ORDER K.K. Dube, J.- l. The Income Tax Appellate Tribunal, under section 256 (1) of the Income Tax Act. 1961 has referred the following question for our opinion. "Whether on the facts and in the circumstances of the case, the Appellate tribunal was correct in holding that the receipt of Rs. 39,000/- under the compromise dated 7-9-1959 by the assessee represent interest under section 2(1) of the M.B. Interest Act, 1956, received by the assessee in the course of carrying on its money-lending business ?" 2. The relevan assessment year is 1961-62, the previous year being the year ending Dwali 1960. The assessee carried on money-lending business at Ashoknagar and Guna. After the Income- Tax Act was extended to Gwalior in the year 1951, the assessee was regularly assessed to tax from the assessment year 1950-51 onwards. The assessee had advanced a loan of Rs. 39,000/- to M/s Dost Mohammad Noor Mohammad sometimes in the year 1927 under a usufructuary mortgage with possession of a factory and property. According to the terms of the mortgage, the assessee was entitled to collect rents, profits and income of every type arising out of the factory including building, machinery which were the subject of mortgage and the assessee was bound to maintain accounts for the receipts. The assessee was required to run the factory and make the expenses of running the same. Under the mortgage deed, the interest was agreed at Rs. 12/- per cent per annum and after adjusting the receipts towards the expenses and interest the balance was to be credited towards the principal. The Madhya Bharat Interest Act, 1956 (Act. No.17 of 1956) came into force with effect from 1st August 1956. This Act defined "Interest" to mean rate of interest and included the return to be made over and above what was actually lent, whether the same was charged or sought to be recovered specifically by way of interest or otherwise. The "principal sum" was defined to mean a sum adjudged as such by a Court. By section 3 a restriction was placed on the powers of the Court not to adjudge interest more than six percent per annum in case of secured and nine percent per annum in case of unsecured debts. The "principal sum" was defined to mean a sum adjudged as such by a Court. By section 3 a restriction was placed on the powers of the Court not to adjudge interest more than six percent per annum in case of secured and nine percent per annum in case of unsecured debts. The provisos to section 3 read as under: "Provided first that the amount of the interest paid in the past on the principal sum together with the amount of interest adjudged by the Court shall in no case exceed the principal sum: Provided secondly that the compound interest shall in no case he adjudged or orderd." In the years earlier to the one in question, the Income-Tax Officer assessed the interest on the basis of receipts from the properties after the deduction of the expenses. After coming into operation of the Madhya Bharat Interest Act. 1956, the assessee claimed that he could not under law claim interest at more than six percent per annum. The assessee's contentions were accepted by the Tribunal. The Madhya Bharat Interest Act, 1956 had retrospective operation and it was so held by the High Court. The assessee could charge interest at the rate of six percent per annum only Accordingly, it was directed by the Tribunal that the interest be calcul1ted at six percent per annum on Rs 39,000/- and be treated as assessee's income in place of Rs. 9,998/-, Rs. 10,789/- and Rs 12,180/- realised by the aisessee on the mortgaged property respectively for the assessment years 1953-54, 1954-55 and 1955-56. 3. Noor Mohammad Khan, the original mortgagor, died and his assets fell to be divided amongst his legal heirs. The female heirs sold their Interest in the mortgaged property to one Tahir Ali for Rs. 12,000/-, Atah Mohammad Khan son of the deceased and Tahir Ali filed suit against the assessee for redemption of their mortgage. On 7-9-1959, the Additional District Judge, Guna passed a decree in accordance with the agreement arrived at between the parties. The two relevant clauses of the compromise decree read as under:- "1 That Mst. Hafijan, Bashiran and Bishillah and Samumian Fateh Mohammad and Faiz Mohammad had virtue of a sale deed dated 9-7-1938 transferred their mortgagor's rights in favour of Haji Tahir Ali and the plaintiffs being the legal heirs and successors to Tahir Ali have the right to get the mortgaged property redeemed. Hafijan, Bashiran and Bishillah and Samumian Fateh Mohammad and Faiz Mohammad had virtue of a sale deed dated 9-7-1938 transferred their mortgagor's rights in favour of Haji Tahir Ali and the plaintiffs being the legal heirs and successors to Tahir Ali have the right to get the mortgaged property redeemed. (2) That the rental income after