COMBINED INDUSTRIALS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a company. THE years of assessment under consideration are 1982-83 and 1983-84. THE assessee had invited deposits from public. THE assessee-company accepted deposits from the public in accordance with the provisions of s. 58-A of the Companies Act, 1956 (hereinafter to be referred to as'the Companies Act'). THE deposits to the amount of Rs. 5, 45, 000 were secured by the creation of floating charge on the fixed assets of the assessee-company. THE assessee-company executed a second hypothecation deed called, second hypothecation trust on 1st day of August, 1981, in favour of some of its directors who are called the trustees. THE deed was executed with a view to create security for repayment of the deposits and the loan and interest thereon and the assessee-company offered to appoint its directors as trustees in favour of whom the second charge was agreed to be created by the company. It is relevant to notice that first charge was created in favour of Karnataka state Financial Corporation, Bangalore . THE assessee created a second charge by way of hypothecation of the fixed assets of the company belonging to the assessee and also on the assets which may thereafter be acquired or brought about by the company for a sum of Rs. 5, 45, 000, subject, however, to the existing first charge. THE hypothecation deed was not registered under the provisions of the Indian Registration Act, but it was registered under the Companies Act with the Registrar of Companies, Chennai to satisfy the requirements of the Companies Act. THE assessee-company during the course of the assessment proceedings for the asst. yrs. 1982-83 and 1983-84 claimed deduction of the interest relatable to the deposits. THE IAC rejected the claim of the assessee on the ground that the trustees were the directors of the assessee-company and the hypothecation deed would not fully secure the interest of depositors. No, therefore, held that the interest claimed by the assessee is liable to be disallowed under s. 40a (8) of the IT Act, 1961 (hereinafter to be referred to as'the Act'). THE CIT (A) following the earlier order of his own passed in the case of another company, M/s Elgi Equipment ltd. , dt. 10th January, 1985, held that the charge was created in favour of a forum of board of trustees and it was a floating charge and it was not possible to create a charge in favour of the large body of members involved in the transaction and the trustees were answerable to the general body of creditors, debenture holders or depositors. According to him, since the charge was registered with the Registrar of Companies as required by the Company Law, there was a valid and proper charge. He also held that the registration with the Registrar of Companies would be noticed by the persons dealing with depositing the money and the assessee was entitled to exemption on the basis of cl. (ix) of s. 40a (8) of the Act and allowed the appeals preferred by the assessee.

(2.) THE Department filed appeals before the Tribunal challenging the order of the CIT (A) on the ground that there was no registered document under the Indian Registration Act and, therefore, there was no charge. THE Tribunal held that the second charge would not be created without registration. THE Tribunal held that the second charge cannot be created by deposit of title deeds since they were already deposited in creation of the charge and, therefore, it cannot be held that the loan was secured by creation of a mortgage or charge of fixed assets of the company and in this view of the matter, the Tribunal held that the disallowance made by the IAC (Asst.) for each of the years under appeal was justified and allowed the appeals preferred by the Department. On applications preferred by the assessee, the Tribunal referred the following questions of law for our consideration. "1. Whether, on the facts and in the circumstances of the case, a valid charge or mortgage was created by the deed of hypothecation Trust dt. 1st August, 1981 " 2. Whether, on the facts and in the circumstances of the case, part of the interest of fixed deposits from the public was liable to be disallowed under s. 40a (8) of the IT Act, 1961 ""

(3.) NOW let us consider the various case law cited by the learned counsel for the Revenue. In Roy & Bros. vs. Ramanath Das (supra), the Calcutta High Court noticed the purpose of the registration under the indian Registration Act and the Indian Companies Act and came to the conclusion that the registration under both the Acts are necessary and the reasoning of the Calcutta High Court reads as under : "in my opinion for the reasons I have given it is necessary that a debenture creating a charge whether floating or fixed over any immovable property should be registered according to the provisions of law laid down in s. 17 of the Registration Act, in addition to the provisions of the companies Act. The provisions of the Companies Act are intended to protect people who have business dealings with companies and to warn them to the extent to which the companies have created obligations over their property. The provisions of the Registration Act are intended to protect all who may have dealings with land so that those persons, particularly those local persons, may have knowledge of the obligations which have been created over and in respect of the land" .