9911796707
Advanced Search 
TMI Blog1958 (8) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... with a money-lending business carried on at Kampar in the Federated Malay States. As the enemy was in occupation of the said country during the period 1942 to 1945, the monetary transactions of payments and realisations recorded in the books of the business were in Japanese currency then in circulation. On re-occupation of the territory on September 5, 1945, Japanese currency ceased to be legal tender, and, in its place, Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired and obligations incurred during enemy occupation. The Debtor and Creditor (Occupation Period) Ordinance, 1948 (hereinafter referred to as the "Ordinance"), was enacted by the Legislative Council on December 16, 1948, to regulate all the monetary transactions in the Federated Malay States during enemy occupation, to which was attached a schedule containing a sliding scale of the value of occupation currency during the relevant years, to scale down the occupation currency to the Malayan currency with a view to adjust rights and obligations in the manner provided for in the aforesaid Ordinance. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excess taxes paid refunded to the assessee. 5. In the aforesaid business at Kampar in Federated Malay States, the assessee in the usual course had made recoveries from its various money- lending debtors during the period of enemy occupation. By virtue of the aforesaid Ordinance, Annexure 'A', which entitled some of these recoveries to be scaled down at rates specified in the schedule attached thereto, the debts being revived to that extent, the assessee actually collected $ 6,437 during the year ended April, 12 1952, the "previous year" for assessment year 1952-53. 6. The Income-tax Officer, included the aforesaid amount of $ 6,437 in the assessment, holding that since these loans were discharged earlier, any second receipts from such debtors were only income assessable to tax. 7. The Appellate Assistant Commissioner accepted the assessee's contention that such receipts were capital in nature and not, therefore, taxable, in the appeal before him against the aforesaid assessment, holding in paragraph 1 of his order, dated October 9, 1953, a copy whereof is annexed hereto as annexure 'C' and forms part of the case, that the aforesaid recoveries re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upation period ceased to be legal tender and in its place Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired during the enemy occupation. This was followed by the Debtor and Creditor (Occupation Period) Ordinance, 1948, hereinafter referred to as "Ordinance," enacted on 16th December, 1948, to regulate all the financial transactions in the Federated Malay States during enemy occupation and to which a schedule containing a sliding scale of the value of occupation currency to scale down the occupation currency to the Malayan currency was attached to adjust rights and obligations in the manner provided for in the aforesaid Ordinance. The aforesaid Ordinance with the aforesaid schedule is annexure 'A' and forms part of the case. It is not printed, but copies thereof are undertaken to be produced by the assessee before their Lordships at the time of hearing. 4. During the accounting years Vikruthi ending on 13th April, 1951, and Kara ending on 12th April, 1952, the assessee paid the following amounts, hereinafter referred to as "second payment" in Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as annexure 'B' and forms part of the case. 8. In the further appeals to the Tribunal which followed, it was contended that the payments in question represented losses, that arose in the usual course of, and were incidental to, the money-lending business of the assessee and alternatively losses due to fluctuations in exchange rates, and in either view, they were legitimate deductions. The Tribunal, however, by its consolidated order, dated 5th April, 1954, a copy whereof is annexed hereto as annexure 'C' and forms part of the case, held that the discharge of the liabilities during the enemy occupation period was infructuous and not a discharge at all, except to the extent of the values of the occupation payments scaled down in accordance with the aforesaid Ordinance, annexure 'A', which kept alive the balance of the debt as still undischarged; that the second payment aforesaid during the two years in question consequently represented only re-payments of such debts so revived and were, therefore, of a capital nature not deductible. It further held that as no exchange rates were involved in the matter, no loss on account of fluctuations therein needed any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of the scheme so far as here material were these: (1) No assessee was under any obligation to accept the scheme; he was free either to opt for it or not. If he desired to opt for the scheme he was required to exercise his option within one month after he was informed of the scheme. (2) The assessee was permitted to include in his expenses various items which would be inadmissible under the Indian Income-tax Act. (3) The losses suffered by the assessee during the five years relevant to the assessment years 1942-43 to 1946-47, were all to be aggregated. (4) The assessee was permitted--reversing the usual procedure fixed in the Indian Income-tax Act--to carry this aggregated loss backwards and set it off against his profits for the assessment year 1942-43. (5) If there was any loss still unabsorbed the assessee was permitted to carry this loss--again backwards--to the year 1941-42. (6) Any excess tax found to have been paid after recomputing the income of the assessee by carrying his losses backwards would be refunded to him. (7) The loss could not be carried forward. The Central Board of Revenue issued further instructions in respect of the scheme: (1) Where proper and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any debt in depreciated Japanese currency