1985-VIL-37-ITAT-

Equivalent Citation: TTJ 023, 132,

Income Tax Appellate Tribunal BOMBAY

Date: 05.08.1985

KALOOMAL SHORIMAL SACHDEV RANGWALA P. LTD. & ANR.

Vs

FIRST INCOME TAX OFFICER.

BENCH

Member(s)  : V. BALASUBRAMANIAN., B. S. AHUJA., I. S. NIGAM.

JUDGMENT

The first two appeals were fixed as Special bench hearings having been referred to the Sceptical Bench by the president the others appeals involving the same point have come up as intervenes. The point at issue is considered on the facts of the first assessee.

2. The assessee-company paid interest of Rs. 68,290 to Directors and their relatives. In the computation of income while filing the Return, the assessee disallowed interest of 15 per cent on the net amount of Rs. 61,101. The disallowance amounted to Rs. 9,165. At the time of the assessment, however, the assessee's ld. counsel contended before the ITO that the provisions of s. 40A (8), on the basis of which the above disallowance was made, were not applicable to the assessee's case. The assessee had not invited public deposits not even deposits from the directors. All the accounts were current accounts to which, according to the ld. counsel, the provision of s. 40A (8) were not applicable. Some decision of the Tribunal were also cited before the ITO. Rejecting the contention of the assessee and holding that it was not possible to distinguish between loans raised by the company from directors or relatives and deposits as envisaged by s. 40A (8), the ITO computed the interest paid on deposits at Rs. 68,090 and disallowed 15 per cent of the same, namely, Rs. 10,213.

3. On appeal, the CIT (A) held that the provisions of s. 40A (8) applied to the case and confirmed the ITO's order. Incidentally, it requires to be mentioned that in para 2.10 of his order the CIT (A) held that order of the Tribunal unacceptable to him, if not misconceived. It is against this order of the CIT (A) that the present appeals are laid before the Tribunal.

4. The ld. counsel for the assessee has pointed out that the definition of 'deposit' obtaining in s. 40A (8) Explanation (b) does not fit in with the facts of the present case. Interest was paid for the asst. Yr. 1979-80 in the assessee case to three directors, Tulsiram Nathumal, R. T. Arora and R. K. Sachdev and also two of their relatives, Lala Shorimal Tulsidas and Master Vijay Arora. Interest was paid to the above parities on their credit balances which could not be held to be deposits under s. 40A (8) Referring to the words of the Finance Minister introducing the sub-s. 40A (8), the ld. counsel has pointed out that in order to accept deposits form the public an invitation has to be issued. Such deposits are governed by s. 58A of the Companies Act, 1965 read with Companies (Acceptance of Deposit) Rules, 1975. The assessee had not invited deposits from the public. There was no unrestricted growth in the credit balances of these parties which came forward from several years. The accounts were mere current accounts and the balances in such accounts could not be interpreted as deposits, Stress is laid in this context on the reference to the cost of borrowings from scheduled banks which have gone up by 1 per cent to which reference was made by the Finance Minister in his budged speech dt. 28th Feb., 1975. The deduction in the present case was corrective by way of disincentive to borrowing from the public by companies referred in the Finance Minister's Speech. The memorandum explaining the provisions of the Finance Bill 1975 also emphasizes this aspect. The ld. counsel took us through the accounts of the various directors coming over from the year 1971 onwards. These were all current accounts showing entries for receipts and payment, of money, crediting of interest, withdrawals for interest and in cash etc. The copies of accounts clearly indicated that what the director had with the company was a current account in which several transactions figured. From the very nature of things, a current account would not come up for consideration in connection with s. 40A (8). The ld. counsel referred also to some of the decisions of the Tribunal in avour of the assessee where a clear distinction has been made between the nature and working of a current account and a deposit account. The Tribunal has consistently taken the view that a current account amounts are outside the purview of the sub-section in question and in respect of order allowing the assessee's appeals also rejected even the Reference Applications. In the assessee's case, the account was clearly a current account as in the case of M. E. Pvt. Ltd. Neither the directors nor their relatives made deposits with the assessee as the accounts would show. The provisions of s. 40A (8) applicable to non-banking and non-financial companies are not applicable to others. In fact, there was no justification as would be clear from the Finance Minister's speech and other details for this "discounted deduction" in cases other than deposits for a period.

5. The intention behind the provisions as clarified by the Finance Minister piloting the Bill and the Memorandum of Explanation to the Finance Act clearly supports the assessee's case. There is a difference between a loan and a deposit as Art. (s) 21 and 22 of the Limitation Act would indicate. There was no limitation on a deposit. The definition of "current account" obtaining in Strounds Dictionary and other legal books is also referred to in this connection. As would be clear from the Civil Court Manual, Vol. 9, 11th Edition, M. L. J., pages 715 to 717, 'deposit' and 'current account' constitute distinctive ideas. Deposits are for the specified term. The Rules also provide that a company cannot accept deposits for a period less than that specified. reference is made in this connection to r. 2 sub-r. (ix) and r. 3 of the Companies Acceptance of Deposits Rules, 1975. According to sub-r. (ix), 'deposits' does not include amounts received from directors or shareholders. Even under the Companies Act, such receipts are not deposits. referring to various legislations, it is pointed out that the expression "deposit" has various connotations. A 'deposit' is a money paid with the stipulation such as, for instance, a repayment after fixed period or term. Even if the deposits is a loan, it is a special type of loan. Reference is made in this connection to page 213 of Biswas Encyclopaedia Law Dictionary, 2nd Edition.

