1962 (7) TMI 60 - HC - Income Tax

Summary

Issues Involved:
1. Validity of proceedings under section 34 of the Income-tax Act.
2. Whether the receipt of Encumbered Estate Bonds during the previous year 1947-48 amounted to receipt of cash during that previous year.
3. Whether the receipt of Encumbered Estate Bonds was tantamount to receipt of income assessable in the year 1948-49.

Detailed Analysis:

1. Validity of proceedings under section 34 of the Income-tax Act:

The court evaluated whether the proceedings initiated under section 34 were valid. The assessee had not shown the interest income in the interest receipt account nor included it in the return for the assessment year in question. The Income-tax Officer (ITO) who made the original assessment was aware that bonds had been received in settlement of the debt and knew of the entry of Rs. 1,24,202-6-1 in the interest "accrued" account. However, the ITO did not scrutinize or investigate the correctness of this entry, which was misleading in a cash basis of accounting. During subsequent investigations, it was admitted that the interest income was at least Rs. 1,59,687-13-6, indicating that the original entry was incorrect.

The Tribunal found that there was an omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. This justified the reopening of the assessment under section 34(1)(a). The court concluded that the order under section 34 made by the successor ITO was valid, answering the first question in the affirmative and against the assessee.

2. Whether the receipt of Encumbered Estate Bonds during the previous year 1947-48 amounted to receipt of cash during that previous year:

The court held that the receipt of Encumbered Estate Bonds on February 26, 1948, amounted to the receipt of cash in the previous year 1947-48. The bonds were transferable and represented money's worth, accepted by the assessee in settlement of the debt. The loan account was squared up in the assessee's account books, indicating that the interest included in the bonds was properly the receipt of interest income on the date the bonds were received. Thus, the second question was answered in the affirmative and against the assessee.

3. Whether the receipt of Encumbered Estate Bonds was tantamount to receipt of income assessable in the year 1948-49:

The court referred to the decision in Commissioner of Income-tax v. Maheshwari Saran Singh [1951] 19 ITR 83, which established that income could be received in kind and if what is received is transferable and convertible into cash, it is tantamount to receipt of cash. The court clarified that in a cash system of accounting, actual receipt or disbursement is required, which can be in kind or by adjustment or settlement of accounts. The bonds received were considered as actual receipt of income, and thus, the interest included in the bonds was assessable in the year 1948-49. The third question was answered in the affirmative and against the assessee.

Conclusion:

All three questions referred to the court were answered in the affirmative and against the assessee. The reference was returned to the Income-tax Appellate Tribunal with this answer, and the department was awarded costs fixed at Rs. 200.