was required to pay over again a certain amount to be ascertained by the application of the schedule. Section 13 expressly excluded from the scope of the Ordinance agreements made between a creditor and a debtor after the end of the occupation period for the purposes of-- "(a) valuing any payment made during the occupation period in respect of a pre-occupation debt or on occupation debt (whether accrued due or not); or (b) providing for payment or settlement of any pre-occupation debt or occupation debt or part thereof; or (c) determining the rate for payment of any such interest as is referred to in sub-section (1) of section 10 of this Ordinance." The cases now before us fall into two categories. On the strength of the Ordinance several assessees were able to obtain or enforce further payments in respect of debts which had been discharged wholly or in part by payment in Japanese currency, and on all these sums, they have been assessed to tax. The assessees questioned the legality of the levy. What is the extent of their liability to pay tax on these amounts is the question raised by one category of cases. On the other side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, with the result that subsequent recoveries thereof amount to only bad debt recoveries normally assessable. The Appellate Assistant Commissioner's order is consequently set aside and the sum of $ 6,437 is accordingly restored to the assessment." The assessee then came to this court and at his instance this court required the Tribunal to state a case on the following question of law: "Whether on the facts and in the circumstances of the case the recovery of the sum of $ 6,437 could be deemed to be the recovery of bad debts as viewed by the Appellate Tribunal and assessable as such." It is unnecessary for us to summarise the facts in the other cases falling in this category since, as we have already explained, the facts here are typical and illustrative and the questions raised in those references notwithstanding differences in phrasing are also in substance the same. R.C. No. 43 of 1955 is a case in the second category and the facts there were as follows: The assessee was carrying on a money-lending business at Kualakubbu Bharu and Paritbuntar in Federated Malay States. The assessee borrowed various sums of money before April 12, 1942, on which date the Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment of India were advanced before us, and so the scheme itself can be dealt with very briefly. From a purely legal point of view the scheme was in the nature of and constituted an offer by the Government of India which when accepted by the assessee brought into existence an agreement between the Government and the assessee. But, the liability of the assessees in these cases--and in fact of all persons--to pay Indian income-tax is created by the provisions of the Indian Income-tax Act. The amounts on which the tax has to be paid, the rates at which the tax has to be computed and the reliefs which the assessee are entitled to, must all be determined in accordance with the provisions of Indian Income-tax Act and the relevant Finance Acts. If, under these Acts, no liability to pay tax arises in respect of any sums of money which the assessee may have received, he cannot be required in assessment proceedings to pay tax on that amount merely because he has opted for the scheme notified by the Government of India whereunder such sums are to be treated as his income. This is because of the general rule that liability to pay a tax like the income-tax must be created by statute and can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in Japanese currency. From this it would follow that repayments subsequently made in discharge of the debt that was thus resuscitated would have to be treated as partaking of the same character as the original debt. If the original debt revived by the Ordinance comprised only the principal, the repayment received would have to be regarded as receipt on account of the principal. If it comprised only interest the repayment would have to be regarded as receipt on account of interest. If the original debt comprised both principal and interest and was paid in full there would have been a receipt on account of both principal and interest. But if the repayment was only partial then there would be a receipt on account of principal or interest according as the amount had been lawfully appropriated to one head or the other. The learned Advocate-General cited two cases to show that payments made in connection with an obligation, payments which at one time were not contemplated at all, must be treated as payments on account of the original obligation and treated for tax purposes as such. The first is reported in Taxation Commissioner of Australia v. Squatting Investment Co. Ltd.* The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistry of Food for losses incurred under wartime arrangements for the purchase of wheat and sale of flour. Having, however, been informed by the Ministry in 1943 and twice later that the remuneration of millers who had begun milling during the period of control was under consideration, he made a claim in 1949 on the same basis as that laid down in the remuneration agreement and received payments in settlement." The assessee contended that the sums received in 1949 were not trading receipts but ex gratia payments. Alternatively he contended that they were received after the cessation of his trade and that if it was a debt arising at the date of the cessation its value at that date was nil. The Commissioners upheld the assessee's contention. On appeal the court held: "If on the discontinuance of a trade a payment for work already done has not been finally settled, accounts can be reopened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter." We may at this stage also refer to the decision in A.M.K.M.K (Firm) v. Periannan Chettiar**. The material facts in that case were as follows: The appellants and the respondents