6. According to the ld. counsel, every amount belonging to the director and lying with the company or given to the company cannot be regarded as a deposit for the purposes of the section. A director can keep money on loan account, deposit account or current account. This will be the position with regard to other as well. In the present case, that the amounts lying in the directors' accounts in the company were on current account is not disputed by the ITO. Since the moneys lie on current account, they are neither borrowing nor deposits for the present purposes. Several Judgment of the Tribunal have held that current accounts do not constitute deposits. The intention behind the legislation was to put restrictions on public companies accepting deposits from the public at attractive rate of interest and not to discourage private limited companies from allowing their directors etc., from opening current accounts for the sake of the company's business. The intention of the legislation as gathered from the Finance Minister's speech and a Memo explaining the provisions cannot be ignored for this purpose.

7. Mr. Raiyani appearing for intervener, G. J. Engg. P. Ltd., pointed out that a provision like this where a deduction is normally allowed for expenditure but is disallowed in certain circumstances should be given a strict interpretation. Words used in the enactment are unambiguous. One need not go to the speech of the Minister or, Explanation but, in case there is an ambiguity, it is our duty to refer to that. Under s. 40A (8), 15 per cent of the interest is to be disallowed on the deposits received by the company. But, if the meaning of the word 'deposit' is so clear, there was no necessity for the Act to give an Explanation. The very fact that an Explanation has to be provided, according to the ld. counsel, indicates that the legislature has intended a particular meaning. In 1975, simultaneously the rules under s. 58A of the Companies Act and provisions of s. 40A (8) of the IT Act were introduced. Both deal with the case of companies only, when the Finance Act was introduced on 20th Feb., 1975 after the Companies Rules were framed on 3rd Feb., 1975, the legislature was clearly aware of the definition of 'deposits' obtaining in the Companies Act, Sec. 40A (8), therefore was intended, to apply only to those deposits already specified under the Deposit Rules. Alternatively, it is contended, deposit, should mean that deposit which was understood as such by the companies and the public at large. All accounts do not refer to deposits or to borrowings. They can also refer to loan accounts. In deposits or borrowings account, a person who wants money has to seek it by giving an advertisement, whereas in several cases in spite of there being no need for the money, money is brought to the company, The initiative in this latter case will lie with the lender. Moneys are also in such cases to be repaid on demand. In a deposit account or a fixed deposit account, generally, there is provision for repayment on a particular date. It is always called a term deposit. As far as companies are concerned, the full meaning of the word 'deposit' being clear, it must be given the meaning as understood under the Deposit Rules. If this is not so, deposits could only mean what they are under the general law under the various decisions given by the Court or under the various legislations. Acceptance of Deposit Rules would apply to the credit balances in this account. If the credit balance of the director with the company is considered to be a deposit, it would be necessary for the company to comply with the provisions of these rules. According to the ld. counsel, the twin requirements of payment after a period or event and conformity to the Deposit Rules cannot be ignored. A mere payment of money to a person cannot give rise to a deposit of money. In fact, the onus is on the Department to show that there were deposits or a demand for loans. Reference is made in this connection to the decisions in Shree Ram Mills Ltd., Bambay vs. CEPT (1953) 23 ITR 120 (SC), CEPT vs. Bhartia Electric Steel Co. Ltd. (1954) 25 ITR 192 (Cal) and Sole Trustee, Loka Shikshana Trust vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC). Other provisions of the Act also deal with the expression 'deposit' for instance s. 269-T. In effect, according to the ld. counsel, money with a company will not by the very fact of its being there be a deposit but will be only a mere credit balance, the company not having invited any deposit.

8. For the Department, stress is laid on the orders of the authorities below. The legislative definition of the expression is found in s. 40A (8) Where there is a statutory definition for a term, no external evidence is called for under standing its implication or scope. There is no ambiguity or obscurity involved in the word 'deposit' obtaining in the Explanation. Borrowed money also is covered therein. In fact, the exclusion clause is provided to exempt or exclude an item which but for the definition would fall within that. In fact, The expression 'loan' is included in the term 'deposit' through the Explanation (iii).

