1956 (8) TMI 45 - HC - Income Tax

Issues Involved:
1. Liability of the assessee company to pay tax on interest received under section 18A(5).
2. Permissibility of deducting interest paid by the assessee under section 18A(7) from the interest received.
3. Interpretation of the statutory assessment form and its implications on tax liability.
4. Applicability of section 10(2)(xv) for deduction of interest paid due to default.
5. Consideration of commercial and technical viewpoints on interest payments.
6. Applicability of section 12(2) for deduction of interest paid.

Issue-wise Detailed Analysis:

1. Liability of the assessee company to pay tax on interest received under section 18A(5):
The assessee company received interest amounting to Rs. 7,519 under section 18A(5) for advance payment of tax. The Taxing Department included this sum as the income of the assessee for the assessment year 1952-53. The court held that the receipt of interest under section 18A(5) constitutes income and is liable to tax.

2. Permissibility of deducting interest paid by the assessee under section 18A(7) from the interest received:
The assessee company argued that the interest amount of Rs. 4,554 paid due to default under section 18A(7) should be deducted from the interest received, thereby reducing the taxable income to about Rs. 3,000. The court rejected this contention, stating that there is no relationship between the receipt of interest under section 18A(5) and the payment of interest under section 18A(7). Each transaction has separate and independent legal consequences.

3. Interpretation of the statutory assessment form and its implications on tax liability:
Mr. Palkhivala argued that the statutory assessment form, which mentions "net amount of interest payable by assessee/Government," implies that the net amount should be considered for tax purposes. The court clarified that the form is for computation purposes and does not determine the nature or quality of the amount received and paid as interest. The net amount does not constitute income for tax purposes.

4. Applicability of section 10(2)(xv) for deduction of interest paid due to default:
The court examined whether the interest paid by the assessee could be considered an expenditure exclusively for business purposes under section 10(2)(xv). It concluded that the consequences of default in discharging a statutory obligation do not constitute business expenditure. The argument that the default was due to a mistake by an employee was not substantiated and was not permitted for elaboration.

5. Consideration of commercial and technical viewpoints on interest payments:
Mr. Palkhivala contended that both the interest received and paid should be viewed as interest in the technical sense and should be netted off. The court referred to Lord Wright's definition of interest and concluded that the interest paid by the assessee is not ordinary commercial interest but a consequence of failing to discharge a statutory obligation. The interest paid by the assessee is in the nature of a penalty, although not explicitly termed as such.

6. Applicability of section 12(2) for deduction of interest paid:
A faint argument was made that the income of Rs. 7,519 falls under section 12 and that the interest paid should be allowed under section 12(2). The court found this argument unconvincing, stating that the assessee did not need to commit default to earn the interest received.

Conclusion:
The court answered both questions in the negative, ruling that the interest received by the assessee is taxable, and the interest paid due to default cannot be deducted from it. The assessee was ordered to pay the costs.

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