1967 (7) TMI 24 - HC - Income Tax

A suit filed by the assessee for the recovery of a sum of money advanced to a limited company together with interest, was compromised and the entire amount was satisfied by the execution of a simple mortgage by the company in favour of the assessee s sons - held that amount of interest recovered assessable in the hands of the assessee

Summary

Issues:
1. Assessment of a sum of Rs. 64,020 as income of the assessee in the assessment year 1956-57.

Detailed Analysis:
The judgment delivered by the High Court of Allahabad pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922. The issue at hand was whether the sum of Rs. 64,020 should be assessed as income of the assessee for the assessment year 1956-57. The assessee, a Hindu undivided family, had advanced money to a company and accrued interest on the same. A compromise decree was passed in a suit filed by the assessee for recovery of the amount, stating that the debt was satisfied by a mortgage in favor of the plaintiff's sons. The Income-tax Officer taxed the assessee on the accrued interest, which was contested in appeals leading to the reference before the High Court.

The main contention before the court was whether the debt and interest were constructively paid due to the compromise decree. The Commissioner argued that the relationship of debtor and creditor was terminated by the decree, resulting in constructive payment of interest. On the other hand, the assessee's counsel contended that the debt continued to exist, albeit in the name of the sons, and it was a case of substituted security. Various case laws were cited by both sides to support their arguments.

The court analyzed the facts and the decree, noting that the relationship between the assessee and the company had ended as per the decree's operative portion, stating that the debt had been satisfied. It highlighted that a new debt was created in favor of the sons of the assessee, not the assessee itself. The court distinguished the present case from those involving substituted security, emphasizing that the debt in this case was fully satisfied.

Additionally, the assessee argued that since they maintained accounts on a cash basis, there should have been actual physical payment for the interest to be assessed. However, the court disagreed, stating that no physical transaction was required by law. It concluded that the debt liability of the company ended, leading to the constructive payment of the interest amount. Consequently, the court answered the question in the negative, in favor of the department, assessing costs against the assessee and fixing the department's counsel fee accordingly.