9. The Companies Deposit Rules came into effect on 3rd Feb., 1975. The definition of 'deposit' in s. 40A (8) is similar to that definition except for an exclusion. Till 18th Sept., 1975. cl (9) of the Deposit Rules (deposit by directors) was not one of the exceptions. This was introduced by the amendment of the Rules w. e. f. 18th Sept., 1975. Sec. 40A (8), on the other hand, belongs to a field where there was no pre-existing law. For the first time, there was an enactment. In view of these clear legal provisions, according to the learned counsel a reference to the Finance Minister's speech etc., is not necessary or relevant. Reference is made in this connection to the decision in CIT vs. Raja Benoy Kumar Sahas Ray (1957) 32 ITR 466 (SC) especially at pages 476 and 477. One has to read the statute to effectuate the intention of the legislature. That which advances the remedy and suppresses the mischief was to be ascertained. The intention of the legislature is important in this connection. Reference is made to State of West Bengal vs. Union of India AIR 1963 SC 1241. It is the expression of the collective will of the legislature as a whole which is important K. P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) is referred to in this connection. In the first case referred to, on facts, there is no current account of the director. In fact, the assessee themselves disallowed 15per cent but only at the time of the assessment they backed out of this. The learned counsel has pointed out that it is mot proper even to adopt the dictionary meaning of a word when the statute has given a definition. In fact, even the Finance Minister's speech did not cover the remaining situation as in this case. Public cannot include directors, shareholders etc. They are separate entities. If there is no borrowing, the interest itself cannot be allowed. It is also pointed out that there are no current accounts at all in the present case. reference to Schedule VI to the Indian Companies Act and the notes at pages 1209-1220 of Ramayya's Companies Act, 1977 as also relied on It is also pointed out that the definition in s. 269-T cannot be resorted to for the present purpose. The amounts deposited whether on own account or taken as a loan or by inviting deposits or by way of the alleged current account-all constitute deposits. According to the ld. counsel, the clear test to be applied in such cases was whether amounts belonging to outsiders are available to the assessee for use and whether interest has been paid on these amounts deposited with the assessee an understood in common parlance. There is no sanctity about the deposit being for any specific period or for an uncertain period. In both the cases, outsiders' money is available to the company and on this interest is paid. The very purpose of the legislation is to prevent such availability of money for limited companies from outsider instead of from the institutional banking system. In fact, even a current account consists of a series of deposits or loans. If they were not there, there would be no money to draw upon even in this case.

10. The simple issue in the controversy before us is to what type of accounts the provisions of s. 40A (8) can be applied. The sub-section runs as under:

"(8) 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, fifteen per cent of such expenditure shall not be allowed as a deduction.

Explanation: In this sub-section,-

(b) "deposit" means any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company-

(i) from the Central Government or any State Government or any local authority, or from any other source where the repayment of the amount is guaranteed by the Central Government, or a State Government;

(ii) from the Government of a foreign State, or from a citizen of a foreign State, or from any institution, association or body (whether incorporated or not) established outside India;

(iii) as a loan from a banking company or from a cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a cooperative land development bank);

(iv) as a loan from any institution or body specified in the list in the Tenth Schedule or such other institution or body as the Central Government may, having regard to the nature and objects of the institution or body by notification in the Official Gazette, specify in this behalf;

(v) from any other company;

(vi) from an employee of the company by way of security deposit;

(vii) by way of security or as an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, the business of the company or as advance against orders of the supply of goods or for the rendering of any service;

(viii) by way of subscription to any share, stock, bond or debenture (such bond or debenture being secured by a charge or a lien on the assets of the company) pending the allotment of the said share, stock, bond or debenture, or by way of advance payment of any money uncalled and unpaid upon any share in the company, if such moneys are not repayable in accordance with the articles of association of the company;

(ix) as a loan from any person where the loan is secured by the creation of a mortgage, charge or pledge of any assets of the company (such loan being hereafter in this sub-clause referred to as the relevant loan) and the amount of the relevant loan, together with the amount of any other prior debt or loan secured by the creation of a mortgage, charge of pledge of such assets, is not more than seventy-five per cent of the price that such assets would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge of pledge for the relevant loan;"

Whether the Speech of the Finance Minister or the Memo accompanying the Bill is made use of for the purpose of interpretation of the section or not, the purpose of the above sub-section introduced by the Finance Act, 1975 w. e. f. 1st April, 1976 is clear. Consequent on the charging of interest on bank deposits, the cost of bank borrowing went up with the resultant diversion of deposits from banks to non-banking non-financial companies. In order to prevent this, it was enacted that interest paid by non-banking non-financial companies on deposits received by them should be discounted by 15 per cent for the purpose of allowance as an expenditure in computing the total income. In other words, a countervailing liability was put on non-banking non-financial companies to set off the extra liability under the Interest Act placed on the banking sector. If the one were to proceed from the purpose of the legislation, it would appear that only those amounts received by banks subject to the interest liability under the Interest Act should if received from non-banking companies be subjected to an impost. In other words, a purposeful interpretation of the provisions would require that if an amount is not a 'deposit' for the purpose of the Interest Act, the same cannot be held to be so under s. 40A (8) also. Under the Interest Act, tax is levied on the interest received by the scheduled banks thus increasing the cost of borrowing from scheduled banks more by about 1 per cent.

