Judgment:
R.K. Agrawal, J.
1. The Tribunal, Allahabad, has referred the following questions of law under Section 256(1) of the IT Act, 1961 (hereinafter referred to as 'the Act') for opinion to this Court:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the amount of Rs. 69,973 realised by the assessee as excess storage rent could not be treated as income of the assessee-company and brought to tax in the asst. yr. 1981-82 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the disallowance under Section 40A(8) should be restricted to the net payment of interest ?'
2. The reference relates to the asst. yr, 1981-82.
3. Briefly stated, the facts of the case so far as they are relevant for the purposes of questions referred to us are as follows :
During the assessment year in question the respondent which is a private limited company and is running a cold storage, has paid interest amounting to Rs. 57,309 to various persons. Before the assessing authority it was claimed that only the net amount of interest should be taken into consideration for working out 15 per cent of the' disallowance as provided under Section 40A(8) of the Act. The plea was not accepted by the assessing authority. Feeling aggrieved, the respondent preferred an appeal before the CIT(A) who upheld the order of the assessing authority. Still feeling aggrieved, the respondent preferred a second appeal before the Tribunal. The Tribunal had allowed the claim of the respondent-assessee by following its decision in another case, namely, Laxmi Talkies (P) Ltd. v. ITO (ITA No. 1498/All/1984, dt. 18th May, 1985), wherein it was held by the Tribunal that disallowance under Section 40A(8) of the Act should be restricted to net payment of interest.
4. We have heard Sri Shambhoo Chopra, learned standing counsel for the Revenue, and Sri Satish Mandhyan, learned counsel appearing for the respondent-assessee.
5. The learned standing counsel submitted that in view of the clear language of Section 40A(8) of the Act, 15 per cent of the amount of interest paid by the company is liable to be disallowed and it is immaterial as to whether the company has received interest from its borrowers/debtors or not.
6. Sri Satish Mandhyan, learned counsel for the respondent-assessee, submitted that the intention of Section 40A(8) was to disallow 15 per cent of the amount of interest which is actually claimed as business expenditure while computing the income of the assessee and, therefore, it would be referable to the net amount of interest and not the gross amount. He has relied upon a decision of Gujarat High Court in the case of CIT v. Wintex Mills Ltd., : [2000]245ITR266(Guj) , wherein the Gujarat High Court has held that interest under Section 40A(8) of the Act has to be disallowed only on the net amount of interest paid by the company.
7. Having heard the learned counsel for the parties, we find that Section 40A(8) of the Act, as it stood during the relevant period, provided for disallowance of 15 per cent of the interest incurred by way of expenditure in respect of any deposit received by the company. Sub-section (8) reads as follows :
'(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, 15 per cent of such expenditure shall not be allowed as a deduction.'
8. The Gujarat High Court drawing analogy from Section 40(b) of the Act, as it stood during the relevant period, had held that the ratio laid down by the apex Court in Keshavji Ravji & Co. v. CIT : [1990]183ITR1(SC) can be invoked by the assessee and the principal underlying Section 40(b), as it then stood, would also apply to Section 40A(8) of the Act. It may be mentioned here that the Expln. 1 to Clause (b) of Section 40 provided that where interest is paid by the firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm.
9. The apex Court in the case of Keshavji Ravji & Co. (supra) has held that where two or more transactions on which interest is paid or received by the partners of the firm, are shown to have the element of mutuality and are referable to the funds of the partnership as such, there is no reason why Section 40(b) should be so construed as to exclude in quantifying the interest on the basis of such mutuality. In such circumstances, the interest, if any, paid to a partner by the firm in excess of what is received from the partner could alone be excluded from deduction under Section 40(b) of the Act.
10. With respect we are unable to subscribe to the view taken by the Gujarat High Court in the case of Wintex Mills Ltd. (supra). The analogy of Section 40(b) of the Act would not be attracted in the present case.
In the present case, the company is a separate and distinct legal entity than its shareholders, members and depositors. The doctrine of mutuality cannot be applied in the case of a company where the payment of interest is being made to a distinct and separate legal entity. Further, there is nothing on record to show that some depositors to whom the company had paid interest, had paid interest to the company. Moreover, the disallowance of 15 per cent of expenditure incurred by way of interest paid on the deposits by the company is to be disallowed under Section 40A(8) of the Act. The disallowance is limited in respect of the interest paid on deposits received by the company and, therefore, we are of the considered opinion that the Tribunal had committed an error in restricting the applicability of Section 40A(8) of the Act in respect of payment of net interest only.
11. We, accordingly, answer the questions referred to us in the negative, i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs.