1929 (8) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Assessment of interest on mortgage bonds and its accrual.
2. Capitalization of interest and its tax implications.
3. Deductibility of security deposit as expenditure.
4. Deductibility of a decree amount as expenditure.
5. Taxability of profits from the purchase of mortgaged property.
6. Date of accrual of profits from the purchase of mortgaged property.
7. Deductibility of expenses incurred in taking delivery of possession.
8. Method of computing the value of property for tax purposes.
9. Appropriation of sale proceeds towards interest and principal.

Issue-wise Detailed Analysis:

1. Assessment of Interest on Mortgage Bonds and Its Accrual:
The assessees argued that interest on the Srinagar Raj mortgages accrued as it fell due from 1894, and the Crown's claim to assess this interest in the financial year 1926-1927 was inadmissible. The Court, however, held that since the assessees kept their accounts on a cash basis and there was no actual realization of interest, the interest did not constitute income until realized. The Court cited the authoritative decision in St. Lucia Usines and Estates Co. Ltd. v. Colonial Treasurer of St. Lucia, emphasizing that income must involve a "coming in" to satisfy the term.

2. Capitalization of Interest and Its Tax Implications:
The assessees contended that the interest, as it accrued, was added to the capital, thus effecting capitalization and making it non-taxable. The Court rejected this argument, stating that an agreement for compound interest does not effect capitalization, as supported by decisions in In re: Craven's Mortgage Davies v. Craven and In re: Morris-Mayhew v. Halton. The interest remains income, profit, or gain despite being added to the capital for bearing interest.

3. Deductibility of Security Deposit as Expenditure:
The assessees argued that the security deposit for safeguarding a claimant's one-eighth share should be deductible as expenditure. The Court held that since no actual expenditure was incurred but only security was provided, it could not be considered deductible. Any potential loss would be accounted for in future assessments under Section 24(1) of the Income Tax Act.

4. Deductibility of a Decree Amount as Expenditure:
The assessees claimed a deduction for the decree amount obtained by Baneli Raj against them. The Court ruled that since the expenditure had not yet been incurred and the decree was pronounced in the subsequent year, it could not be deducted from the income of the current assessment year. It may be considered in the subsequent year when the amount is actually paid.

5. Taxability of Profits from the Purchase of Mortgaged Property:
The assessees contended that the transaction was capital in nature and outside the provisions of the Income Tax Act. The Court disagreed, stating that the properties purchased represented the money advanced along with accumulated profits, thus constituting assessable income. The Court referenced decisions in Scottish and Canadian General Investment Co. Ltd. v. Easson and Californian Copper Syndicate v. Harris to support its conclusion.

6. Date of Accrual of Profits from the Purchase of Mortgaged Property:
The Court considered whether the profits accrued on the date of decree, date of sale, date of confirmation of sale, or date of delivery of possession. It concluded that profits were realizable when the sale became absolute, not at the date of the sale or decree. The statutory fiction created by Section 65 of the Code of Civil Procedure comes into play only when the sale is confirmed and becomes absolute.

7. Deductibility of Expenses Incurred in Taking Delivery of Possession:
The assessees sought to deduct expenses incurred in taking delivery of possession and effecting mutation in the collectorate registers. The Court ruled that such expenses incurred after the accrual of profits must be ignored and are not deductible.

8. Method of Computing the Value of Property for Tax Purposes:
The assessees argued that the real value of the properties should be based on the civil Court Commissioner's valuation rather than the purchase price. The Court held that the Income Tax Department did not err in taking the purchase price as the true value, as there was no material to suggest otherwise.

9. Appropriation of Sale Proceeds Towards Interest and Principal:
The Commissioner submitted a question on whether the sale proceeds should first be appropriated to interest or principal. The Court concluded that the profit accrued to the assessees is the sum realized less the capital sums advanced. The Assistant Commissioner's view that the assessees could declare the appropriation was upheld, and the Court found no material to decide otherwise.

Conclusion:
All points raised by the assessees were overruled, and the Court affirmed the Commissioner's findings, emphasizing the principles of income realization, the non-capitalization of interest, and the proper method of computing assessable income. The assessees were ordered to pay the costs of the reference.