Shah, J. - (1.) The appellant, a Hindu undivided family, carries on the business of money-lending and maintains its accounts on cash basis. The appellant commenced an action in the Civil Court for a decree for recovery of Rs. 2,58,000 due by Nisar Ahmad Khan, Taluqdar of Mohana Estate. The action was carried to the Judicial Committee of the Privy Council and was ultimately decreed in favour of the appellant. Nisar Ahmad Khan then obtained under the U. P. Encumbered Estates Act 25 of 1934 an order applying the provisions of the Act to him. The special Judge, Sultanpur, passed an order for payment of Rs. 5,00,992 to the appellant. Pursuant to the order the appellant received in 1946 Rs. 1,54,692 from the debtor and for the balance the Government of the United Provinces gave to the appellant Encumbered Estates bonds of the face value of Rs. 3,46,300. The amount received in the year 1946 was appropriated by the appellant towards the principal due. The appellant split up the amount of the face value of the bonds into two sums of Rupees 2,22,097/9/11 and Rs. 1,24,202/6/1, and credited the first amount in the books of account towards the balance of principal and the second amount to an account styled "Interest Accrued":In submitting the return of his taxable income for the assessment year 1948-49 the appellant did not disclose any receipt of income from interest due on the loans advanced to Nisar Ahmad Khan. The appellant was duly assessed to tax on the income disclosed by him. In October 1948, the appellant sold the Encumbered Estates bonds and realized a total sum of Rs. 3,21,600 and disclosed in the return for the assessment year 1949-50 as interest received during the year of account the difference between the amount realized by sale of the bonds and the amount due as principal. The Income-tax Officer issued a notice under Section 34 (1) (a) of the Indian Income-tax Act and brought to tax the difference between the face value of the bonds and the amount due as principal as escaped income of the previous year relevant to the assessment year 1948-49. The order was confirmed by the Appellate Assistant Commr. and the Income-tax Appellate Tribunal. The Tribunal then submitted three questions to the High Court of Judicature at Allahabad of which the following were canvassed before us:
(2.) The High Court answered the questions in the affirmative. Against the order passed by the High Court, with certificate the appellant has appealed to this Court. (2) The scheme of the U. P. Encumbered Estates Act 25 of 1934 and the form of the bonds issued in satisfaction of the liability of the debtors may be briefly summarised. Under the U. P. Act a "landlord" may apply to the Collector stating the amount of his debts and requesting that the provisions of the Act be applied to him. The Collector entertains the petition and transfers it to the Special Judge. The landlord then submits a written statement giving the list of his creditors and the list of his assets. Notices are published by the Special Judge and the creditors are called upon to submit their written claims. On the claims for debts secured or unsecured duly proved, simple money decrees are passed in favour of the creditors. The Special Judge then determines the properties belonging to the landlord and prepares a list of the properties and a list of the debts adjudged to be due by the landlord ranking the same in order of priority and then sends the decrees to the Collector for execution. If the amount due by the debtor is less than the instalment value of his proprietary rights in land, the Collector is enjoined to direct the landlord to pay with land revenue dues such amount to the Provincial Government in instalments with future interest at a rate determined by the Provincial Government. If the Collector has proceeded under Section 27 he has to give to each creditor a bond or bonds bearing interest at the prescribed rate for the amount due to him payable in instalments within a period not exceeding 20 years. The form of the bond is as follows: "The Governor of the United Provinces hereby promises to pay to ....... or order at any Treasury in the United Provinces or at the General Treasury at Fort William or at Bombay on the....... day of ..... 19 on the application of the holder or earlier at the entire option of the Government of the United Provinces, the sum of.......and in the meantime to pay at the said Treasury interest on such sum at the rate of three and one quarter per cent per annum, such interest to be paid half yearly on the 20th day of February and the 20 th day of August in every year, commencing from the 20th day of ..... 19 ..... on which date the whole interest due from the date hereof shall be paid." On February 26, 1948 the appellant received Encumbered Estates Bonds of the face value of Rs. 3,46,300. The Appellant appropriated bonds of the face value of Rs. 2,22,097/9/11 towards the principal and costs due, and appropriated the remaining bonds of the value of Rs. 1,24, 202/6/1 towards "interest accrued due" in the debtor's account. The departmental authorities and the Tribunal held that the receipt by the appellant of bonds of the face value exceeding the principal amount of the debt due constituted receipts of interest. The High Court agreed with that view.
(3.) Counsel for the appellant submitted that the accounts maintained by the appellants being on cash basis, until the appellant realised the value of the bonds no interest was received by the appellant. Counsel asserted that when a trader maintains account on cash basis receipts of money alone may be taken into account in determining the taxable income. In the alternative Counsel urged that the bond issued by the Government under the U. P. Encumbered Estates Act merely amounted to promise by an agent of the debtor to pay the amount of the bond in instalments and by receiving the bonds incorporating such a promise no money or money's worth is received by the creditor.;