Commissioner Of Income-Tax vs Bhandari Machinery Co. (P.) Ltd.
1998 Latest Caselaw 143 Del

JUDGMENT

R.C. Lahoti, J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue seeking the opinion of the High Court on the following question of law arising out of the assessment year 1976-77;

"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting a sum of Rs. 9,964 being 15 per cent. interest paid to the directors and shareholders of the assessee-company, disallowed under Section 40A(8) of the Income-tax Act, 1961 ?"

2. The assessee is a private limited company deriving income from property and also business in purchase and sale of machinery parts. The assessee, during the relevant accounting period, made payment of interest amounting to Rs. 66,386 mainly to its directors and shareholders. The Income-tax Officer made a disallowance of Rs. 9,957, i.e., 15 per cent, of the amount of interest paid by invoking the provisions of Section 40A(8) of the Income-tax Act. Before the Income-tax Officer, the assessee by his letter dated March 8, 1979, submitted that the assessee-company was a private limited company ; it had not borrowed any money from the public and hence the provisions of Section 40A(8) of the Income-tax Act could not be applied in its case. The assessee also pointed out to a news item dated September 20, 1975, appearing in the Times of India wherein a certain clarification by the Company Law Board was published. In the said news item, it was clarified that deposits secured by a company, whether public or private limited, from its directors were excluded from the definition of "deposits". However, it was clarified that as far as shareholders were concerned, only deposits received by a private limited company, from their shareholders, were exempt from the definition of "deposits", but the deposits received by a public limited company from its shareholders would continue to be considered as "deposits". It appears that the Income-tax Officer did not discuss the above contention of the assessee and made a disallowance under Section 40A(8) of the Income-tax Act without assigning any reasons.

3. The assessee went in appeal. The Commissioner of Income-tax (Appeals) rejected the above said contention of the assessee raised before him.

4. The assessee filed a second appeal before the Tribunal. In support of its contention that Section 40A(8) was not applicable to the deposits made by the directors and shareholders in a private limited company, reliance was placed on the following excerpt from the speech of the Finance Minister while presenting the budget for the financial year 1975-76 on February 28, 1975 (appearing in [1975] 98 ITR (St.) 113) :

"The levy of a tax under the Interest-tax Act, 1974, on interest received by scheduled banks has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax has, therefore, made the acceptance of deposits by non-banking non-financial companies from the public all the more attractive, specially in the context of the selective credit control measures adopted by the Reserve Bank. Some corrective, by way of disincentive to borrowings from the public by these companies seems to be indicated so that credit planning according to the priorities laid down by the Government is not defeated. I propose, therefore, that in computing the taxable income of non-banking non-financial companies, only 85 per cent, of the interest paid by them on public deposits will be allowed as expenditure for tax purposes. This measure will yield Rs. 10 crores, in a full year and Rs. 7.5 crores in 1975-76."

5. Learned counsel for the assessee also referred to a Company Law Board's clarification regarding the word "deposits" published in the Times of India dated September 20, 1975, according to which deposits secured by a company from its directors were excluded from the definition of deposits.

6. The Tribunal placed reliance on K.P. Varghese v. ITO , in forming an opinion that the speech made by the Finance Minister on the floor of the House could be looked into for the purpose of interpreting a statutory provision.

7. The Tribunal also drew assistance from the following Notes on Clauses :

"Sub-clause (b) seeks to insert new Sub-section (8). Under the new Sub-section (8), 15 per cent, of the interest paid by non-banking non-financial companies on deposits received by them from the public will be disallowed in computing their total income.

This amendment will take effect from April 1, 1976, and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years." (see [1975] 98 ITR (St.) 168)

8. Taking into consideration the several contentions raised by the assessee, the Tribunal allowed the appeal filed by the assessee and deleted the disallowance of Rs. 9,957 made by the Income-tax Officer.

9. The controversy centres around Sub-section (8) of Section 40A (as it stood at the relevant time), as inserted by the Finance Act, 1975, with effect from April 1, 1976 (later on omitted by the Finance Act of 1985), with effect from April 1, 1986). The relevant part of the provision is extracted and reproduced hereunder :

"Expenses or payments not deductible in certain circumstances.--(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,--

(a) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949), applies and includes any bank or banking institution referred to in Section 51 of that Act :

(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 co-operative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a co-operative 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 deposits;

(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 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 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 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 or 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 or pledge for the relevant loan ; . . ."

