TMI Blog1958 (8) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... d on at Kampar in the Federated Malay States. As the enemy was in occupation of the said country during the period 1942 to 1945, the monetary transactions of payments and realisations recorded in the books of the business were in Japanese currency then in circulation. On re-occupation of the territory on September 5, 1945, Japanese currency ceased to be legal tender, and, in its place, Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired and obligations incurred during enemy occupation. The Debtor and Creditor (Occupation Period) Ordinance, 1948 (hereinafter referred to as the Ordinance ), was enacted by the Legislative Council on December 16, 1948, to regulate all the monetary transactions in the Federated Malay States during enemy occupation, to which was attached a schedule containing a sliding scale of the value of occupation currency during the relevant years, to scale down the occupation currency to the Malayan currency with a view to adjust rights and obligations in the manner provided for in the aforesaid Ordinance. The aforesaid Ordinance with the aforesaid schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5. In the aforesaid business at Kampar in Federated Malay States, the assessee in the usual course had made recoveries from its various money- lending debtors during the period of enemy occupation. By virtue of the aforesaid Ordinance, Annexure 'A', which entitled some of these recoveries to be scaled down at rates specified in the schedule attached thereto, the debts being revived to that extent, the assessee actually collected $ 6,437 during the year ended April, 12 1952, the previous year for assessment year 1952-53. 6. The Income-tax Officer, included the aforesaid amount of $ 6,437 in the assessment, holding that since these loans were discharged earlier, any second receipts from such debtors were only income assessable to tax. 7. The Appellate Assistant Commissioner accepted the assessee's contention that such receipts were capital in nature and not, therefore, taxable, in the appeal before him against the aforesaid assessment, holding in paragraph 1 of his order, dated October 9, 1953, a copy whereof is annexed hereto as annexure 'C' and forms part of the case, that the aforesaid recoveries represented only part of the original debts. 8. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l tender and in its place Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired during the enemy occupation. This was followed by the Debtor and Creditor (Occupation Period) Ordinance, 1948, hereinafter referred to as Ordinance, enacted on 16th December, 1948, to regulate all the financial transactions in the Federated Malay States during enemy occupation and to which a schedule containing a sliding scale of the value of occupation currency to scale down the occupation currency to the Malayan currency was attached to adjust rights and obligations in the manner provided for in the aforesaid Ordinance. The aforesaid Ordinance with the aforesaid schedule is annexure 'A' and forms part of the case. It is not printed, but copies thereof are undertaken to be produced by the assessee before their Lordships at the time of hearing. 4. During the accounting years Vikruthi ending on 13th April, 1951, and Kara ending on 12th April, 1952, the assessee paid the following amounts, hereinafter referred to as second payment in Malayan currency to some of the creditors whose bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,100-00 2,493-95 4. Sivakami 2,327-97 2,589-48 3,075-30 5. Paritbuntar creditor 993-77 1,452-64 November 1944 472-04 Total second Payment during year Kara ended 12-4-1952 11,574-31 5. In the absence of the various creditors' accounts in the books which were wiped off by the payments during year, the aforesaid second payments of $ 28,586-72 and $ 11,547-31 were shown as expenses of the years Vikruthi and Kara respectively and claimed as deductions from the assessments of 1951-52 and 1952-53 of which they are the respective previous years . 6. The Income-tax Officer refused both the aforesaid deductions for identical reasons, viz., that the assessee was under no legal obligation to make the aforesaid second payment and also that it represented only re-payments of capital and not an expense of the business. 7. The appeals before the Appellate Assistant Commissioner against both the aforesaid assessments were dismissed. A copy of the Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich reference will be made presently. The schedule to that Ordinance shows that up to the end of December, 1942, the new Japanese currency and the old Malayan currency circulated at par. In January, 1943, the Japanese currency began to depreciate and in December, 1943, one hundred old Malayan dollars were equivalent to 385 new Japanese dollars. In 1944, the depreciation became more rapid with the result that in December, 1944, one hundred old Malayan dollars were equal to 1,850 new Japanese dollars. From January, 1945, the rate of depreciation became almost a landslide. On 1st August, 1945, one hundred old Malayan dollars were equal to 10,500 new Japanese dollars. On 8th August, 1945, one hundred old Malayan dollars were equal to 55,000 new Japanese dollars. By 13th August, 1945, the Japanese dollars ceased to have any value. Soon after they reoccupied Malaya in September, 1945, the British Government declared a moratorium on all private debts. A large number of Indian nationals were doing business in Malaya before the Japanese occupation, during the Japanese occupation and also thereafter and they sustained heavy losses during and on account of the occupation. In response to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders a further payment has to be made, this payment will be taken into account in the assessment of the year in which the payment is made. (4) Any tangible asset taken in satisfaction of debts and subsisting at the close of the