TMI Blog1933 (1) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year . The assessee's practice was to make up his accounts for the Fasli year which ends on 30th September and consequently, under s. 2(11)(a) of the Act, the previous year in the present case is the Fasli year 1332, which ended on 30th September, 1925. The taxable income of the assessee for the year 1926-1927 thus consists of his income, profits and gains for the year ending 30th September, 1925, as computed in accordance with the provisions of the Act. The Assistant Commissioner of Income Tax, acting as Income Tax Officer, having made an assessment of the assessee's taxable income for the year in question, the assessee appealed to the Commissioner of Income tax, Bihar and Orissa, acting as Assistant Commissioner, who made an order reducing the assessment in respect of three particular items but otherwise affirming it. The assessee then required the Commissioner under s. 66(2) to refer to the High Court certain questions, purporting to be questions of law arising out of his order. The Commissioner, as required by the Act, drew up a statement of the case and referred it with his own opinion thereon to the High Court. It is against the answers rendered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the assessee's deposit register. On this occasion the officer made his computation by taking first all the sums allocated to interest and entered in the interest register for that year, irrespective of the years in which these sums had actually been received by the assessee; he then resorted to the deposit register, noted the sums there shown as actually received in that year by the assessee but from which no allocations to interest had been carried to the interest register, made his own calculation of the proportions of interest comprised in such sums and added the result to the sum of the entries in the interest register for that year. In computing the income of the assessee for the next year, viz., 1332 Fasli, being the income of the year of account with which their Lordships are concerned in this appeal, the assessing officer again took first the amount shown as credited in that year in the interest register, but on this occasion, less the sums which he had in the previous year taken into account from the deposit register and which now appeared in the interest register; he next examined the deposit register and in the case of sums there shown as received in 1332 Fasli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of sums received in previous years and allocated by the assessee to interest in that year. The question is whether this method or combination of methods was legitimate. That it was legitimate to ascertain in the first place the actual receipts of interest in the year of computation is undoubted. Was it legitimate to add the items which the assessee in the year of computation carried to interest account out of sums received in previous years? Was the officer entitled to treat these allocations as income of the year of computation? Where an assessee keeps his books on a cash basis disclosed to the Revenue Authorities and the officer accepts that basis, it is clear that the calculation must be based on actual receipts in the year of computation. Here, however, the assessee kept his books on a hybrid system and it was his practice to enter sums as he received them in a deposit register not made available to the Revenue Authorities, without discriminating between interest and capital payments, and then subsequently to allocate and treat as income certain portions of these sums which he attributed to interest. What the officer is directed to compute is not the assessee's receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Commissioner is as follows:- 2. In the circumstances of this case, what portion of the amount received from Damodar Das Burman in the previous year is legally taxable?? The facts as stated by the Commissioner are that the total amount of interest irrespective of whether it was paid or not, which had as a matter of calculation, accrued on the debt from the date of its commencement down to the date of the payment of ₹ 2,78,000 to the assessee in the year 1332 Fasli was ₹ 3,09,281. During the currency of the debt the debtor made regular payments over a number of years to the assessee, the total of which payments is not stated. These payments were entered in the deposit register but no allocation thereof were made as between principal and interest and no part of these payments was carried to the interest register. Consequently no part of these payments was subjected to tax until the year Fasli 1331, when the deposit register became available to the Income Tax Officer. In that year the deposit register showed the receipt of ₹ 38,091 and on this the officer claimed and was paid tax on the footing that it was attributable to interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not having received any payment of interest in years in which he made no appropriations to interest out of sums received by him in these years and neither disclosed such receipts to the Revenue Authorities nor made any return of any part of them as income. Their Lordships therefore approach the question of how the sum of ₹ 2,78,000 actually received in the year fasli 1332 is to be dealt with on the footing that up to then no interest had been treated as paid out of the total of ₹ 3,09,281 due other than the sum of ₹ 38,091. Now, where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as between capital and interest, by either debtor or creditor, the presumption is that the payment is attributable in the first instance towards the outstanding interest: Venkatreddi Appa Row v. Parthasarathi Appa Row [61 I.C. 31; 19 A.L.J. 465; 33 C.L.J. 447; A.I.R. 1922 P.C. 233]. This presumption is no doubt operative primarily in questions between debtor and creditor, but in their Lordships' view, the Income Tax