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

1. The appellant, a Hindu undivided family, carries on the business ofand maintains its accounts on cash basis. The appellant commenced an action in the Civil Court for a decree for recovery of Rs. 2,58,000 due by Nisar Ahmad Khan, Taluqdar of Mohana Estate. The action was carried to the Judicial Committee of the Privy Council and was ultimately decreed in favour of the appellant. Nisar Ahmad Khan then obtained under the U. P. Encumbered Estates Act 25 of 1934 an order applying the provisions of the Act to him. The special Judge, Sultanpur, passed an order for payment of Rs. 5,00,992 to the appellant. Pursuant to the order the appellant received in 1946 Rs. 1,54,692 from the debtor and for the balance the Government of the United Provinces gave to the appellant Encumbered Estates bonds of the face value of Rs. 3,46,300. The amount received in the year 1946 was appropriated by the appellant towards the principal due. The appellant split up the amount of the face value of the bonds into two sums of Rupees 2,22,097/9/11 and Rs. 1,24,202/6/1, and credited the first amount in the books of account towards the balance of principal and the second amount to an account styled "Interest Accrued" : In submitting the return of his taxable income for the assessment yearthe appellant did not disclose any receipt of income from interest due on the loans advanced to Nisar Ahmad Khan. The appellant was duly assessed to tax on the income disclosed by him. In October 1948, the appellant sold the Encumbered Estates bonds and realized a total sum of Rs. 3,21,600 and disclosed in the return for the assessment yearas interest received during the year of account the difference between the amount realized by sale of the bonds and the amount due as principal. TheOfficer issued a notice under Section 34 (1) (a) of the IndianAct and brought to tax the difference between the face value of the bonds and the amount due as principal as escaped income of the previous year relevant to the assessment yearThe order was confirmed by the Appellate Assistant Commr. and theAppellate Tribunal. The Tribunal then submitted three questions to the High Court of Judicature at Allahabad of which the following were canvassed before usWhether the receipt of Encumbered Estate Bonds during the previous yearamounted to receipt of cash during that previous year and not during the previous yearwhen the Bonds were in fact sold at less than their face value?3. Whether in the circumstances of the case, the mere receipt of the Encumbered Estate Bonds was tantamount to receipt of come assessable in the yearHigh Court answered the questions in the affirmative. Against the order passed by the High Court, with certificate the appellant has appealed to this Court.

Reasoning: 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."