TMI Blog1962 (8) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax? (3) Whether the receipt by the assessee of the sum of ₹ 58,266 in April, 1935, during the execution proceedings of the decree was rightly treated by the Tribunal as receipt towards the principal of the debt? From the statement I find that the assessee advanced a loan of ₹ 1,50,000 to two brothers, Wahiduddin and Bashiruddin, on a mortgage of the property at a certain rate of interest. In 1930 the assessee filed a suit to enforce the mortgage and in January, 1931, obtained a preliminary decree for ₹ 2,27,699, made up as follows: ₹ 1,50,000 principal ₹ 74,642 past amp; pendente lite interest ₹ 3,057 costs Total ₹ 2,27,699 A final decree seems to have been passed and was put into execution. In the course of the execution the assessee on April 25, 1935, realised ₹ 58,266. He is a money-lender by profession and maintains the accounts on cash basis. He did not appropriate the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Principal pertaining to the half share of Bashiruddin. ₹ 1,19,200 Received from Bashiruddin, through bonds on account of principal, interest amp; costs. Deduct ₹ 45,867 Due from him as principal. Deduct ₹ 1,529 One half of the costs due from Bashiruddin. Balance ₹ 71,809 Received as interest from Bashiruddin. Thus in the assessment for 1945-46 the disputed receipt was treated as receipt towards principal, i.e., as capital receipt. On June 5, 1947, relevant to the assessment year 1948-49, the assessee got bonds of the face value of ₹ 1,32,000 in satisfaction of the money decree obtained against the other brother, Wahiduddin. The Income-tax Officer assessed him on an income of ₹ 79,347, treating ₹ 79,347 out of the value of the bonds as receipt on account of interest. He calculated this amount of interest as follows, after accepting the assessee's contention that the bonds were of the market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should mention that this contention was not advanced on behalf of the assessee in the earlier assessment proceedings terminating with this court's order in I.T.R. No. 117 of 1953 [1963] 47 I.T.R. 127., referred to above. I do not treat this fact as a bar, but the fact that it did not occur to the assessee or his counsel to advance this plea in the earlier proceedings shows that there is not much force in it. Section 14(7) of the Encumbered Estates Act simply provides for the passing of a simple money decree by the special judge after ascertaining the amount due from the debtor-applicant to the creditor. It is deemed to be a decree of a court of competent jurisdiction but not capable of being executed within Uttar Pradesh except as provided in the Act: vide sub-section (8). Section 18 states the effect of the special judge's findings. It is to extinguish the previously existing rights, if any, of the claimant (e.g., the creditor), together with all rights, if any, of mortgage or lien by which the same are secured and....to substitute for those rights a right to recover the amount of the decree in the manner and to the extent hereinafter prescribed . What is extinguished by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cree remained unsatisfied and the debtor is required to pay certain instalments to the State. Even when this is done it cannot be said that the State has become a debtor of the creditor in place of the original debtor against whom the decree had been passed. Moreover, this is not the question referred to us; the contention advanced on behalf of the assessee was not that the State became the debtor in place of Wahiduddin when it issued bonds to the assessee but whether it became the debtor in Wahiduddin's place when the special judge passed a decree against him and in the assessee's favour. Since question No. 1 is answered in the negative, the second question does not arise. We were required to answer it only if it had been answered in the affirmative. My answer to the third question is yes . The assessee has come to this court with absolutely unclean hands. He realised the disputed sum in 1935 but did not appropriate it towards interest. Since the money was received in execution of a decree against the brothers, there was no question of their appropriating it towards the principal due from them or towards the interest due from them and when they could not, and did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriation as against his debtors, he had to make up his mind and appropriate the disputed receipt towards the principal or the interest when he submitted his return for the assessment year 1936-37. He was obliged to treat the disputed receipt either as receipt of interest or as receipt of principal. If he had treated it as receipt of interest he would have been liable to pay income-tax on it. It suited him in 1936-37 to refrain from paying income- tax for it. He was not sure whether he would get his whole debt back from the brothers and he must have thought it better to treat the disputed receipt as receipt of principal and to escape liability for income-tax. His assessment for 1936-37 cannot now be reopened and that is why he turns round and claims that the disputed receipt was on account of interest and not principal. He must be deemed to have made an appropriation as against the income-tax authorities when he treated the disputed receipt as receipt towards the principal and not towards the interest and cannot be permitted to make a different appropriation now. There is no substance in his claim that he had a right to appropriate only when he received the bonds from the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtgage. Since under rule 12 the property is sold free from the prior mortgage and the prior mortgagee is given the same right in the sale proceeds as he had in the property, this provision was made in rule 13 that he must be paid off before the subsequent mortgagee is paid his interest and principal. There is, therefore, no doubt whatsoever that rule 13 is connected with rule 12 and has no applicability in a case not governed by rule 12. In the present case there is no question of any prior mortgage and rule 13 cannot be applied and the assessee cannot claim that under the law itself the disputed sum was to be applied in payment of the interest first. Reference to rule 13 was entirely misconceived and misleading. The assessee relies upon the judgment of this court in Income-tax Misc. Case No. 117 of 1953 (Ramji Lal Rais v. Commissioner of Income-tax [1963] 47 I.T.R. 127.) referred to above. Gurtu and Upadhya JJ. said: The provisions of Order 34, rule 13, of the Code of Civil Procedure, directing that moneys realised in execution sale of mortgaged property should be applied in payment of interest and costs and then only in payment of the principal money due on account of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey in execution of a decree for a sum which included principal and interest and when the money was realised neither the judgment debtor made an appropriation nor the creditor. The assessee claimed a right under section 59 of the Contract Act to appropriate part of it towards interest and part towards principal. He was denied this claim and this court held that part of it was to be appropriated towards the costs and the remainder towards the interest. Though he had appropriated the payment partly towards interest and partly towards principal in his return the Appellate Tribunal took it to be a case in which there was no appropriation by the debtor and no appropriation by the creditor simply because he had not kept any accounts. Though this court observed that an Income-tax Officer is not a court and, therefore, has no right of appropriation conferred by section 61 of the Contract Act, it itself proceeded to appropriate. If the Income-tax Officer could not appropriate and, therefore, the Appellate Tribunal also could not appropriate, this court answering a question of law referred to it under section 66(1) also could not appropriate. It could not give a decision which could not have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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