DIXIT C.J. - This is a reference under section 66(2) of the Income-tax Act. The question which we have to answer is 'Whether having regard to the provisions of section 10(2)(iii) of the Act, the Income-tax authorities had power to scale down the rate of interest on the ground of unreasonableness.'
The material facts are that the assessee is a private limited company carrying on the business of managing agents of various mills and concerns. It borrowed or accepted on deposit moneys from several persons at different rates of interest and the funds so obtained were made available to several concerns in which the assessee was interested. In the assessment proceeding for the years 1950-51, 1951-52 and 1952-53 the assessee claimed that in the relevant accounting years it had paid certain sums to four ladies by way of interest at 6 3/4 per cent. per annum on the moneys borrowed from them and that, therefore, this interest amount should be deducted under section 10(2)(iii) in the computation of its business income for the respective assessment years. The Income-tax Officer made a allowance calculating interest at the rate of 3 per cent. per annum finding that the payment of interest to the four ladies at 6 3/4 per cent. was not on business considerations. The assessee had paid to the four ladies an aggregate amount of interest of Rs. 38,297, Rs. 40,450 and Rs. 41,394 for the years 1950-51, 1951-52 and 1952-53 respectively. The Income-tax Officer disallowed the claim to the extent of Rs. 21,276 Rs. 32,950 and Rs. 22,552 for the three years. An appeal preferred by the assessee before the Appellate Assistant Commissioner was dismissed. Thereupon the assessee appealed to the Tribunal. The Judicial Member of the Tribunal held that the claim made by the company for deduction of the interest amount must be accepted wholly as it was not disputed that the capital was borrowed for the purposes of business and was actually utilized in the business and there was nothing mala fide in the transactions. The Accountant Member took the view that though it was not for the department to say that the assessee should pay interest at a particular rate, but when a claim for deduction on account of interest at a certain rate was put forward by the assessee, it was open to the department to find out whether the rate of interest claimed was one 'which is businesslike in the circumstances of the case'. On this view he upheld the decision of the Appellate Assistant Commissioner. The matter then came up before the President of the Tribunal for resolving the difference of opinion between the two Members. The question that was referred to the President was, whether on the facts and circumstances of this case the department was right in disallowing the sums of Rs. 21,276, Rs. 32,950 and Rs. 22,552 paid as interest to the depositors.' According to the President, the money obtained from the four ladies was not of any material importance to the business of the assessee; that it was not even 10 per cent. of the total assets of the business; that it was not the case of the assessee that any of the borrowings had been utilized in the managing agency business as such and therefore the interest paid to the four ladies could not be claimed as a deduction against the agency commission received by the assessee; that the money borrowed had been utilized in making advances to industrial concerns at a lower rate of interest; and that no sane person would borrow at 6 3/4 per cent. and invest at 3 per cent. or less. The President concluded by observing that 'after taking into account all the transactions of advances taken and advances given' the payment of interest at a rate higher than 3 per cent. 'was not wholly and exclusively for business considerations'. The President thus found himself in agreement with the view of the Accountant Member of the Tribunal, and the assessees appeal was dismissed by the Tribunal. Subsequently, the assessee moved the Tribunal for a reference under section 66(1). When this prayer was rejected, the assessee came up to this court. On 20th April, 1960, we directed the Tribunal to state the case and refer the question stated earlier for our decision.
The point raised by this reference is a very short one and does not really require any elaboration. There is a specific provision in section 10(2) dealing with the deduction of payments on account of interest. Sub-section (2)(iii) of section 10 provides :
'(2) Such profits or gains shall be computed after making the following allowances, namely :....
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid.'
The assessees claim for deduction rested on this clause. It will be seen that for a deduction under this clause all that is necessary is that, first, the money, that is the capital, must have been borrowed by the assessee; secondly, it should have been borrowed for the purposes of the business, profession or vocation to the assessee; and, thirdly, the assessee should have paid the interest amount claimed by him as an allowance under that clause. The interest paid has not been made subject to the test of reasonableness as is bonus or commission under section 10(2)(x). Clause (iii) also does not say that the allowance under that clause shall be such sum as the Income-tax Officer may determine having regard to certain circumstances. Therefore, when the income-tax authorities have found that the borrowing transactions were not illusory or colourable and that the capital was borrowed by the assessee for the purpose of business and the amount of interest was paid, then they have no jurisdiction under clause (iii) to determine a reasonable amount of interest as deduction. This view is fortified by the decision of the Madras High Court in East India Industries (Madras) Ltd. v. Commissioner of Income-tax [ 31 I.T.R. 803, 808.], where it has been held that in cases of genuine business borrowings, the department cannot disallow any part of the interest on the ground that the rate of interest is unreasonably high. Rajagopalan J., delivering the opinion of the court in the Madras case, said :
'The sum of one lakh of rupees was the amount borrowed by the assessee to provide working capital for its expenses. What it paid annually was interest. Learned counsel for the department could not dispute that the relationship between the shareholders of the company that lent moneys to the company on the one hand and the company on the other which borrowed those moneys was that of creditors and debtors. The genuineness of the loan and that of the payments made by the assessee were never in issue. It was only on that basis that the Tribunal could allow and did allow 6% towards interest charges. Once the factors mentioned above were established, there was no scope for limiting the deduction to what the Tribunal considered was a reasonable rate of interest. Section 10(2)(iii) did not provide for such a limitation. All that section 10(2)(iii) requires is (i) that the money, the capital, must be borrowed by the assessee; (ii) the amount should have been borrowed for the purpose of the business of the assessee; and (iii) the assessee should have paid as interest the amount claimed as allowance under section 10(2).'
