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PETITIONER: SHEW KISSEN BHATTAR

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, CALCUTTA

DATE OF JUDGMENT05/03/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR 2348            1973 SCR  (3) 462  1973 SCC  (4) 115

ACT: Indian  Income Tax Act, 1922, s. 9(1) (iv)-Scope  of-Consent decree  in respect of property involved stipulating  payment of compound interest by assessee-Assessee claiming deduction of  compound interest-Interpretation of expressions  "amount of  any interest on such mortgage or charge"  and  "interest payable  on  such.  capital" in  s.  9(1)(iv)-Held  assessee entitled to deduct only simple interest payable.

HEADNOTE: The  assessee,  a  trustee of the  house  property,  claimed deduction of compound interest in terms of a consent  decree passed in April 19, 1928, in a title suit in respect of  the property.  ’Under the terms of that decree, the property was held  to belong to the first defendant who, however, was  to make  a  payment of Rs. 8,61,000/to the  plaintiff  therein. There  was stipulation for the payment of compound  interest on  the  unpaid amount @ 6 3/4 with yearly  rests.   It  was further provided therein that Rs. 4,25,000,/- was to be paid on  the  execution of  the terms  of  the  settlement  and therefore  monthly instalment of Rs. 35,000/- for  seventeen months and the balance in the 18th month.  The terms of  the compromise  were  not  adhered to  inasmuch  as  there  were defaults  in payment of interest.  After making the  payment on  February 19, 1945, there still remained outstanding  Rs. 2,70,535/--  The interest on this amount @ 6 3/4 for a  year worked   out  to  Rs.  18,000/-.   The  assessee,   however, calculated  the total interest payable at Rs.  38,221/-  for the  assessment year 1956-57, relying on the clause  in  the agreement  providing for payment of compound interest.   The Income  Tax Officer gave a deduction of Rs. 18,000/only,  on the basis of simple interest at the rate of Rs. 6 3/4’%  per annum.   The  assessee’s  appeal  against  this  order   was dismissed by the Appellate Assistant Commissioner and  later on by the Tribunal.  On reference of the question and  other similar questions ’in respect of the assessment years  1956- 57 to 1958-59, the High Court held that only simple interest was allowable to the assessee. On  appeals  by certificate to this  Court,  dismissing  the appeals; HELD  :  (1) What the law permits is the  deduction  of  the

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"amount  of any interest on such mortgage or charge."  Under the  terms of the contract, when. the interest  payable  is not  paid,  the  same became a Part  of  the  principal  and thereafter, interest has to be paid not only on the original principal  but also on that part of the ’interest which  had became  a part of the principal.  The interest which  became part  of the principal cannot be considered as  the  capital charge. What  the assessee is entitled to deduct  ’is  the interest  payable by him on the capital charge and  not  the additional  interest which ’because of his failure to  pay the interest on the due date had been considered as a  part of  the  loan.  The real capital charge is  that  which  was originally due.  The other portion is merely an interest  on which the assessee has agreed to pay :interest.  Hence  the interest paid on interest is not an interest paid  on  the capital charge. [570 B] 568 (2)Any interest’ paid on capital borrowed or charged  does not  include  compound interest.  The compound  interest  is payable  riot on the capital charge but on that part of  the interest  on which he has agreed to pay interest.   That  is not  the  capital  taken not of by s.  9(1)  (iv).   If  the contention that "any interest" included compound interest is accepted  as correct, then the door will be open for  evasin of tax.  Such an interpretation is impermissible.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1500  to 1502 of 1970. Appeals  by certificates from the judgment and  order  dated January  28,  1969 and June 13, 1969 of  the  Calcutta  High Court  in Income-tax Ref.  Nos. 202 of 1963 and 76 of  1968, respectively. M.   C. Chagla and D. N. Mukherjee, for the appellant. J.   Ramamurthi, R. N. Sachthey and B. D. Sharma, for the respondent. The Judgment of the Court was delivered by HEGDE,  J.-These  are  appeals  by  certificate..  A  common question of law is involved in these appeals.  These appeals relate  to a common assessee but arise from three  different assessments  in respect of three different assessment  years (1956-57  to  1958-59),  the  accounting  years  being   the respective calendar years. The  question  of law arising for decision  is  whether  the assessee  was  entitled  to  claim  deduction  of   compound interest  under section 9(1) (iv) of the  Indian  Income-tax Act,  1922.   The High Court answered that question  in  the negative and in favour of the Department.  Aggrieved by that decision the assessee has come up in appeal to this Court. To decide the question set out above, it will be  sufficient if we- refer to the facts relating to one of the  assessment years i.e. 1956-57.  The material facts are as follows ;- The  assessee is a trustee of a house property at  Chandmari Road,  Howrah.  In respect of that house there was  a  title suit  filed  by  one  Durga  Prasad  Chamria  against   Smt. Anardeyi  and others claiming title over that  property  and for other reliefs.  A consent decree was passed in that suit on  April  19,  1928.  Under the terms of  that  decree  the aforementioned  house  property was held to belong  to  Smt. Anardeyi  Sethani  but  she was to make  a  payment  of  Rs. 8,61,000/- to the plaintiff therein.  There was  stipulation for the payment of compound interest on the unpaid  amount.@ 61%  with  yearly rests.  It was  further  provided  therein