Officer, finding that the assessee received a payment from his debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the year in which he appropriated it to income. The question on this topic which was stated by the Commissioner is thus expressed:- 3. What is the amount of profits and gains arising out of the payments made by this judgment debtor legally taxable in this year? Their Lordships agree with the High Court in answering that out of the appropriations to interest in the year of computation the total amount taxable is ₹ 60,107, over and above the proportion representing interest of the payment of ₹ 1,38,955 actually received in the year 1332, such proportion being admitted to be ₹ 1,23,906, so that the total sum chargeable with tax is ₹ 1,23,906 + ₹ 60,107 = ₹ 1,84,013. Passing to the further questions raised in the case and omitting a transaction relating to a loan to Colonel Lewellyn as to which the assessee has acquiesced in the decision of the High Court, their Lordships have next to consider the estimate made by the Income Tax Officer of the income received by the assessee in the year of computation from the purchase of properties under mortgage decrees. The general question which was raised below on behalf of the assessee was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned counsel for the assessee has argued that the officer is not entitled to make a guess without evidence and I agree with that contention, but in this case the state of affairs in the previous years, coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions, afford ample material for the assessment made. I would answer the question in the affirmative. The other Judges concurred and their Lordships also agree, adding only that if the assessee wished to displace the Taxing Officer's estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof, which he apparently made no attempt to do. Their Lordships next turn to the consideration of a transaction between the assessee and one Kumar Ganesh Singh. In the year 1332 Falsi Kumar Ganesh Singh owed the assessee 32 lacs as principal and ₹ 6,09,571 as interest, or a total of ₹ 38,09,571 in all, in respect of an unsecured loan. In that year the assessee and his debtor entered into an arrangement whereby, as the Commissioner states, the assessee took over from the debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arris and Scottish and Canadian General Investment Company v. Easson both cited by Das, J., below). Now here the first six items, amounting to ₹ 20,74,973, may perhaps reasonably enough be regarded as the equivalent of cash, but the seventh item of ₹ 17,34,596, consisting of the debtor's own promissory notes, was clearly not the equivalent of cash. A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attributes. So far then as this item of ₹ 17,34,596 is concerned the assessee did not receive payment of any taxable income from his debtor or indeed any payment at all. In so holding their Lordships find themselves in agreement with the learned Judges of the High Court who differed on this point from the Commissioner. This conclusion seems to have been regarded in the High Court as decisive of the whole question, but before their Lordships an argument was submitted for the Crown which does not appear to have been advanced below. Assuming that the first six items, amounting to ₹ 20,74,973, may be treated as money's w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner put the question- 6. Whether if any sum is held to have been realised, it was legally recovered in the year 1331 or in the year 1332? The Judges of the High Court agreeing with the Commissioner expressed the view that if there was any receipt of interest it was attributable to the year 1332. The learned Chief Justice stated that it was conceded on both sides that the instrument of transfer was executed and dated on April 29th, 1925, that is, in 1332, and that the title to the assets conveyed passed on that date. Had the amount of interest been assessable it would have been assessable in respect of 1332. Their Lordships agree, and the answer of the High Court to the question will be affirmed. The next question is of a different character. When Kumar Ganesh Singh, who was a sub-lessee of the Kajora Colliery transferred it to the assessee as of the value of ₹ 7,37 339 he represented it to be free from encumbrances. The assessee subsequently discovered that there were arrears of fixed or dead rent due to the superior landlord to the extent of ₹ 67,872. The assessee paid this sum to the superior landlord and now claims to deduct it from his assessment. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue for ₹ 7,37,399. Had he known, what was concealed from him, that arrears of unpaid rent had accumulated which he would have to pay to the superior landlord, he would have correspondingly diminished the sum at which he was prepared to take over the colliery and according to the Commissioner, it was admitted that the assessee has a claim against Kumar Ganesh Singh for the difference, although he may not be able to recover it. If it was recovered, it would properly be credited in diminution of the figure at which the colliery was taken over and would not enter the profit and loss account of working the colliery. From this it follows that the sum overpaid by the assessee for the colliery cannot properly be described as a loss sustained by him on income account. It is a sum which was payable by him in order to get possession of the colliery, not a sum expended by him in the carrying out of the colliery. It is not rent for any period of his possession, nor is it an expenditure incurred by the assessee for the purpose of earning the profits or gains of the colliery business. If the assessee paid it without any legal liability or necessity on his part to do so, such a voluntary p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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