TMI Blog1933 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... 's order. The Commissioner accordingly, as directed by the Act, drew up a statement of the case and referred it to the High Court with his own opinion on the eight questions which he formulated. The transactions which have given rise to the questions at issue relate to the lending of money by the appellants or their predecessor (hereinafter called the assessees ) in connection with a property known as the Srinagar estate. It appears that on the death of the proprietor of this estate in 1880 a one-third share thereof was in a partition suit awarded to his son Nityanand and the other two-thirds jointly to Kamalanand and Kalikanand, his sons by another wife. In 1894 Nityanand mortgaged his one-third share to the assessees for two lacs of rupees. Five years later he borrowed on further mortgage of his share a sum of three and a half lacs from the Benaili Rajas. On this latter mortgage the Benali Raja obtained in 1902 a decree against Nityanand for ₹ 4,57,159, principal and interest. His half-brothers in 1903 bought this mortgage decree for five lacs and in security of the purchase price mortgaged their two-thirds of the Srinagar estate to the Benaili Rajas. In the same ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormulated by the Commissioner:- 1. When a bond is discharged and extinguished by a fresh bond and where the assessees have credited the principal and interest of this bond in their books of accounts, can notional interest on the first bond be said to arise in years subsequent to the execution of the second bond, and can it be charged to income tax subsequently? Their Lordships deprecate the statement of questions of law in this abstract from divorced from the facts of the particular case. The real question is whether, when the assessees on 18th July, 1904, accepted a new mortgage for ₹ 7,33,135, representing to the extent of ₹ 2,33,135 the arrears of interest due under a previous mortgage of 14th June, 1894, and discharged the previous mortgage and all sums due thereunder, they thereby in effect received payment then and there of the arrears of interest due under the previous mortgage. The assessees contended that the acceptance of the new mortgage in 1904 and the extinction of the previous mortgage operated (as?) payment of the arrears of interest due under the previous mortgage, which were included in the capital sum for which the new mortgage was granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or another. The company's claim was upheld by Rowlatt, J., on the ground that it had in substance realized its former holdings and received for them money's worth of a definite amount. The loss was thus a realized loss susceptible of exact estimation in money. The transaction was on a money basis. Reference may also be made to the recent case in the House of Lords of Westminster Bank, Ltd v. Osler (15th November, 1932), where the bank surrendered certain holdings of National War Bonds in exchange for other Government securities and the Crown claimed tax on the excess value of the substituted over the original securities. The question was whether these transactions were the equivalent of a realization of the original holdings, and it was held that they were. The exchange effected in the present case, said Lord Buckmaster, was in fact the exact equivalent of what would have taken place had instructions been given to sell the original stock and invest the proceeds in the new security. The bank had thus in effect realized its profit, for it had received it in money's worth of a definitely ascertained amount. From these cases it is plain that the essence of the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest of a party claiming a oneeighth share in the property to be unaffected by the decree, can the value of the whole property be taken into account for the purpose of computing profits, or, on the other hand, can the amount deposited in the Court as security in these circumstances be claimed as deductible expenditure in computing profits? The facts are that in 1923 Ghananand Singh, a minor son of Kalikanand, sued the assessees for a declaration that his one-eighth share of the Srinagar estate was not affected by the mortgage decrees obtained by the assessees on 22nd December 1917. Pending a decision in this suit the assessees deposited in Court ₹ 3,20,633, being one eighth of the purchase price of ₹ 25,65,100, at which they bought the property at the judicial sales. The Subordinate Judge pronounced a decree in favour of Ghananand Singh on 15th September, 1927. It is not stated whether an appeal was taken. The question is whether, on the assumption that any part of the purchase price of ₹ 25,65,100 at which the assessees bought the Srinagar estate is computable as income of the assessees in the year 1925-26, it is permissible to deduct from such part t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the assessees to be such charge on account of an express covenant embodied in an original mortgage bond) an allowable deduction from taxable income in this case? Here the facts are that the Benaili Rajas in 1923 sued the proprietors of the Srinagar estate and the assessees to recover the amount due on a mortgage of the estate dated the 29th April, 1910. On the 18th September, 1926, the Rajas obtained a decree in their favour for ₹ 1,50,818 which the Court held to be a valid and prior charge on the property purchased by the assessees. It will be observed in this instance also that the assessees purchased the property at the judicial sales in 1924-25 in the full knowledge of the Rajas' claim and in bidding ₹ 25,65,100 presumably allowed for the possibility of this claim succeeding, as it ultimately did. Moreover, in the year 1925-26 the assessees made no expenditure of ₹ 1,50,818, and it was not till the 18th September, 1926, that this sum was declared to be a charge on the property purchased by the assessees. Their Lordships accordingly, for the reasons assigned in disposing of the preceding question, are of opinion that this sum of ₹ 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,31,965, in excess of the principal sums due. This excess was plainly available to be set against the arrears of interest, costs and expenses. But the special question which arises is whether in the circumstances a further sum is attributable to interest, viz., the sum of ₹ 2,33,135, which on 18th July, 1904, was due as arrears of interest under the former mortgage of 14th June 1894, and which was included in the principal sum of ₹ 7,33,135 for which the mortgage of 18th July, 1904, was granted. Their Lordships, in disposing of the first question in the case, have decided that this sum of ₹ 2,33,135 of arrears of interest was not paid in 1904, and they are of opinion that when the assessees as the result of the judicial sales received payment in account of the sum of ₹ 7,33,135 due under the mortgage of 18th July, 1904, they then received payment for the first time of the arrears of interest included in that sum. To the extent of ₹ 2,33,135, therefore, the sum of ₹ 7,33,135 represented an income receipt and must, as already indicated, be brought into computation as such by the assessees for tax purposes. On the general issue raised in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the assessees entitled to deduct from these taxable profits expenses which are always entailed in taking delivery of possession and effecting mutation in the Collectorate Registers? Their Lordships agree with the Commissioner and the High Court that the expenses incurred by the assessees in completing their title and entering into possession after the sales had become absolute are not deductible by the assessees from their taxable profits. The assessees in bidding for the property must have had in view that they would incur these expenses if they were the successful purchasers and doubtless estimated accordingly the price which they thought it worth their while to bid. The eighth and last question is as follows:- 8. What is the correct method of computing the value of the property acquired by the assessees in this case? It appears that the civil Court Commissioners had valued the property before the sales at ₹ 17,13,701, and the assessees' contention was that it should be taken at this value instead of being taken at the value of ₹ 25,65,100, the price at which they acquired the property at the sales. Their Lordships, agreeing with Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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