COMMISSIONER OF INCOME TAX Vs. SANDIKA PRIVATE LIMITED

JUDGEMENT

(1.) THE assessee is a private limited company. THE company paid a total amount of Rs. 57,941 by way of interest to its depositors in the period relevant to assessment year 1976-77. In the assessment proceedings, the company claimed deduction of the interest paid but the Income-tax Officer disallowed 15% in view of Section 40A(8) of the Income-tax Act, 1961 (hereinafter called "the Act"), which was on the statute book during the relevant assessment year. That provision was as follows :

(2.) THE Income-tax Officer also found that the interest was paid at the rate of 24 per cent. per annum on the deposits made by the directors of the company and their relations and consequently proceeded to consider, under Section 40A(2)(a) read with Sub-section (2)(b)(ii) of the Act, whether the payment of interest on the deposits was excessive or unreasonable. He came to the conclusion that payment of interest to the extent of 6 per cent. per annum out of 24 per cent. per annum was unreasonable and disallowed payment of interest to this extent under Section 40A(2)('a) read with Sub-section (2)(b)(ii) of the Act. Some other matters were also decided. THE assessee went up in appeal before the Appellate Assistant Commissioner. THE Appellate Assistant Commissioner agreed with the Income-tax Officer that 15 per cent. has to be disallowed under Section 40A(8) of the Act. He also agreed that the payment of interest at the rate of 18 per cent. per annum was reasonable and the balance was considered as disallowable under Section 40(c) of the Act. In spite of this, he made the following observation :

(3.) ON the contrary, Section 40A(2) is applicable to all assessees including individuals, companies, firms, associations of persons and Hindu undivided families. This provision provides that where an assessee incurs expenditure in respect of which payment has been made or has to be made to any person referred to in Clause (b) of sub-section, and if the Income-tax Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the circumstances mentioned in the provision, such expenditure shall not be allowed as a deduction.