1964 (12) TMI 50 - HC - Income Tax

Summary

Issues:
Interpretation of section 10(2)(iii) of the Indian Income-tax Act, 1922 regarding the power of income-tax authorities to scale down the rate of interest due to an individual.

Analysis:
The judgment of the Orissa High Court involved the interpretation of section 10(2)(iii) of the Indian Income-tax Act, 1922, regarding the power of income-tax authorities to scale down the rate of interest due to an individual. The court considered a case where the assessee, a Hindu undivided family, claimed payment of interest at 9 per cent. on a credit balance held by Bai Mani Poddar. The Tribunal allowed interest at 6 per cent. only, disallowing the excess payments in four assessment years. The assessee challenged this decision, leading to a detailed legal analysis by the court.

The court emphasized that for an assessee to claim allowance under section 10(2)(iii) of the Act, three conditions must be satisfied: the capital must have been borrowed, borrowed for business purposes, and interest paid on the borrowed capital. The Tribunal found that interest at 6 per cent. was expended wholly and exclusively for business purposes, satisfying all conditions. The court rejected the argument that the capital was in the nature of a fixed deposit, emphasizing that the crucial factor is whether the capital was borrowed for business purposes. Citing precedents, the court held that once conditions under section 10(2)(iii) are met, the authorities cannot question the reasonableness of interest paid.

The court further discussed the absence of a reasonableness test in section 10(2)(iii) and highlighted that business exigencies may justify higher interest rates. Referring to legal principles, the court concluded that income-tax authorities have no power to scale down interest rates based on reasonableness or non-business considerations. The judgment also noted that the provisions of section 10(2)(iii) were retained in the new Income-tax Act of 1961, reinforcing the interpretation provided by the court.

In conclusion, the Orissa High Court answered the question in the negative, holding that income-tax authorities cannot scale down interest rates based on reasonableness or non-business considerations under section 10(2)(iii) of the Indian Income-tax Act, 1922. The court awarded costs to the assessee, emphasizing the strict interpretation of tax statutes in favor of the taxpayer.

This comprehensive analysis of the judgment showcases the court's detailed examination of the legal provisions and precedents to provide a clear interpretation regarding the power of income-tax authorities in scaling down interest rates under the Indian Income-tax Act, 1922.