Case: Commissioner of Income Tax, Madras Vs. V. MR. P. Firm, Muar

2. During the last World War Japan occupied Malaya. During the period of their occupancy i. e., from February, 1942 to September, 1945, they introduced their own currency in dollars. During that period both the currencies were in vogue though there was a progressive depreciation of Japanese currency in its relation to Malayan currency. On September 5, 1945, the British Government reoccupied Malaya and introduced the Malayan currency as legal tender in place of Japanese currency. The Indian nationals, who were carrying on business in Malaya during the period of Japanese occupation, were hit adversely and suffered losses. The Government of India came to their rescue and by Notification dated August 14, 1947, they propounded a scheme to give them relief by allowing them to set off the losses incurred by them during the 5 years relevant to the assessment years 1942-43 to 1946-47 against the profits of the assessment years 1942-43 and 1941-42. We shall consider the scheme in some detail at a later stage of the judgment. On December 16, 1948, the Malayan Legislature passed the Ordinance declaring that payments made in Japanese currency by debtors to their creditors in respect of debts incurred prior to and during the Japanese occupation were to be valued and scaled down in accordance with the schedule appended to the Ordinance. We shall deal with the Ordinance in some detail at the appropriate place but the broad effect of the Ordinance was that though a debt had been discharged fully by paying the amount due in Japanese currency, the debt was revived in proportion to the depreciation of Japanese currency in relation to the Malayan currency as laid down by the schedule. The creditors right to recover the debt to the said extent and the liability of the debtor to pay the same revived3. As the question raised is one of law and does not depend upon the peculiar facts of each case, we think it is enough if we state briefly the facts of two cases, one illustrating the claim of an assessee against the imposition of income-tax in respect of the income he realised by the revival of the debts and the other illustrating that of an assessee to an allowance on the ground that he paid the scaled down debts over again4. The respondent in Civil Appeals Nos. 722 to 735 of 1963 is a firm carrying on business of moneylending in Kampar in Federated Malaya State. It applied for relief under the special scheme. It incurred loss for the aforesaid four years of Rs.1,33,125. For the years 1941-42 and 1942-43 it had a profit of Rs. 53,010 and Rs. 35,753 respectively. The said profits were set off against the losses and the taxes paid by it for the years 1941-42 and 1942-43 were refunded to it. After the Ordinance was passed, in terms of that Ordinance the respondent recovered 6,437 dollors during the previous year ending April 12, 1952 corresponding to the assessment year 1952-535. Civil Appeals Nos. 518 to 520 of 1963 deal with the converse case. The appellant therein is a Hindu undivided family carrying on, inter alia, a money-lending business in its own villasam in Kaula Kubbu Bharu and Parit Buntar in the Federated Malaya States. In the course of its business it had taken moneys as deposits from various persons before April 12, 1942. During the period of occupation it discharged its liability to various creditors but after the publication of the Ordinance it had to pay again to the creditors 6,214.58 dollars in the previous year ending April 12, 1950; 28,586 dollars for the previous year ending April 12, 1951; and 11,547 dollars for the previous year ending April 12, 1952. The aforesaid amounts were claimed by the appellant as deductions respectively for the assessment years 1950-51, 1951-52 and 1952-53The Income-tax Officers held that during the period of Japanese occupation the debts were discharged and that the receipt of additional amounts under the Ordinance was in fact assessable to tax. They also held that in the case of an assessee who was a debtor no deduction was permissible on the ground that the amounts paid represented only repayment of capital and not business expenditure. On appeal the Appellate Assistant Commissioner held that the receipts by the assessee in respect of the revived debts were only realization of the original amounts lent and, therefore, could not be regarded as income. In the case of the, claim for deduction, he agreed with the view of the Income-tax Officer. On further appeal to the Tribunal, in the case of receipts it held that the assessee by claiming all its cash and Bank balance in the Malayan business as part of the losses incurred therein in effect indirectly wrote off the debts to them and, therefore, the recoveries under the Ordinance were only a subsequent realization of the written off bad debts. and, therefore, assessable to income-tax. In those appeals relating to deduction, the Tribunal confirmed the orders of the Appellate Assistant Commissioner8. The High Court answered the questions referred to it as follows :(1) Where an assessee has received repayments, he will not be liable to tax in respect of amounts he has received as or towards principal, but he will be so liable in respect of moneys which he has received as or towards interest. Where only part of the debt has been recovered, the assessee will be at liberty, subject to the law relating to appropriation of payments, to appropriate the money he has received either towards principal or interest. The assessment in respect of such receipts will proceed on this basis, that is to say : If the payment has been lawfully appropriated towards interest assessee will be liable to pay tax thereon. But if he has lawfully appropriated it towards principal, he will not be liable to pay tax on it(2) Where an assessee has made payments, he will be entitled to deduct them from his income and claim exemption from tax for only such amounts as he has paid on account of interest. He will not be entitled to deduct any payments on account of principal9. The Tribunal was directed to review the assessment in the light of the said directions. The main reason given by the High Court for giving the said answers was that the result of the Ordinance was to revive the old debts and the question of the exigibility of the said income to tax can only be decided on the provisions of the Income-tax Act and not by the terms of the scheme of the Ordinance. Hence the appeals.

