Case: Raja Mohan Raja Bahadur Vs. The Commissioner Of Income-Tax, U.P

that contention. The Government of the State undertook to pay the amount of the bonds in satisfaction of the liability of the debtor. The liability of the original debtor was extinguished and a fresh obligation was undertaken by the State Government in substitution of the original liability. The Government had the right to recover the amount due under the bonds from the landholder, but on that account the Government did not become the agent of the landholder for payment of his debts Even if the Government was unable to recover the money from the landholder, the liability undertaken by the Government under the bond remained unimpaired. The bond was a security for payment of the debt which completely replaced the original liability of the debtor.6. The decision in Cross (H. M. Inspector of Taxes) v. London and Provincial Trust Ltd., (1937) 21 Tax Cas 705 on which counsel for the appellant relied has, in our judgment, no application to this case. In 1932 the Brazilian Government suspended payment of interest on Government bonds for a period of three years and issued interest bearing funding bonds in exchange for the interest coupons. The London and Provincial Trust Ltd. which held among its investments Brazilian bonds received funding bonds which it sold from time to time. It was held that by issuing the funding bonds the Government of Brazil did not pay interest and the assessee Bank received no interest when it received the funding bonds. Sir Wilfrid Greene, M. R., observed :"It is not open to question that income can be in the form of moneys worth. Nor is it open to question that if the holder of a security, the contractual income from which is money, receives from the person liable to pay that money something of moneys worth (e. g., goods) instead of the money, such goods are income arising from the security * *.On the other hand where there is a mere substitution of a promise to pay at a later date for the obligation to make an interest payment presently due, the owner of security cannot be said to have received income from it. In such a case, * * * the payment has been postponed instead of being made on its due date. Nor do I see how it can make any difference if upon the true reading of the transaction the original obligation is extinguished and the promise to pay at a later date is accepted in his place."7. MacKinnon, J. J., observed at p. 721:"It is quite true that income may arise by the receipt of moneys worth as well as by the receipt of money. And it is equally true that a debtor may pay his debt by giving the promise of a third party to pay :* * * But I am satisfied that there can never be payment of his debt by a debtor by giving his own promise to pay at a future date. And I am equally satisfied that, though income arises to a creditor from a debtors paying his debt income does not arise by the debtors promising that he will pay his debt later on."But the Encumbered Estates bonds were by operation of the statute received by the appellant in satisfaction pro tanto of the liability of the debtor. They were a fresh security. The liability of the original debtor was substituted by an obligation undertaken by the State : the bonds were convertible in terms of money. Income was therefore received by the appellant when the bonds were received.8. It is necessary to state that the income-tax authorities have brought to tax the difference between the face value of the bonds and the principal which remained due in the relevant previous year. But what was taxable was only that income which represented the difference between the amount due as principal and the market value of the bonds (which were payable in twenty instalments) at the date of receipt. It is true that before the Income-tax Appellate Tribunal this question was not expressly pressed. The appellant did however contend that no part of the difference between the face value of the bonds and the principal amount due was taxable and the third question referred by the Tribunal was sufficiently comprehensive to justify consideration of the plea that a part of the difference only was taxable. Having regard to the argument presented before the Tribunal and the amplitude of the question referred, the High Court was in error in refusing to consider whether only a part of the difference between the face value of the bonds and the principal amount due to the appellant was taxable. Counsel appearing on behalf of the Department concedes that what was taxable was only the difference between the principal amount due and the market value of the bonds when received in the year of account, and he has agreed that the necessary adjustments will be made by the Department in that behalf. In that view we do not think it necessary to modify the answer recorded by the High Court on the third question.9. It is also necessary to observe that in the year 1949-50 the appellant had submitted a return disclosing the difference between the amount received by sale of the bonds and the principal amount due as income received in the previous relevant year. Whether that income was brought to tax pursuant to the return cannot be ascertained from the record. Counsel for the Department has stated that it is not the object of the Department to levy tax in respect of the same income twice. He has agreed that if tax has been levied in respect of the difference between the principal and the realized value of the bonds disclosed in the return for the assessment year 1949-50, appropriate adjustments will be made in that behalf. In view of the statements made at the Bar we do not think it necessary to give any directions in that behalf also.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]5. We are unable to agree with that contention. The Government of the State undertook to pay the amount of the bonds in satisfaction of the liability of the debtor. The liability of the original debtor was extinguished and a fresh obligation was undertaken by the State Government in substitution of the original liability. The Government had the right to recover the amount due under the bonds from the landholder, but on that account the Government did not become the agent of the landholder for payment of his debts Even if the Government was unable to recover the money from the landholder, the liability undertaken by the Government under the bond remained unimpaired. The bond was a security for payment of the debt which completely replaced the original liability of the debtor.6. The decision in Cross(H. M. Inspector of Taxes) v. London and Provincial Trust Ltd., (1937) 21 Tax Cas705 on which counsel for the appellant relied has, in our judgment, no application to this case.It is necessary to state that the income-tax authorities have brought to tax the difference between the face value of the bonds and the principal which remained due in the relevant previous year. But what was taxable was only that income which represented the difference between the amount due as principal and the market value of the bonds (which were payable in twenty instalments) at the date of receipt. It is true that before the Income-tax Appellate Tribunal this question was not expressly pressed. The appellant did however contend that no part of the difference between the face value of the bonds and the principal amount due was taxable and the third question referred by the Tribunal was sufficiently comprehensive to justify consideration of the plea that a part of the difference only was taxable. Having regard to the argument presented before the Tribunal and the amplitude of the question referred, the High Court was in error in refusing to consider whether only a part of the difference between the face value of the bonds and the principal amount due to the appellant wasthat view we do not think it necessary to modify the answer recorded by the High Court on the third question.9. It is also necessary to observe that in the year 1949-50 the appellant had submitted a return disclosing the difference between the amount received by sale of the bonds and the principal amount due as income received in the previous relevant year. Whether that income was brought to tax pursuant to the return cannot be ascertained from theview of the statements made at the Bar we do not think it necessary to give any directions in that behalf also.Under Section 4 of theAct, 1922, the total income of any previous year of a resident assessee includes all income, profits and gains from whatever sources derived which are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or accrue or arise to him without the taxable territories during such year, or having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year. The Act does not contain much guidance as to cases in which tax is to be levied on income received, and cases in which tax is to be levied on income accrued or arisen. Section 13 however requires that income, profits and gains for the purposes of Sections 10, and 12 shall be computed in accordance with the method of accounting regularly employed by the assessee. If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised income embedded in the receipt is deemed to arise or accrue. Where the accounts are maintained on cash basis receipt of money or moneys worth and not the accrual of the right to receive is the determining factor.Therefore, if commercial assets are received by a trade maintaining accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received the receipt of income is not deferred till the asset is realised in terms of cash or money. It makes no difference whether the receipt of assets is in pursuance of an agreement or that the trader is compelled by law to accept the assets from the debtor. Once title of the trader to an asset received is complete, whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset.In CalifornianCopper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes), (1905) 5 Tax Cas159 Lord Trayner in dealing with a case of assessment to income tax of a Company formed for the purpose inter alia, of acquiring and reselling mining property resold the whole of its assets to a second Company and received payment in fully paid shares of the purchasing Companyprofit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the Appellants had been pleased to do so. I cannot think that Income Tax is due or not according to the manner in which the Parson making the profit pleases to deal with it."