TMI Blog1929 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... inandan Singh the proprietor of the Srinagar Raj, had three sons, Nityanand Singh, Kamlanand Singh and Kalikanand Singh. Sometime in 1892 Nityanand Singh separated from his brothers. In 1894 he borrowed ₹ 20,000 from the predecessors in title of the assessees and executed a mortgage bond in his favour. In 1897 he borrowed ₹ 3,50,000 from the Baneli Raj on the security of the properties belonging to him. The Baneli Raj sued to enforce the mortgage and, on 11th March 1902, obtained a decree for ₹ 4,57,189 against Nityanand Singh. On 12th September 1903 Kamlanand Singh and Kalikanand Singh purchased from the Baneli Raj the decree obtained by it as against Nityanandfor the sum of ₹ 5,00,000, but, being unable to find the money, executed a mortgage bond in favour of the Baneli Raj. 3. On 20th October 1903 Kamlanand and Kalikanand purchased from Nityanand his share in the properties constituting the Srinagar Raj and became liable to satisfy the claims of the predecessor in title of the assessees. The position on 18th July 1904 which is a very material late in these proceedings was as follows. Kamlanand and Kalikanand owed the assessees or their predecessor-in-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended by Mr. Jayaswal on behalf of the assessees that it is too late now to assess the interest on the Srinagar Raj mortgages to Income Tax and that such interest should have been, assessed if at all, as it accrued due. Section 4, Income Tax and which is the charging section provides that the Income Tax Act shall apply to all income, profits or gains, as described or comprised in Section 6 from whatever source derived, accruing or arising or or received in Brtish India, or deemed under the provisions of this Act to accrue, or arise, or be received in British India. 6. Mr. Jayaswal contends that the interest on what have been described as the Srinagar Raj mortgages as income, profits or gains accrued to the assessees as they fell due from 1894 and that the claim of the Crown to assess that interest in the financial year 1926 1927 is wholly inadmissible. Now in dealing with this point we are conclusively bound by the finding of the commissioner that the assessees kept their accounts on the cash basis and that those accounts do not show actual realisation of interest at any time. I think the fallacy of the argument lies in confusing a debt due but not realised with income. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Colonial case. In my view the argument advanced by Mr. Jayaswal must be overruled. 9. It was next contended that by the express agreement between the parties the interest as it accrued due was added to the capital and that the agreement in fact effected--capitalization in the sense that no tax can be levied on it. All that we know from the case as stated by the Commissioner is that there were provisions as to compound interest in the bonds executed by the proprietors of Srinagar Raj. The question then resolves into this: Does the interest cease to be an income, profit, or gain, because at the end of certain specified periods it is added to the capital so that it may bear interest? I think not; and I am supported in my view by the decisions of the English Courts to the effect that an agreement as to compound interest does not effect capitalization. The question was debated in In re: Craven's Mortgage Davies v. Craven [1907] 2 CH. 448. 10. The facts were these: By a mortgage of 1st June 1888, the mortgagor covenanted that on his death or on his son's death, whichever event should first happen, he, his executors, administrators, or assigns, would pay to the mortgagee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own as his clear duty was to follow that decision which he accordingly did. In the Court of appeal, however, there was an elaborate discussion; but the Court in the end, came to the unhesitating conclusion that an agreement as to compound interest does not effect capitalization. In my judgment the view taken by the learned Commissioner is right; and I have no hesitation whatever in endorsing it. 13. It was then contended that the interest which accrued on the bond of 1894 is no longer assessable since that bond was extinguished so far back as 18th July 1904. I have already mentioned that the proprietors of the Srinagar Raj owed the assessees ₹ 4,33,135 on the transaction of 1894. They took a further loan of ₹ 3,00,000 from the assessees on 18th July 1904 and executed a bond in favour of the assessees for ₹ 7,33,135. It is claimed that the transaction of 18th July 1904 must be looked as if the mortgage bond of 1894 was completely paid off and that a fresh advance of ₹ 7,33,135 was made on 18th July 1904. Mr. Jayaswal contends that the assessees should have been taxed on the sum of ₹ 2,33,135 which represented the accumulated interest on the bond of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity for that amount. It is now contended that the profits or gains in this case should have been computed after: making allowance of ₹ 3,20,633 as an expenditure (not being in the nature of I capital expenditure) incurred solely for the; purpose of earning such profits or gains. 