TMI Blog1971 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ar is 1944-45, corresponding to the accounting year ended on April 12, 1944. The assessee is one Chidambaram Chettiar (since deceased). The father of the assessee, Palaniappa Chettiar, was a money-lender. He had made various advances to one Nallathambi Sakkarai Manradiar, who will hereinafter be referred to as the Pattayagar, a prominent landlord in Coimbatore District, on promissory notes. The total principal advanced by the father of the assessee up to July 6, 1932, amounted to Rs. 1,38,535. The interest on the same came to Rs. 1,34,965. On July 6, 1932, a further advance of Rs. 2,500 was made to the Pattayagar and for the amounts due from him, the Pattayagar executed a mortgage of some of his properties in favour of the assessee's father for a sum of Rs. 2,76,000. Till 1938, only a sum of Rs. 13,620 was paid by the mortgagor in part payment of the debt due from him. On December 14, 1940, the mortgagee instituted a suit on the foot of the mortgage bond claiming a sum of Rs. 5,50,573, inclusive of principal and interest. On September 19, 1943, the claim was compromised and on October 5, 1943, a compromise decree was passed for a sum of Rs. 3,50,500, in full satisfaction of the mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgagor. The Income-tax Officer did not accept the plea of the assessee. He accordingly included an additional sum of Rs. 1,50,000 in the income of the assessee earlier determined for the assessment year 1944-45 and taxed him on that basis. In appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and directed the Income-tax Officer to redo the assessment after giving the assessee an opportunity to cross-examine the parties examined by the Income-tax Officer on the basis of whose statements he had come to the conclusion that a sum of Rs. 1,50,000 had been secretly paid to the mortgages by the mortgagor. Thereafter the Income-tax Officer further inquired into the matter ; Pattayagar's books of account were got produced to prove that an additional sum of Rs. 1,50,000 had been paid to the assessee. Some witnesses were also examined in the presence of the assessee to prove that fact. After doing so, a fresh order of assessment was made on the assessee under section 23(3) read with section 34. His order was affirmed by the Appellate Assistant Commissioner as well as by the Tribunal. At the instance of the assessee, the following three questions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him, the Income-tax Officer could have formed the necessary belief. In the notice issued he says that he had formed that belief. In our opinion, the requirements of section 34(1)(a) are fully satisfied. The fact that there was some vague information before the Income-tax Officer that the assessee's father had secretly received a sum of Rs. 1,50,000 from the mortgagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessee had stoutly denied that fact and the court records did not support that information. It is true that the Income-tax Officer could have made further enquiry into the matter but the fact that he did not make any further enquiry does not take the case out of section 34(1)(a) particularly when the assessee had failed to place truly and fully all the material facts before him. The remark of the Income-tax Officer that " in any event this (the receipt of Rs. 1,50,000) should come up for consideration only in the assessment year 1944-45 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debtor had not given any direction about the appropriation of that amount, it was open to the creditor to appropriate the same towards the principal amount and further he must be presumed to have appropriated that amount towards the principal amount before section 34 proceedings were started against him, firstly, because of the system of accounts maintained by him, and, secondly, because every one must be deemed to have acted in a manner least disadvantageous to him. In support of this conclusion reliance was placed by the High Court on the decision of the Judicial Committee in Commissioner of Income-tax v. Kameshwar Singh. In that case, the nature of several receipts by the assessee came up for consideration. For our present purpose we need only refer to two of them. One Damodar Das Burman owed to the assessee in the Fasli year 1332 Rs. 3,09,281. During the currency of the debt the debtor had made regular payments to the assessee over a number of years, the total of which payments was not stated. Those payments were entered in the deposit register maintained by the assessee but no allocations thereof were made as between principal and interest, and no part of those payments wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e drawn in regard to appropriation of an open payment depends on the circumstances of a case. Now, we shall proceed to deal with the second receipt, namely, that from Kumar Ganesh Singh. In the Fasli year 1332 Kumar Ganesh Singh owed the assessee Rs. 32 lakhs as principal and Rs. 6,09,571 as interest, or a total of Rs. 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 stated, " the assessee took over from the debtor in satisfaction of this amount the following items of property movable or immovable : Rs. 1. The Kajora Colliery valued at 7,37,339 2. Shares in different companies valued at 94,125 3. Bills received by the above brokers (i.e., Ganesh Singh's firm) 48,809 4. Decree 1,42,594 5. Transfer of loan to the Agra United Co. 10,00,000 6. Pronotes and hand-notes (of third parties) 52,106 7. Hand-notes from Kumar Ganesh Singh 17,34,596 Rs. 38,09,569 " The question for decision was whether, as a result of the above settlement, it could be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee as taxable income in the year of computation. " Here again, we notice that the conclusion drawn by the Judicial Committee depended on the facts and circumstances before them. Though the factum of settlement of the debt was relied upon as one of the circumstances, for finding out the meaning of appropriation it was by no means a conclusive circumstance. Evidently, their Lordships bore in mind the possibility of the assessee not being able to realise the debts under the handnotes. Under those circumstances it was advantageous to the assessee to appropriate the money value of the properties received towards the capital, otherwise there was a possibility of his having to pay income-tax on a receipt which ultimately may not prove to be an income. It is under those circumstances their Lordships observed : " that in a question with the revenue the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself. " In our opinion the High Court was in error in thinking that the decision of the Judicial Committee in Kameshwar Singh's case has laid down a firm rule that whenever an assessee receives a payment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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