Shew Kissen Bhattar Vs. the Commissioner of Income Tax, Calcutta - Court Judgment

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direct taxation - compound interest - section 9 (1) of indian income tax act, 1922 - whether assessee was entitled to claim deduction of compound interest under section 9 (1) (4) of indian income tax act, 1922 - interest payable by assessee on capital charge was at rate of certain percentage per annum - failing which assessee would be liable to pay compound interest - when interest payable was not paid it becomes a part of principal - interest had to be paid not only on original principal but also on that part of interest which had become part of principal - assessee is entitled to deduct interest payable by him on capital charge and not on the additional interest which because of his failure to pay the interest on due date had been considered as a part of the loan. - [p.b. gajendragadkar, c.j.,; k.n. wanchoo,; n. rajagopala ayyangar,; j.c. shah, jj.] the appellant and his mother (the lessors), granted a lease of an open site in the town of coimbatore to abirama chettiar under a registered 'deed dated september 19,1934. the annual rent stipulated under the lease was rs. 10,80 and the period of the lease was 20 years. the term under the lease was that the land was to be utilised for constructing buildings thereon for "purposes of cinema. drama etc." it was further agreed between the parties that at the end of the term the lessee would demolish the buildings which he had. constructed and deliver vacant possession of the site lo the lessor. abirama chettiar constructed a theatre on the site, and assigned his rights to the respondent-company. in an action against the company for a decree in ejectment and for mesne profits, the trial court awarded to the lessors a decree for possession and mesne profits. against the decree the company-respondent preferred an appeal to the district court which was transferred for trial to the high court. during the pendency of this appeal, the state of madras extended the madras city tenants' protection act, 3 of 1922, as amended by madras act 19 of 1955 to the municipal town of coimbatore. the company then applied under a. 9 of the act and on this application the high court directed that the lessors do sell to the company the site in dispute under s. 9 of the madras city tenants protection act, 1922. against payment of the full market value of the land on the date of the order. the order was confirmed in an appeal under the letters patent held: per gajendragadkar, c.j., shah and sikri, jj. section 12 has been enacted to protect the tenants against any contractual engagements which may have been made expressly or by implication to deprive themselves wholly or partially of the protection intended to be conferred by the statute. and the only class of cases in which the protection becomes ineffective is where the tenant has made a stipulation in writing registered as to the erection of buildings, erected after the date of the contract of lease. the stipulations not protected in s. 12 are only those in writing registered and relate to erection of buildings. such as restrictions about the size and nature of the building constructed, the building materials to be used therein and the purpose for which the building is to be utilised. (ii)section 9(1) of the act was manifestly in the interest of the general public to effectuate the mutual understanding between the, landlords and the tenants as to the duration of the tenancies, and to conserve building materials by maintaining existing buildings for purposes for which the leases were granted. restriction imposed upon the right of the landlord to obtain possession of the premises demised according to the terms of the lease would, therefore not be regarded as imposing an unreasonable restriction in the exercise of the right conferred upon the landlord by art. 19(1) of the constitution, because the restriction would be regarded as one in the interests of the general public. what s. 9 does is not so much to deprive the landlord of his property or to acquire his rights to it as to give effect to the real agreement between him and his tenant which induced the tenants to construct his building on the plot let out to him. if the law is not invalid as offending art. 19(1)(f) of the constitution, no independent infringement of art. 31(1) of the constitution may be set up. per wanchoo and ayyangar, jj (dissenting) (1) the preamble of the act would indicate that the act would not apply to afford protection in a case where by an express term in a registered lease deed a tenant agreed to surrender the site on which he had erected a building, where he specifically contracted that he would demolish the building and deliver vacant possession of the site on the termination of his tenancy. if the scope of the proviso to s. 12 had to be construed in the light of the preamble, it is obvious that the tenant who had entered into a contract with a stipulation of the sort as stated above could not be said to have constructed the buildings on another's land "in the hope that he would not be evicted so long as he pays rent for the land". the high court erred in interpretting the proviso to s. 12 of the act. (ii) these words "as to the erection of buildings" mean a stipulation which bears on or is in relation to the erection of buildings. such a construction would reconcile the proviso with the preamble which sets out the object sought to be achieved by the act. if the lease deed contains no stipulation whatsoever in regard to the erection of buildings, as was the case with the large number of leases in the city of madras which were entered into prior to the enactment of the act in 1922, the tenant who erected the building exconcessis without contravening any undertaking on his part, obtains protection under the act. the test would therefore be "did the parties advert to and have in mind the lontingency of the tenant erecting buildings on the leased land"? if they had and had included in a solemn registered instrument a provision which would bear upon the relative rights of the parties in the event of the erection of buildings on the site, the stipulation would have effect notwithstanding the act; for in such an event the tenant would not have constructed buildings on the land in the hope that he would not be disturbed from possession so long as he paid the rent agreed upon. - what the assessee is entitled to deduct is the interest payable by him on the capital charge and not the additional interest which