Law: Income Tax Act, 1961

Section: 40,40A(8)

Income-tax--Expenses or payments not deductible-"Deposit", meaning of---Foreign company amalgamated with Indian company under scheme of amalgamation approved by High Court---All assets and liabilities of foreign company vesting with Indian company---Indian company issuing debentures to foreign company in part satisfaction of consideration for vesting the business in Indian company---Debentures treated as unsecured loans in books of Indian company and Indian company paying interest to foreign company on such loans---Indian company paid interest "on the mode of payment of consideration for assets received by virtue of scheme of amalgamation"--­Loan does not amount to "deposit" as defined in Expln. (b) to subsection (8) of S.40A---15 per cent. of such interest cannot be disallowed---Indian Income Tax Act, 1961, S. 40A(8), Expln. (b) [before deletion by Finance Act, 1985, with effect from April 1, 1986]. A foreign company (Commonwealth Trust Ltd., London) was amalgamated with the Indian Company (Commonwealth Trust (India) Ltd.) with effect from October 1, 1977, as a result of a scheme of the amalgamation approved by the High Court. As a result of the amalgamation all the assets and liabilities of the foreign company vested in the Indian Company. The consideration fixed for the transfer was Rs.50,00,000 and towards the consideration the Indian company issued debentures to the foreign company in part satisfaction of the consideration for vesting the business in the Indian company. The, debentures were treated as unsecured loans in the books of the Indian company consequent of which the Indian company was paying interest to the foreign company. For the assessment years 1983-84 and 1984-85, the Inspecting Assistant Commissioner (Assessment) held that the loan amounted to a "deposit" within the meaning of Explanation (b) to subsection (8) of section 40A of the Income Tax Act, 1961, and hence disallowed 15 per cent. of such interest amounting to Rs.82,500. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Inspecting Assistant Commissioner (Assessment). On further appeal, the Tribunal held that what the assessee paid was interest on the mode…

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