11. The section does not clearly define what a 'deposit' for the purpose of s. 40A (8) is. There is, however, a definition of this expression in cl. (b) of the Explanation reproduced above. According to this 'deposit' means a deposit of money with a company. When a 'deposit' is defined as a deposit, it virtually means that the statute takes it for granted that the meaning of the expression 'deposit' is clear. It must have the general or any other acceptable meaning. There could, however, be deposits of various types and deposit means only deposit of various things. The Explanation would appear to serve only to indicate certain purposes instead of giving a general definition of the expression 'deposit'. The first is that it clarifies that a deposit means only deposit of money with a company it also acts as an inclusive definition including "any money borrowed by" a company and also excluding the amounts received by the company in the nine types of amounts dealt with in the Explanation. Theses exclusions follow a pattern and cover (1) amounts received from Govt., (2) loans from banking company coop. society, specified institutions etc., (3) from other companies, employees, etc. and (4) by way of security from agents, subscription, mortgage, etc. Clear reading therefore of the Explanation would indicate that from the normally well understood meaning of the word 'deposit' one has to concentrate on deposit of money with a company. To this must be added money borrowed by the company and from this must be taken away the specified amounts mentioned in the cls. (i) to (ix). An inclusive definition generally includes in an expression what it does not normally connote. When therefore the expression 'deposit' is stated to "include" any money borrowed by the company, prima facie, it would appear that the word 'deposit' is understood not to include borrowings. By a legal fiction, borrowings by a company are this sought or understood to be included The Explanation thus makes clear two things : by a fiction it includes money borrowed meaning there by that 'deposit' would only mean amounts kept on deposit voluntarily by the outsider and not amounts the company seeks from the outsider by way of borrowings ; secondly, the word should cover items like amounts received from Govt., loans from banks or other companies from employees by way of security, etc. The one characteristic common to these items numbering 9 is that they represent a one time receipt, e. g., a 'loan' means a single receipt; a security deposit would be a single receipt; a subscription or an amount received from a company would also be a single receipt. By excluding therefore only items of single receipts it would appear that 'deposit' as understood should normally relate to only single receipts. If there are a series of receipts or out of an amount received or borrowed adjustments are made, withdrawals are done leaving a balance etc., the balance may not constitute a deposit for the purpose of the section. This fact, in our view, is of importance while considering the question whether a current account with balance would constitute a deposit, an important argument urged by the learned counsels for the assessee.

12. The important issue canvassed for the assessee in the present case is that even though the directors have some moneys owing to them from the company, this would not satisfy the requirements of s. 40A (8) because they are held on current account and dealt with as such. It is in this context that the distinction between current account and deposit has been emphasized both in terms of accountancy principles and also in the light of the Companies Deposit Rules. In our view, s. 40A (8) does not, in the first place, make any difference between a director, a non-director, a relative of a director etc. as far as the deposit is concerned. It only refers to expenditure of interest "in respect of any deposit received by it". Whether therefore the depositor is a director, a non-director, a shareholder, a relative of these or an outsider does not matter at all for the purpose of this discount of expenditure allowable. whatever applies to directors would apply to relatives, outsider in fact to all persons who make deposits. We are emphasising this fact for the reason that irrespective of the ground of appeal raised before us in these appeals, the question referred to the Special bench appears to deal with interest on deposits from directors or and their relatives.  Incidentally, there was a dispute regarding the terms 'loans' and 'deposits' Essentially, they are not mutually exclusive terms. There are a number of features common to them, an important distinction being the time of repayment. A loan is repayable the minute it is incurred, whereas in the case of a deposit, the repayment would depend upon the maturity date fixed therefor or the terms of the agreement relating to the demand, on the making of which the deposit will become repayable. There is no immediate obligation to make the repayment in the case of a deposit. See: Abdul Hmid Sahib & Ors. vs. V. Rahmat Bi AIR 1965 Mad 427. 1983 (Ker) LJ 83 (86) (DB) considered the true test to distinguish a loan from deposit thus: whether it was intended that the amount should remain with the payee indefinitely or not, in other words, whether it was intended that the payee was to seek out the creditor for the payment of the amount paid or the whether payer was to demand he amount from the payee before the amount become payable. In the former case the transition is of a loan and in the latter case it is of deposit. AIR 1976 Punjab 352 held that were a question arises as to whether a transaction is a deposit or a loan, there is no presumption law that it is a deposit except in regard to the monies of a customer in the hands of a banker. "If a person hands over money to another who is not a banker on the understanding it is not a gift, it would be regarded in law as a loan and if the former wants to make out that it is a deposit, the onus is on him to show that the parities intended to treat it as such. Where there is no evidence in support of the proposition that the intention of the parties was that the defendant should keep the money till it was asked for by the plaintiff, the trisection is a loan". Even though, before us, the question whether loans would come under the terms of s. 40A (8) was raised, this no more remains an issue in point because of the explicit provision of cl. (b) of the Explanation stating that a deposit "included money borrowed by a company" and also the reference to 'loans' in some of the sub-cls. (i) to (ix) of this clause.