period would be valued at a reasonable rate. It may be explained here that the scheme proceeds on the basis that Japanese currency whether kept in the till or in the bank was of no value after September, 1945. On 16th December, 1948, the Malayan Legislature passed the Ordinance of which mention was made earlier, and that Ordinance took effect from October 1, 1949. It was intended to regulate the relationship between debtors and creditors in respect of debts incurred (1) prior to the Japanese occupation, and (2) during the Japanese occupation. Subject to certain provisions, section 3 directed that any preoccupation debt which remained wholly unpaid at the time the Ordinance commenced was to be paid in full. Subject again to certain provisions and conditions, payment of a pre-occupation debt, either in Malayan currency or in Japanese currency, made before December 13, 1943, was to be a valid discharge to the extent of the face value of the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After the Ordinance took effect the assessee collected $ 6,437 during the year ended April 12, 1952. The Income-tax Officer observed: These are amounts recovered from debtors who discharged their loans during the occupation period. Since these loans were discharged earlier any second receipt from such debtors are only income assessable to tax. On this reasoning he held that the assessee was liable to pay tax. The Appellate Assistant Commissioner allowed the appeal which the assessee preferred before him. The reasons he gave were: In this case in accordance with that Ordinance what he received from the debtors had to be scaled down and the difference had to be realised in normal currency. That came to $ 6,437. It was only a realisation of the original amounts lent. It is not income. The Department appealed to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal for these reasons: In the computation made by the assessee for purposes of claiming benefits under the scheme, it included and claimed all its cash and bank balances in Malayan business as part of the losses incurred therein. These cash and bank balances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmissible losses for income-tax purposes. The Tribunal agreed with the view of the Department: By virtue of the provisions of the Ordinance, the repayment of creditors during the occupation period in Japanese currency was not accepted as full discharge in certain circumstances but limited to the scale laid down in the schedule thereto. In this view, the amount due and outstanding, which had subsequently been repaid, can only be said to represent a liability of the business as at the date of reoccupation, even though in the books, such a liability did not appear. The repayments to creditors in both the years presently in question or consequently of a capital nature and cannot therefore be deducted from the profits. The argument that the payments in question have been necessitated by and the incidental loss incurred on account of fluctuations in exchange rates is hardly tenable, as no exchange rates are involved in the present consideration. At the instance of the assessee the Tribunal referred the following question for the decision of this court: Whether the payments of $ 28,586 and $ 11,547 are deductible from the foreign profits of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch returned to Malaya first declared a moratorium and then enacted the Ordinance. The result of the Ordinance was to reopen debts and obligations which would otherwise have been treated as discharged in whole or in part because of the payments made in Japanese currency. The Legislature declared that payments made in Japanese currency would be treated as valid payments only in a fractional degree. It directed that though occupation notes whose face value aggregated to a certain amount had been paid, still those notes would be treated as having been worth only a fraction of their face value. It further provided that the amount of the fraction should be ascertained in accordance with the schedule appended to the Ordinance. This meant that to the extent that the Ordinance declared that there had been no valid discharge, the original debt was revived. Thus, if X had borrowed 1010 dollars from Y before the occupation and if in discharge of that debt X paid 1010 Japanese dollars in July, 1944, to Y the debt would be wiped out under the law as it then stood. The Ordinance, however, directed that this payment of $ 1010 was to be treated as a payment only of 100 Malayan dollars. This meant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. The Commissioner of Taxation claimed that the amounts so received by the company were liable to tax. The High Court of Australia negatived the claim of the Commissioner. On appeal the Privy Council held: that having regard to the whole history of the matter, the sum received by the respondents pursuant to the provisions of the Act of 1948 must be regarded as an additional payment voluntarily made to them for wool supplied for appraisement, or, if the compulsory acquisition could properly be described as a sale, a voluntary addition made by the Commonwealth to the purchase price of the wool. It was in the respondent's hands a trade receipt of an income nature, and formed part of their assessable income under section 25 of the Income-tax Assessment Act, 1936-49, as 'gross income derived directly or indirectly from all sources whether in or out of Australia...........which is not exempt income,' and was accordingly liable to tax. The other case is reported in Sevrene (H.M. Inspector of Taxes) v. Dodswell*. The facts are thus summarised in the first paragraph of the headnote: The respondent was granted a licence to mill flour in October, 1941, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of such pre-occupation debt to the extent of the face value of such payment, subject, of course, to provisions for scaling down. In seeking an answer to the questions that arise on these