COMMISSIONER OF INCOME TAX Vs. KHIVARAJ MOTORS LIMITED

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal referred the following common question for the asst. yrs. 1977-78 to 1979-80 for the opinion of this Court under s. 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act") :

(2.) 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 asst. yr. 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 asst. yr. 1978-79 interest accrued and became due to the four directors to the extent of Rs. 13,02,944.67. Similarly, for the asst. yr. 1979-80, interest accrued and became due to the four directors on moneys left with the company to the extent of Rs. 11,23,785.50. For the asst. yr. 1977-78, by order dt. 24th January, 1978, the ITO without giving any reason, disallowed under s. 40A(8) of the Act, interest of 15 per cent on Rs. 7,09,938. But a rectification order was passed on 5th April, 1978, restricting the disallowance at 15 per cent on interest of Rs. 4,41,450. For the asst. yr. 1978-79, by order dt. 17th April, 1979, the ITO disallowed interest under s. 40A(8) of the Act of Rs. 1,95,541. Similarly, for the asst. yr. 1979-80, the 15 per cent disallowance of interest under s. 40A(8) came to Rs. 1,68,567. THE assessee filed appeals to the CIT(A). THE CIT(A) held that the moneys of the directors with the company amount to a deposit or borrowing by the company and hence he held that s. 40A(8) of the Act applied and confirmed the disallowance of 15 per cent interest accrued due to the directors in the company. As against such order, the assessee filed appeals before the Tribunal. THE Tribunal had gone through the rationale behind the introduction of s. 40A(8) of the Act by the Finance Act, 1975, w.e.f. 1st April, 1976, and had also considered the Finance Ministers Speech at page 113 (St.) of 98 ITR. THE Tribunal was of the view that the amounts left by the directors with the assessee could not be considered as a deposit. THE Tribunal, for the reasons given by it, held that the provisions of s. 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 s. 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.

(3.) THE passage occurring in Sampath Iyengars Law of Income-tax, 9th Edn., p. 2826, is stated as under :