1. This is an appeal filed by the assessee against the order dated 8-12-1981 of the Commissioner (Appeals), Lucknow.
2. The assessee, New International Chemicals (P.) Ltd., Prag Narain Road, Lucknow, is a private limited company which is engaged in the manufacture of drugs and medicines. For the assessment year 1978-79, the ITO disallowed Rs. 5,175 as representing 15 per cent of the interest on Rs. 34,494 (Rs. 8,540 plus Rs. 25,954) being deposits under Section 40A(8) of the Income-tax Act, 1961 ('the Act').
3. The assessee being aggrieved, came up in appeal before the Commissioner (Appeals). It was contended before the Commissioner (Appeals) on behalf of the assessee that the amounts on which interest had been paid had been received from the directors/shareholders which could not be construed as 'deposits' within the meaning of Section 40A(8). It was also contended that the said deposits were made much before the coming into force of Section 40A(8) and, therefore, the disallowance could not be made. Reliance was also placed, on behalf of the assessee, on the decision dated 2-2-1980 of the Tribunal, Bombay Bench, in the case of M.E. (P.) Ltd. [IT Appeal No. 691 (Bom.) of 1979] for the assessment year 1976-77 wherein it was held that sums received from the directors and shareholders were not deposits under Section 40A(8). However, these contentions did not find favour with the Commissioner (Appeals). In regard to the decision of the Tribunal, the Bombay Bench in the case of M.E. (P.) Ltd. (supra), the Commissioner (Appeals) held that the decision was not applicable to the facts of the present case, as in the present case, the accounts are not in the nature of current accounts.
4. The assessee-company, being still aggrieved, has come up in appeal before us. Shri C.L. Kumar, the learned counsel for the assessee, referred to the statement of the standing balance in ledger copies and contended that the assessee-company did not receive or call for any deposits during the assessment year in question and that the amounts were those which were standing balances of the directors, shareholders and friends which did not fall within the purview of Section 40A(8).
According to him, they were in the nature of current accounts without any strings. In the return, the assessee had treated the disallowed amount of Rs. 5,175 as income and it was included in the income of Rs. 11,761, returned by the assessee. Shri Kumar submitted that the inclusion of this amount by the assessee as its income did not preclude it from claiming it to be not taxable. He referred to Sections 58A and 58B of the Companies Act, 1956, inserted by the Companies (Amendment) Act, 1974, which regulate the acceptance of deposits by the companies.
He submitted that the amounts in question did not qualify as 'deposits' under the Companies Act. He pointed out that there was no time factor involved in the amounts, nor were they made by the public and, therefore, they could not be treated as 'deposits'. Reference was also made by him to the Memorandum explaining the provision of the Finance Bill, 1975 (paragraph 9) wherein the scope and objectives of the provisions of Section 40A(8) were explained. It is as follows : As a result of the general policy of credit restraint and enforcement of selective control measures by the Reserve Bank of India, non-banking, non-financial companies have been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. The levy of interest-tax under the Interest-tax Act, 1974 on the gross amount of interest received by scheduled banks on loans and advances made in India has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax, has, therefore, made the acceptance of deposits by non-banking non-financial companies from the public all the more attractive. In order to ensure that the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non-banking, non-financial companies, all deposits received from the public will be disallowed in computing the taxable income.
He also reiterated to the reliance on the decision of the Tribunal, Bombay Bench, in the case of M.E. (P.) Ltd. (supra). On the other hand, Shri Satya Prakash, the learned departmental representative placed strong reliance on the orders of the income-tax authorities. He also pointed out that the amounts in question were covered within the definition of 'deposit' as appearing in Explanation (b) to Section 40A(8). He pointed out that the amounts in question did not fall under any of the exclusionary clauses specified under the aforesaid definition. Next, he pointed out that the definition of 'deposit' under the Explanation to Section 58A of the Companies Act, 1956, Section 45-1 of the Reserve Bank of India Act and under Rule 2(5) of the Companies (Acceptance of Deposits) Rules, 1975, framed under Section 58A, read with Section 642, of the Companies Act, 1956, were not applicable. He submitted that the facts in the case of M.E. (P.) Ltd. (supra) were not the same as in the present case. Summing up his arguments, Shri Satya Prakash submitted that there was no warrant or justification for any interference with the orders of the income-tax authorities.
5. We have considered the rival submissions of both the parties.
Firstly, it needs to be noticed that the taxability or disallowance of interest as explained, is to be considered only with reference to the provisions of the Income-tax Act and not with reference to any provisions of the Companies Act, the Reserve Bank of India Act or the Companies (Acceptance of Deposits) Rules. We have only to look at the language of Section 40A(8). The expression 'deposits' has been defined under the Explanation (b) to Section 40A(8) as any deposit of money with and includes any money borrowed by, a company, but does not include any amount received by the company under any of the nine heads specified thereunder. In reply to a specific query from the Bench, Shri Kumar said that it was not the case of the assessee that the amounts in question fell within any of the nine heads referred to above. Next, it needs to be noticed that the aforesaid definition uses the expression 'any deposit'. It does not make any distinction between deposit made by the public, or a time deposit, or a deposit of the kind contemplated under the Companies Act. The provisions of Section 40A(8) are mandatory. According to them in every case, 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, 15 per cent of such expenditure shall not be allowed as a deduction in computing the profits and gains of the business or profession carried on by the assessee. By virtue of this mandatory provision, it is sought to treat 15 per cent of the interest paid by all companies on the deposit received by them, as the income of the company and to levy tax thereon at the rates applicable to the company. Since we have to take the plain meaning of the aforesaid provision, any reference to the Memorandum explaining the provisions of the Finance Bill, 1975, cannot be taken advantage of. According to the definition of 'deposit' as appearing in Explanation (b) to Section 40A(8), every loan taken by a company from a private party would be liable to be regarded as a deposit and the interest thereon would come up for disallowance to the extent of 15 per cent in every case, regardless of the quantum of the interest, the nature of company, the purpose of the loan, the terms of repayment and the rights and liabilities of the parties in respect of the amount of such loan. We are not considering here nor could we consider any challenge to the constitutional validity of the provisions of Section 40A(8). Having regard to the above discussion, the fact that the amounts on which interest was paid had been received from the directors/shareholders or that the deposits were received before the coming into force of Section 40A(8) or that no deposits were made during the assessment year in question or that there was no invitation issued by the assessee to the public for inviting deposits as already stated above would not be material. Once the amounts in question are treatable as 'deposits' within the meaning of Section 40A(8), the taxing provisions are automatically attracted. So far as the decision of the Bombay Bench in the case of M.E. (P.) Ltd. (supra) is concerned, we agree with the Commissioner (Appeals) that it would not apply to the facts of the present case, as in the present case, it is not admitted nor it has been found that they are in the nature of current accounts.
It is no doubt true that the mere admission by the assessee of the amount of Rs. 5,175 as an income would not have made the amount taxable, but as we have seen above, in fact and, in law, the amount in question is taxable. Therefore, the aforesaid action on the part of the assessee is not material. It is not under dispute before us that the disallowable amount is Rs. 5,175. Therefore, having regard to the facts and circumstances of the case and in view of the foregoing discussion, the decision of the income-tax authorities regarding disallowance of Rs. 5,175 under Section 40A(8) is justified and is upheld.6. In the result, the appeal filed by the assessee fails and is dismissed.