Interest paid on deposits to the director, his relations, or associates is not an expenditure within the meaning of Section 40(c) of the Income-tax Act, 1961.

Nazir Ahmad, J.

1. A statement of the case has been submitted by the Income-tax Appellate Tribunal, Patna Bench A, Patna, under Sec.256(1) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), referring the following questions of law for the opinion of this court :

"1, Whether, on the facts and in the circumstances of the case, the provision of Sec. 40(c) could be applied to the old creditors who were related to the directors of the company ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the interest so paid to the above creditors was not an expenditure within the meaning of Sec. 40(c) ?"

2. The relevant facts of the case can be culled out from the statement of the case. The assessee-company paid a total amount of Rs. 47,783 as interest to its creditors. Out of this amount, a sum of Rs. 33,297 was paid to the relations of the directors or their associates. The deposits in the names of the relations of the directors or the associates was old and the interest so paid was being allowed by the Income-tax Officer in the past. In the assessment year 1971-72, the Income-tax Officer, taking note of the provisions of Sec. 40(c) of the Act, held that the sum of Rs. 33,297 was not allowable in the hands of the company. A copy of the assessment order of the Income-tax Officer has been annexed and marked as annexure-A forming part of the statement of the case.

3. The assessee appealed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that the interest payment of Rs. 47,788 related partly to individuals and partly to institutional creditors and allowing the interest paid to the institutional creditors, the rest of the payment relating to the directors, their relatives and associates amounting to Rs. 33,297 was disallowed by the Income-tax Officer. The Appellate Assistant Commissioner held that the reasoning given by the Income-tax Officer is incorrect and the application of Sec. 40(c) in this case is also incorrect. The Appellate Assistant Commissioner, therefore, deleted the addition of Rs. 33,297. He also pointed that no such disallowance was made by the Income-tax Officer for the assessment year 1972-73 and also in the earlier assessment years. A copy of the order of the Appellate Assistant Commissioner has been annexed and marked as annexure-B forming part of the statement of the case.

4. Being aggrieved by the order of the Appellate Assistant Commissioner, the Department came in appeal t;o the Tribunal and it was contended on behalf of the Department that in view of Sec. 40(c) of the Act, the interest paid to the relations of the directors were not allowable in the hands of the company. It was also submitted that the company had liquid cash and there was no need for the assessee-company to borrow money on interest and, therefore, payment of interest was an attempt to reduce the profits. The Tribunal held that Section 40(c) of the Act deals with an expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a relative of the director or such person, as the case may be. The Tribunal held that the interest paid on the deposits is not remuneration as remuneration is paid by an employer to an employee, and so the interest paid to such a relation cannot be taken as remuneration. The Tribunal also took the view that the benefit within the meaning of Sec. 40(c) of the Act is also a benefit which is normally enjoyed by an employee of (he company and a creditor of the company is not an employee and so is the case with amenity. The Tribunal also held that normaly interest paid by the company is an expenditure of the company but it is not expenditure within the meaning of Sec. 40(c) of the Act, as it is not expenditure for which there is a provision. The Tribunal also held that under Sec. 40(c) of the Act, the expenditure is that expenditure which is incurred by the co