DEO, J. - (1.)THIS is a reference under sub -s. (1) of s. 66 of the Indian IT Act, made by the Tribunal, Bombay, on the application of the assessee Diwan Bahadur Seth Gopaldas Bulakidas Mohta of Hinganghat. In order to have a clear idea of the facts of the case we allowed the assessee to produce for our perusal the original partition dt. the 26th May, 1930, which, we are told, was produced in the income -tax proceedings. In the partition Seth Mathuradas got assets of larger value than Seth Gopaldas. The result of the partition and accounts was that Seth Mathuradas had to pay Rs. 5,13,712 -3 -0 to Seth Gopaldas and the latter had to pay Rs. 1,21,376 to the former. It was agreed that Rs. 13,712 -3 -0 should be set off and Seth Gopaldas should pay Rs. 1,07,663 -13 -0 in cash while the sum of Rs. 5 lakhs should be paid to the assessee by Seth Mathuradas in ten equal annual instalments with interest thereon at Rs. 0 -7 -9 per cent. per mensem. If the interest was not paid punctually as provided in the deed, Seth Mathuradas was liable to pay compound interest and the entire standing -out amount was to become payable in default of three instalments. Seth Mathuradas was given the option to pay the instalments or the whole amount before due date and interest was to be charged on katmiti basis, i.e., on daily balances.
(2.)SETH Mathuradas paid the first two instalments on due dates but did not make any further payment evidently on account of some dispute between the parties. The assessee instituted Civil Suit No. 8 of 1933 for partition of certain joint family property alleged to have been concealed by Seth Mathuradas. Evidently, as a counterblast the minor sons of Seth Mathuradas instituted Civil Suit No. 15 -A of 1934 for reopening the partition. While these suits were pending the assessee instituted Civil Suit No. 1 -B of 1939 for the recovery of the balance of Rs. 4 lakhs and interest thereon payable under the partition deed from 1st July, 1932, the whole amount having become payable on the 13th June, 1935, on default of three instalments. The total claim made was Rs. 5,73,137 -13 -0. On 18th July, 1940, there was a compromise of all these three suits according to which the first two suits were dismissed and in the last suit Seth Mathuradas paid Rs. 4 lakhs in cash. As regards interest the dispute was referred to arbitration with full authority to the arbitrator to decide the question of interest in any way he liked. The arbitrator gave the award in these terms : - -
"Taking into consideration the arguments of both the parties, their status, mutual agreement and dealings, business outlook, the existing rate of interest between leading businessmen and the fact that no businessman would allow his funds to remain idle but would take an advantage of the same, I give my award on these two questions that the plaintiff should be allowed interest on Rs. 4 lakhs and the rate of this interest would be four annas per cent. per month on daily balance system (katmiti)."
Interest was thus allowed from 1st July, 1932, to the 22nd Dec., 1941, the date fixed by him for payment of the interest thus calculated. It was further directed that if the full amount of interest was not paid on this date interest would continue to run at the same rate till the amount was paid in full. This amount of Rs. 1,12,084 was received by the assessee on the 22nd Dec., 1941, and the suit was dismissed on the 23rd Dec., 1941, as the claim was thus fully satisfied. Litigation expenses were deducted from this amount and the balance of Rs. 1,02,063 was assessed to tax in the asst. yr. 1943 -44 as the previous year was 21st Oct., 1941, to 18th Nov., 1942. The assessee having unsuccessfully objected to this assessment before the Asstt. CIT and the Tribunal, has sought this reference and we are asked to express our opinion on the question "whether in the circumstances of the case the sum of Rs. 1,02,063 is income liable to tax under the Indian IT Act."
(3.)THE learned counsel for the applicant urged that the transaction embodied in the partition deed dt. the 26th May, 1930, was one single and indivisible transaction and that whatever was payable there -under then or subsequently to a co - sharer would be capital. He contended that the IT authorities erroneously assumed that there were two agreements : one of partition and the other of an advance of loan, and wrongly held that the sum in dispute was income.
At the time of the partition the parties determined the values of the movable and immovable properties and running businesses allotted to them. The properties were income yielding properties. As stated above, as a result of accounting and set -off Seth Mathuradas would have been required to pay a net amount of Rs. 3,92,336 -3 -0 to equalise the shares in partition but they arrived at an arrangement under which the assessee agreed to pay Rs. 1,07,663 -13 -0 immediately to Seth Mathuradas and the latter agreed to pay to the former Rs. 5 lakhs on terms and conditions above stated. If the assessee had received this sum of Rs. 5 lakhs he (to use the words of the arbitrator) "would not have allowed it to remain idle but would have taken advantage of the same by investing it in his business, money -lending or otherwise, and would have earned income, gain or profit therefrom." The reason for entering into this arrangement for payment, as given in Civil Suit No. 1 -B of 1939, is that it was not convenient for Seth Mathuradas to pay this sum in cash at once. He could have borrowed this sum from a bank or other source and paid it to the assessee if the latter had insisted. Instead of doing so he persuaded the assessee to allow him to pay by instalments in return for interest agreed for this accommodation. Without this agreement to pay return for the use of money the assessee would not have allowed his brother the concession to pay the amount by instalments. The question would therefore arise whether this in reality is interest. There can be no doubt that there were two agreements between the parties though embodied in the same document : one by which division of assets was effected, and the other for the use of the amount belonging to one by the other in consideration of payment of interest and its return in the manner provided in the partition deed. We are of opinion that the IT authorities have taken a correct view of the partition deed.