UPADHYA J. - (1.) THE question of law referred for the opinion of this Court under s. 66(1) of the IT Act are : "1. Whether the U. P. Encumbered Estates Bonds received by the assessee in 1944 should be adjusted against the dues of both the debtors, Wahi -ud -din and Bashir -ud -din, notwithstanding the passing of two separate money decrees in 1940 against each of the debtors for half the debt by the special judge under the U. P. Encumbered Estates Act, 1934? 2. Whether the receipt by the assessee of the sum of Rs. 58,266 in April, 1935, was rightly treated by the Tribunal as a receipt towards the principal of the debt ? and 3. Whether the receipt of the U. P Encumbered Estates Bonds by the assessee in November, 1944, was a receipt, in part, of income, profits and gains for the purpose of the assessment for 1945 - 46 -
(2.) THE assessee is an HUF which lent a sum of Rs. 1,50,000 to two brothers, Wahi -ud -din and Bashir -ud -din, on a mortgage of their properties on the 15th Dec., 1926. The money was repayable with compound interest at 9 per cent. per annum with six monthly rests. No payment was made and the assessee brought a suit in December, 1930, and obtained a decree in January, 1931, for Rs. 2,27,699 -5 -0 which amount included costs amounting to Rs. 3,057 -5 -0. Execution proceedings were taken and a sum of Rs. 58,266 was realised on the 25th April, 1935, by sale of a portion of the mortgaged property. Before further proceedings in execution could be taken the U. P. Encumbered Estates Act, 1934, came into force and the debtors who were landlords within the meaning of that Act applied under s. 4 of that Act with the result that the special judge passed simple money decrees in 1940 under s. 14(7) of the Act against each of the two debtors for Rs. 98,625 with future interest at 31 1/4 per cent. Bashir -ud -din's half of the original debt was satisfied by the local Government issuing to the creditor in accordance with s. 30 of the Act twenty year bonds carrying interest at 3 1/4 per cent. per annum for Rs. 1,19,200. This was done in November, I944. In respect of Wahi -ud -din's debt similarly Government bonds were issued one or two years later. During the course of assessment for 1945 -46 the assessee submitted an application to the ITO along with the return of his income saying that a sum of Rs. 1,19,200 was received in respect of a debt outstanding against K. B. Wahi -ud -din and Bashir -ud -din in 'the form of Encumbered Estates Bonds during the relevant previous year but this amount had not been shown as a realisation of the part of the debt of money because the assessee considered that there had not been any actual realisation of the debt. It was also claimed that a sum of Rs. 3,182 had been spent in Court expenses and out of this amount a sum of Rs. 3,057 had been spent in obtaining the decree for Rs. 2,27,699 on the 14th Jan., 1931. It was contended that this expenditure was not considered in working out the income from interest in the asst. yr. 1931 -32. The ITO after referring to the record was satisfied that this contention relating to expenditure was sound and he allowed a deduction of the amount out of the sum received in respect of the debt mentioned above. The debt had been split into two portions and a sum of Rs. 1,529 was apportioned as expenses pertaining to Khan Bahadur Wahi -ud -din. The ITO calculated the income in respect of the debt due frorn Sri Bashir -ud - din, as the bonds in respect of the decree against him had been received during the year. The amount of these bonds was Rs. 1,19,200. Out of this sum the ITO deducted Rs. 45,862 being the principal amount outstanding against Khan Bahadur Wahi -ud -din and Rs. 1,529, Court expenses, incurred prior to 1931 -32. Deducting these sums aggregating to Rs. 47,391 he determined the assessee's net income to be Rs. 71,809 in this transaction.
(3.) THIS assessee preferred an appeal to the AAC and appears to have contended that the mere receipt of U. P. Government bonds did not amount to any realisation of either the principal amount or the interest thereon particularly when the money of the bond was payable after twenty years and the market value of the bonds was said to be 70 per cent. of their face value. The assessee relied on a Privy Council decision where the execution of a promissory note was not considered to be payment of the original debt and interest for which the promissory note had been executed. This case was distinguished by the AAC on the ground that the bonds were not bonds executed by the debtors but they were bonds issued by the Government established by law and these bonds were transferable in the market and carried interest at 3 1/2 per cent. payable on the 20th day of August and 20th day of February, every year. Relating to the market value the Asstt. CIT said that this contention was not supported by cogent evidence and the question could only arise when the bonds were actually sold in the market. There was some dispute relating to the expenditure allowed but the assessee's contention did not find favour with the AAC who upheld the assessment order.;