Commissioner of Income-tax Vs. Kohinoor Glass Factory P. Ltd. - Court Judgment

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direct taxation - charge in favour of depositors - section 132 of companies act and section 40a (8) of income tax act, 1961 - charge was created in favour of depositors against assets of assessee company - assessee claimed deduction under section 40a (8) on interest payable on deposits - date on which certificate pertaining to charge issued by registrar fell after end of previous year relevant to assessment year under consideration - there was no delivery of any document of title to immovable property to depositors - charge cannot be said to have been created during relevant assessment year - section 40a (8) not applicable - held, assessee not entitled for exemption. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and there is no ambiguity in it. it shows that when an insurer is impleaded and has been given notice of the case, it is entitled to defend the action only on grounds enumerated in sub-section (2) of section 149 of the act, and no other grounds are available to it. the insurer is not allowed to contest the claim of the injured or heirs of the deceased on other grounds, which are available to the insured. if insurer is permitted to contest the claim on other grounds it would mean adding more grounds of contest to the insurer and will be negation of the intention of the legislature and annihilate mandate of the provisions of sections 170 and 149 of the act. the insured can pursue appeal only after giving up the insurer as the appellant and not otherwise. in the instant case, the insurer has not withdrawn from party array but has remained prosecuting the appeal with the insured on the grounds which are available only to the insured. therefore, the joint appeal as filed by the insured and the insurer is not maintainable. section 166: [v. gopala gowda & jawad rahim, jj] claim for compensation accident due to mechanical defect in the vehicle held, it is not in dispute that the claimant suffered injuries in an accident, which occurred during the course of his employment, albeit due to his negligence but law does not render him remediless. statutory right is conferred on him, accruing by virtue of his employment under insured to claim compensation under workmens compensation act. the insurer is statutorily duty bound to discharge the liability of the owner of the vehicle, to pay such compensation to the employee, as mandated under the provisions of section 149 of the act. the right of an injured employee or his dependents as the case may be to be compensated, when injury is suffered or death occurs during his employment, is recognised not only under workmens compensation act, but also under benevolent provisions under section 166 and 167 of the m.v. act. the right of driver to seek compensation is not restricted only to the workmens compensation act, it has been enlarged to enable such person to seek just compensation (sections 166 and 168), conferring upon him the right of election engrafted under section 167 of the act to choose either of the two forum. the only defence which the insurer could take is limit of its liability as enumerated under section 147 of the act, leading to contest, inter alia, only between insured and insurer and does not impact claimants right to recover the compensation determined by the tribunal which crystallizes into enforceable right against both. in the instant case, the claimant/driver has exercised right of election under section 167 of the act to seek compensation under section 166 of the act resulting in award passed by the tribunal. therefore, the insured and the insurer have no escape but to discharge the said award as directed. undisputedly, in this case as deduced for proved facts, the vehicle in question was not properly maintained by the owner and despite faulty brake system, the claimant had undertaken the hazardous journey to his peril at the behest of and at the instruction of the owner. the owner is therefore, tortfeasor. section 168: [v. gopala gowda & jawad rahim, jj] insurers limit of liability - held, it is well settled that the liability of the insurance company for payment of compensation can be statutory or contractual. is for the insurance company to show that the insurance policy was a statutory policy and not a contractual policy to restrict its liability. that issue was neither raised before the tribunal nor is raised in this appeal requiring decision. thus, if at all the insurer has any valid ground to restrict its liability, it can proceed against the insured but firstly it has to discharge the award as required under section 149 (1) of the act. where the owner/insured has failed to maintain the vehicle as per prescribed safety standards and has caused the claimant to drive the vehicle with mechanical defects, the owner would be the tortfeasor and the claimant can maintain a petition seeking compensation under the provisions of the act, instead of seeking compensation under the workmens compensation act. on facts, held, the material evidence on record, particularly, with regard to the income of the claimant, his age, medical evidence and the evidence relating to pecuniary loss has not been considered by the tribunal in the correct perspective, which has resulted in passing of the impugned award, disproportionate to the pecuniary loss and the loss of future income of the victim. the settled principles governing determination of compensation has been given a go-bye. compensation of rs.4,15,150/- awarded by the tribunal was enhanced to rs.8,20,000/-. - an appeal to the commissioner of income-tax (appeals) was unsuccessful. the commissioner of income-tax was not satisfied with the tribunal's direction to allow interest and consequently filed an application under section 256(1) of the act and sought a reference of the following question :whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal was right in concluding that a charge on the assets of the company was created on december 2, 1976, within the meaning of section 40a(8)(b)(ix) ?' 