BOMBAY BENCH PIRAMAL SONS PVT. v. INCOME TAX OFFICER LTD. December 20, 1985 JUDGMENT Order I. S. NIGAM, A. M.: Against order of CIT (A) I, Bombay, both assessee-company and Revenue have comp up in appeal before us. Both appeals are, therefore, disposed of by consolidated order. assessee is private limited company and appeal relates to asst. yr. 1978-79. ITO applied provisions of s. 40A(8) and out of claim of deduction of interest to various persons (other than banks) disallowed 15 per cent. Before CIT (A) assessee-company claimed firstly that it was "investment company" within meaning assigned to it under sub-cl. (ii) of cl.-(c) of Explanation to s. 40A (8) and consequently s. 40A(8) will not be applicable in assessee s case. Alternatively it was claimed that accounts of two directors, MRs. Vijaya M. Piramal and Miss Archana M. Piramal, were current accounts and interest paid on these current accounts of directors did not attract provisions of s. 40A(8). CIT (A) held that principal business of assessee-company was export of cloth etc. and, therefore, assessee is not "investment company" within meaning assigned to it under sub-cl. (ii) of cl. (c) of Explanation to s. 40A(8). CIT (A) however, accepted alternative contention of assessee-company that accounts of directors Mr. Vijaya M. Piramal and Miss Archana M. Piramal, were current accounts and, therefore, interest paid on these current accounts did not attract provisions of s. 40A(8). Th CIT (A), therefore, deleted disallowance of 15 per cent of interest of Rs. 1,11,758 paid on these two accounts. assessee-company is aggrieved with finding of CIT (A) that assessee-company is not "investment company" within meaning assigned to it under sub-cl.(ii) of cl. (c) of Explanation to s. 40A(8) and, therefore, interest paid to various persons (other than banks) will attract provisions of s. 40A(8), on other hand, Revenue is aggrieved by finding of CIT (A) that since account of directors, MRs. Vijaya M. Piramal and Miss Archana M. Pirmamal, were in nature of current accounts, interest paid on these accounts will not attract provisions of s. 40A(8) and, therefore, disallowance out of interest paid on these two accounts amounting to Rs. 1,11,758 was not justified. assessee s ld. counsel, Shri Doshi, submitted to us that assessee- company had only income from dividends, while it incurred loss in business of export, net result being very small income, which was offset by deduction under s. 80M. Proceeding further he submitted that total investments of assessee-company, according to audited Balance Sheet of company, at end of previous year amounted to Rs. 19,21,362 out of total assets of company, which again, according to Balance Sheet, amounted to Rs. 28,01,353. Shri Doshi also referred to investments in sister-concerns, which were also investments and submitted to us that these investments were far in excess of total share capital of Rs. 10,00,000, and reserves and surplus of Rs. 1,17,437. In these circumstances, according to Shri Doshi, principal business of assessee-company was investments and assessee company was "investment company" within meaning assigned to it by sub-cl. (ii) of cl. (c) of Explanation to s. 40A(8). therefore, vehemently argued before us that provisions of s. 40A(8) were not applicable to case of assessee-company and entire disallowance on this account made by ITO was unjustified. On other hand ld. Departmental Representative , Shri Subramaniam, pointed out to us that investment in shares were in companies, which were either under same management, i.e. subsidiary company, e.g. M/s. Alpana Investments Pvt. Ltd. or other companies, e.g. Maheshwari Mills Ltd. and Piramal Spg. & Wvg. Mills Ltd. where directors of assessee-company were also directors and these investments in sister- concerns or subsidiary companies could not be said to be activity of nature of business. In this connection it was pointed out by him that all shares held by assessee-company in three companies of same group were brought forward from earlier years and there was no purchase or sale of any share during previous year. Similar was position, according to Shri Subramaniam, of advances, which were again to sister-concerns and where again they were either under same management or where directors of assessee-company were also directors or had substantial interest. According to Shri Subramaniam, carrying on of business in investments connotes some systematic or organised course of activity, which is not there so far as investments in shares of advances to associated concerns are concerned. On other hand, Shri Subramaniam pointed out that in business of exports turnover was Rs. 1,32,83,573 and in these circumstances principal business of assessee-company was exports. Shri Subramaniam, therefore, vehemently argued before us that principal business of assessee- company was not investment in shares, etc. and, on other hand, principal business of assessee-company was export of cloth. In these circumstances, according to Shri Subramaniam assessee could not be treated as "investment company" within meaning assigned to it under sub-cl (ii) of cl. (c) of Explanation to s. 40A(8) and claim of assessee-company that provisions of s. 40A(8) will not be applicable was incorrect. Coming to appeal filed by Revenue Shri Subramaniam relied on decision of Special Bench of ITAT in case of M/s. Kaloomal Shorimal Sachdev