TMI Blog1997 (2) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellate Tribunal was right in holding that the Income-tax Officer was not justified in disallowing the interest paid to the directors on their current running accounts with the assessee-company under section 40A(8) of the Act ? The assessee-company was a private limited company, but because its turnover had exceeded rupees one crore, it is deemed to be a public limited company. During the Assessment year 1977-78, interest accrued and became due to the four directors, Khivaraji Chordia, Devarajji Chordia, Prafulchand Chordia and Sainikraj Chordia, to the extent of Rs. 4,41,450. For the assessment year 1978-79 interest accrued and became due to the four directors to the extent of Rs. 13,02,944.67. Similarly, for the assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be considered as a deposit. The Tribunal, for the reasons given by it, held that the provisions of section 40A(8) of the Act did not apply and the disallowance of 15 per cent. of the accrued interest due to the directors for the three years was not warranted. Regarding the alternative plea about the non-applicability of section 40A(8) of the Act on the ground that a substantial portion of the interest amounts were only interest on interest, the Tribunal observed that no elaboration was necessary on this point in view of its finding in the assessee's favour on the main question. Thus, the Tribunal allowed the assessee's appeal. Learned standing counsel appearing for the Department submitted that the definition of the term " deposit " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submitted that the amounts left by the directors in the company are not capital borrowed by the company and the interest deduction in the case of the assessee is allowable under section 37 of the Act as expenditure laid out or expended wholly and exclusively for the purpose of the business. A perusal of the account entries would go to show that the directors had left their moneys in the company and the company had maintained a running account and on different dates moneys were withdrawn by the directors or paid by the directors to the company. This would show that the nature of the transaction was only a running current account. It was further submitted that a substantial portion of interest for the three years in respect of the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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. " This passage is based upon the following decisions : (1) CIT v. Gandhi Metals Mills (P.) Ltd. [1993] 200 ITR 252 (Raj). (2) Agew Steel Manufacturers (P.) Ltd. v. CIT [1994] 209 ITR 77 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the deposits received after that date, constituted borrowed money for the purpose of rule 2A. It was further held that the deposits received by the assessees from May 5, 1944, to February 14, 1945, partook more of the nature of trading receipts than of security deposits, and, therefore, the sums received during this period could not be regarded as borrowed money for the purposes of rule 2A. Therefore, this decision was rendered on the facts arising in that case. The provisions of section 40A(8) of the Act were not the subject-matter in the abovesaid decision. Reliance was also placed upon the decision in CIT v. Bazpur Co-operative Sugar Factory Ltd. [1989] 177 ITR 469 (SC). In this decision the Supreme Court held that the moneys d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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