Reasoning:
11. The first question had not been raised at any stage of the proceedings before the Tribunal and the High Court. Nor does it find a place in the statement of case. We cannot, therefore, allow the learned counsel to raise it for the first time before us12. Nor has the second question been raised in the High Court in the form in which it is presented before usThe doctrine of approbate and reprobate is only a species of estoppel; it applies only to the conduct of parties. As in the case of estoppel it cannot operate against the provisions of a statute. If a particular income is not taxable under the Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Equity is out of place in tax law; a particular income statute or it is not. If it is not, the Income-tax Officer has no power to impose tax on the said income14. The decision in Amarendra Narayan Roy v. Commissioner of Income-tax, West Bengal, AIR 1954 Cal 271  has no bearing on the question raised before us. There the confessional scheme tempted the assessee to disclose voluntarily all his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present case what is sought to be taxed is not a taxable income. The assessee in such a case can certainly raise the plea that his income is not taxable under the Act. We, therefore, reject this pleaUnder the said Ordinance payments in Japanese currency were to be valued and scaled down in accordance with the Schedule appended to the Ordinance. If a debtor was paid his debt in depreciated Japanese currency, he was required to pay over again a certain amount to be ascertained by the application of the provisions of the Schedule. In terms sub-section (2) says that the payment in Japanese currency shall be a valid discharge of such debt only to the extent of such revaluation. When the payments made towards debts were scaled down the debts were revived in regard to the balance of the debt. After the making of the Ordinance, the creditor could enforce his debt to the extent not discharged and the debtor had the obligation to discharge the same. On the express terms of the Ordinance it is impossible to accept the contention that the State provided for compensation for the losses incurred by the assessee. Indeed the State did not pay any compensation at all. The legal relationship of the creditor and debtor was not created by the Ordinance but it was regulated on the basis of the pre-existing relationship. We, therefore, hold, agreeing with the High Court, that under the Ordinance the discharged debts, became enforceable to the extent of the balance of the amount due after the scaling down of the payments. If so, the Income-tax Officer could only impose tax on the income recovered by the assessees thereafter towards their debts if such income was taxable under the provisions of the Act17. So too, in regard to the payment made by the assessee towards such debts they could claim relief by way of deductions only if such deductions were permissible under the Act18. The High Court held that the assesses who had received repayments would not be liable to tax in respect of amounts they had received towards principal but they would be so liable in respect of moneys which they had received towards interest. It further held that those assessees who had made payments towards the debts would be entitled to deduct from their income and claim exemption from tax only such amounts as they had paid on account of interest but they would not be entitled to deduct any payment made on account of principal. The High Court also gave a direction that in the case of open payments the respective amounts paid towards principal or interest should be ascertained in accordance with the law of appropriation of payments. Neither the learned Solicitor General, who appeared for the Revenue, nor the learned counsel, who appeared for the assessees, questioned the correctness of the said directions if the construction we placed on the Ordinance was correct. The directions given by the High Court will, therefore, stand. In our view, the High Court gave correct answer to the questions referred to it.