13. The main issue thus raised on behalf of the assessee is that current accounts do not come within the purview of s. 40A (8). Both in law as well as accountancy, a 'current account' is specifically distinguished from other deposits. A 'current account' is in common parlance referred to as a 'running account'. In fact, what is known as a 'current account' as well as a 'savings bank account' under banking law would be running accounts and would for the purpose of s. 40A (8) be placed in juxtaposition to a deposit. A running account-which would be a more correct general expression to be used in this context-would represent an account which outlines in the accountancy terms a series of truncations one person has with another. Here, money is either paid in cash or by cheque or withdrawn in cash or against cheques issued. Adjustments for other receipts of money, incurring of expenditure, etc. are also made through this account. There would be no prohibition for putting any money into the account at any time or taking it out also. In the course of the same day, in a very actively operated running account, there could be several transactions in respect of cash, bank items, expenditure and even other transactions. The balances in these accounts are struck after every transaction or a series of transactions and a balance at the beginning of the day may not be the same as at the end of the day or even at any other point during the day. What normally one has in this account is therefore a balance of account. It is not even impossible that the running account shows, if the party tolerates it, an excess withdrawal by the person who puts in money so that the actually owes money instead of having a positive balance in his favour. Money in a current account can be with drawn or put in without previous notice and at any time the holder of the account could only regard the balance in his account at any time as the result of his numerous financial transactions. None of these inputs or out-takes of money is therefore accompanied by a specific stipulation as to time for which the money could be kept. The person who puts in money can claim a withdrawal at any time.

14. Reference was made to the notes by way of general instructions for the preparation of balance sheets of companies and the schedule of the balance sheet as well. Item No. (p) of the notes refers to "current account with directors, managing agents, secretaries and treasures and manager, whether they are in credit or debit, shall be shown separately." On the strength of this, it was argued that the proforma balance sheet itself stipulates a special treatment for current account as different from loans and fixed deposits which obtain in the body of the Scheduled IV proforma. This argument ignores the fact that the Schedule refers only to "loans from directors, the managing agents etc.... should be shown separately" and "loans from directors etc. should be shown separately" both against secured loans and unsecured loans mentioned in column of the schedule. No reference to "current account' obtains in the Schedule, whereas 'current account' is mentioned only in the notes. In the first place, this does not mean that a current account would be a deposit or a loan. Secondly, the Schedule only requires that the financial liabilities or assets directly relatable to the directors, managing agents, etc., should be specifically mentioned in the balance-sheet so that any outsider can notice them. If these liabilities are loans or deposits, they should be shown as such. On the contrary, if they are current accounts, they should be shown on the credit or on the debit side fo the balance-sheet as the case may be. In our view, this general mention of two unrelated items would not strengthen the Revenue's case.

15. The expression 'current account' is defined in Earl Jowitt's Dictionary of English Law thus:

"Current Account: in banking a term used to distinguish drawing accounts from fixed deposits accounts, in partnership and individual entrepreneur's account, a current account where each partner or the entrepreneur is usually set up as an account current (q. u.) between the individual and the business."

A deposit account, on the other hand, is treated as a single time or payment to be held by the recipient for a specific term under specific conditions of interest etc. and not to be called back before the specified term except in exceptional cases. In the latter case, generally, the higher rate of interest charged for term deposits is not paid by the debtor. While in a deposit, generally, both the terms of the deposit and a rather higher rate of interest than in other accounts is stipulated, it is not always the case that in current accounts no interest is granted. A savings account in the bank is a running account and for the purposes of operation almost like a current account. Interest is charged in the savings account. Sometimes (as it sued to be earlier) banks grant interest even on balances in current account even though now-a-days no interest is granted. All these clearly indicate that there is a distinct difference between moneys on current or running account and moneys kept as deposit both in accountancy and finance.

16. Even from the purely legal point of view there is a difference between a current account and a deposit. The right to demand return of money and enforce the same ; fixation of different periods after which only the demand can be made ; different limitation periods under the Limitation Act for making demand or filing suits for recovery ; the fixed nature of a deposit as contrasted with the daily or even from frequent fluctuation in amounts in a running account; the differences specifically cast by the Companies Acceptance of Deposits Rules, 1975 all these leave us with no doubt that in law also there is a substantial distinction between a deposit and a current account.

17. In view of the above, the expression 'deposit' in s. 40A (8) cannot be said to include a running account. In fact, what one gets in running or current account is the balance one person owes to the other at any time as against an amount standing deposit that obtains in the case of a deposit. If the purpose of the legislature was to discount the interest paid balances in an account or even net balances, we see no reason why a direct reference to "balances" or "net balance" is not made in the section but a reference is made only to deposits. That in a current account or running account amounts will be coming in and going out and adjustments would be made is certainly well known. If that be so, the deliberate use of the word 'deposit' instead of a 'balance' or net balance' is a clear indication that a running account was not in view. The factual difficulty that arises if a running account is considered as a deposit would be illustrated if a running account of the following type could be envisaged:

The above account starts with an opening balance in the running account. Could it be said that this balance is a deposit ? On 15th March, 1985, a sum of Rs. 50,000 is put into the account thus increasing the balance to Rs. 72,039. Immediately thereafter, a withdrawal of Rs. 2,000 is made bringing the balance to Rs. 70,039. A further credit of Rs. 3,000 brought up the balance to Rs. 73,039. Could we say that all these balances Rs. 22,039, Rs. 72,039 Rs. 70,039, Rs. 73,039, Rs. 70,039 etc. are the deposits of the assessee in this account since these represent amounts the assessee is to get from this account ? The account can also show a negative balance if the assessee has been permitted to withdraw more moneys from the running account that he has put in over-all. Could a negative balance be called a "deposit" or, for that matter, a "negative deposit"?

