1. This appeal by the revenue is directed against the order of the Commissioner (Appeals) cancelling the two disallowances made by the ITO.2. The assessee is a company. Under Section 58A of the Companies Act, 1956, no company shall invite or accept a deposit from the public or its members in excess of the limits prescribed by the Central Government in consultation with the RBI. In the present case, it is an admitted fact that in terms of those conditions prescribed by the Central Government the company could not invite or accept any deposit at all. Nevertheless, the company had accepted from its members deposits in respect of which interest of Rs. 45,366 was payable in the previous year ended 31-3-1979 corresponding to the assessment year 1979-80. The ITO was of the view that this was irregular and illegal and opposed to public policy and, therefore, the deduction claimed could not be allowed as an expenditure incurred for the purpose of the business. On appeal, the Commissioner (Appeals) noted that it was not the ITO's case that the borrowals were not required for the purpose of the business. He also noted that the only consequence of any infraction of Section 58A was a possible prosecution which does not appear to have been taken. He further noted that a similar deduction had been allowed as a business expenditure in the preceding assessment year on the same facts. He, accordingly, directed the allowance of this deduction for this assessment year also.
3. In this appeal, the contention of the revenue was that since the borrowal itself was in contravention of the provisions of the Companies Act, the liability to pay interest could not be allowed as a proper deduction under the Income-tax Act, 1961 ('the Act'). We are unable to appreciate this contention of the revenue. Under Section 58A, no doubt, certain limits are prescribed to ensure that the companies which are not in a position to repay the deposits would not be able to borrow any funds. The underlining objective of that provision is the protection of the depositors whose amounts may be borrowed by a company which is not in a position to repay the amounts and which may generate the funds without revealing its actual financial condition. To further ensure and protect the interest of the depositors, the section, provides that in case there is a borrowal in contravention of that section, the company may be penalised and penalty will be the return of the deposit within a period of one month. It was argued on behalf of the revenue that even this provision says nothing about the interest payable on the deposit and, therefore, there can be no liability to pay the interest. This argument also ignores the fundamental principles of law relating to contracts which may be void. Even assuming that a borrowal made in contravention of Section 58A is either illegal as being forbidden by law or opposed to public policy and, therefore, void under Section 23 of the Indian Contract Act, 1872, the liability to pay interest on this deposit could never cease. It has been repeatedly held by the Supreme Court that where the contract is thus void, Section 70 of the Indian Contract Act will be attracted and compensation will have to be paid (sic) as the deposit was not intended to be given gratuitously and the company had enjoyed the benefit thereof. Hence, it must be taken as an undisputed fact that there is a liability of the assessee to pay the interest and in fact a provision was made in the accounts to meet that liability. It is also an undisputed fact that the amounts were borrowed for the purpose of the business of the assessee and, therefore, the interest liability was an expenditure laid out for the purpose of business. It follows that the condition prescribed under Section 37 of the Act is clearly satisfied and the Commissioner was right in allowing the deduction of this amount. The revenue harps upon the fact that there was a contravention of the provisions of the Companies Act but it has to be remembered that the payment of the interest was not the consequence of that contravention. If at all any liability could arise out of that contravention, it would be the penalty which may be payable and any claim for deduction of the penalty may require the consideration of the question whether such a penalty paid in contravention of the statutory provisions would be an allowable business expenditure. But, this is not the issue before us and since we are only concerned with the allowability of the liability to pay interest, which is a normal business expenditure of the assessee, we see no reason to interfere with the order of the Commissioner (Appeals) allowing that deduction. His order is, therefore, confirmed. The appeal is dismissed.