17. In my opinion it is impossible to give effect to the contention. It is sufficient to say that the assessees have not incurred any expenditure at all though they have given security for a definite I sum and that if they incurred any expenditure it was not incurred solely or otherwise for the purpose of earning such profits or gains. It may be that if Kumar Ghananand Singh ultimately succeeds in his action, the assessees will incur a loss; but the Income Tax department will no doubt take such loss into consideration if and when it takes, place land set it off against the income, profits or gains under any other head under Section 24(l), Income Tax Act. The question in my view does not arise in the present proceedings; and I must accept the view which has been taken by the learned Commissioner on this point. 18. The next point arises with reference to a decree which Baneli Raj has obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian General Investment Co. Ltd. v. Easson 8 Tax Cas 265. and Californian Copper Syndicate v. Hurris 5 Tax Cas. 159. In the former of the cases, the question arose in this way. The appellant held bonds of a company unable to meet the coupons for the interest thereon for the half year from 1st July 1915. A reorganization involving the formation of a new company took place, and the appellant surrendered the bonds, with the unpaid coupons, and received in exchange five per cent bonds of the new company of equivalent face value, bearing interest from 1st July 1917, together with an issue of debentures of the new company equal in face value to 10 per cent of the face value of the surrendered bonds, such debentures being thus equivalent in face value to the coupons for the two years' interest from 1st July 1915 to 1st July 1917. It will be noticed that the interest was paid in kind, not in cash; and, in computing the profits of the appellant, a sum equal to 75 per cent of the face value of these debentures, as representing their actual value at the time of receipt, was included as income received. This method of computation was contested by the assessee; but it was held that, there be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at considerably less profit was made by the assesses. I am not prepared to attach any importance to the valuation: as made by the civil Court Commissioner; but it is sufficient for me to say that the; Income Tax Department did not err, in point of law, in taking the view that the: price pail by the assessees represented the true value of the properties and that there is no material in the record which would enable us to say that its conclusion, in point of fact, is not a correct one. 24. The next question argued is one of considerable difficulty, and it is necessary for me to proceed with care. The question is formulated as follows in the case stated by the Commissioner: If the profits or gains arising to the assessees from the buying in of mortgaged property are taxable, what is the date on which the profits are to be deemed to have arisen? Is it the date of decree, the date of sale, the date of confirmation of sale, or the date of delivery of possession? 25. The importance of the question lies in the circumstance that, in order to enable the Crown to claim Income Tax in the case, it must be shown that the profits accrued, arose or were received, by the assessees in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the Srinagar Raj. The position is not different, according to the argument advanced before us, because the assessees who are the decree-holders have themselves bought in the properties. Mr. Jayaswal relies upon Order 21 Rule 72 of the Code which provides that where a decree-holder purchases with the express permission of the Court, the purchase money and the amount due on the decree may be set off against one another and the Court executing the decree shall enter up satisfaction of the decree in whole or in part accordingly. Mr. Jayaswal contends that though the assessees have not in fact paid the purchase money into Court and have therefore not withdrawn the purchase money r the transaction must be regarded as if they paid the purchase money and with-drew that purchase money, so that it must follow that the profits accrued to them at the dates of the sales. 29. As I have said the argument is a. weighty one but at the same time if this argument is to succeed, it must-follow that the material dates are not the dates of the sales but the date, on-which the Court entered up satisfaction of the decree. Now there are no materials in the record to enable us to decide when the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order confirming the sale and thereupon the sale shall become absolute. Now let me turn to Section 65 which provides that where immovable property is sold in execution of a decree and such sale has become absolute the property shall be deemed to have vested in the purchaser from the time when the property is sold and not from the time when the sale becomes absolute. This section has a long history behind it; but it is not necessary for me to deal with it except to point out that the emphasis is on the words and such sale has become absolute. It is obvious therefore that the statutory fiction created by Section 65 comes into play only when the sale has become absolute. 