M.A.A Khan, J.M:— These three appeals are directed against the orders passed by the Commissioner of Income Tax, Baroda (Commissioner) under s. 263 of the IT Act, 1961 (the Act). The orders of the Commissioner are couched in the same language and were passed on the same date. In fact, the facts in all the three cases are quite identical and the common dispute involved in all the three cases relates to the allowance or disallowance of interest paid to the directors and shareholders and their relatives by the assessee-appellants on their current accounts. All these appeals are, therefore, disposed of by this consolidated order.
2. While making assessments under s. 143(3) of the Act in the cases of the appellants, private limited companies and which are possibly sister concerns, for the asst. yr. 1982–83 the ITO alllowed the following amounts claimed by the appellants as deductions on account of interest paid to their directors, shareholders and/or their relatives on their current accounts, viz.,
1.
“ITA No. 379 of 87 M/s Sayaji Iron Works (Quary) Pvt. Ltd.
Rs.
7,030
2.
ITA No. 380 of 87 M/s Sayaji Iron Works (Contracts) Pvt. Ltd.
Rs.
23,910
3.
ITA No. 381 of 87 M/s Sayaji Iron & Engg. Co. Pvt. Ltd.
Rs.
14,808
3. In the opinion of the Commissioner the assessments as made by the ITO in the cases of the appellants were erroneous and prejudicial to the interest of Revenue inasmuch as the amount of interest paid, as mentioned above, was not allowable in view of the provisions of s. 40A(8) of the Act. Being of that opinion he issued the necessary notices to the appellants asking them to show cause why the aforementioned amounts be not disallowed and included in their assessments. The appellants' explanation before the learned Commissioner was that the amounts of interest had been paid by the appellants on the balances in the ‘current accounts’ of the directors, shareholders and/or their relatives and therefore the same were not disallowable. It was contended on behalf of the appellants that the balances in the current account did not fall Within the purview of the definition of the term ‘deposit’ used in the language of the Explanation to s. 40A(8). The learned Commissioner did not accept the contention of the appellants and for the reasons recorded in his orders under appeal held the view that all the deposits in the current accounts would be deposit within the meaning of the term defined in s. 4QA(8). He accordingly set aside the assessments as made by the ITO in the cases of the appellants and directed the ITO to re-do the same after disallowing interest paid on deposits of directors and shareholders as per provisions of s. 40A(8).
4. During the course of hearing these appeals it was pointed out to us that the question whether interest paid to the directors and shareholders on their cur rent accounts was disallowable under s. 40A(8) of the Act-was examined by the Special Bench of the Tribunal in the case of KALOOMAL SHORIMAL. SACHDEV RANGWALLA P. LTD v. FIRST ITO, (1985) 23 TTJ (Bom) 132 (SB) : (1985) 14 ITD 248 (Bom) (SB) where it was held that current accounts were also covered by the definition of ‘deposit’ given in the Explanation to s. 40A(8) and, therefore, interest paid by the companies on such deposits was to be disallowed under s. 40A(8). It was further pointed out that the said decision of the Special Bench was followed by the Ahmedabad Bench ‘B’ of the Tribunal in deciding the appeal of M/s Sayaji Iron Works (Quary) Pvt. Ltd. (one of the appellants) for asst. yr. 1980–81 against the assessee. In that behalf it was also pointed out that the Tribunal was pleased to refer a question on the point arising out of the said order of the Tribunal, to the Hon'ble High Court vide R.A No. 156.Ahd/86 dated 16th May, -1986. In the course of bringing these facts to our notice we were told that there has been a latest decision from the Madhya Pradesh High Court on the point in the case of CIT v. KALANI ASBESTOS PVT. LTD., (1989) 180 ITR 55 (MP) where it has been held that interest paid to directors and shareholders on current accounts with the company cannot he disallowed under s. 40A(8) of the Act. We called for the said decision and after giving the parties an opportunity of studying the same as well as considering the implication of the Special Bench decision in the case of KALOOMAL SHORIMAL SACHDEV (supra) we heard them at sufficient length.