because of his failure to pay the interest on the due date had been considered as a part of the loan. 7. we are clearly of the opinion that the interpretation placed by the high court is the correct interpretation .in the result, these appeals fail and they are dismissed with costs;k.s. hegde, j.1. these are appeals by certificate, a common question of law is involved in these appeals. these appeals relate to a common assessee but arise from three different assessments in respect of three different assessment years (1956-57 to 1958-59), the accounting years being the respective calendar years.2. the question of law arising for decision is whether the assessee was entitled to claim deduction of compound interest under section 9(1)(iv) of the indian income-tax act, 1922. the high court answered that question in the negative and in favour of the department. aggrieved by that decision the assessee has come up in appeal to this court.3. to decide the question set out above, it will be sufficient if we refer to the facts relating to one of the assessment years i.e. 1956-57. the material facts are as follows :-4. the assessee is a trustee of a house property at chandmari road, howrah. in respect of that house there was a title suit filed by one durga prasad chamria against smt. anardeyi and others claiming title over that property and for other reliefs. a consent decree was passed in that suit on april 19, 1928. under the terms of that decree the aforementioned house property was held to belong to smt. anardeyi sethani but she was to make a payment of rs. 8,61,000/- to the plaintiff therein. there was stipulation for the payment of compound interest on the unpaid amount @ 6.75% with yearly rests. it was further provided therein that rs. 4,25,000/- was to be paid on the execution of the terms of settlement and thereafter monthly instalments of rs. 35,000/- for seventeen months and the balance in the 18th month. the terms of the compromise were not adhered to inasmuch as there were defaults in payment of interest. after making the payment on february 19, 1945, there still remained outstanding rs. 2,70,535/-. the interest on this amount @ 6.75% for a year worked out to rs. 18,000/-. the assessee, however, calculated the total interest payable at rs. 38,221/- for the assessment year 1956-57, relying on the clause in the arrangement providing for payment of compound interest. the income-tax officer gave a deduction of rs. 18,000/- only, on the basis of simple interest at the rate of 6.75% per annum. the assessee's appeal against this order was dismissed by the appellate assistant commissioner and later on by the tribunal. thereafter, at the instance of the assessee the following question of law was referred to the high court, in respect of the assessment year 1956-57 :-whether, on the facts and in the circumstances of the case, and on a true construction of the words 'interest payable on such capital' in section 9(1)(iv) of the indian income-tax act, 1922, the amount of interest allowable was rs. 18,000/- or rs. 38,221/- the questions referred to for the remaining assessment years are more or less similar. the high court answered those questions, as mentioned earlier, in favour of the department.5. herein we are called upon to consider the true scope of section 9(1)(iv) of the indian income-tax act, 1922. the relevant portion of that section reads thus :-(1) the tax shall be payable by an assessee under the head 'income from property' in respect of the bonafide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to the following allowances, namely :-(i)....(ii)....(iii)....(iv) where the property is subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge; where the property is subject to an annual charge not being a capital charge, the amount of such charge; where the property is subject to a ground rent the amount of such ground rent; and, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital : . . . . . . . . . . . . . . . . . . . . . . 6. the question is whether the assessee is entitled to deduct the compound interest payable by him in accordance with the terms of the contract referred to earlier or whether he is only entitled to deduct simple interest at the rate of 6.75% per annum. it must be borne in mind that what the law permits is the deduction of the 'amount of any interest on such mortgage or charge'. the interest payable by the assessee on the capital charge was at the rate of 6.75% per annum. but if he fails to pay that in accordance with the terms of the contract, he was liable to pay compound interest. in other words, if he fails to pay interest in accordance with the contract, he was liable to pay interest on interest. or to put it differently, when the interest payable is not paid, the same became a part of the principal and thereafter, interest has to be paid not only on the original principal but also on that part of the interest which had become a part of the principal. it cannot be said that the interest which became a part of the principal can be considered as the capital charge. what the assessee is entitled to deduct is the interest payable by him on the capital charge and not the additional interest which because of his failure to pay the interest on the due date had been considered as a part of the loan. in fact, the real capital charge is that which was originally due. the other portion is merely an interest on which the assessee has agreed to pay interest. hence we are unable to accept the connection of the assessee that the interest is an interest paid on the capital charge. mr. chagla, the learned counsel for the assessee, contended that the law permits his client to deduct any interest paid by him on the capital borrowed or charged and 'any interest' included compound interest also. this, to our minds, appears to be a fallacious argument. the compound interest is payable not on the capital charge but on that part of the interest on which he has agreed to pay interest. that is not the capital taken note of by section 9(1)(iv). if we accept mr. chagla's contention as correct, then the door will be open for evasion of tax. all that the debtor need do is not to pay interest regularly but utilise that amount for other purpose and make the revenue pay compound interest payable by him and thus derive advantage out of his own omission. such an interpretation is impermissible.7. we are clearly of the opinion that the interpretation placed by the high court is the correct interpretation . in the result, these appeals fail and they are dismissed with costs; one hearing fee.