R. K. DAS J. - In all the four cases, this court, under section 66(2) of the Indian Income-tax Act, 1922, required the Appellate Tribunal to state the case and to refer the following question for the opinion of the cour :
'Whether on the facts and circumstances of this case and having regard to the provisions of section 10(2)(iii) of the Indian Income-tax Act, 1922, the Income-tax Tribunal had power to scale down the rate of interest due to Bai Mani Poddar from 9 per cent. to 6 per cen ?'
The assessment years involved in these cases are 1949-50, 1950-51, 1951-52 and 1952-53, the corresponding previous years being Diwali years 2005, 2006, 2007 and 2008.
For all these four years the assessee was a Hindu undivided family with Onkarmal Poddar as the karta. The assessee carried on various business in cloth, yarn, etc. and derived income from other sources also. Mani Bai Poddar is the wife of Onkarmal Poddar. On the occasion of her marriage with Onkarmal, she received a sum of Rs. 20,000 from her father-in-law and Rs. 2,500 from her mother-in-law. The total sum of Rs. 22,500 she kept as initial deposit in the books of account of the assessee. The assessee claimed payment of interest at the rate of nine per cent. on the amount of credit balance standing in the name of Bai Mani. In the assessment year 1930-31, the Commissioner directed that the interest credited to this amount should be allowed as a deduction. In accordance with that direction of the Commissioner, the interest used to be credited to the account of Bai Mani at the rate of 9 per cent. No amount having been withdrawn by the lady, by the assessment year 1950-51 the credit balance swelled to Rs. 1,62,464. Long after the decision of the Commissioner for the assessment year 1930-31, it was found that the assessee was borrowing from other persons at rates of 6 to 7 per cent. interest and was also lending out money at the rate of 6 per cent. In the course of the assessment year 1946-47, the department wanted to go back on their previous order and urged that the money did not belong to Bai Mani, but to the assessee-Hindu undivided family and on that footing payment of interest was disallowed and the matter came up before the Tribunal. There was a difference of opinion between the two members. One of the members agreed with the findings of the department while the other felt that at that distance of time the fact of borrowing from the lady could not be questioned. The matter was referred to the third member who found that the money in question was the stridhan property of Bai Mani, but in view of the fact that the money was kept in the nature of a fixed deposit by a member of the family, it would be reasonable to allow interest at the rate of 6 per cent. only. Against this decision, the assessee came up before the High Court in O.J.C. No. 32 of 1952, questioning the propriety of the third member to vary the rate of interest from 9 per cent. to 6 per cent. when no such question was referred to him. The High Court by order dated September 10, 1954, held that the third member was called upon merely to decide whether the amount of interest should be allowed as revenue deduction or not and it was not open to him to vary the amount of interest. Accordingly, in that year the assessees claim for deduction was allowed without any adjudication as to the quantum of interest allowable as a commercial transaction.
In the four assessment years stated above, the assessee also claimed payment of interest at 9 per cent. on Bai Manis credit balance. The amount of interest claimed was Rs. 12,422, Rs. 13,442, Rs. 10,174, and Rs. 9,446 respectively for the aforesaid four assessment years. The Income-tax Officer, following the previous decisions of the Tribunal in the earlier assessment year 1946-47, allowed interest only at the rate of 6 per cent. and disallowed the excess in all the four years. Against the order of the Income-tax Officer, the assessee carried appeals to the Appellate Assistant Commissioner who confirmed the order passed by the Income-tax Officer and disallowed the excess claim of interest.
The assessee preferred appeal before the Tribunal. In the course of hearing of these appeals by the Tribunal, some statements were filed showing that for a number of years, the assessee who borrowing money at the rate of 6 per cent. and even at 3 per cent. from Bansidhar Charitable Trust, during the assessment year 1952-53 and onwards and in the assessment year 1950-51, the assessment had borrowed from two other parties at the rate of 6 per cent. and had also lent money to Poddar Brothers at an interest of 6 per cent. Thus, though capital was available to the assessee at the rate of 6 per cent. or even lesser rate of interest, still the assessee credited interest to the account of Bai Mani uniformly at the rate of 9 per cent. In consideration of these facts, the Tribunal held that it would be reasonable to allow interest at the rate of 6 per cent. only as expended wholly and exclusively for the purposes of business. The claim of interest payment in excess of this rate was held to be out of non-business consideration. Accordingly, the Tribunal upheld the disallowance of the excess payments of interest amounting to Rs. 4,107, Rs. 4,200, Rs. 3,391 and Rs. 3,215 in these four years.
The assessee challenged the correctness of this decision of the Tribunal, and made an application under section 66(1) of the Income-tax Act, 1922, requesting the Tribunal to refer a question law that arose from the order of the Tribunal to the High Court. By order dated December 31, 1962, the Tribunal rejected such application of the assessee.
Thereafter, the assessee filed an application under section 66(2) of the Income-tax Act before the High Court and this court by its order dated March 30, 1964, directed the Tribunal to state a case and refer the aforesaid question of law to this court. Accordingly, the said question has now come up for consideration before this court.
The sole question for consideration in all these references are whether in view of the provisions of section 10(2)(iii) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), it is open to the income-tax authorities to scale down the rate of interest merely on the ground of unreasonableness. The relevant provisions of section 10 may by quoted belo :
'10. (1) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, viz....
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid.'