Now, here, no dispute was ever raised before the income-tax authorities or the Tribunal about the genuineness of the borrowings from the four ladies. It was also not disputed that the capital was borrowed for the purposes of the business of the assessee and was actually utilized in the business and that the interest amounts which the assessee claimed to deduct were in fact paid to the four ladies. All that was urged was that the interest rate of 6 3/4 per cent. per annum was unreasonably excessive. That there was no dispute on these points is evident from the opinion expressed by the Judicial Member of the Tribunal in paragraph 2 of his order (page 12 of the paper-book). The Accountant Member of the Tribunal also accepted the facts stated by the Judicial Member and said that :
'The point that, therefore, really arises for consideration is whether this transaction of borrowing money from these four ladies at the rate of 6.75% per annum is a genuine one so far as the rate of interest is concerned'.
The Accountant Member thus found that the borrowing transactions were genuine and that interest was also in fact paid to the four ladies, but that the rate was not genuine, meaning thereby that it was unreasonable. The President also expressed the opinion that he did accept these facts. In coming to the conclusion that the payment of interest at a rate higher than 3 per cent. 'was not wholly and exclusively for business considerations' the President, like the Accountant Member, brought to bear upon the matter considerations relevant to section 10(2)(xv) and put a construction on clause (iii) by introducing into that clause words which are not there. It is well settled that if an allowance is specifically dealt with by any one of the clauses of section 10(2), then clause (xv) which is the residuary clause cannot be resorted to (see Subodhchandra Popatlal v. Commissioner of Income-tax [ 24 I.T.R. 566.] and N.M. Rayaloo Iyer & Sons v. Commissioner of Income-tax [ 26 I.T.R. 265, 290.]). Both the President and the Accountant Member overlooked the fact that there could be no comparison between the interest paid to the four ladies on the moneys lent by them which was in the nature of fixed deposits and interest payable on current accounts and advances by the assessee. The President also observed that it had not been shown whether the borrowings from the ladies had been utilised in the managing agency business as such or in making advances to industrial concerns. It was not necessary for the assessee to show for the purposes of deduction under clause (iii) whether the money borrowed was utilized for a particular branch of its business. As pointed out in Calico Dyeing & Printing Works v. Commissioner of Income-tax [ 34 I.T.R. 265.], under section 10(2)(iii) all that the assessee has got to show is that the capital which was borrowed was used for the purpose of the business.
Learned Advocate-General appearing for the department did not dispute the correctness of the view that if the borrowings were genuine and not illusory and colourable, then the department could not disallow any part of the interest on the ground that it was unreasonably high. He, however, sought to argue that the money taken from the four ladies was not any 'capital borrowed' from them and that there was no relationship of creditor and debtor between the assessee on the one hand and the ladies on the other. It was said that the Tribunal should be directed to submit a supplementary statement of the case. In our opinion this contention is not now open to the department. The Tribunal and the taxing authorities have nowhere held that the money obtained from the four ladies was not capital borrowed. Before the taxing authorities and the Tribunal the matter proceeded on the undisputed fact that the money taken from the four ladies was capital borrowed for the purposes of the assessees business, and that the interest amount was in fact paid to them. The question whether those amounts were capital borrowed within the meaning of clause (iii) and whether there was any relationship of creditor and debtor between the assessee company and the ladies was never canvassed before the taxing authorities or the Tribunal. Indeed, if the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal had taken the view that the money supplied by the four ladies was not capital borrowed for the purposes of the business of the assessee, then consistently with that view they would have disallowed the whole of the interest allowance claimed by the assessee. This was not done. What these authorities did was to find that the rate of interest of 6 3/4 per cent. was unreasonable and scale it down to 3 per cent. This they could not do after having accepted the position that the amount borrowed was for the purposes of the business of the assessee and interest amount was in fact paid by the assessee to the four ladies. The argument of the learned Advocate-General really raises a new case which had never been made by the department before the income-tax authorities or the Tribunal and which therefore cannot be said to arise out of the order of the Tribunal. Even if the question whether the money taken from the four ladies was capital borrowing is treated as a question of law, the Tribunal cannot be directed to record fresh findings of fact in order to enable the department to put forward a new case here. As has been held by the Supreme Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax [ 37 I.T.R. 11 (S.C.).] and Zoraster & Co. v. Commissioner of Income-tax [ 40 I.T.R. 552 (S.C.).], section 66(4) does not enable the High Court to raise a new question of law which does not arise out of the Tribunals order and direct the Tribunal to investigate new and further facts necessary to determine this new question of law which has not been referred under section 66(1) or section 66(2) and direct the Tribunal to submit a supplementary statement of the case.
For all these reasons our answer to the question stated by the Tribunal is in the negative. The assessee shall have costs of this reference. Counsels fee is fixed at Rs. 250.
Question answered in the negative.