32. Now if this position be accepted, then it must follow that the entering up of satisfaction of the decree by Court under Order 21, Rule 72 of the Code does not decide the question as to the point of time at which profits must be said to have accrued to the assessees. Rule 72 does not say when the Court shall enter up satisfaction of the decree if it allows the purchase money to be set off against the amount due on the decree. I apprehend that if the Court executing the decree knows its duty it will not enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but that it would not be a profit if it was held in suspense by the assessees. It would, in my judgment, be open to the assessees to hold the money in suspense and to say to the Income Tax Officer, if any attempt was made to tax it. We do not know our position with respect to this money until the sale has become absolute, for there is a statutory obligation on us to bring it into Court, should the sale be set aside under Order 21, Rule 92 of the Code. Please call when the sale has become absolute; for until then we do not propose to deal with the money as in any way belonging to us. 34. In my judgment such an answer would be conclusive to any attempt on the part of the Income-tax-Officer to tax the money before confirmation of sale. 35. But as I have said we are not concerned with the question as to what the position would have been, had the properties been purchased by a third party. The only question before us is whether, the decree-holders having purchased the properties, it can be said that the profits accrued when the Court entered up satisfaction of the decree. In my opinion the answer must be in the negative for the reason that such entering up of satisfaction of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it ought to be affirmed. 38. I need not discuss the other question, namely, whether the critical date is the date of delivery of possession which was effected on 30th September 1926. It was not seriously contended that that is the material date to be regarded by us. In my view the profit was a realizable profit at the date when the sale became absolute. 39. The last question argued before us, namely, whether the assessees are entitled to deduct from the profits expenses which are always entailed in taking delivery of possession and effecting mutation, in the collectorate registers must be answered in favour of the view taken by the Commissioner. If I am right in taking the view that the profits must be said to have accrued to the assessees at the date when the sales became absolute, then it must follow that the expenses incurred by the assessees subsequent to that date must be entirely ignored. 40. The learned Commissioner has submitted a question for our consideration under Section 66(1), Income Tax Act. The facts as stated by the learned Commissioner are. These: The total of the decrees passed in favour of the assessees including principal, interest and costs up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us by the learned Commissioner arises on the facts as stated by him. We do not know whether it is possible for the assessees to recover anything more from the Srinagar Raj. We were not told whether the assessees have taken out execution against the Srinagar Raj to realise what is still due to them. In these circumstances and as there is no material in the record to enable us to decide the point. I am unable to say that the view taken by the Assistant Commissioner is erroneous 42. As all the points raised on behalf of the assessees have failed, they must pay the costs of this reference: hearing fee ₹ 500. Kulwant Sahay, J. 43. I entirely agree with Das, J. and I have nothing further to add. Wort, J. 44. This is a case stated by the Commissioner of Income Tax on some nine questions of law. The facts have already been set out in the judgment of my learned brother and it is therefore unnecessary for me to state them. Taking the questions in the order in which they have been put to this Court by the Commissioner, the first is whether notional interest on the first bond can be said to arise in years subsequent to the execution of the second bond and can it be charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of this section, it seems to me to be a very bold proposition to assert that a person might be charged for Income Tax when he may have no income, and the learned Counsel on behalf of the assessee admits that he is driven back to the position in which he must agree that a person may be so charged although he has not received the sums which in fact go to make up his income. This question is not without authority. 