references it is as well to begin by examining the simplest possible case. Let us take the case of a money-lender who has got a capital of one lakh of rupees. He employs no borrowed money in his business. He lends the entire amount of one lakh of rupees at ten per cent. per annum and all the loans he makes are repaid at the end of the year, which means, he would have received in all ₹ 1,10,000. But, we compute his profits at ₹ 10,000; that is to say, from the aggregate sum of ₹ 1,10,000 that our money lender has received we deduct the principal amount he has advanced. In other words, we ignore the amount he has received from his debtor in repayment of the principal. Now, if we do not do that and treat the entire sum of ₹ 1,10,000 that has come into his hands as a revenue receipt and require him to pay tax on the whole of that sum, a very absurd situation would arise. But, in substance, this is exactly what the Income-tax Officer and the Tribunal have done in the cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000, that is to say, ₹ 3,000. Even now, we do not take into account the moneys received in repayment of principal and the moneys paid back in repayment of principal. If in this particular case, any debt has become irrecoverable, the amount of that debt will be deducted from the sum of ₹ 3,000 and the balance alone, if any, will be the actual profits. No doubt, when we prepare a statement of assets and liabilities, we certainly bring into the account the principal amounts involved in the transactions; we would show on the one side the principal outstanding and similarly on the other side the principal repayable. But, and it is important to bear this in mind, amounts which come into a statement of assets and liabilities do not all of them enter into the reckoning when we have to ascertain the profits. From all this, one simple conclusion emerges plainly. When we have to compute or ascertain the profits a money-lender has made, we do not take notice of the moneys he has received in repayments of principal, nor conversely do we take notice of the moneys he has repaid on account of principal. From this it follows that the sums which a money-lender has received in repaymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fused both the aforesaid deductions for identical reasons, viz., that the assessee was under no legal obligation to make the aforesaid second payment and also that it represented only repayments of capital and not an expense of the business. The view that the assessee was under no obligation to pay is clearly unsustainable. The obligation to repay was created by a statutory enactment and could not be avoided. The other mistake which the Department and the Tribunal fell into in dealing with this category of cases was that they overlooked the difference between payments made towards interest on the money borrowed and payments made in repayment of the principal borrowed. Interest on money borrowed is a necessary item of expenditure, as essential and as unavoidable as the rent for the premises occupied by the business or the rent paid for a godown or the hire paid for a lorry for the transport of goods. When we look at the matter from a business point of view it will be seen that interest is nothing more than hire charges for money. Certain other contentions were put forward during the arguments and to some of these reference must now be made. In several judgments it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own anything to justify the view that during the period the country was occupied by the Japanese, mere possession of Malayan currency was an offence. Nor do we think it right to say that the direction in the Ordinance that further repayments should be made on account of old debts could be obeyed only by disposing of the stock-in-trade. In fact, this argument is illustrative of the danger of pressing the analogy between money and stock-in-trade too far. It must next be remembered that for purposes of tax, the source from which an assessee has to pay is not very important. The argument of Mr. Vasantha Pai also overlooks the fact that the effect of the Ordinance was to revive the old debt. It may be that at the time he paid the money, the assessee thought that he had discharged the debt. But the Legislature thought it fit to decree otherwise. Mr. Pai next said that the effect of the statute was to impose an extra liability on the assessee and the payment of a statutory liability is a legal item of expense. The argument would have been good if the Ordinance had been a taxing statute. But it was not that. Mr. Pai next said that we may treat the payments as losses occasioned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessable item of receipt. So far as the agreement dated 15th February, 1950, is concerned, the arrangements then entered into would undoubtedly be valid in view of section 13 of the Ordinance. But as the allegations in that regard have been placed before us for the first time in the form of an affidavit we cannot naturally investigate them here. That will have to be done by the Tribunal. We answer the questions raised by these references as follows: A: Where an assessee has received repayments, he will not be liable to tax in respect of amounts he has received as or towards principal; but he will be so liable in respect of moneys which he has received as or towards interest. Where only part of the debt has been recovered, the assessee will be at liberty, subject to the law relating to appropriation of payments to appropriate the money he has received either towards principal or interest. The assessment in respect of such receipts will proceed on this basis; that is to say, if the payment has been lawfully appropriated towards interest, the assessee will be liable to pay tax thereon. But if he has lawfully appropriated it towards principal, he will not be liable to pay ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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