10. According to the said provision 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, 15 per cent, of such expenditure shall not be allowed as a deduction. The Explanation appended to the Sub-section, defines "deposit" to mean any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company belonging to any of the categories (i) to (ix) provided therein. In the exclusionary categories directors and shareholders are not to be found mentioned.

11. On a plain reading of the above said provision, it is clear that the deposits made by directors and shareholders are not excluded therefrom. However, the Tribunal has tried to ascertain the underlying object behind the provision by reading the speech of the Finance Minister and deriving assistance from the Notes on Clauses and the clarification issued by the Company Law Board, to form an opinion that deposits by directors and shareholders were not intended by Parliament to be covered by the said provision.

12. Learned senior standing counsel for the Department has submitted that there is no ambiguity in the language of the provision and, therefore, it has to be interpreted as it stands; an attempt at finding out the assumed intention of Parliament is futile, also not permissible. Any attempt at deriving assistance from the provisions of the Companies Act or the Company Law Board circular issued thereunder was totally misplaced in view of the plain language of the provision. In support of his submission that the deposits by the directors and shareholders fell within the purview of Section 40A(8) aforesaid, learned counsel for the Department placed reliance on a few decisions to which we will advert a little later.

13. Learned counsel for the assessee has, on the other hand, submitted that the Companies Act is an enactment complementary to the Income-tax Act and hence the clarification issued by the Company Law Board can be pressed into service for interpreting the Income-tax Act. The object behind introducing Section 40A(8) was to discourage growth of deposits by public and obviously deposits by directors and shareholders were not intended to be discouraged by bringing them within the purview of the provision.

14. By way of rejoinder learned counsel for the Department stuck to his original plea submitting that if the interpretation placed by the assessee was to be accepted, it will defeat the very purpose sought to be achieved by the provision. The directors would accept the deposits in their own name and then make deposits in the company and thus escape the net of Section 40A(8).

15. As the Tribunal has drawn assistance from the speech of the Finance Minister, the Notes on Clauses and the Company Law Board circular for the purpose of finding out the object and purpose behind the enactment of the provision and then interpreting the same, let us apprise ourselves with the relevant principles of interpretation of statutes inasmuch as learned counsel for the assessee has also forcefully adopted before us the same reasoning as has been adopted by the Tribunal, placing strong reliance on K.P. Varghese's case . Fortunately all the relevant field wherein we propose to make our search is covered by the law laid down by the Supreme Court.

16. Fiscal laws must be strictly construed, words must say what they mean, nothing should be presumed or implied, these must say so. The true test must always be the language used : Goodyear India Ltd. v. State of Haryana . Primarily the language employed is the determining factor of the intention of the Legislature. The first and primary rule of construction is that the intention of the Legislature must be found in the words used by the Legislature itself. The question of interpretation arises only when the language is ambiguous and, therefore, capable of two interpretations : Om Prakash Gupta v. Dig Vijendrapal Gupta, P.K. Unni v. Nirmala Industries, .

17. Before going in search of any external aids of construction, look at the language employed by the Legislature because no canon of construction can be said to be more firmly established than this that the Legislature uses appropriate language to manifest its intention : Babaji Kondaji Garab v. Nasik Merchants Co-operative Bank Ltd., . The golden rule of construction which interprets according to the grammatical and ordinary sense of the word can be departed from if the words are ambiguous, uncertain or any doubt arises as to the terms employed : Kehar Singh v. The State, . In Girdhari Lal and Sons v. Balbir Nath Mathur, , their Lordships have permitted the golden rule of interpretation being departed from to avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law.

18. The speeches made by the members of the House in the course of the debates are not admissible as external aids to the interpretation of a statutory provision : Aswini Kumar Ghose v. Arabinda Base, State of Travancore-Cochin v. Bombay Company Ltd. AIR 1952 SC 366. A statute, as passed by Parliament, is the expression of the collective intention of the Legislature as a whole, and any statement made by the individual, albeit a Minister, of the intention and objects of the Act cannot be used to cut down the generality of the words used in the statute, though a reference to the statement of objects and reasons and the circumstances leading to a certain enactment may be of use when the terms of the statute are ambiguous or vague so that the intention of the Legislature may be ascertained, (see Express Newspapers (P.) Ltd. v. Union of India, State of West Bengal v. Union of India, ). The Statement of Objects and Reasons, seeks only to explain what reasons induced the mover to introduce the Bill in the 'House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the objective which the majority of members had in view when they passed it into law. The Statement of Objects and Reasons appended to the Bill should be ruled out as an aid to the construction of a statute : Aswini Kumar's case, .

