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TMI Blog1962 (8) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt due from Wahiduddin was revenue income liable 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 & 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 receipt of ₹ 58,266 and odd (which will be referred to as the disputed sum, receipt or payment) either to the principal that was due from the two brothers or to the interest that was due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of ₹ 1,26,743 and that he must be deemed to have received only that sum and not ₹ 1,31,000 on account of the principal, the interest and the costs due from Wahiduddin: ₹ 1,26,743 Received on account of the principal, interest and costs. Deduct ₹ 45,867 Wahiduddin's half share in the principal. Deduct ₹ 1,529 Wahiduddin's half share in the costs. Balance ₹ 79,347 Which must be on account of interest. The assessment order was upheld by the Appellate Assistant Commissioner and the Tribunal. The assessee's contention in these assessment proceedings was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 the decree is not the right of the creditor to recover the money found due to him from the debtor but simply his right as a mortgagee or lienholder. The debt due to him is not extinguished; it is only the right to the security that is extinguished. The debtor does not cease to be his debtor and of course there is no question of the State being substituted as a debtor. The State is not even referred to in either section 14 or section 18 and I fail to comprehend how the effect of these two provisions can be said to be to substitute in place of the debtor the State of U.P., which is not mentioned in them even impliedly or indirectly. The effect of the decree is simply to alter the previously existing right of the creditor as against the debtor. His right over the money due from the debtor to him remains intact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird 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 not, appropriate it the right vested in the assessee to appropriate it. He was free to appropriate it towards the interest or towards the principal. Undoubtedly there was no time limit fixed for his appropriation; he could appropriate it at any time so long as his right of appropriation was not lost by his own act. When neither party makes any appropriation and the question arises in court, the court is required to apply the payment in discharge of the debts in order of time. This is the law contained in sections 59, 60 and 61 of the Contract Act. The law laid down in these provisions has been applied to judgment debts as well and the principle contained in them has been applied to principal and interest treated as distinct debts. These provisions reproduce in a statutory for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipt 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 of U.P. and that at that time he appropriated the disputed receipt towards the interest. He could not cite any authority in support of his contention that he had a right to make the appropriation when he received the bonds. I do not know what connection there is between the supposed right and the receipt of the bonds. The assessee referred us to Order XXXIV, rule 13, Civil Procedure Code, which reads as follows: "(1) Such proceeds shall be brought into court and applied as follows: first, in payment of all expenses..............; secondly, in payment of whatever is due to the prior mortgage on account of the prior mortgage...................; thirdly, in payment of all interest due on account of the mortgage in consequence whereof the sale was directed, and of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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 suit-mortgage, is meant to regulate matters between the mortgagor and the mortgagee... The nature of the payment being determined by statute under Order 34, rule 13, we are unable to see how the alleged improper conduct of the assessee could alter its nature and make it an amount appropriated towards the principal debt. If the assessee evaded payment of appropriate tax he might have exposed himself to certain penal liabilities. Similarly, if the Income-tax Officer overlooked the provisions of Order 34, rule 13, and erroneously treated it as recovery of the principal amount the real nature of the receipt could not be changed. In the circumstances of the case we are therefore of opinion that the Tribunal was not right in treating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 been given by the Appellate Tribunal itself under section 33 of the Income-tax Act. Further, this court was bound by the statement of fact in the case referred to it that no appropriation had been done by the assessee. There is no such statement binding us in the present case. Thirdly, the rule laid down in Parr's Banking Company's case [1898] 2 Q.B. 460 is a rule laid down for the benefit of the creditor and is admittedly not of universal application. This court did not lay down that regardless of all circumstances a payment must be appropriated first towards interest and then towards principal. It did not lay down that even where the creditor has in his income-tax return treated the payment as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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