Judgment:
ORDER
R.C. Lahoti, J.
1. This is a reference under Section 256(1) of the Incometax Act, 1961 made at the instance of Revenue seeking 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% interest paid to the Directors and shareholders of the asses see company, disallowed u/s 40A(8) of the Income tax Act, 1961?'
2. The assessed 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% 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 assessed by his letter dated 8.3.1979, submitted that the assessed 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 assessed also pointed out a news item dated 20.9.1975 appearing in the Times of India wherein 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 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 assessed and made a disallowance u/s 40A(8) of the Income-tax Act without assigning any reasons.
3. The assessed went in appeal. The CIT (Appeals) rejected the above said contention of the assessed raised before him.
4. The assessed filed a second appeal before the Tribunal. In support of its contention that Section 40-A(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 28.2.75 (appearing in 98 ITR 113 Statutes) :-
The levy of a tax under the Interest-tax Act, 1974 on interest received by scheduled banks has had the effect of increasing, on average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax has, thereforee, 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 as that credit planning according to the priorities laid down by the Government is not defected. I propose, thereforee, that in computing the taxable income of non-banking non-financial companies, only 85% 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.'
4.1 The learned counsel for the assessed also referred to a Company Law Board's clarification regarding the word 'deposits' published in the Times of India dated 20.9.1975 according to which deposits secured by a company from its Directors were excluded from the definition of deposits.
4.2 The Tribunal placed reliance on K.P.Verghese Vs . ITO Ernakulam & Anr. : [1981]131ITR597(SC) 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.
4.3 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% 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 1.4.1976 and will accordingly apply in relation to the assessment year 1976-77 and subsequent years.'
[See 98 ITR 168
4.4 Taking into consideration, the several contentions raised by the assessee, the Tribunal allowed the appeal filed by the assessed and deleted the disallowance of Rs.9,957/- made by the ITO.
5. The controversy centres around sub-Section (8) of Section 40-A (as it stood at the relevant time), as inserted by the Finance Act, 1975 w.e.f. 1.4.76 (later on omitted by the Finance Act of 1985 w.e.f. 1.4.86).
The relevant part of the provision is extracted and reproduced hereunder :-
Expenses or payments not deductible in certain circumstances.
40A.(1) xxx xxxx xxx xxxx xxx xxxx (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. Explanationn : In this subsection,
(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 cooperative society engaged in carrying on the business of banking (including a cooperative and 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 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 repay able 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,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 of pledge for the relevant loan; xxxx xxx
6. 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% of such expenditure shall not be allowed as a deduction. The Explanationn appended to the subsection, 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.
7. On a plain reading of the above said provision, it is clear that the deposits made by the directors and shareholders are not excluded there from. However, the Tribunal has tried to ascertain the underlying object behind the provision by readings 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 the deposits by directors and shareholders were not intended by the Parliament to be covered by the said provision.
8. The learned senior standing counsel for the department has submitted that there is no ambiguity in the language of the provision and thereforee 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 there under was totally misplaced in view of the plain language of the provision. In support of his submission that the deposits by directors and shareholders fell within the purview of Section 40A(8) above said, the learned counsel for the Department placed reliance on a few decisions to which we will advert a little later.
8.1 The learned counsel for the assessed 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 the deposit by directors and shareholders were not intended to be discouraged by bringing them within the purview of the provision.
8.2 By way of rejoinder the learned counsel for the Department stuck to his original plea submitting that if the interpretation placed by the assessed 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 40-A(8).
9. As the Tribunal has drawn assistance from the speech of 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 in as much as the learned counsel for the assessed has also forcefully adopted before us the same reasoning as has been adopted by the Tribunal, placing strong reliance on K.P.Verghese case (supra). Fortunately all the relevant field wherein we propose to make our search is covered by the law laid down by the Supreme Court.
