TMI Blog1964 (12) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... down the rate of interest due to Bai Mani Poddar from 9 per cent. to 6 per cent? The assessment years involved in these cases are 1949-50, 1950-51,1951 52 and 1952-53, the corresponding previous years being Diwali years 2005, 2006, 2007 and 2008. For all these four years the assessee was a Hindu undivided family with Onkarmal Poddar as the karta. The assessee carried 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 ₹ 20,000 from her father-in-law and ₹ 2,500 from her mother-in-law. The total sum of ₹ 22,500 she kept as initial deposit in the books of account of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a fixed deposit by a member of the family, it would be reasonable to allow interest at the rate of 6 per cent. only. Against this decision, the assessee came up before the High Court in O.J.C. No. 32 of 1952, questioning the propriety of the third member to vary the rate of interest from 9 per cent. to 6 per cent. when no such question was referred to him. The High Court by order dated September 10, 1954, held that the third member was called upon merely to decide whether the amount of interest should be allowed as revenue deduction or not and it was not open to him to vary the amount of interest. Accordingly, in that year the assessee's claim for deduction was allowed without any adjudication as to the quantum of interest allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration 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 ₹ 4,107, ₹ 4,200, ₹ 3,391 and ₹ 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 High Court. By order dated Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (iii) interest paid on such borrowed capital. These are essentially questions of fact. Mr. D. Mohanty, learned counsel for the department, however, urged that there is no specific finding that the capital was borrowed for the purposes of the business, and as such, one of the essentials being wanting, the assessee is not entitled to the benefits of this provision. This, however, is not the correct position. From the statement of the case as stated above, it is clear that the Tribunal found that: It would be reasonable to allow 6 per cent. only as expended wholly and exclusively for the purposes of the business . Whether it was expended wholly and exclusively for the purposes of the business is a question which has to be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on the loans will clearly be a permissible deduction under section 12(2) of the Income-tax Act. Whether the loan is on an overdraft or is a fixed deposit or a debenture makes no difference in law. Mr. B.K. Mohanty, learned counsel for the assessee, relied upon a Division Bench decision of the Madras High Court in East India Industries (Madras) Ltd. v. Commissioner of Income-tax [1957] 31 I.T.R. 803, where it was held that if the conditions laid down in section 10(2)(iii) of the Act are satisfied, the income- tax authorities are bound to allow the amount which has in fact been paid as interest and they have no power to reduce the quantum paid as interest to anything considered reasonable by them, as it is not open to them to question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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