deducting the repairing charges of the house, house tax and wages of the watchmen shall be set off towards mortgage money and interest. A total sum of Rs. 58,000/- (Rupees fifty eight thousands) is settled in respect of the claim of the defendants which amount the plaintiff shall pay to the defendants in the manner and instalments given below:- Rs. 19,000/-to be paid on 7-10-1959. Rs. 19,000/ to be paid on 7-11-1959. Rs. 20,000/-to be paid on 7-12-1959 In case of defaults of payment of any sum on the date herein fixed the defendants shall be entitled to charge an interest of eight annas per hundred per mensen on the instalments so made default of and recover the same from the mortgaged property on behalf of the plaintiffs." 4. Coming to the assessment year 1961-62, the Income-Tax Officer, Guna reasoned that the assessee had advanced a sum of Rs. 39,000/- to the debtor on the mortgage of the properties. But under the Madhya Bharat Interest Act. 1956. the assesee can receive by way of interest a maximum sum up to Rs. 39,000/- from the debtor and the amount of loan together witb interest recoverable by the assessee from the debtor could not exceed a sum of Rs.78,000/-. The assessee had received amounts far in excess of the sum of Rs.78,000/- Therefore the sum of Rs. 39,000/- which the assessee received during the year under consideration, in the circumstances had to be considerd to be the return on the principal sum. The assessee was carrying on money-lending business and in course of such business received Rs. 39,000/- and the said receipt is a trading receipt liable to be included in assessee's total income from the business He accordingly taxed the amount as income. 5. The assessee filed an appeal against the assessment order objecting inter alia to the assessment of Rs 39,000/- as interest income The Appellate Assistant Commissioner held that the receipt of Rs. 39,000/- was not interest but was the return of the capital. 6. 5. The assessee filed an appeal against the assessment order objecting inter alia to the assessment of Rs 39,000/- as interest income The Appellate Assistant Commissioner held that the receipt of Rs. 39,000/- was not interest but was the return of the capital. 6. Aggrieved by the finding, the Commissioner, of Income-Tax preferred an appeal before the Appellate Tribunal challenging the correctness of the finding. The appellate, Tribunal found that having regard to the fact that the assessee had with it excess realisation of Rs. 54,749/- no amount was recoverable by the assessee under the law from the debtor. Notwithstanding the legal position, the successors-in-interest of the mortgagor had entered into an agreement with the assessee and made payment of Rs. 39,000/-. This amount could only be considered to be the return to be made over and above what was actually lent within the meaning of section 2 of the Madhya Bharat Interest Act, 1956. The tribunal set aside the findings of the Appellate Assistant Commissioner restoring the findings of the Income-Tax Officer upholding the view that the addition of Rs. 39,000/- in the assessment was by way of income. The assessee then moved the Tribunal to state the case and refer the question of law to the High Court. 7. According to the assessee, a sum of Rs. 39,000/- can only be taken to be an amount which was returned as capital or the principal and not as interest. Reliance is placed on the compromise deed which mentions that 'Vadigan Rahinan Ko Jo Rahan Dhan Tatha Byaj Dena Hal'. It is urged that this means that the principal amount was due and the decree had been passed for the principal amount plus interest to the extent of Rs. 19,000/-.Under section 60 of the Indian Contract Act it is contended that the creditor is entitled to first adjust the amount towards interest and any payments made earlier would be thus adjusted. 19,000/-.Under section 60 of the Indian Contract Act it is contended that the creditor is entitled to first adjust the amount towards interest and any payments made earlier would be thus adjusted. The Madhya Bharat Interest Act only prohibited the Court from passing a decree in excess of interest at 6 percent or a sum equal to the principal but it did not prohibit parties from giving and taking interest in excess of the rates In other words, if the parties chose to voluntarily make payments as per the agreement, the Act did not make such payment illegal nor did it place any restraint on them to act in the manner they had decided. It is also contended that the settled accounts cannot be re-opened under the Madhya Bharat Act and such settlements were binding on the parties. Therefore, the accounts upto the year 1942 became final and even if the M.P. Interest Act applied, it would have to take into account the enhanced principal after 1942 Calculated thus, Rs. 1,02,556-11-3 had become the principal amount. 