Sabyasachi Mukharji, J.
1. This reference arises out of the assessment for the assessment year 1956-57. The relevant previous year ended on 31st December, 1955. The assessee is the trustee to the estate of Sm. Anardeyi Sethani. A title suit being Suit No. 61 of 1923 was filed by one Durga Prosad Chamaria against Sm. Anardeyi Sethani and others claiming title over certain properties including the property at Chandmari Road; Howrah. A consent decree was passed on the 19th April, 1928. Under the terms of the said decree it was provided that the said Chandmari Road property was to belong to Sm. Anardeyi Sethani and she on her part was to make a payment of the sum of Rs. 8,61,000 to the plaintiff in that suit. There was a stipulation of payment of compound interest on the unpaid amount at Rs. 63/4 per cent with yearly rests. It was further provided that Rs. 4,25,000 was to be paid on the execution of the terms of settlement and then monthly instalments of Rs. 35,000 for 17 months and the balance was to be paid on the 18th month. The terms or the compromise were not adhered to and there were defaults of payments. After making the last payment on 19th February 1965 there still remained an outstanding of Rs. 2,70,506 as the balance of the principal amount. The interest on this amount at 6% per cent for the year in question worked out to be Rs. 18,000. The assessee, however, claimed that he was entitled to a deduction of Rs. 38,221 on the basis of the calculation of the total interest payable on the total outstanding comprising of the principal and the compound interest. The Income-tax Officer disallowed the claim of the assessee and only allowed the claim to the extent of Rs. 18,000, against income from the said property. In appeal the Appellate Assistant Commissioner upheld the order of the Income-tax Officer and on further appeal the Tribunal also upheld the said decision.
2. The question that fell for decision by the Tribunal was what is the amount of interest that an assessee is entitled to as an allowance under Section 9 (1) (iv) of Indian Income Tax Act, 1922. It was contended before the Tribunal that the allowance provided for under Section 9 (1) (iv) of the Act was interest payable on 'such capital', in other words the interest allowable was interest on original capital as well as interestdue on accumulated interest capitalised. The Tribunal was unable to accept that contention and on an application being made under Section 66 (1) of the Act referred to this Court the following question: 'Whether on the facts and in circumstances of the case and on a true construction of the words 'interest payable on such capital' under Section 9 (1) (iv) of the Indian Income-tax Act, 1922 the amount of interest allowable was Rs. 18,000 or Rs. 38,221?'
3. In our opinion, for the purpose of answering this question, it is important to bear in mind that what is allowed, is interest on 'such capital'. The expression 'such capital' in the last part of Clause (iv) of Section 9 (1) is descriptive of the capital employed for the acquisition or construction or repair or renewal or reconstruction of the property. It is this capital which is a borrowed capital which has been indicated by the expression 'such capital'. What the assessee is claiming here is interest on that capital plus the interest on interest that has remained unpaid. In our opinion that would not be interest payable on 'such capital'. It would be interest on such capital or part thereof and interest on accrued interest which has remained unpaid. It is a well settled principle that provisions of this nature should receive strict construction. It was urged by Dr. Pal that there was no provision which disentitled an assessee from entering into an agreement whereby the assessee would become liable to pay compound interest. He 'further urged that compound interest also retained the character of interest. He drew our attention to the decision of the House of Lords in 'the case of Inland Revenue Commissioners v. Oswald, (1945) 13 ITR 39 (Supplement). He referred us to the observations of Lord Thankerton at p. 43 of the said judgment where his Lordship was quoting the observation of Lord Sterndale in Morris, in re Mayhew, (1922) 1 Ch. 126 at p. 133 to the effect: 'when these sums of interest came to be paid at the end of the time, when payment is made, although interest has been charged upon them and although as a matter of book-keeping, they have from time to time been added to capital, they do not cease to be interest of money -- that is to say, they are overdue interest upon which interest has been paid.' It is true the compound interest will still remain to be interest but the question is where the capital or any portion thereof remains unpaid and interest is added and on this sum further interest is charged, it is interest on what? When the unpaid interest has been capitalised and added to the original capital or part thereof is it still interest on such original capital or is it interest on something else? If it is interest on something else then in our opinion it does not come within the provision for allowance under Clause (iv) of Section 9 (1) of the said Act. It is clear that in this case what has happened is that the remaining unpaid portion of interest has been capitalised and whatis being claimed is interest on that. So, even though it is interest, it is not interest on 'such capital'. In that view of the matter we are of the opinion that the decision arrived at by the Tribunal was right and the question must be answered by saying that the interest allowable was Rs. 18,000 and not Rs. 38,221. The assessee will pay the costs of this reference.
4. I agree.
Reference answered against the assessee.