Rangwala P. Ltd. vs. ITO (ITA. No. 3020-3021/Bom/81) wherein Tribunal held that even current accounts of directors will attract provisions of s. 40A(8) and consequently disallowance of 15 per cent out of interest paid in these accounts under s. 40A(8) was justified. assessee s ld. counsel, Shri Doshi, in reply submitted that there is no requirement under law that there should be acquisition of shares during previous year also in case of investment company. He further submitted that as mentioned in commentary on Companies Act by A. Ramaiya and other authors director of company is not servant but agent of company. Reference in this connection was also made by him to decision of Hon ble Supreme Court in case of R. K. Dalmia vs. Delhi Administration (1962) 32 Comp. Cas. 699, wherein their Lordships laid down that word agent in s. 405 of Penal Code also applies to persons who occupy position of agent under law like directors of companies. Our attention was also invited to ruling of Hon ble Supreme Court in case of Ram Prashad vs. CIT 1972 CTR (SC) 327: (1972) 86 ITR 122 (SC) wherein their Lordships laid down that person who is engaged to manage business may be servant or agent according to nature of his service and authority of his employment . He, therefore, vehemently argued before us that since two directors of company under consideration here were agents of company interest paid on their current accounts will be exempt from provisions of s. 40A(8) in view of sub-cl. (vii) of cl. (b) of Explanation to s. 40A(8). He, therefore supported order of CIT (A) that on interest paid to two directors on their current accounts provisions of s. 40A(8) will not be applicable and, therefore, disallowance under s. 40A(8) out of interest on these two accounts was not justified. We have carefully considered rival submissions. Hon ble Supreme Court in number of judicial pronouncements had laid down that even though words used in definition of business under s. 2 (13) are wide, underlying each of them is fundamental idea of continuous exercise of activity, i.e. some real, substantive and systematic or organised course of activity or conduct with set purpose of earning income or making profits. In this context, it is not under dispute that shares held by assessee- company were in Alpana Investments Pvt. Ltd., which is subsidiary of assessee-company and in Maheshwari Mills Ltd. and Piramal Spg. & Wvg. Mills Ltd. in which directors of assessee-company were also directoRs. Besides shares in these companies were purchased prior to beginning of previous year, in some cases as long back as in 1970 and there has been no continuous, substantive, systematic or organised course of activity or conduct in making investment in shares. On other hand, assessee s business of export of cloth showed turnover of Rs. 1,32,83,573 during previous year and this business was result of continuous exercise of real, substantive and systematic or organised course of activity. Considering all this and looking to totality of facts and circumstances, we cannot accept contention of assessee-company that principal business of assessee-company was acquisition of shares and not business of exports. claim of assessee- company, therefore, that provisions of s. 40A(8) are not applicable to assessee-company at all in these circumstances does not appear to be correct. Sub-cl. (vii) of cl. (b) of Explanation to s. 40A(8) reads as follows: "By way of security or as advance from any purchasing agent. selling agent or other agent in course of, or for purpose of business of company or as advance against orders for supply of goods or for rendering of any service." plain reading of this sub-clause shows that this refers to security or advance from purchasing agent, selling agent or other agent in course of or for purpose of business of company or as advance against orders for supply of goods or for rendering of any services. In spite of specific query by Bench, assessee s ld. counsel, Shri Doshi , has not been able to show to us that so called current accounts of two directors, MRs. Vijaya M. Piramal and Miss Archana M. Pirmamal, were by way of security or advance for services, etc. undertaken to be rendered by them. Nothing, therefore, turns on fact that assessee-company being impersonal entity, it has to act through agency of its directoRs. provisions of sub-cl. (vii) of cl. (b) of Explanation to s. 40A (8), will therefore, not be applicable to so called current accounts of two directoRs. MRs. Vijaya M. Piramal and Miss Archana M. Piramal. Considering all this, looking to totality of facts and circumstances and following, with respect, Special Bench decision in case of M/s Kaloomal Shorimal Sachdev Rangwala P. Ltd. vs. ITO (supra) we have no hesitation in holding that even interest paid in so called current accounts of two directors, MRs. Vijaya M. Piramal and Miss Archana M. Pirmamal, attracts provisions of s. 40A (8). Out of interest paid in these two accounts, therefore, disallowance of 15 per cent as laid down under s. 40A(8) made by ITO was justified and this disallowance made by ITO was wrongly deleted in appeal by CIT (A). On this issue, therefore, order of CIT (A) is reversed, while disallowance made by ITO is restored. appeal filed by assessee-company fails and is hereby dismissed, while appeal by Revenue succeeds and is hereby allowed. *** PIRAMAL SONS PVT. LTD. v. INCOME TAX OFFICER