18. The above facts therefore clearly indicate that a current account would not be the subject matter of discounted interest envisaged in s. 40A (8).

19. It was argued for the Department that even if a current account could not be brought into the mischief of s. 40A (8), in the present case, the directors or relatives, accounts are not current or running accounts. There are large amounts deposited on specified dates. The amounts remained with the assessee company for a long time. If at all, it is only a misuse of the current account provisions to keep a deposit with the company so as to get over the provisions of s. 40A (8).

20. The accounts of these persons with the company have been seen. Copies of their accounts are on record. We do not see how these running accounts could not be regarded as running or current accounts but could be only called deposits. Taking, for instance, the account of director, Tulsiram Nathmal, for the period 1st Jan., 1978 to 31st Dec., 1978, there is a balance in this account carried forward of Rs. 2,11,146.27. Two cheques were received on 3rd Jan., 1978 and 6th Jan., 1978 of Rs. 50,000 and Rs. 75,000 respectively. A sum of Rs. 1,25,000 was withdrawn by issue of a cheque by the company on 2nd March, 1978. On 31st march, 1978, the company credited interest of Rs. 8,557 and debited a sum of Rs. 856 by way of tax deducted. There were cheque payments into the account on 22th April, 1978, 18th May, 1978, 7th August, 1978, 11th August, 1978, and 7th Dec., 1978. On 31st Dec., 1978, interest of Rs. 27,997 was credited to the account. Tax deducted of Rs. 2,800 was debited to the account thus leaving a balance of Rs. 4,29,044.27. This is exactly what a typical running or current account would reveal. It would be a misuse of the concept to term the payments made into this account as deposits and ignoring the withdrawals or debits. In the accounts of other persons also, there are payments in withdrawals, charging of interest, transfers, etc. There is no time limit fixed for the retention of the payment of any of the amount. Apparently at any time the director concerned could withdraw the amount from this account. There seems to be no prohibition also on this account running negative. As far as the director is concerned he can leave a negative balance rather than a positive one in the account. On the facts, we have to hold that the account of the directors with the company in the present case are clearly current or running accounts and would not come under the head 'deposits' for the purpose of s. 40A (8). The position is the same in the case of the intervenes also.

21. In the case of intervener, Space Builders P. Ltd., certain other grounds have been raised. As this appeal as such is not referred to the Special Bench, that will be decided separately by the Bench which hears it.

22. The assessee's appeals are allowed, while the Departmental appeals are dismissed.

25th July, 1985

B. S. Ahuja, J. M.-I have carefully read the order proposed by the ld. vice-presidents but regret that I cannot bring myself to subscribe to the views propounded therein and the conclusions reached by him.

2. The arguments advanced by the parties have been reproduced by the vice-president and need not, therefor, be repeated. The short question at issue is whether the amounts to the credit of directors, their relatives, friends and some trusts, described as relatives, are covered by the term 'deposit' in s. 40A (8) as defined in the Explanation. The definition is inclusive. If the meaning of deposit can be clearly gleaned from the definition, then external aids to interpretation statutes cannot be brought into consideration for varying the meaning of deposit.

3. In CIT vs. Shahzada Nand & Sons (1966) 60 ITR 392 (SC), the Supreme Court dealing with the interpretation of statutes held as follows:

"In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. To this may be added a rider: in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. the underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just or expedient. The expressed intention must guide the Court.'

4. In K. P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC), the Supreme Court held as follows:

"A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even do some violence to it so as to achieve the obvious intention of the legislature and produce a rational construction."

(Luke vs. IRC (1963) AC 557 : (1964) 54 ITR 692 (HL) followed).

"Speeches made by the member of the legislature on the floor of the house when the bill is being debated are inadmissible for the purpose of interpreting the statutory provisions but the speech made by the mover of the Bill explaining the reasons for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in account with the recent trend in juristic thought not only in western countries but also in India, that the interpretation of a statute being an exercise in the ascertainment of meaning everything which is logically relevant should be admissible."

5. With the principle of interpretation in mind let us have a look at the definition of a 'deposit' in s. 40A (8), Explanation (b). It is an admitted position that the assessee is a non-banking company which has incurred expenditure by way of interest on the amounts which are claimed to be current accounts, so that if they can come within the definition of deposits under this section, 15 per cent of the interest would have to be disallowed.

6. "Deposit" means any deposit of money, with and includes any money borrowed by, a company but does not include any money received by the company:

(i) from the Central Government or any State Govt. or any local authority, or form any other source where the repayment of the amount is guaranteed by the Central Government or a State Government;

(ii) from the Government of a foreign State, or form a citizen of a foreign State, or from any institution, association or body (whether incorporated or not) established outside India;

(iii) as a loan from a banking company or from a cooperative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a cooperative land development bank);

(iv) as a loan from any institution or body specified in the list in the Tenth Schedule or such other institution or body as the Central Govt. may, having regard to the nature and objects of he institution or body, by notification in the Official Gazette, specify in this behalf;

(v) from in any other company;

(vi) from an employee of the company by way of security deposit;

(vii) by way of security or as an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, the business of the company or as advance against orders for the supply of goods or for the rendering of any service;

(viii) by way of subscription to any share, stock, bond or debenture (such bond or debenture being secured by a charge or lien on the assets of the company) pending the allotment of the said share, stock, bond or debenture, or by way of advance payment of any moneys uncalled and unpaid upon any shares in the company, if such moneys are not repayable in accordance with the articles of association of the company;

(ix) as a loan secured by the person where the loan is secured by the creation of mortgage, charge or pledge of any assets of the company (such loan being hereafter in this sub-clause referred to as the relevant amount of any other prior debt or loan secured by the creation of a mortgage, charge or pledge of such assets, is not more than seventy-five per cent or the price that such assets would ordinarily fetch on sale in the open market on the date of creation of he mortgage, charge or pledge for the relevant loan)."