8. In Bhansalal Parmasukh v. Naval Kishore Mungalal, 1957 JLJ 954=AIR 1958 Madhya Pradesh 21 this Court came to the conclusion that the Madhya Bharat Interest Act, 1956 was retrospective in its operation. Accordingly, the payments made in the past could also be re-opened and considered. In our opinion, the Act was undoubtedly retrospective in operation other wise the whole purpose of the Act would be defeated If the debtors were to be saved from excessive burden of the interest the payments made by them had also to be reconsidered. As long as the debt existed the debtor was entitled to take all the payments made in lieu of such debt to be considered under the provisions of the Interest Act. Under the provisions of the Interest Act interest could not be charged at a rate in excess of six per cent and the total amount of interest payable could not exceed the principal amount. The restriction on total interest paid in itself goes to show that the Act was to be restropective in operation. We wholly agree with the view taken in Bhansalal Parmasukh's case (supra) that the Madhya Bharat Interest Act, 1956 is restrospective in its operation. 9. The reliance in the compromise decree that the sum payable was in lieu of the principal as well as interest is not justified. We wholly agree with the view taken in Bhansalal Parmasukh's case (supra) that the Madhya Bharat Interest Act, 1956 is restrospective in its operation. 9. The reliance in the compromise decree that the sum payable was in lieu of the principal as well as interest is not justified. The department was entitled to examine the transaction and to see whether the payment now being received by the assessee was in lieu of interest or partly interest and whole of principal As far as the Income-Tax department was concerned they were concerned with the substance and not the form in which the transaction was couched. It was apparent that the assessee had received large amount more than that was permitted under the Madhya Bharat Interest Act as interest. It was, therefore, proper to work out the transction as permissible under the Madhya Bharat Interest Act and by working in that manner, the assessee could not expect to receive more than Rs 39 000/- as interest plus Rs 39,000/- as principal. If he had already received this amount, the excess receipt would be nothing but payment in lieu of interest. Even if section 60, Indian Contract Act is applied, the position would be that after the payment of Rs. 39,000/- towards interest, the subsequent payment to the extent of Rs. 39,000/- would be considered as payment towards principal. 10. Apart from this, it would be seen that the assessee himself was taking advantage of the Madhya Bharat Interest Act, l956 inasmuch as for the assessment years 1953-54, 1954-55 and 1955-56 the receipts in respect of these transactions were treated as interest only to the extent of six per cent. The balance received by him would thus be towards the capital. He had received Rs. 9,998/-. Rs 10,789/- and Rs. 12,180/- for these years, out of which about Rs.2,000/- for each year was to be treated as interest for the relevant assessment years and the rest as principal. He cannot now say that the entire amount paid to him was as interest, 11. Lastly, we come to the question that the account had been settled between the parties and that there was a new contract in 1942 wherein the principal amount was Rs 1,02,556-11-3. There is absolutely no evidence that there was any such contract. He cannot now say that the entire amount paid to him was as interest, 11. Lastly, we come to the question that the account had been settled between the parties and that there was a new contract in 1942 wherein the principal amount was Rs 1,02,556-11-3. There is absolutely no evidence that there was any such contract. We have already stated that the Madhya Bharat Interest Act operated restrospectively and if for the account purposes any such settlement was made between the parties, the transaction did not assume a new character and did not become a new loan as such to thwart the provisions of the Madhya Bharat Interest Act which Act in our opinion, fully applied notwithstanding any such account entry in the assessee's books. There is no evidence worth the name for relying on this part of the contention of the assessee. In our opinion, the loan was only Rs. 39,000/- and rest of the payments received by the assessee were in lieu of interest and the department was justified in treating them so. 12. We, therefore, answer that the department was fully justified in treating Rs. 39,000/- as interest receiving under the compromise dated 7-9-1959 and the Tribunal was right in holding that the receipt was by way of interest. The reference made by the assessee therefore, fails and is hereby rejected with costs. Counsel's fee Rs. 250.