10. 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 [M/s.Goodyear India Ltd. v. State of Haryana AT 1990 SC 781. 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 thereforee capable of two interpretations [Om Prakash Vs . Dig Vijaindrapaul : [1982]3SCR491 P.K.Unni Vs . Narmada Industries : [1990]1SCR483 ]
11. 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. [B.K. Garad Vs . Nasik Merchants Coop Banks Ltd. : [1984]1SCR767 ]. The golden rule of construction 'interpret according to 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 Vs . State : 1989CriLJ1 ]. In M/s.Girdhari Lal & Sons Vs . Balbir Nath : [1986]1SCR383 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.
12. 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. [Aswani Kumar Ghose Vs . Arabinda Bose : [1953]4SCR1 State of Travancore Cochin v. Bombay Company Ltd. AIR 1952 SC 366 A statute, as passed by the 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 statement of objects and reasons and the circum stances leading to 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 Ltd. VS . The Union of India & Ors., : (1961)ILLJ339SC State of West Bengal Vs . Union of India : [1964]1SCR371 ]. 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 be achieved. 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. [Aswani Kumar's case (supra)].
13. When the language of statute is plain, marginal note cannot be seen for construing the provision (Kalawati Bai Vs . Soirya Bai : [1991]2SCR599 The Board of Muslim Wakfs Vs . Radha Krishan : [1979]2SCR148 The CIT Bombay Vs . Ahmed Bhai Umar Bhai : [1950]181ITR472(SC) ). 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 & Ors. v. President of India AIR 1980 SC 149.
14. Unless the two statutes be in paramateria, expression 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 Muslims Wakf v. Radha Krishan (supra)].
15. In Shashikant Lakshman Kale v. Union of India 1990 SC 2114 their Lordships refused to accept the words used in the explanatory memorandum while introducing the Finance Bill in the Parliament to be determinative of or to camouflage the true object of the legislation. The catchphrase used therein was considered to have been possibly used as a populist measure. In Smt.Mary Oommen Vs . Manager, MGM High School, : (1987)ILLJ510SC while interpreting certain statutory rules, their Lordships observed that the note appended to 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 thereforee do not have utility for interpreting otherwise plain language of an enactment.
16. What are relied on by the learned counsel for the assessed for interpreting the provisions of Section 40-A(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 embarrass 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 Explanationn 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 clauses which it has chosen not to do. There is, thereforee, 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 deposits 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 40-A(8) of the Income-tax Act. Strictly speaking, even the speech of Finance Minister and Note on clause do not lend support to the view taken by the Tribunal. The Tribunal went completely amiss in taking the view which it has done.
17. In the view which we have been taken, we are fortified by a few decisions which were brought to our notice by the learned counsel for the Revenue.
17.1 In Agew Steel . Vs . CIT : [1994]209ITR77(Guj) and CIT Vs . Gandhi Metal Mills (P) Ltd. 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 Director on such borrowings is liable to be disallowed to the extent prescribed in Section 40-A(8).
17.2 In CIT Vs . Jhaveri Bros. & Co. Pvt. Ltd. : [1995]214ITR374(Bom) and CIT Vs . Suman Tea & Plywood Industries (P) Ltd. : [1993]204ITR719(Cal) interest on credit balances in current account of shareholders and directors was held to be covered by Section 40-A(8).
17.3 In CIT Vs . 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 40-A(8) of the Act.
18. We have carefully gone through the Supreme Court judgment in K.P. Verghese v. ITO Ernakulam, : [1981]131ITR597(SC) forcefully relied on by the counsel for the assessee. Their Lordships have held that the speeches made by the members of the legislature during the course of 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 legislative 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 brevity of the Section or to show what the Section is dealing with. As to circulars issued by CBDT, their Lordships have held that they are valuable evidence of contemporaneous exposition but must give way where any of the statute is unambiguous. We do not think that the principle above said can lend strength to any of the contentions raised by the learned counsel for the assessed in view of what we have already stated hereinabove.
19. 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 40-A(8). The question is, thereforee, answered in the negative i.e. in favor of the Revenue and against the assessee.