Court limits interest deduction under tax law, stresses precise interpretation.

Shewkissen Bhatter Versus Commissioner of Income-Tax, West Bengal.

Shewkissen Bhatter Versus Commissioner of Income-Tax, West Bengal. - [1969] 74 ITR 331 Issues: Interpretation of section 9(1)(iv) of the Indian Income-tax Act, 1922 regarding the allowance of interest on capital and accumulated interest.

Analysis:

The judgment pertains to an assessment for the year 1956-57 where the assessee, a trustee, claimed a deduction of interest on unpaid amounts from a property dispute settlement. The dispute arose from a consent decree in 1928, where the property was to belong to the trustee, subject to payment of a specified sum with compound interest. Despite defaults, an outstanding balance remained after the last payment in 1965. The Income-tax Officer disallowed a portion of the claimed interest deduction, leading to subsequent appeals.

The central issue before the Tribunal was the interpretation of "interest payable on such capital" under section 9(1)(iv) of the Act. The assessee argued for the allowance of interest on the original capital and accumulated interest, while the Tribunal disagreed, leading to a reference to the High Court for clarification.

The High Court emphasized the strict construction of tax provisions and analyzed the concept of "such capital" as the capital employed for property acquisition or related purposes. It deliberated on whether interest on unpaid accumulated interest could be considered as interest on "such capital." Referring to legal precedents, the Court highlighted the distinction between interest on original capital versus interest on capitalized unpaid interest. It concluded that interest on the remaining unpaid interest, though still interest, did not qualify as interest on "such capital" as per the Act.

The Court upheld the Tribunal's decision, ruling that the allowable interest deduction was limited to Rs. 18,000, not the claimed Rs. 38,221. The judgment underscored the importance of precise interpretation in tax matters and directed the assessee to bear the costs of the reference.

In a concurring opinion, another judge agreed with the decision, affirming the correctness of the Tribunal's conclusion. The judgment provides a detailed analysis of the applicable tax provision and its interpretation in the context of the specific case, clarifying the scope of allowable interest deductions under the Act.