1967 (4) TMI 7 - SC - Income Tax

HUF - business of money-lending, and maintains its accounts on cash basis - Whether the receipt of Encumbered Estate Bonds during the previous year 1947-48 amounted to receipt of cash during that previous year and not during the previous year 1948-49 when the bonds were in fact sold at less than their face value - Held, yes - assessee s appeal dismissed

Summary

Issues Involved:
1. Whether the receipt of Encumbered Estate Bonds during the previous year 1947-48 amounted to receipt of cash during that previous year and not during the previous year 1948-49 when the bonds were in fact sold at less than their face value.
2. Whether, in the circumstances of the case, the mere receipt of the Encumbered Estate Bonds was tantamount to receipt of income assessable in the year 1948-49.

Issue-wise Detailed Analysis:

1. Receipt of Encumbered Estate Bonds as Cash:
The appellant, a Hindu undivided family engaged in money-lending, received Encumbered Estate Bonds of face value Rs. 3,46,300 in 1946 as part of a settlement. The appellant appropriated Rs. 2,22,097-9-11 towards the principal and Rs. 1,24,202-6-1 towards accrued interest. The appellant did not disclose any receipt of income from interest in the return for the assessment year 1948-49. However, the Income-tax Officer brought to tax the difference between the face value of the bonds and the principal amount as escaped income of the previous year relevant to the assessment year 1948-49. The High Court affirmed this view.

The Supreme Court held that under section 4 of the Income-tax Act, 1922, the total income includes all income received or deemed to be received. For traders maintaining accounts on a cash basis, receipt of money or money's worth is the determining factor. The Court concluded that the receipt of Encumbered Estate Bonds, which were commercial assets, constituted receipt of income embedded in the value of the assets, regardless of whether the assets were realized in terms of cash later.

2. Receipt of Encumbered Estate Bonds as Income:
The appellant argued that since the accounts were on a cash basis, no interest was received until the bonds were realized. The appellant also contended that receiving bonds was merely a promise by the debtor's agent (the Government) to pay in instalments, not an actual receipt of money or money's worth.

The Supreme Court disagreed, stating that the bonds issued by the Government under the U.P. Encumbered Estates Act were a fresh security replacing the original liability of the debtor. The bonds were convertible into money, and thus, income was received when the bonds were received. The Court cited Californian Copper Syndicate v. Harris to support the view that income can be realized in forms other than cash if the assets received are convertible into cash.

Adjustment of Taxable Income:
The Court noted that the income-tax authorities taxed the difference between the face value of the bonds and the principal amount due. However, only the difference between the principal amount due and the market value of the bonds at the date of receipt should be taxable. The department agreed to make necessary adjustments to ensure that only the correct taxable amount is considered.

Double Taxation Concern:
The Court acknowledged that the appellant disclosed the difference between the sale amount of the bonds and the principal due as income in the return for the assessment year 1949-50. The department assured that no double taxation would occur, and appropriate adjustments would be made if the same income was taxed twice.

Conclusion:
The appeal was dismissed with no order as to costs. The Court affirmed the High Court's decision that the receipt of Encumbered Estate Bonds constituted receipt of income in the year 1948-49, but emphasized the need to tax only the correct amount based on the market value of the bonds at the time of receipt.