1961 (1) TMI 76 - HC - Income Tax

Interest income from late payments not taxable under Income-tax Act, Court rules in favor of assessee

Lakhmichand Muchhal Versus Commissioner of Income-Tax, Madhya Pradesh

The Court ruled in favor of the assessee, holding that the interest received from purchasers in taxable territories for late payment of sale proceeds was ... - Issues:Interpretation of section 42 of the Income-tax Act regarding the taxability of interest received by an assessee from Indian purchasers for late payment of sale proceeds.Analysis:The case involved a reference under section 66(1) of the Income-tax Act, where the question was whether the interest received by the assessee from Indian purchasers for late payment of sale proceeds accrued to the assessee in India under section 4 or 42. The assessee, a cloth dealer in Indore, charged interest on sales to purchasers in British India due to delayed payments, totaling Rs. 12,261. The Income-tax Officer contended that this interest accrued in a taxable territory and was assessable. The Appellate Assistant Commissioner disagreed, stating there was no debtor-creditor relationship or money-lending transaction, hence not taxable under section 42. The Appellate Tribunal, however, upheld that the interest accrued to the assessee in India, emphasizing that indirect income could also be assessed under section 42 to prevent tax evasion.The assessee argued that there was no advance of money or goods to the purchasers, no agreement treating sale proceeds as a loan, and hence the interest was not on money lent in a taxable territory. The Court agreed, highlighting the absence of a creditor-debtor relationship and no indication of treating sale proceeds as loans. Referring to Supreme Court decisions, the Court emphasized the essential elements of the debtor-creditor relationship. The interest received did not meet the criteria for interest on money lent as per legal precedents.The Advocate-General for the department contended that the interest arose from the retention and utilization of money by purchasers, constituting a taxable source. However, the Court disagreed, stating that the source of income must be something from which income arises, not merely the retention of funds. The interest was deemed part of the price, not dependent on the utilization of sale proceeds by purchasers. Referring to legal principles and precedents, the Court concluded that the interest received did not accrue in British India under section 4 or 42, ruling in favor of the assessee.In conclusion, the Court held that the interest received by the assessee from purchasers in taxable territories was not taxable under section 4 or 42 of the Income-tax Act. The assessee was awarded costs for the reference, and the counsel's fee was fixed at Rs. 150.