Thus, three conditions are to be satisfied before the assessee can claim allowance under section 10(2)(iii) of the Act, that is, (i) the capital must have been borrowed, (ii) it must have been borrowed for the purposes of the business, profession or vocation, and (iii) interest paid on such borrowed capital. These are essentially questions of fact.
Mr. D. Mohanty, learned counsel for the department, however, urged that there is no specific finding that the capital was borrowed for the purposes of the business, and as such, one of the essentials being wanting, the assessee is not entitled to the benefits of this provision. This, however, is not the correct position. From the statement of the case as stated above, it is clear that the Tribunal found tha : 'It would be reasonable to allow 6 per cent. only as expended wholly and exclusively for the purposes of the business'. Whether it was expended 'wholly and exclusively' for the purposes of the business is a question which has to be determined on the facts of each case, but when the Tribunal allowed interest at six per cent. and disallowed the excess of the amounts as aforesaid, it is clearly on the footing that the capital was borrowed for the purposes of the business. Thus, there is no doubt that all the three conditions have been satisfied in the case.
Learned counsel for the department next contended that the amount was in the nature of a fixed deposit carried from year to year and it was not borrowed each year for the purposes of the business of that particular year. We have already seen that only on the basis that the capital was borrowed for the purposes of the business in the assessment years in question that the claim of interest at 6 per cent. was allowed. In my opinion, it is immaterial whether the money was physically borrowed by the assessee in each accounting year or the amount was kept in deposit with the assessee. The sole question is whether in fact it was so borrowed for the years in question for the purposes of the business. That is a matter which can be found by investigation into the accounts of the assessee. It is relevant at this stage to refer to a decision of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax. Dealing with the question of payment of interest, their Lordships said that this being an investment company, if it borrowed money and utilised the same for its investment on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under section 12(2) of the Income-tax Act. Whether the loan is on an overdraft or is a fixed deposit or a debenture makes no difference in law.
Mr. B. K. Mohanty, learned counsel for the assessee, relied upon a Division Bench decision of the Madras High Court in East India Industries (Madras) Ltd. v. Commissioner of Income-tax, where it was held that if the conditions laid down in section 10(2)(iii) of the Act are satisfied, the income-tax authorities are bound to allow the amount which has in fact been paid as interest and they have no power to reduce the quantum paid as interest, to anything considered reasonable by them, as it is not open to them to question the reasonableness of the interest actually paid by the assessee. The same view was also taken by the Madhya Pradesh High Court in a case, Birla Gwalior (P.) Ltd. v. Commissioner of Income-tax. Their Lordships held that once the conditions laid down in section 10(2)(iii) are satisfied, the assessees claim for deduction of interest paid on borrowed capital can be sustained. The interest paid is not subject to the test of reasonableness. Once 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 purposes of the business and the amount of interest was paid, they have no jurisdiction to determine whether the rate of interest agreed to be paid was reasonable or not and to disallow a portion of the interest which has been paid. The High Court of Andhra Pradesh in a case, Commissioner of Income-tax v. Gopikrishna Murlidhar also held the same view.
In the present case the genuineness of the loan is not in dispute as also the interest paid to Bai Mani. On that basis the Tribunal allowed interest at 6 per cent. The only ground on which the excess was disallowed is that when money was available to the assessee at 6 to 7 per cent. interest, there was no reason for the assessee to pay a higher rate of interest except for other considerations. Thus, the excess interest was disallowed merely on ground of unreasonableness. It is significant that the test of reasonableness, like bonus and commission in section 10(2)(x), is wholly absent in section 10(2)(iii). The reason appears to be obvious. It is not possible for a party to raise loan in open market on a uniform rate. Nor can a debtor dictate his rate of interest to the creditor. Rate of interest naturally depends upon various factors such as the credit of the debtor in the market, availability of capital in the market at a particular time. On account of business exigencies a business man may be forced to pay a higher rate of interest. It may be reasonable to hold that no business man would agree to borrow capital at an excessive or unreasonable rate of interest. That apart, from the very language of section 10(2)(iii) there is no scope for the application of the test of reasonableness to a case of payment of interest. In a decision of the Supreme Court in A. V. Fernandez v. State of Kerala their Lordships said that in construing fiscal statutes and in determining the liability of a subject to tax, one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law, and if the case is not covered within the four corners of the provision of the taxing statute, no tax can be imposed by inference or analogy. The Supreme Court in another case in C. A. Abraham v. Income-tax Officer, Kottayam held that in interpreting taxing statutes, the court cannot make good the deficiency, if there be any. The court must interpret the statute as it stands and in case of doubt in a manner favourable to the taxpayer.
The new Income-tax Act (43 of 1961) came into force with effect from April 1, 1962. But the provisions laid down in section 10(2)(iii) of the old Act was kept intact in section 36(1)(iii) of the new Act, in spite of the aforesaid decision of the Madras High Court in East India Industries (Madras) Ltd. v. Commissioner of Income-tax. It is one of the ordinary canons of construction that when the words of an old statute are either incorporated in or by reference made part of a new statute, this is understood to be done with the object of adopting any legal interpretation which has been put on them by the court : Barras v. Aberdeen Steam Trawling and Fishing Co.
In view of this position of the law, the question must be answered in the negative, and it must be held that, having regard to the provisions of section 10(2)(iii) of the Act, the income-tax authorities had no power to scale down the rate of interest on the ground of reasonableness and/or on the ground of non-business considerations.
The department will pay Rs. 100 (one hundred) to the assessee towards the costs of these references.
NARASIMHAM C.J. - I agree.
Question answered in the negative.