Gokal Chand Mital, J. - (1.) THE assessee is a private limited company. THE company paid a total amount of Rs. 57,941 by way of interest to its depositors in the period relevant to assessment year 1976-77. In the assessment proceedings, the company claimed deduction of the interest paid but the Income-tax Officer disallowed 15% in view of Section 40A(8) of the Income-tax Act, 1961 (hereinafter called "the Act"), which was on the statute book during the relevant assessment year. That provision was as follows : "(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."
(2.) THE Income-tax Officer also found that the interest was paid at the rate of 24 per cent. per annum on the deposits made by the directors of the company and their relations and consequently proceeded to consider, under Section 40A(2)(a) read with Sub-section (2)(b)(ii) of the Act, whether the payment of interest on the deposits was excessive or unreasonable. He came to the conclusion that payment of interest to the extent of 6 per cent. per annum out of 24 per cent. per annum was unreasonable and disallowed payment of interest to this extent under Section 40A(2)('a) read with Sub-section (2)(b)(ii) of the Act. Some other matters were also decided. THE assessee went up in appeal before the Appellate Assistant Commissioner. THE Appellate Assistant Commissioner agreed with the Income-tax Officer that 15 per cent. has to be disallowed under Section 40A(8) of the Act. He also agreed that the payment of interest at the rate of 18 per cent. per annum was reasonable and the balance was considered as disallowable under Section 40(c) of the Act. In spite of this, he made the following observation : "Taking into consideration the fact that the total disallowance is in excess of 15%, disallowance of Rs. 14,425 is considered as inclusive of the disallowance required to be made under Section 40A(8)." Against the aforesaid appellate order, the assessee as well as the Department went up in separate appeals before the Income-tax Appellate Tribunal, Amritsar. On behalf of the assessee, it was contended that in view of the specific provisions of Section 40A(8) of the Act, disallowance of 15 per cent. could be made and no further disallowance could be made either under Section 40(c) or under Section 40A(2) of the Act. It was also contended that a special provision overrides the general provision and, therefore, in the face of Section 40A(8), the other provisions would not apply. On the other hand, counsel for the Revenue pleaded that under Section 40A(8) of the Act, 15 per cent. of the interest, whether paid to a stranger or to a director of the company or any relative of such director, was disallowable whereas under Section 40A(2), payments made to a director of the company or any relative of such director, if found to be excessive or unreasonable, could be disallowed and in this manner it was urged that both the provisions were different and had different objects to be achieved and could stand at the same time and one provision did not exclude the other as was sought to be argued on behalf of the assessee. The Tribunal agreed with the contention of the assessee and held that disallowance of Rs. 8,691 only was justified with reference to the figures of interest payment of Rs. 57,941 and the disallowance was restricted to this figure. We are surprised to find, on a reading of para 6 of the order of the Tribunal, that the matter was remitted to the Income-tax Officer for fresh disposal to see whether Section 40A(2) of the Act was applicable or not. In the aforesaid background, we have to opine on the following question referred for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in restricting the disallowance of interest paid by the assessee-company to its directors and their relations to 15% only of the expenditure under Section 40A(8) regardless of the specific provisions made by the Income-tax Act, 1961, in Sections 40(c) and 40A(2) ?" Learned counsel for the Revenue could not dispute that in view of CIT v. Avon Cycles (P.) Ltd. [1980] 126 ITR 448, Section 40(c) of the Act would not be applicable to the facts of the case. We have to see whether Section 40A(8) would exclude or override Section 40A(2) or both can stand. On a careful consideration of the two provisions and the objects sought to be achieved, we are of the opinion that both the provisions can co-exist and are applicable to the facts of the case. Section 40A provides for expenses or payments not deductible in certain circumstances. Sub-section (8) was inserted with effect from April 1, 1976, and has been omitted with effect from April 1, 1986. Section 40A(8) makes provision in regard to companies other than a banking or financial company and is not applicable to individual assessees, firms, associations of persons or Hindu undivided families. Whenever such a company incurs expenditure by way of interest in respect of any deposit received by it, 15 per cent. of such expenditure has to be disallowed in view of the aforesaid provision.
(3.) ON the contrary, Section 40A(2) is applicable to all assessees including individuals, companies, firms, associations of persons and Hindu undivided families. This provision provides that where an assessee incurs expenditure in respect of which payment has been made or has to be made to any person referred to in Clause (b) of sub-section, and if the Income-tax Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the circumstances mentioned in the provision, such expenditure shall not be allowed as a deduction. Therefore, one distinction between Section 40A(8) and Section 40A(2) is that 15 per cent. is disallowable out of the expenditure incurred under Section 40A(8) ; whereas, under Section 40A(2), only that part of the expenditure is disaflowable which is found to be excessive or unreasonable. The other distinction is more vital and conclusive. For the applicability of Section 40A(8), it makes no distinction whether payment of interest is made to a director of the company or his relations or strangers totally unconnected with the company or their relatives. Section 40A(2) is applicable only when payments are made to relatives of an individual assessee, a director of the company, partner of the firm, member of the association or family, or any relative or any such director, partner or member. Therefore, it is clear that these provisions have different objects to be achieved and can co-exist in the statute book and one does not exclude the other. The Tribunal was in error in coming to the conclusion that Section 40A(8) excluded Section 40A(2) of the Act so far as companies are concerned. ;