Report No. 55
8. Rationale of interest. -
The rationale of interest is that it is damages for wrongful retention of money. This was noticed in a Supreme Court case1. The facts (so far as relevant for the present purpose) were as follows:-
On the death of Arunachalam Chettiar (Senior), his estate in Ceylon was assessed for estate duty by the Estate Duty Authorities of Ceylon. The administrator of the deceased paid the estate duty under protest, and filed a suit questioning the validity of the assessment. In the meantime three widows, two widows of Arunachalam Chettiar and a widow of his predeceased son adopted one child each. The claims of the administrator was ultimately upheld by the Supreme Court of Ceylon, which ordered refund of the estate duty along-with interest. This decision was confirmed by the Judicial Committee on appeal.
Ramanathan Chettiar, one of the adopted sons, received one-third share out of the money refunded by the Estate Duty Authorities of Ceylon. The money so received by him was assessed by the Income-tax authorities in India, and he was required to pay income-tax on the interest also. The assessee objected to the inclusion of interest in income-tax assessment. At the instance of the assessee, the Income-tax Appellate Tribunal referred the following questions of law to the High Court.
1. Whether the aforesaid interest receipt constitutes income?
2. If so, whether it is exempted under section 4(3)(vii) of the Income-tax Act as a receipt of a casual and non-recurring nature?
The High Court answered the reference against the assessee; hence, appeal was taken to the Supreme Court. Before the Supreme Court also, only the above mentioned questions were raised.
The contentions of the appellant were that the amount of interest received by him was not a revenue receipt assessable to income-tax and that in any event, the receipt was of a casual and non-recurring nature falling within the exemption under section 4(3)(vii) of the Income-tax Act, 1929. Therefore, the Supreme Court had to examine the exact nature-of the money received by way of interest.
The Ceylon Civil Procedure Code2 empowers the court to award interest, and provides as follows:-
"When the action is for a sum of money due to the plaintiff, the Court may in the decree order interest according to the rate agreed on between the parties by the instrument sued on, or in the absence of any such agreement at the rate of nine per cent. per annum to be paid on the principal sum adjudged from the date of action to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the action, with further interest at such rate on the aggregate sum so adjudged from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit."
The Supreme Court held that the word used is "interest" in contrast to "principal sum adjudged", hence the interest received by the appellant could not be considered a capital receipt, being in the nature of damages for wrongful retention of money. The court further said that the interest is also not exempted from tax under section 4(3)(vii) of the Income-tax Act; even the plea of the appellant that what he had received was not as an interest but as the estate of his deceased father, was not accepted, and the appeal was dismissed.
1. Ramanathan v. I.T. Commissioner Madras, AIR 1967 SC 657.