B.P.JEEVAN REDDY, C.J. - (1.) THIS batch of writ petitions calls in question the constitutional validity of Sub -section (8) of Section 40A of the Income -tax Act, 1961. The sub -section was inserted by the Finance Act, 1975, with effect from April 1, 1976, and omitted by the Finance Act, 1985, with effect from April 1, 1986.
(2.) SECTION 40A sets out expenses or payments not deductible in certain circumstances. For the sake of convenience, we may set out Sub -section (8). It reads : '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. - - In this sub -section, - - (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 co -operative society engaged in carrying on the business of banking (including a co -operative land mortgage bank or a co -operative 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 repayable 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 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; . . .' , A reading of the sub -section shows that it provides for disallowance of 15 per cent. of expenditure incurred by a company (other than a banking or a financial company) by way of interest in respect of any deposit received by it. Clauses (a) and (c) of the Explanation define the expressions 'banking company' and 'financial company', respectively, while Clause (b) defines the expression 'deposit'. The purpose of Clause (b) of the Explanation is to exclude the deposits received from the several specified sources from the ambit of the expression 'deposit'. Generally speaking, deposits received from Governments, local authorities, foreign agencies, banking institutions and other public financial institutions (mentioned in the then Tenth Schedule to the Act) are excluded. Similarly, deposits received from any other company, or an employee or an agent and by way of subscription to share capital, etc., as also loans raised on security are also excluded.
(3.) THE objects and reasons behind this sub -section were set out in a memorandum accompanying the Finance Bill, 1975. It has been extracted in paragraph 8(b) of C.M.W.P. No. 175 of 1979. It reads thus (see [1975] 98 ITR 184) : '9. Deduction in respect of interest paid by non -banking non -financial companies on public deposits, - - As a result of the general policy of credit restraint and enforcement of selective control measures by the Reserve Bank of India, non -banking non -financial companies have been increasingly resorting to acceptance of deposits from the public to meet their financial requirements. The levy of interest -tax under the Interest -tax Act, 1974, on the gross amount of interest received by scheduled banks on loans and advances made in India has had the effect of increasing, on an average, the cost of borrowings from scheduled banks by about one per cent. The levy of this tax has, therefore, made the acceptance of deposits by non -banking non -financial companies from the public all the more attractive. In order to ensure that the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non -banking sector, the Bill seeks to provide that 15 per cent. of the interest paid by non -banking non -financial companies on deposits received from the public will be disallowed in computing their taxable income. 10. For the purpose of the new provision, moneys received by the company from the Central Government or any State Government or any local authority, as also amounts repayment of which is guaranteed by the Central Government or a State Government will not be regarded as deposits. Moneys borrowed from foreign sources, banking companies, co -operative banks and specified financial institutions and bodies will also not be regarded as deposits. The Central Government is being empowered to add to the list of such institutions or bodies by notification in the Official Gazette. Inter -corporate borrowings, security deposits made by employees, amounts received by way of security or advance from purchasing agents, selling agents, etc., and advances received against orders for the supply of goods or for the rendering of services will not be treated as deposits. Likewise, subscriptions to shares, stocks, bonds or debentures pending allotment of such shares, stocks, bonds or debentures as well as calls in advance on shares will not be regarded as deposits. 11. The proposed amendment will take effect from 1st April, 1976, and will accordingly apply in relation to the assessment year 1976 -77, and subsequent years.' ;