5. It was urged on behalf of the appellant that the decision in the case of CIT v. KALANI ASBESTOS PVT. LTD. (supra) was directly on the point and there being no decision from any other High Court expressing a contrary view the said decision of the Madhya Pradesh High Court be followed in preference to the decision of the Special Bench in the case of KALOOMAL SHORIMAL SACHDEV (supra). On the other hand the learned Sr. Departmetal Representative vehemently urged that this Bench is bound by the decision of the Special Bench in the case of KALOOMAL SHORIMAL SACHDEV (supra) and since the decision in the case of CIT v. KALANI ASBESTOS PVT. LTD. (supra) is not a decision from the Jurisdictional High Court the same should not be followed in preference to the decision of the Special Bench. The learned Sr. Departmental Representative further submitted that in view of the fact that in the case of one of the appellants before us the Special Bench decision was followed by the Tribunal in deciding the appeal for immediately preceding year, we must maintain consistency in our view at least on the same point, on the same facts and in the cases of the same assessee or assessees similarly placed.
6. After having given our utmost consideration to the points raised before us and after having made quite a serious study of the cases referred to above we are of the considered opinion that in deciding these appeals the decision of Madhya Pradesh High Court in the case of CIT v. KALANI ASBESTOS PVT. LTD. (supra) is required to be followed.
7. In the case of CIT v. KALANI ASBESTOS PVT. LTD. (supra) the ITO, While framing the assessment for asst. yr. 1983–84, had held that in respect of payment of interest by the assessee to certain parties, the principal amounts were received by the asesssee by way of deposits and, hence, under the provisions of s. 40A(8) of the Act, 15 % of the interest paid to those persons was required to be disallowed. When the matter came up before the Tribunal, the Tribunal upheld the contention of the assessee and which was to the effect that interest was paid mainly to directors and shareholders on their current account and, therefore, the same was not required to be disallowed under s. 40A(8) of the Act. The Madhya Pradesh High Court approving the view of the Tribunal held that “the Tribunal having found that interest was not paid by the assessee in respect of any deposit received by it the Tribunal was right in holding that disallowance under the provisions of s. 40A(8) of the Act was not called for.” It is thus clear that the Madhya Pradesh High Court has in unambiguous words held that where interest has been paid by a company to its directors and share holders on the balances in their current accounts such interest payment does not attract the provisions of s. 40A(8). This view clearly suggests that there is certainly a clear distinction between deposits made with a company and the balances in the current accounts of the directors and shareholders. The credit balances in the current account cannot be given the same treatment for the purposes of application of s. 40A(8) as is required to be given to the ‘deposit’ within the meaning of the term defined in Explanation to sub-s. (8) of s. 40A. When the aims and objects behind s. 40A(8) (since omitted by the Finance Act, 1985 with effect from 1st April, 1986 which was inserted by the Finance Act, 1975 with effect from 1st April, 1976) are kept in mind, it may legitimately be observed that the said sub-section was aimed at discouraging the acceptance of deposits by non-banking, non-financial companies from the public so that the same could not defeat the credit planning of the Government according to the priorities laid down by it. The purpose of the said provision, as has been suggested by the Madhya Pradesh High Court in its decision cited supra, was not to disallow interest eveti on the credit balances in the current account of the directors and shareholders.
8. It seems to us that the Special Bench was also conscious of the fact that credit balances in the current accounts of the directors and shareholders could not be equated with the deposits made with the company. In the case before the Special Bench the learned Vice-President, whose order represents the minority view, dealt with the distinction between a current account and a deposit at sufficient length. The learned Vice-President expressed himself on the point as follows in para 17 and 18;
“17. Even from the purely legal point of view, there is a difference between a current account and a deposit. The right to demand iretun of money and enforce the same; fixation of different periods after which only the demand can be made; different limitation periods under the Limitation Act for making demands or filing suits for recovery; the fixed nature of a deposit as contrasted with the daily or even from frequent fluctuation in amounts in a running account; the difference specifically cast by the Companies (Acceptance of Deposit) Rules—all these leave us with no doubt that in law also there is a substantial distinction between a deposit and a current account.
18. In view of the above the expression ‘deposit’ in s. 40A(8) cannot be said to include a running account. In fact, what one gets in running or current account is the balance one person owes to other at any time as against an amount standing deposited that obtains in the case of a deposit. If the purpose of the Legislature was to discount the interest paid on balances in an account or even net balances, we see no reason why a direct reference to ‘balances’ or ‘net balance’ is not made in the section but a reference is made only to deposits. That in a current account or running account amounts will be coming in and going out and adjustments would be made is certainly well known. If that be so, the deliberate use of the word ‘deposit’ instead of a ‘balance’ or ‘net balance’ is a clear indication that a running account was not in view.”
