1. This appeal filed by the assessee is directed against the order dated 17-3-1983 passed by the Commissioner (Appeals).
2. The assessee is a limited company. The assessment year involved is 1978-79 for which the accounting year ended on 30-6-1977. The ITO disallowed interest amounting to Rs. 17,744 under Section 40A(8) of the Income-tax Act, 1961 ('the Act'). On appeal, the Commissioner (Appeals) following his decision on the issue for the assessment year 1977-78, sustained the disallowance. The first ground raised in this appeal by the assessee relates to this disallowance made under Section 40A(8).
3. Shri N.K. Poddar, the learned authorised representative for the assessee, submitted before us that the managing director, and three directors of the assessee-company besides shareholders and two other persons, namely, Suit. Madhuri Boyd and Shri Lalit Singh Boyd, have, according to the assessee, current accounts with the assessee-company and that out of the interest paid by the assessee-company on the credit balance standing in the names of these persons in their current accounts, the ITO disallowed the sum of Rs. 17,744 under Section 40A(8). It was urged that the amounts deposited by the aforesaid persons in their current accounts with the assessee-company were not for any fixed period and that amounts could be deposited in or withdrawn from the current accounts as and when desired. It was further submitted that it is not a case of fixed deposit and that the interest paid to the aforesaid persons did not fall within the purview of Section 40A(8) and, hence, the ITO was not justified in making the disallowance. In support of his contention Shri Poddar relied upon two decisions of Tribunal, Madras Bench 'C and the Tribunal, Bombay Bench 'B', copies whereof appear at pages 19 to 25 of the paper book filed on behalf of the assessee.
4. The learned departmental representative has on the other hand, stoutly supported the orders of the authorities below on the issue under consideration. It was further submitted that the deposits made by the aforesaid persons in their accounts with the assessee-company clearly fell within the provisions of Section 40A(8) and that the assessee has failed to establish that the deposits in question were covered by any of the exemptions enumerated in Explanation (b) to Section 40A(8) which defines the word 'deposit'.
5. We have considered the rival submissions and also the facts on record. We have also perused the paper book filed on behalf of the assessee which contained 51 pages. Details of interest account for the year ending on 30-6-1977 are given at page 1 of the paper book. Ledger accounts of interest paid during the accounting year appear at pages 2 to 18 of the paper book. On the basis of these papers, it was urged before us on behalf of the assessee that the deposits made with the assessee-company were not fixed deposits and that the managing director and other persons who made the deposits were free to withdraw from their accounts without any restriction and that this indicated that all these persons had current accounts with the assessee-company. Shri Poddar in reply to a query from the Bench stated that no scheme has been formulated in respect of accounts which the aforesaid persons had with the assessee-company. The expression 'current account' is used in relation to an amount of money a person has deposited in a bank and on which he can draw from or add to as he may desire, no interest being chargeable on either side. So in the strict sense of the term the accounts which the aforesaid persons had with the assessee-company cannot be characterised as 'current account' as the amounts deposited in these accounts earned interest, However, answer to the question whether these accounts are current accounts or not cannot conclusively go to show whether the deposits in question on which the assessee-company paid interest, fall within the mischief of Section 40A(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 (b) to Section 40A(8) defines the word 'deposit' as any deposit of money with, and includes any money borrowed by a company, but does not include any amount received by the company as enumerated in Clauses (i) to (ix) of Explanation (b). The use of the word 'any' before the word 'deposit' is very significant and it gives widest amplitude to the definition of the word 'deposit'. While constructing certain provision in a statute every word used by the Legislature has to be given a meaning and should not be ignored. The intention of the Legislature has to be gathered from the language used by it. When the language is plain and admits of but one meaning recourse to extraneous matters like the speech of the Finance Minister at the time of introduction of the Finance Bill is not permissible. In taking this view, we are fortified by the decision of the Full Bench of the Kerala High Court in ITO v. K.P. Varghese [1973] 91 1TR 49. It was held in that case that neither the speech of the Minister at the time of the introduction of the Finance Bill nor the instruction issued by the Central Board of Revenue, should be allowed to control the plain words of the section. These observations were made by their Lordships while interpreting the provisions contained in Section 52 of the Act. While defining the word 'deposit' in Explanation (b) the Legislature has used the expression 'any deposit'. The word 'deposit' used in the definition part of Explanation (b) has to be given its ordinary meaning. The word 'deposit', inter alia, means something entrusted to another's care, specially money put in a bank. So, the definition of the word 'deposit' as given in the Explanation (b) covers within its ambit, money entrusted to a company and includes any money borrowed by such company.