2. the tribunal conceded the commissioner's claim for reference and accordingly referred the above question for the consideration of this court. it may, however, be pointed out that in any event, this document is dated may 2, 1977, which clearly fell after the end of the previous year relevant to the assessment year under consideration.y.v. anjaneyulu, j.1. kohinoor glass factory private limited is a company incorporated under the companies act. it would appear that the company mobilised certain deposits aggregating to rs. 10,96,300 on which interest was paid by the company. in its income-tax assessment for the year 1977-78 for which the previous year ended on december 31, 1976, the assessee claimed deduction of the interest paid on the deposits relying on the provision contained in section 40a(8)(b)(ix) of the act. it was claimed that the depositors were demanding interest and, consequently, the board of directors of the company passed a resolution on december 2, 1976, stating, inter alia, 'the demand of the depositors has been considered and it was resolved to create a charge in favour of all the depositors through a representative who is fully authorised by the members through a resolution'. a copy of the above resolution was lodged with the registrar of companies on december 27, 1976, and finally an agreement was executed on march 17, 1977, describing it as a deed of agreement for creating the charge. it was claimed before the income-tax officer that inasmuch as a charge was created in favour of the depositors against the assets of the assessee-company, the interest payable on the deposits/loans is allowable in terms of section 40a(8)(b)(ix). the income-tax officer declined to accept the assessee's claim and disallowed the interest on the ground that the claim that an equitable mortgage was created in favour of the depositors was not established. an appeal to the commissioner of income-tax (appeals) was unsuccessful. the assessee-company thereupon filed a second appeal before the tribunal and reiterated its contention that the interest corresponding to the charge, after the charge was created, should be allowed by way of deduction. the tribunal accepted the contention and held that the interest for the quarter ended on december 31, 1976, was paid after the charge was created and, consequently, the interest relating to that quarter should be allowed as deduction in computing the assessee's income. the commissioner of income-tax was not satisfied with the tribunal's direction to allow interest and consequently filed an application under section 256(1) of the act and sought a reference of the following question : 'whether, on the facts and in the circumstances of the case, the income-tax appellate tribunal was right in concluding that a charge on the assets of the company was created on december 2, 1976, within the meaning of section 40a(8)(b)(ix) ?' 2. the tribunal conceded the commissioner's claim for reference and accordingly referred the above question for the consideration of this court. 3. before we refer to the relevant facts, we may first refer to the provisions contained in section 40a(8). sub-section (8) was inserted in section 40a by the finance act, 1975, with effect from april 1, 1976. eventually, this was omitted by the finance act, 1985, with effect from april 1, 1986, so that from the assessment year 1986-87 onwards, the provision is out of the statute book. it is not in dispute that for the assessment year 1977-78, sub-section (8) was very much on the statute book. it provided that where the assessee, being a 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 deduction. interest, if any, paid in excess of the fifteen per cent, is allowable as deduction. clause (b) of sub-section (8) defines a deposit as meaning 'any deposit of money with, and includes any money borrowed by, a company, but does not include any amount received by the company, inter alia, 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 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'. the income-tax officer relied on this provision and purported to disallow the interest to the extent of fifteen per cent. rejecting the assessee's contention that the sums borrowed by the assessee aggregating to rs. 10,96,300 were secured by the creation of a mortgage of some of the assets of the company and, consequently, the provision authorising disallowance of the interest to the extent of fifteen per cent. goes out of operation. 