The Hindu Business Line : Deposits are in creditors' interest

ARE deposits the same as loans? How naïve to ask, you may chide, but that was the subject of discussion in the Oriental Insurance case taken up by the Income-Tax Appellate Tribunal (ITAT), Delhi, recently.

The company had made deposits with the RBI, IDBI and so on, and did not pay `interest tax,' which became a handle for the Department to fight for lost revenue. It can't be, said the company, because interest tax is on interest received for loans and advances, not deposits, as per the Interest-tax Act. A case of interest, it turned out to be with pun intended, since the Tribunal had to see whether deposits are loans, after all, as the taxman argued.

K.C. Singhal, Judicial Member, noted the similarities between loans and deposits: "Both are debts repayable; in both cases, money passes from one hand to another; there is a relationship of debtor and creditor; and there is the liability to return the money." Yet, there is a "fine distinction between the two," he added.

Deposit is repayable only on demand by the depositor without the debtor having to seek out the creditor; but in the case of loan, obligation to repay compels the debtor to seek out the lender, stated the Tribunal. Let us not digress into practical problems such as no money being realised from borrowers in spite of lenders knocking on their doors many times.

In an ancient case of 1936, the Privy Council had held that the taker of deposit "is to keep the money till asked for it." A 1965 decision of the Madras High Court too is cited in the ITAT's ruling: "A loan is repayable the minute it is incurred. But this is not so with a deposit."

Again, a 1996 verdict of the Madhya Pradesh High Court, throws more light on the distinction between loan and deposit, saying that to take a loan, it is the borrower who goes to the lender, while to make a deposit, the creditor goes to the debtor. To explain how `debt' is a more comprehensive concept than loan, the apex court ruled about four decades ago that a deposit creates a debt, but "it does not necessarily involve a contract of loan."

Citing these judgments as appropriate precedents, the ITAT said: "Although the terms `loans' and `deposits' are not mutually exclusive, they are not the same thing." The `most distinguishing feature' is this: "In the case of loan, the needy person approaches the lender for seeking loan at terms of the lender, while in the case of deposit, it is the depositor, who goes to the depositee for investing his money primarily with the intention to earn interest."

But this subtlety may not seem to hold good when a sales rep calls you to make a desperate offer of a `personal loan without any collateral.' Though called a `loan' it may rather look as if the financing company is trying to make a deposit with you. Which explains why, in such a loans-for-the-asking scenario, borrowers tend to feel relaxed about repayments.

That apart, depositors have little interest left to wear themselves out for making a trip to the bank and filling up the FD form for paltry rewards.

Offers of `highly attractive' interest rates for deposits are perceived to be highly risky too; because it would be asking for trouble to assume that the taker of deposit would "keep the money till asked for it". Price of avarice, as seen during the notorious NBFC scam, may well translate to a futile chase by the creditor-depositor of the debtor, who when cornered may have all but a burp to offer in return for swallowed deposits.

ExParte@TheHindu.co.in

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