7. While borrowing is included in the definition, cls. (iii) and (iv) show that a loan would also be a deposit. Cl. (v) shows that but for the exclusion any money received by the company from any other company would also be treated as a deposit. Clause (vi) and (vii) show that but for the exclusion, even a security deposit received from an employee or security or advance received from an agent or any advance against orders for supply of goods or for rendering of service would be a deposit under the section for disallowance of interest vide cl. (viii). It is clear that but for the exclusion, subscription paid for any shares, stock, bond or debenture pending allotment would be a deposit under the section.

8. The above analysis shows that the definition of deposit under s. 40A (8) is very wide.

9. When a director, or his relative or a trust with which they are connected, give money to the company with an agreement, express or implied, to pay interest, the question arias whether it does not fall within this wide definition of deposit because the lawyers-accountants have named these accounts as "current accounts". Incidentally, all accounts are not similar to those reproduced in the order of the learned vice-president. The following accounts would give an altogether different complexion to so-called current accounts:

Lala Shorimal Tulsidas (By Mrs. Rajkumar Tulsiram)

III. 1979	.	.	.		.
31-3-1979 To TDS on Int.	282.00	1-1-1979		By Bal. b/d	95,347.48
31-12-1979,, I. Tax on Int.	886.00	31-3-1979		" Int.	2821.00
Bal. c/f.	1,05,852.48	"		" "	8852.00
Rs.	1,07,020.48	.		Rs.	1,07,020.48

Only interest has been credited, TDS and IT debited.

Master Vijay R. Arora

VI.

There is no transaction except interest credited and TDS debited.

STATEMENT OF ACCOUNT OF SMT. CHANDRIKABEN J. JHAVERI FROM 1-4-1978 TO 31-3-1979

STATEMENT OF ACCOUNT OF SMT. PRABHAVATIBAN AMRUTLAL SHAH FROM 1-4-1978 TO 31-3-1979

STATEMENT OF ACCOUNT OF SHRI BHUPENDRAKUMAR AMRUTLAL SHAH FROM 1-4-1978 TO 31-3-1979

STATEMENT OF ACCOUNT OF SHRI NALINKUMAR AMRUTLAL SHAH FROM 1-4-1978 TO 31-3-1979

STATEMENT OF ACCOUNT OF SHRI SEVENTILAL SURAJMAL JHAVERI FROM 1-4-1978 TO 31-3-1979

10. Thus, all accounts are not such where there are a number of deposits and withdrawals during the year. There are also these where there are no transactions at all.

11. Does the fact that these amounts were paid to the company by directors or others, without any advertisement by the company inviting deposits as per Companies (Acceptance of Deposit) Rules, make them in a class by themselves different from 'deposits' under s. 40A (8)? We fail to see how that can be so. Indeed, the purpose for which this section was enacted has been elaborately discussed in the order of the Vice president. However, the definition of 'deposits' in the explanation is so wide that it must include all these so called 'current accounts' so that the benefit of mischief rule for interpretation cannot limit the meaning of the term 'deposit' as enacted in the Explanation to s. 40A (8), since there is no ambiguity in the definition.

12. The argument advance on behalf of the assessee was that 'deposit' means only a term deposit for a fixed period. This argument is totally misconceived. There are deposits, commonly understood, made in the bank accounts like (i) current account; (ii) savings bank account; (iii) fixed deposit account etc., for a certain period.

13. It cannot be said that what a person put in the current account is not a deposit. If it is not a deposit, we fail to understand what it is. In Halsbury's "Laws of England" under the head 'Business of Banking', in para-89 the ld. author describes the bank accounts as follows:

1. A deposit account repayable on demand;

2. A deposit account repayable at a fixed future date or after the lapse of a specified time;

3. A deposit account repayable at the end of a given period of notice.

14. On page 33, the ld. author observes that the receipt of money on deposit account constitutes the banker a debtor to the depositor but not a trustee thereof for him. No new contract is created every time there is a fresh deposit, the account is a continuing one. The debt is repayable either on demand or on conditions agreed with the depositor."

15. If that be the legal relationship created by the deposit in current account (deposit account repayable on demand) in a bank that the bank becomes a debtor to the depositor, the same relationship would be created when amounts are deposited with the company under the so-called current accounts. A person taking a loan is a debtor while a person giving the loan is a creditor. 'Loan' is included in the definition of 'deposit'. Therefore, all deposits in these current accounts would be deposits within the meaning of 'deposit' in s. 40A (8).