w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal he originally lent. Let us now complicate the position by supposing that out of the loans our money-lender has advanced a sum of ₹ 2,000 and interest thereon is found to be irrecoverable. In such a situation in order to ascertain his true profits, what we do is to deduct the irrecoverable amount of ₹ 2,000 from the interest recovered on the other loans which our money-lender has made. That is under this express statutory provision in section 10(2)(xi) of this Act. The position would then be this. Interest earned by ₹ 98,000 at 10 per cent. is ₹ 9,800. Deduct ₹ 2,000 which is irrecoverable and is lost. Profit ₹ 7,800. It will be appreciated that even in this case when computing profits, we do not take into account moneys received in repayment of the principal amount. Now, let us suppose that our money-lender uses no capital of his own but trades with borrowed money; that is to say, he has borrowed one lakh of rupees at 4 per cent. and has lent out the whole of it at 10 per cent. If, at the end of the year, he gets back all the moneys he has lent and also repays all the moneys he has borrowed, he would have made a profit of ₹ 10,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, repayments of principal received by the money-lender and repayments of principal made by the money-lender must both of them be excluded. When a debt has become a bad debt, the amount of that debt is deducted from the profits, under the specific terms of section 10(2)(xi) of this Act. The reason given by the Income-tax Officer for treating the entire amount received by the assessee in pursuance of the Ordinance as income proceeds on a misconception of the legal and factual position. He overlooked the fact that the payments were made in a depreciated currency and that though the payments discharged the debts in accordance with the law at the time the payments were made, the result of the Ordinance was to revive the old debt. By missing these facts he was inclined to take the view that the subsequent payments were in the nature of accretions to profits which, of course, they were not. The Appellate Assistant Commissioner appreciated correctly the legal implications of the Ordinance but the mistake he made was in not distinguishing receipts on account of principal from receipts on account of interest. The Tribunal took the view that the moneys received in pursuance of the Ordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are brought to one side of the account and all the moneys he spends on acquiring the goods or wares are brought into the other side of the account. On this basis it was suggested on behalf of the assessees who had been required to make further payments in pursuance of the Ordinance that whatever sums a money-lender has to pay to his creditor must be treated as a permissible deduction. Now, though several decisions speak of a money-lender's stock-in-trade as consisting of his money the expression is only descriptive and we must be careful not to push the analogy too far. A trader is concerned to sell his goods are wares and he does not expect or even want to see them back. A money-lender, on the other hand, does not sell his stock-in-trade, he only lends it. Or, to put in a different way, he only hires out his money. He not only expects but also wants to get back his wares; if he did not get them he would go bankrupt. R.C. No. 59 of 1954 is a case in the second category, that is to say, a case where the assessee had to make further payment in pursuance of the Ordinance. Mr. Vasantha Pai, who appeared for the assessee, argued: during the period the country was occupied by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mr. Subbaraya Iyer put forward this argument. One Palaniappa Chettiar owed the assessee $ 40,500 being the principal of a pre-occupation debt. On 15th August, 1944, 16th August, 1944, and 17th August, 1944, Palaniappa Chettiar repaid $ 40,000 in Japanese currency. As on 12th April, 1945, the account showed that $ 5,000 was still due. Palaniappa Chettiar died on 10th September, 1945. Lakshmanan Chettiar, the executor of his will, and the assessee, entered into an agreement on 15th February, 1950, whereby the sum payable by the estate of Palaniappa Chettiar on account of principal and interest was fixed at $ 46,052-48. Out of this, the interest was $ 5,686-88. The balance of the principal therefore should be $ 40,365-60. (In the affidavit filed in this court, however, the amount is shown as $ 40,500). Some twenty days before this agreement, that is to say, on 25th January, 1950, Lakshmanan Chettiar, the executor, paid $ 5,000 which was adjusted against the principal as subsequently ascertained on 15th February, 1950. On 1st July, 1950, there was a partition between the two coparceners of the family of the assessee and one half of the debt was taken by each of the coparceners. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the directions we have now given. In all these cases, the assessees will be entitled to their costs. Counsel's fee: ₹ 250 in each case. The cases in this category are: R.C. Nos. 33, 58, 59, 60, 64 and 65 of 1955 and R.C. Nos. 97, 98, 102, 112, 113 and 115 of 1956. B: Where an assessee has made payments, he will be entitled to deduct 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 principal. In this category of cases too, statements have been filed in certain cases. The Tribunal will have to check and verify them and revise the assessments in the light of our directions. In all these cases, the assessees will pay the costs of the Department. Counsel's fee: ₹ 250 in each case. The cases in this category are: R.C. Nos. 59 of 1954, 42, 43, 75 and 82 of 1955 and 64 of 1957. In all these cases, as a further investigation of the factual position is necessary, the Tribunal should give both the assessees and the Department a further opportunity of placing before the Tribunal such material as is available to them. References answered accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