There is nothing in the language used in defining the word 'deposit' which could go to suggest even faintly that it includes only such deposits which are long-term deposits or only those deposits with the non-banking companies which were obtained from the public. On the other hand, the language of Explanation (b) clearly shows that any money entrusted to a company including money borrowed by it would fall within the meaning of Explanation (b) with the result that the provision contained in Section 40A(8) would be called into play in such a case.
If the intention of the Legislature was to assign a restrictive meaning to the word 'deposit' the language of Explanation (b) would have been quite different. Here it would be relevant to point out that in Section 269T of the Act, the word 'deposit' is defined as any deposit of money which is repayable after notice or repayable after a period. There a restrictive meaning has been assigned by the Legislature to the word 'deposit' as used in Section 269T. This example is useful to bring home the point that the definition of the word 'deposit' as given in Explanation (b) to Section 40A(8) is wide enough to include any money deposited with a company irrespective of the fact that it is deposited in a current account by the directors or shareholders of a company or the deposit is for a period or there is some restriction on withdrawal of such deposit. We have, therefore, no doubt in our mind that the amounts deposited by the managing director, directors, shareholders and two other persons with the assessee-cornpany fall within the ambit of Section 40A(8). The assessee has not been able to show that the amounts deposited fell under any of the exemptions enumerated under Explanation (b). As a matter of fact, no such exemption has been claimed before us and the assessee's contention is that the amounts deposited in this case cannot be regarded as 'deposits' within the meaning of Section 40A(8). This contention has to be repelled for the reasons already given above.
7. We have perused the order dated 2-2-1980 passed by the Tribunal, Bombay Bench in the case of Michigan Engg. (P.) Ltd. [IT Appeal No. 699 (Bom.) of 1979] a copy whereof appears at pages 23 to 25 of the paper book. The learned members in that case took into account the Finance Minister's speech while coming to the conclusion that the provisions of Section 40A(8) are not aimed at payment of interest to private accounts of a purely domestic nature. In that case also interest was allowed by the assessee on the amounts standing in the current accounts of the directors and their family members and friends. That order was followed by the Tribunal, Madras Bench in the case of Shivraj Motors Ltd. [IT Appeal Nos. 444 to 446 (Mad.) of 1981]. The Bombay Bench in the case of Michigan Engg. (P.) Ltd. (supra) seems to have followed the 'mischief rule' while interpreting the provisions of Section 40A(8). The language of Section 40A(8) including the definition of the word 'deposit' is plain and unambiguous. With great respect of the learned brothers who decided the aforesaid cases, we are for the reasons already stated above, unable to agree with the view taken by them. For the foregoing reasons, we hold that the disallowance of interest amounting to Rs. 17,744 under Section 40A(8) was fully justified in view of the facts of this case.
8. The second ground raised by the assessee states that the Commissioner (Appeals) erred in disallowing irrecoverable amount of Rs. 35,929 in respect of Ashok D. Paul. The facts relevant for the purpose of disposing of this ground, briefly stated, are that in the year 1976 the assessee-company opened a branch office in Madras and appointed Ashok D. Paul as the regional manager with effect from 17-7-1976. The assessee-company used to remit from its head office necessary funds to Ashok D. Paul to meet the day-to-day expenses of the branch office.
Ashok D. Paul was empowered to operate bank account in his individual capacity. In 1977, seensing some irregularities on the part of Ashok D.Paul, the accounts were scrutinised and it was found that Ashok D. Paul had misappropriated a sum of Rs. 35,929 out of the company's funds. The assessee-company framed various charges against Ashok D. Paul and appointed an advocate to go into those charges. As per findings of the advocate, appointed for the purposes, the charge of misappropriation of the sum of Rs. 35,929 was fully proved against Ashok D. Paul who, however, failed to pay any part of the misappropriated account. On legal advice, the company, however, did not proceed against Ashok D.Paul to recover the misappropriated amount. For all these reasons the embezzled amount of Rs. 35,929 was written off in the books of the company for the year and before the ITO the misappropriated amount was claimed as an allowable deduction. The ITO, however, disallowed the claim.
9. On appeal, the Commissioner (Appeals) noted that no FIR was lodged with the police in respect of embezzled amount. The action of the ITO in disallowing the claim was sustained.