Finally the learned Vice-President concluded thus in para 19:
“The above facts, therefore, clearly indicate that a current account would not be the subject-matter of discounted interest envisaged in s. 40A(8).” It may be noted that the minority view of the Special Bench did not ‘consider the interest paid on current account as a subject-matter of discounted interests envisaged in s. 40A(8).
9. The majority view represented by the order of the Learned Judicial Member did not seriously dispute the position of law in so for as interest payment on current accounts was concerned. The learned Judicial Member took note of certain other account wherein only interest had been credited and. TDS and income tax debited. Taking note of such accounts the learned Judicial Member observed in para 9 of his order that ‘incidentally all accounts are not similar to those reproduced in the order of the learned Vice-President.’ The learned Judicial Member further observed in para 10 of his order as follows:
“10. Thus all accounts are not such where there are a number of deposits and withdrawals during the year. There are also those where there are no transactions at all.”
It may thus be noted that having taken note of such accounts which could not have been treated as current accounts the majority view of the Special Bench held that interest payments on such deposits to the directors and shareholders attracted the provisions of s. 40A(8) of the Act. In coming to hold the majority view the learned Judicial Member had taken specific note of the treatment given to the amounts in the relevant accounts by the assessee himself. In para 26 the learned Judicial Member observed as follows:
“However, the assessee has always treated the amounts in the current accounts as moneys borrowed for the purposes of business and claimed and was allowed deduction of interest under s. 36(1)(iii) of the Act. Even the assessee while filing the return treated the amounts as deposits and disallowed 15 per cent interest voluntarily. This, too, gives an indication as to how the assessee has looked at these deposits. Whether these were deposits under s. 40A(8) cannot be a mixed question of facts and law and the fact that the assessee treated them as deposits is a fact which cannot be brushed aside as inconsequential.”
[Emphasis supplied (here printed in bold)].
10. A close study of the decision of the Special Bench in the case of KALOO-MAL SHORIMAL SACHDEV (supra) clearly suggests that disallowance of interest payment on credit balances in the current accounts of the directors and shareholders of the company was not unhesitatingly disapproved even by the majority view of the Special Bench. In the case before us it is quite undisputed that the accounts involved herein are current accounts. The copies of such accounts have been placed before us and on a perusal thereof we cannot take any other view of them. They are certainly current accounts wherein debit and credit entries have been made from time to time as and when necessisty arose. Withdrawals were made for meeting personal expenses as also other household expenses by the person concerned. The learned Commissioner has also not disputed that the accounts involved in these appeals were nothing but current accounts. In our opinion, therefore, on facts of these cases we do not think that the Spl. Bench decision goes against the assessee.
11. Though we have already found that even Special Bench decision does not go against the appellants in these appeals yet in the presence of Madhya Pradesh High Court decision and against which no other decision has been brought to our notice we are bound to hold that interest paid by the appe llants to the directors and shareholders on the credit balances in their current accounts could not have been disallowed under the provisions s. 40A(8). Had we been of the opinion that the Special Bench decision clearly prohibited us from taking a view favourable to the appellants even then in the presence of the Madhya Pradesh High Court decision we would have held as stated above for the reason that law declared by a High Court in a State is binding on the Tribunal in another State particularly when there is no other decision from any other High Court on that point. The Bombay High Court in the case of CIT v. SMT. GODAVARIDEVI SARAF, (1978) 113 ITR 589 (Bom) had considered such a situation and held that “an authority like the income-tax Appellate Tribunal, acting anywhere in the country, has to respect the law laid. down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question.” In. view of this position of law we would have felt duty bound to follow the decision of the Madhya Pradesh High Court in the case cited supra.
12. To sum up we are of the opinion that since interest payments had been made by the appellants to their directors and shareholders on the credit balances in their current accounts the same could not have been disallowed under the provisions of s. 40A(8) of the Act. In that view of the matter the assessments made by the ITO were not erroneous and prejudicial to the interest of Revenue. The orders under appeal are accordingly required to be vacated.
13. The orders passed by the learned Commissioner under s. 263 in these cases are set aside and all the appeals are allowed.