4. in order that a company is eligible to claim interest at fifteen per cent., it must show that the deposits or the amounts borrowed by way of loans were secured by the creation of a mortgage. if this fact is established, there is no dispute that the interest is allowable. the income-tax officer points out that in the balance-sheet for the year ended on december 31, 1976 of the assessee-company, the entire amount of deposits was shown as unsecured, although the tribunal which has gone into the question explains it as a mistake on the part of the auditors. be that as it may, the evidence in support of the creation of the charge, as will be noticed from the facts enumerated above are these : (a) resolution dated december 2, 1976, passed by the board of directors; (b) lodgment of the resolution with the registrar of companies on december 27, 1976; and (c) deed of agreement creating charge dated march 17, 1977. 5. a perusal of the resolution of the board of directors would not indicate that by that resolution any charge is created in favour of the depositors or the persons who lent the monies to the assessee. all that the resolution states is that it was resolved to create a charge in favour of all the depositors. the resolution does not indicate the assets which are proposed to be charged and the manner in which the charge was sought to be created. all that can be said is that it is a step in the direction of taking action at a future date to create a charge, which act bears the authorisation of thee board of directors of the company. it is not possible to consider the resolution dated december 2, 1976, itself as creating a charge because it lacks the necessary ingredients of a charge. 6. the lodgment of the resolution with the registrar on december 27, 1976, can much less be considered to be creating a charge in favour of the depositors as the purpose of lodgment of the resolution with the registrar of companies is to bring on public record that the whole or a portion of the assets of the company was subject to a charge. the formalities associated with the creation of a charge do not find a place in the intimation sent to the registrar of companies. therefore, the lodgment of the resolution on december 27, 1976, cannot also be considered to be creating a charge. the registrar issued the certificate on may 2, 1977, acknowledging the fact that pursuant to the provisions contained in section 132 of the companies act, in the records of the registrar, a charge has been registered against rs. 10,96,300. this again does not fulfill the requirements of a charge. it may, however, be pointed out that in any event, this document is dated may 2, 1977, which clearly fell after the end of the previous year relevant to the assessment year under consideration. we are, therefore, finally left with the deed of agreement for creating a charge. this deed is executed between the company on the one hand and sri mahesh chand described as an authorised representative of the depositors on the other and states that the company agreed to give security for the deposit of rs. 10,96,300. the properties agreed to be given as security are specified in the memorandum. beyond this, there is nothing more in the document which would spell out the creation of a charge against the proposed assets by the assessee-company in favour of the depositors. there is no reference in this document to the deposit of any title deeds relating to the immovable property proposed for the creation of a charge. there is no indication that the delivery of title deeds was effected following the execution of the deed of agreement dated march 17, 1977. since the assessee's contention is that an equitable mortgage is created in favour of the depositors, it is imperative that the act of deposit of title deeds is established in order to make the mortgage valid. we may refer to section 58(f) of the transfer of property act which requires delivery to a creditor or his agent of documents of title to immovable property with intent to create a security thereon in order that an equitable mortgage is created under law. we do not find in the present case any reference in the document to the delivery of any document of title to immovable property. it is, therefore, not possible to consider that even the agreement dated march 17, 1977, created an equitable mortgage or a charge in favour of the depositors. 7. mr. satyanarayana, learned counsel appearing for the assessee, contends that the cumulative effect of the resolution dated december 2, 1976, the lodgment of the resolution on december 21, 1976, and the execution of the agreement on march 17, 1977, is an inevitable presumption that the relevant title deeds were deposited in order to create an equitable mortgage in favour of the depositors. we do not think that such a presumption can be spelt out. the factum of deposit of title deeds has to be established by evidence. all that we can say is that the documents placed before us do not indicate the fulfillment of the requirement of essential ingredients. in the circumstances, the income-tax officer was justified in declining to allow interest at fifteen per cent, and holding that the exception contained in clause (ix) to section 40a(8) is not applicable. in our opinion, the tribunal was in error in directing the allowance of the expenditure. 8. having regard to the above, we answer the question referred in the negative, that is to say, in favour of the revenue and against the assessee. there shall be no order as to costs.