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that,  s. 4,25,000/- was to be paid on the execution of  the terms  of settlement and thereafter monthly  instalments  of Rs. 35,000/for seventeen months and the balance in the 18th. month.   The  terms of the compromise were  not  adhered  to inasmuch as there                             569 were  defaults  in payment of interest.   After  making  the payment   on  February  19,  1945,  there   still   remained outstanding Rs. 2,70,535/-.  The interest on this amount @ 6 3/4 % for a year worked out to Rs. 18,000/-.  The  assessee, however,  calculated  the  total  interest  payable  at  Rs. 38,221/-  for  the assessment year 1956-57,  relyinging  the clause in the arrangement providing for payment of  compound interest.   The Income-tax Officer gave a deduction  of  Rs. 18,000/-  only, on the basis of simple interest at the  rate of  6  3/4% per annum.  The assessee’s appeal  against  this order was dismissed by the Appellate Assistant  Commissioner and  later on by the Tribunal.  Thereafter, at the  instance of the assessee the following, question of law was  referred to the, High Court, in respect of the assessment year  1956- 57 :-               "Whether,   on ,the  facts   and   in   the               circumstances  of  ;the case, and  on  a  true               construction of the words ’interest payable on               such  capital in section 9 ( 1 ) (iv)  of  the               Indian  Income-tax  Act, 1922, the  amount  of               interest  allowable  was Rs. 18,000/-  or  Rs.               38,221/- ?" The questions referred to for the remaining assessment years are  more  or less similar.  The High Court  answered  those questions,   as   mentioned  earlier,  in  favour   of   the Department. Herein  we  are called upon to consider the  true  scope  of section 9 (1) (iv) of the Indian Income-tax Act, 1922.   The relevant portion of that section reads thus               "(1)  The tax shall be payable by an  assessee               under  the  head  Income  from  Property’   in               respect  of  the  bonafide  annual  value   of               property consisting of any buildings or  lands               appurtenant thereto of which he is the  owner,               other  than such portions of such property  as               he   may  occupy  for  the  purposes  of   any               business,  profession or vocation, carried  on               by him the profits of which are assessable  to               tax,  subject  to  the  following  allowances,               namely :-               (i)               (ii)               (iii)               (iv)where  the  property  is  subject  to  a               mortgage  or other capital charge, the  amount               of  any interest on such mortgage  or  charge;               where  the  property is subject to  an  annual               charge not being a capital charge, the  amount               of such charge,; where the property is subject               to  a  ground rent the amount of  such  ground               rent;  and,  where  the  property  has   ,been               acquired, constructed, repaired, renewed or               570               reconstructed   with  borrowed  capital,   the               amount of any interest payable on such capital                       .............................. The  question is whether the assessee is entitled to  deduct the compound interest payable by him in accordance with  the terms  of the contract referred to earlier or whether he  is

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only  entitled to deduct simple interest at the rate of  61% per  annum.   It  must be bore in mind that  what,  the  law permits is the deduction of the ’amount of any interest.  on such  mortgage  or  charge’.  The interest  payable  by  the assessee  on the capital charge was at the rate of:  6  3/4% per  annum.  But if he fails to pay that in accordance  with the  terms  of the contract, he was liable to  pay  compound interest.   In other words, if he fails to pay  interest  in accordance with the contract, he was liable to pay  interest on  interest.  Or to put it differently, when  the  interest payable is not paid, the same became a part of the principal and  thereafter,  interest has to be paid no,, only  on  the original  principal  but also on that part of  the  interest which had become a part of the principal.  It cannot be said that  the interest which became a part of the principal  can be  considered as the capital charge.  What the assessee  is entitled  to  deduct is the interest payable by him  on  the capital charge and not the additional interest which because of his failure to pay the interest on the due date had  been considered as a part of the loan.  In fact, the real capital charge is that which was originally due.  The other  portion is  merely an interest on which the assessee has  agreed  to pay interest.  Hence we are unable to accept the  connection of the assessee that the interest is an interest paid on the capital  charge.   Mr. Chagla, the learned counsel  for  the assessee,  contended  that  the law permits  his  client  to deduct  any interest paid by him on the capital borrowed  or charged and ’any interest’ included compound interest  also. This,  to  our minds, appears to be a  fallacious  argument. The  compound interest is payable not on the capital  charge but  on that part of the interest on which he has agreed  to pay  interest.   That is not the capital taken  note  of  by section 9 (1) (iv).  If we accept Mr. Chagla’s contention as correct, then the door will be open for evasion of tax.  All that the debtor need do is not to pay interest regularly but utilise  that amount for other purpose and make the  Revenue pay  compound  interest  payable  by  him  and  thus  derive advantage  out of his own omission.  Such an  interpretation is impermissible. We  are  clearly  of the. opinion  that  the  interpretation placed  by the High Court is the correct interpretation.  In the  result, these appeals fail and they are dismissed  with costs; one hearing fee. S.B.W.                         Appeals dismissed. 571