47. It is true that the decision which has been quoted, and which I refer to, is not binding on this Court, but it is, if I may be allowed to say so with great respect, a very weighty decision on the very subject which is debated before us. It is a case of St. Lucia Usines and Estates Co. Ltd. v. Colonial Treasurer of St. Lucia [1924] A.C. 508. In that case a Company ceased to carry on their business and sold their assets in the year 1920. A part of the purchase price was left unpaid and was secured by, what is known locally, as vendor's privilege with a covenant to pay on the following year 30th November that sum so left together with interest at 6 per cent, from 19th November 1920. Interest was not paid and the Company obtained judgment and was subsequently pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument which I have dealt with in regard to the bond of 1894, interest not having been paid it was capitalized for four months that is, every four months interest then accrued due became capital and interest was to be paid thereon. It is said as a result of this that the payment received by the assessee from these three bonds is a capital accretion and not income within the meaning of the Act at all. 49. I am not certain that this question in this argument really arises on the case stated by the Commissioner. But it does arise, I think, in another form with regard to the bond of 1904. This point has been dealt with by English authorities. I propose to follow them. The first case is the case of Craven's Mort gage: Davies v. Craven [1907] 2 Ch. 448. The mortgagor in that case covenanted that on his death or on the death of his son, whichever event should first happen, a certain sum of money would be paid to the mortgagee, his executors, administrators or assigns, together with interest at the rate of five per cent per annum and up to the time of such death and if, the aggregate amount of such sum and interest or any part thereof should not then be paid, then and in such case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest of the last year. It was contended that the words compound interest when rests are taken, turns the interest overdue into capital. Therefore when there is a payment to the mortgagee it was a repayment of capital. It was contended! that the word capitalization as used in many of the books in this connexion was fallacious and Lord Sterndale points out that: when these sums of interest came to be paid at the end of the time when payment is made, although interest had been charged on them, and although as a matter of bookkeeping, they had from time to time been added to the capital, they did not cease to be interest. 52. No further statement need be mad with regard to the matter than what is stated in the judgment to which I have referred. In other words interest was interest whatever you may call it. If it was interest in its inception it remains interest whether you charge interest upon it or not. Now as to the question whether the fact that the consideration for the bond of 1904 was first of all the interest overdue on the bond of 1894 plus a cash payment then made and that the interest was to be charged thereon, had the result of capitalizing the interest on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Commissioner to decide that it is an expenditure which can be taken into account in a later assessment year. 54. The next question is whether a deduction can be made with regard to a sum of ₹ 1,50,000, which the Courts held to be the value of the encumbrance held by the Baneli Raj being a prior encumbrance. The judgment in this case was given on 18th September 1926, and the same answer which was given to the second question, it seems to me, applies to this. 55. The fourth question is answered by this judgment on the first and should be answered in favour of the Income Tax authorities. 56. The fifth question is whether the transaction in which the mortgagee purchased the mortgaged property is a capital transaction or whether from that transaction it can be said that the mortgagee has recovered the income to which he was entitled by reason of the obligation of the mortgagee to pay him interest In one sense of the word, of course, the transaction is a capital transaction but the question is, can the mortgagee escape from paying the Income Tax on sums of money which have been held to be interest and income therefrom and not capital by real son of the fact that he p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t thereof for the mortgaged property. The reason why I do not think it was a question of law is this: we are not considering when the assessee as purchaser became, if I might use the expression, absolutely entitled to the property or when, to repeat myself in other language, the assessee was allowed to use his decree as if it represented cash and in payments for the mortgaged property. It is uncertain whether satisfaction was entered on the date of the sale or shortly after or not or was paid on the date on which the sale was confirmed. In my judgment, however, these are irrelevant matters. It was pointed out in this connexion by the Crown that the transaction was not complete in two ways; first, it had not been confirmed and secondly as a result thereof the whole transaction might hereafter be set aside. However, I do not see any difference in this case from the case of an ordinary commercial transaction which is not represented by the passing of cash or its equivalent but which on a bookkeeping entry shows a profit. As I have said, this appears to me to be not a question of law but essentially a practical one, in other words, it was open to the Income Tax authorities to say to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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