Malik, C.J. - (1.) The question referred to us under Section 66 (1), Income-tax Act, is as follows: "Whether in the circumstances of the case, the cash amount of Rs. 13000 received as part of the liquidation of the mortgage debt which included a sum of Rs. 34994 on account of interest could in the absence of any circumstances prior to the filling of the return indicating to which item of the mortgage dues principal, interest or costs, the amount was to be applied could be presumed in law to be the receipt of interest and assess-ed as such."
(2.) The facts are that a sum of Rs. 49320 had been advanced by the assessee on foot of a mortgage bond. The debtor applied under the U. P. Encumbered Estates Act and a decree under Section 14 of the said Act was passed for Rs. 85828 which included the principal sum of Rs. 49320 lent and interest thereon Rs. 34994 and costs Rs. 1582. That decree was sent to the Collector for liquidation of the debt. The Collector paid a sum of as 13000 only in cash and for the balance bonds were executed in favour of the assessee. The bonds were for Rs. 72900, the assessee having paid Rs. 4 in cash to round up the figure.
(3.) Learned counsel appearing on behalf of the assessee has urged that the assessee has a right under Section 59, Contract Act, to appropriate the payment either towards interest or towards the principal and from the fact that in her income-tax return she had divided this amount of Rs. 13,000 in the proportion of 1/3rd and 2/3rd between interest and capital, it must be deemed that she had appropriated only 1/3rd of this amount of Rs. 13000 towards the payment of interest. Learned counsel has farther urged that if neither the creditor nor the debtor had made any appropriation, it was open to the Court under Section 61, Contract Act, to appropriate it in order of time and the same principle had been applied to a debt and interest due on it by their Lordships of the Judicial Committee in Rama Shah v. Lal Chand, A. I. R. (27) 1940 P. C. 63, the appropriation as between debt and interest duo on it was, there, fore, admissible.;