16. It is immaterial that in some cases there have been a number of deposits, and withdrawals. Once it is held that these are deposits, all that the ITO the ITO has to do is to disallow arithmetically 15 per cent of the interest paid thereon. It was not necessary for Parliament to say that the disallowance of interest would be on balance, as observed by the learned Vice President in para-17 of his order. The failure of Parliament to use the words 'balance' or 'net balance' would not justify the conclusion that current or running account would be outside the purview of s. 40A (8).

17. The difficulty expressed at the end of para-17 by the ld. Vice President of a negative deposit is purely hypothetical because in that event no interest would be paid to him but it would be charged from him and no question of interest being disallowed would then arise.

18. In Black's Law Dictionary, it is stated:

"A general deposit is where the money deposited is not itself to be returned but an equivalent in money (that is, a like sum) is to be returned".

It is equivalent to a loan and the money depositor becomes the property of the depositor; Demand deposit. "Bank deposit which may be withdrawn at any time by the depositor without prior notice to bank. On page 296, Time Deposit has been described as deposit which is to remain for specified period of time or on which notice must be given to bank before withdrawal. Thus, a deposit with the bank creates a loan and a loan is a 'deposit' under s. 40A (8).

19. Thus, it is clear that whatever amount stands to the credit of directors on their relatives etc., creates a loan or debtor/creditor relationship between the assessee company and the depositors which clearly falls within the definition of 'deposit' under s. 40A (8).

20. We may here point out that except a banking company, which the assessee is admittedly not, no one can do the business of banking under the Banking Regulation Act, 1949. Banking has been defined in s. 5(b) as: "banking means accepting for the purpose of lending or investment of deposits repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise."

21. Relatives of the directors or trusts (which cannot be relatives of a company, in any event) would clearly be part of public and if the assessee claims to have current accounts of depositors, then it is violating the Banking Regulations Act.

22. The conclusion reached by the ld. Vice President in para-11 that the definition of deposit indicates that "the money should be kept on deposit voluntarily by the outsider and not the amounts the company seeks from the outsider by way of borrowings' and characteristic common to Explanation (b) (i) to (ix) is that it means a single receipt does not, in our opinion, following from the reading of the definition. Nothing, however, in our opinion, turns on such a conclusion, for reasons already given by us.

23. The Companies (Acceptance of Deposits) Rules came into effect on 3rd Feb., 1975, and till 18th Sept., 1975, the definition of 'deposit' in the Rule and s. 40A (8) was the same, but on 18th Sept., 1975, however, cl. 9 of the Rules (Deposits by Directors) was enacted to exclude deposits by Directors from the term 'deposit'. That it become necessary to except deposits from the directors from the definition of 'deposit' in the Deposit Rules clearly means that otherwise the deposit by directors would be covered by definition of 'deposit'.

24. Sec. 40A (8) was, however, not amended to exempt deposits by directors from the definition in IT Act. The conclusion is inescapable that under the IT Act. deposits by directors continued to be included in the definition of deposits rules they did not amount to deposit for disallowance of interest, though under the deposit for calculating the limits of borrowing. The failure to amend the definition in s. 40A (8) appears to have been a conscious decision.

25. The difference between a loan and a deposit under the Indian Limitation Act is purely for the purpose of limitation and rulings under that Act cannot be of Assistance to decide the point at issue.

26. However, the assessee has always treated the amounts in the current account as moneys borrowed for the purposes of business and clained and was allowed deduction of interest under s. 36 (1) (iii) of the I. T. Act. Even the assessee while filing the return treated the amounts as deposit and disallowed 15 per cent interest voluntarily. This, too, gives an indication as to how the assessee has looked at these deposits. Whether these were depsits under s. 40A (8) cannot but a mixed question of facts and law and the fact that the assessee treated them as deposits is a fact which cannot be brushed aside as inconsequential.

27. In para-14 of his order the ld. Vice President has dealt with the requirements of the Companies Act to show in the balance sheet separately "current account with directors, managing agents, Secretaries and members of the management." This shows firstly, that none else except directors etc. (i. e., their relatives and connected trusts) can have a current account with the company. Secondly, since the assessee did not show these amounts in question as current accounts in the balance sheet, it is clear that the assessee company never treated them as current accounts.

28. I, therefore held that-

(i) All the credits in the account involved in these appeals cannot be described as current accounts.

(ii) Even as current accounts, all the credits therein fall within the definition of 'deposit' under s. 40A (8) Explanation (b).

(iii) The definition of 'deposit' is so explicit and unambiguous that it is not permissible to take the aid of speech of the finance Minister, the Memorandum explaining the purview of the Finance Bill 1975 or to invoke mischief rule for the interpretation of statutes.

I. S. Nigam- I agree with my learned brother.

ORDER UNDER SEC. 255(4) OF THE INCOME TAX ACT

By the Tribunal: In view of the majority decision, the appeals by the assessee for asst. yrs. 1979-80 & 1980-81 (I. T. A. Nos. 3020 & 3021/Bom/1981) by M/s Kaloomal Shorimal Sachdev Rangwalla Pvt. Ltd. are dismissed.

 

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