10. The learned authorised representative for the assessee has submitted before us that in view of the facts and circumstances of the case, the embezzled amount having become irrecoverable, should have been allowed as a deduction. The facts that the enquiry set up against the erring manager and the legal opinion subsequently obtained by the assessee-company clearly established the factum of embezzlement as also the fact, that the amount has become irrecoverable, were highlighted before us. It was further submitted that as the embezzlement took place within the accounting period it should be allowed as a deduction this year. In support of this contention reliance has been placed on the decision of the Allahabad High Court in CIT'v. U.B.S. Publishers & Distributors [1984] 147 ITR 114.
11. The learned departmental representative has, on the other hand, fully supported the order of the Commissioner (Appeals). The fact that neither any FIR was lodged nor any criminal proceeding was launched against Ashok D. Paul was highlighted before us. It was further submitted that the claim for deduction was wholly unjustified.
12. At page 35 of the paper book, is a copy of the letter dated 19-9-1977 addressed by Shri S. Balasubramanian, advocate to the managing director of the assessee-company enclosing his enquiry report regarding the charges levelled against the regional manager, Madras Branch. A copy of the enquiry report appears at pages 36 to 48 of the paper book. A perusal of this report goes to show that the regional manager did misappropriate the amount of Rs. 35,929. This amount could not be recovered from the regional manager. At page 49 of the paper book is a copy of the legal opinion obtained by the assessee from M.R.Bhowmick, advocate, on 17-10-1977. According to the legal opinion obtained by the assessee-company it was not advisable to institute any criminal or civil proceedings against the regional manager for realisation of the misappropriated sum. So, from the evidence placed before us, it is clear that it was only when Shri Balasubramanian submitted his enquiry report on 19-9-1977 that it was established that the regional manager had misappropriated the amount of Rs. 35,929 and thereafter the assessee-company came to know that the embezzled amount has become irrecoverable. In view of these facts, the misappropriated amount cannot be treated as a trading loss in the accounting year relevant to the assessment year under consideration. In Associated Banking Corpn. of India Ltd. v. CIT [1965] 56 ITR 1 (SC) the secretary of a bank withdrew Rs. 18 lakhs by posting false entries in the books of the bank in the accounting year ending 30-6-1947. The withdrawals for the first time came to the knowledge of the liquidator of the bank after the end of the accounting year and the liquidator had to pay to the constituents of the bank Rs. 10,15,000 pursuant to an order of the Court made in 1949 and a settlement in 1951. It was held by their Lordships of the Supreme Court that on the facts, the loss must be deemed to have occurred to the bank after the liquidator came to know about the embezzlement and realised that the amount embezzled could not be recovered and that the sum of Rs. 10,15,000 was not a permissible deduction in the accounting year. The ratio laid down in that case by the Supreme Court is fully applicable to the facts of the case in hand.
In the instant case, the loss in respect of embezzled amount occurred to the assessee-company only after it had realised that the embezzled amount has become irrecoverable. This happened after the accounting year was already over. For this reasons, the amount in question cannot be claimed as a trading loss this year. On this ground, therefore, the claim of the assessee for deduction in respect of the amount of Rs. 35,929, cannot be allowed.
13. The next objection of the assessee relates to the disallowance of the claim in respect of Rs. 5,798. A small-scale co-operative unit was formed by some of the workers of the assessee's factory in the year 1970-71. The assessee advanced a sum of Rs. 10,550 in 1971-72 to enable the aforesaid co-operative unit to meet the cost of machinery and equipment. In the assessment year 1974-75 a sum of Rs. 4,752 was adjusted against the advance leaving a balance of Rs. 5,798. Since, this balance could 'not be recovered from the aforesaid co-operative unit it was written off by the assessee-company during this year. The ITO disallowed the claim for bad debt, and his action in this regard was also sustained by the Commissioner (Appeals).
14. The learned authorised representative for the assessee has submitted before us that the debt in question became irrecoverable during this year and the claim for deduction should have been allowed.
The learned departmental representative, on the other hand, supports the orders of the authorities below.
15. From the facts available from the papers filed by the assessee, it appears that the members of the aforesaid co-operative unit fought amongst themselves and they could not run the factory smoothly and the factory was virtually closed down. Majority of the workers who started the said co-operative unit left the service of the assessee-company.
The balance of Rs. 5,798 remained due for several years. As the original members of the co-operative unit did not have any considerable assets no action could be taken by the assessee-company for realisation of the balance. On a consideration of the facts and circumstances of the case, we feel convinced that the debt in question became bad during the year of account and was rightly written off in the assessee's books of account. The claim for bad debt in respect of the amount of Rs. 5,798 deserves to be allowed. The assessment shall be modified accordingly.
17. For the foregoing reasons, the appeal is allowed partly to the extent indicated above.