TaxTMI 
TaxTMI 
1964 (12) TMI 50
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....ed on various businesses 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 No amount having been withdrawn by the lady, by the assessment year 1950-51 the credit balance swelled to Rs. 1,62,464.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 dep....
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.... cent. from Bansidhar Charitable Trust, during the assessment year 1952-53 and onwards and in the assessment year 1950- 51, the assessee 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 considerations. 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 of law that arose from the order of the Tribunal to the Hi....
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....ts 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 [1951] 20 I.T.R. 1; [1951] S.C.R. 594. Dealing with the question of payment of i....
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....nreasonableness. 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 [1957] 8 S.T.C. 561; [1957] S.C.R. 837 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 o....