19. When the language of a statute is plain, the marginal note cannot be seen for construing the provision : Kalawatibai v. Soiryabai, Board of Muslim Wakfs v. Radha Kishan CIT v. Ahmedbhai Umarbhai and Co. . If there is any ambiguity in the meaning of the provisions in the body of the statute, the marginal note may be looked into as an aid to construction S.P. Gupta v. Union of India and another , .

20. Unless the two statutes be in pari materia, expressions used in one Act and the decisions thereon cannot be applied for interpreting another Act. Here again reference to construction of expressions in another Act cannot be resorted to in the absence of ambiguity in the statute in hand (see Board of Muslim Wakfs v. Radha Kishan, ).

21. In Shashikant Lax-man Kale v. Union of India , their Lordships refused to accept the words used in the explanatory memorandum while introducing the Finance Bill in Parliament to be determinative of or to camouflage the true object of the legislation. The catch-phrase used therein was considered to have been possibly used as a populist measure. In Smt. Mary Umen v. Manager, MGM High School, , while interpreting certain statutory rules, their Lordships observed that the note appended to the rule, did not form part of the rule nor did it have any binding effect, though it could have a persuasive force for clarificatory purposes. We are definitely of the opinion that the Notes on Clauses do not form part of the enactment as passed by the Legislature and therefore do not have utility for interpreting the otherwise plain language of an enactment.

22. What are relied on by learned counsel for the assessee for interpreting the provisions of Section 40A(8)--(i) the speech of the Finance Minister, (ii) the Notes on Clauses, and (iii) a circular issued by the Company Law Board under the Companies Act are all external aids to interpretation which cannot be resorted to when the language of enactment is plain and unambiguous just as the language of the provision under scrutiny is. The opening clause speaks of any deposit received by a company (other than a banking company or a financial company). The language used is wide and sweeping, so as to embrace within its ken any deposit without any reservation or qualification as to the source from which it originates. The term "deposit" as defined by the Explanation to Section 40A(8) also means any deposit of money and includes any money borrowed by the company. Here also the phraseology used is wide and sweeping. Then there are nine exclusionary clauses. Had it been the intention of the Legislature to exclude deposits made by or money borrowed from either a director or a shareholder then the Legislature could have added that category in the exclusionary clause which it has chosen not to do. There is, therefore, no occasion for drawing a difference between deposits made by directors and shareholders and deposits made by public other than directors and shareholders of the company. The Company Law Board circular deals with dseposits dealt with by the Companies Act and for the purpose of that Act. It cannot be pressed into service for the purpose of interpreting the provision of Section 40A(8) of the Income-tax Act. Strictly speaking, even the speech of the Finance Minister and Notes on Clauses do not lend support to the view taken by the Tribunal. The Tribunal went completely amiss in taking the view which it has done.

23. In the view which we have taken, we are fortified by a few decisions which were brought to our notice by learned counsel for the Revenue.

24. In Agew Steel Manufacturers Pvt. Ltd. v. CIT and CIT v. Gandhi Metals Mills (P.) Ltd. [19931 200 ITR 252 (Raj), it has been held that borrowings made by the company from the directors are also included within the meaning of deposit and interest paid to directors on such borrowings is liable to be disallowed to the extent prescribed in Section 40A(8).

25. In CIT v. Jhaveri Bros, and Co. Pvt Ltd . and CIT v. Suman Tea and Plywood Industries (P.) Ltd. , interest on credit balances in current accounts of shareholders and directors was held to be covered by Section 40A(8).

26. In CIT v. Jain Cables Pvt. Ltd. , interest paid to directors on their deposits in running accounts was held liable to be disallowed to the extent prescribed under Section 40A(8) of the Act.

27. We have carefully gone through the Supreme Court judgment in K.P. Varghese v. ITO , forcefully relied on by counsel for the assessee. Their Lordships have held that the speeches made by the members of the Legislature during the course of the debate on a Bill are inadmissible for interpreting the statutory provisions but the speech made by the mover of the Bill can 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. As to the marginal note to the section, their Lordships have held that they cannot be referred to for the purpose of construing the section but can be relied upon as indicating the drift of the section or to show what the section is dealing with. As to the circulars issued by Central Board of Direct Taxes, their Lordships have held that they are valuable evidence of contemporaneous exposition but must give way where the language of the statute is unambiguous. We do not think that the principle above said can lend strength to any of the contentions raised by learned counsel for the assessee in view of what we have already stated herein-above.

28. For the foregoing reasons, we are of the opinion that the Tribunal was not correct in forming an opinion that the deposits made by the directors and shareholders were not covered by Section 40A(8). The question is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee.