B.L.GUPTA J. - (1.) THIS is a reference under section 66 of the Income-tax Act. Three questions have been referred to this court for opinion : (1) Whether, on the facts and in the circumstances of the case, proceedings undertaken by the income-tax authorities under section 34 of the Income-tax Act are valid in law ? (2) Whether the receipt of Encumbered Estate Bonds during the previous year 1947-48 amounted to receipt of cash during that previous year and not during the previous year 1948-49, when the bonds were in fact sold at less than their face value ? (3) Whether, in the circumstances of the case, the mere receipt of the Encumbered Estate Bonds was tantamount to receipt of income assessable in the year 1948-49 ?
(2.) THE assessment year in question is 1948-49 relevant to the accounting period the financial year ending March 31, 1948. THE facts giving rise to the reference are that the assessee which is a Hindu undivided family carries on a money-lending business. In the course of that business it advanced a sum of Rs. 2,58,000 during the years 1919-1926 to Sri Nizar Ahmed Khan, a Taluqdar. In due course a suit had to be filed for realisation of the debt and it was fought up to the Privy Council. Ultimately a decree was passed in favour of the assessee. THEreafter the debtor made an application under the U. P. Encumbered Estates Act and in due course a decree was passed by the special judge under section 14 of that Act and finally a sum of Rs. 5,00,992 was received by the assessee in full satisfaction. The receipt of the amount was partly in cash, viz., Rs. 1,54,692, and partly in the form of Encumbered Estate Bonds of the face value of Rs. 3,46,300. The cash was appropriated towards the principal amount in the year 1946 and we are no longer concerned with it. The cash was not sufficient to wipe out the principal and, therefore, the amount of the bonds included part of the principal, the entire interest and costs of the litigation. The bonds received by the assessee on February 26, 1948 which date fell within the accounting period relevant to the assessment year in question. The assessee credited the amount of the bonds to the account of the debtor and debited it to the encumbered estate bonds account and squared up the account on March 31, 1948, which was the last date of the accounting period. The assessees system of accounting with regard to interest income was the cash system. It maintained two interest accounts, one called the interest accrued account and the other the interest realised account. The assessee split up the amount of the bonds into two amounts, one of Rs. 2,22,097-9-11 and the other of Rs. 1,24,202-6-1. It debited the amount of the bonds to the debtors account by the last of the above amount and credited the same to the interest accrued account and not to the interest realised account. In the return which it subsequently filed for the assessment year in question it did not include the sum of Rs. 1,24,202-6-1 as its interest income of the year. In the course of the examination of its books for assessment purposes, the Income-tax Officer signed the particular ledger account in which the receipt of the bonds was entered and also put tick marks against the entry of Rs. 1,24,202-6-1 in the interest accrued account. He completed the assessment without including this amount as the assessees interest income of the year. With regard to the assessees interest accrued account the Income-tax Officer made a note to the following effect a scrutiny of the interest accrued account is called for in greater detail. This account is allied to the account of Nizar Ahmad Khan, Taluqdar of Mohana Estate, District Sultanpur. It is a matter of pity that during the last year and half, there have been five deaths in the assessees family and whenever an attempt was made to fix a date for further scrutiny of accounts, it was learnt that members of the assessee family together with the staff were pre-occupied otherwise.
(3.) THE assessment was completed by order dated January 23, 1951. During the next accounting period the assessee sold the bonds for a sum of Rs. 3,21,600 and out of the sale proceeds showed the amount which it considered to be its interest income in its return of income for the assessment year 1949-50. In the course of proceedings for this year the Income-tax Officer who was different from the officer who had completed the assessment for the date when by sale they were converted into cash in the succeeding accounting period. Accordingly, he took the view that interest income in the loan account of Sri Nizar Ahmed Khan had escaped assessment in the assessment year in question. THEreupon, after taking the sanction of the Commissioner of Income-tax, he issued a notice dated January 29, 1953, to the assessee under section 34 . In the course of proceedings initiated by this notice he made a careful and detailed scrutiny of the interest accrued account of the assessee which his predecessor could not do on account of deaths in the assessees family but about which he had left a note on the file. The result of the scrutiny was entirely unfavorable to the assessee and during the course of the scrutiny it was admitted by the assessee that the amount of Rs. 1,24,202-6-1 shown by it in the interest accrued account was not correct and the amount included in the decree on account of interest was Rs. 1,59,687-13-8. The on the admission of the assessee himself the entry in regard to interest amounted to a suppression of interest himself the entry in regard to interest amounted to a suppression of interest income to the extent of over Rs. 35,000. The Income-tax Officer did not, however, accept even the increased interest income as correct and in the course of further investigation observed :;