B.L.GUPTA, J. - (1.) THIS is a reference under section 66(1) of the Income-tax Act. Two questions have been referred for the opinion of the court. They are : (1) Whether, on the facts and circumstances of the case, the receipt by the assessee of the transferable U. P. Encumbered Estate Bonds amounted to receipt of interest included in the full value of the bonds on the date when the bonds were received ? (2) Whether, on the facts and in the circumstances of the case, the proceedings under section 34(1)(a) and the resultant assessment were valid in law ?
(2.) THE case relates to the assessment year 1946-47, relevant to the previous year, which was the financial year 1945-46. THE facts in brief are : the assessee is a Hindu undivided family. It carries on money-lending business. Its method of accounting is the cash basis. In the course of its money-lending business it lent a sum of Rs. 51,315 to one Swaleh Khan. THE debtor was landlord within the meaning of the U. P. Encumbered Estates Act. A decree against the landlord-debtor was passed in favour of the assessee on September 29, 1943, for a sum of Rs. 1,09,500 which included both principal and the accumulated interest. In due course, in pursuance of the decree the Collector gave an award on March 29, 1945, offering to the assessee transferable U. P. government Encumbered Estates bonds of the face value of the decretal amount, in lieu of cash in full settlement of the assessees claim against the landlord-debtor. THEse bonds were accepted by the assessee on March 16, 1946, that is, within the accounting period relevant to the assessment year in question. Out of these bonds, on March 26, 1946, that is, still within the accounting period, the assessee sold bonds worth Rs. 80,000 for a sum of Rs. 79,228. THE assessee credited the sale proceeds in his account books in the account of Mohammad Swaleh as follows : JUDGEMENT_502_ITR49_1963Html1.htm THE account of Mohammad Swaleh in the assessees ledger was squared up and no balance on account of interest was shown therein as still outstanding. THE remaining bonds of the face value of Rs. 29,500 were thus held by the assessee outside the ledger account of the landlord-debtor. THE amount of these bonds was neither credited to the suspense account nor to the capital account of the assessee. THE amount represented by the value of these remaining bonds did not find a place in the balance-sheet drawn up by the assessee at the end of the accounting period. What the assessee, however, did was that in his cash book, where he made an entry regarding the sale proceeds of the bonds of the face value of Rs. 80,000, he added a note below the entry to the effect that the bonds sold were out of the bonds of the value of Rs. 1,09,500 received by it on account of the settlement of the debt. THEse bonds of the value of Rs. 29,500 were sold by the assessee on April 17, 1946, for Rs. 29,365 and the sale proceeds were credited in the accounts of the succeeding accounting period. In the original assessment made by the Income-tax Officer on July 25, 1950, he included only a sum of Rs. 27,913 which stood credited in the interest account of Mohammad Swaleh in the assessees books but omitted to include therein the value of the remaining bonds which admittedly was also interest as the Income-tax Officer did not know that the total value of the bonds received by the assessee was Rs. 1,09,500. THE want of knowledge of the Income-tax Officer was due to the fact that no entry regarding the receipt of the full amount of the bonds was made by the assessee in his investment account. It is also not the case of the assessee that the attention of the Income-tax Officer was drawn to the note made by the assessee in its cash book. Subsequently, the Income-tax Officer came to know that the assessee had concealed the receipt of further interest in the sum of Rs. 29,365 in the assessment year in question. THEreupon with the sanction of the Commissioner of Income-tax he issued a notice to the assessee on January 9, 1953, under section 34 and brought that additional amount of interest to the charge of tax by order dated January 9, 1954, under section 34(1)(a). THE order was upheld in appeal by the Appellate Assistant Commissioner and in further appeal by the Income-tax Appellate Tribunal. THEreafter, the assessee asked for the statement of a case to this court and the case has accordingly been stated as mentioned above. The first argument which learned counsel has addressed to us on this reference is that there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment and as such action under section 34(1)(a) was not justified. It is clear that in view of the facts and the circumstances of this case there is no force at all in this submission. The assessee omitted to make an entry with regard to the total value of the bonds received by him in full settlement of the debt. As seen above he omitted the mention of the total value of the bonds in its investment account or in the ledger account of this particular debtor or in its interest account. Mention of the difference between Rs. 1,09,500, the full value of the bonds, and Rs. 80,000, the value of the bonds which were sold, was also omitted from the suspense account, the capital account and the balance-sheet. All these various accounts were the appropriate and proper places where mention should have been made of the total value of the bonds received by the assessee. This was not done. The loan account of Mohd. Swaleh was squared up by entry of the sale proceeds of bonds of the value of Rs. 80,000. This would lead one to believe that bonds of the value of Rs. 80,000 were all that were received in settlement of the debt. No one, however careful, would look beyond these accounts to discover whether any other amount may also have been received in satisfaction of the liability. There was nothing at all in these entries to put the Income-tax Officer upon enquiry or to lead him to make further investigation. On the other hand the nature of the entries particularly the squaring up of the loan account of Mohd. Swaleh was such as to lull the Income-tax Officer into a state of complete belief. Merely because in the cash book where the entry of the sale proceeds of bonds of the face value of Rs. 80,000 was made, a note was recorded that the bonds sold came out of the bonds of the total value of Rs. 1,09,500 cannot be held to fasten the Income-tax Officer with the knowledge of that note. It is clear that the place where the note was made was not at all a proper or appropriate place for recording the information in the note. The Tribunal observed that there is not an iota of evidence that the attention of the Income-tax Officer was drawn to this note. Merely because the account books were produced before the Income-tax Officer and entries in appropriate accounts were scrutinised by him, knowledge of the contents of entries or information which lay embedded in the account books could not be attributed to the Income-tax Officer. There is plenty of authority for the proposition that merely because account books are produced before the Income-tax Officer, it does not necessarily follow that the Income-tax Officer has knowledge of particular entries which may lie embedded in those account books. This position has been made clear by the addition of an explanation to sub-section (1) of section 34 by amendment of this section in 1948. The Explanation is as follows : Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section. Prior, however, to the addition of this Explanation the position had always been understood to be the same as it is under the Explanation. In other words the addition of the Explanation has not made any change in the law. In view of what has been stated above it is quite clear that there was omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for its assessment for the year in question. It follows that the action taken under section 34(1) was perfectly valid and the second question referred to this court must, therefore, be answered in the affirmative and against the assessee. The other question which now remains to be answered in this reference is whether the receipt of the bonds amounted to receipt of interest on the date when the bonds were received. This very question came up for consideration before this court in Commissioner of Income-tax v. Maheshwari Saran Singh, where it was held that the bonds being transferable, their receipt amounted to receipt of moneys worth. Accordingly if in the value of the bonds any amount was included on account of interest, such amount was received in moneys worth on the date of the receipt of the bonds. It was accordingly held that if the date of the receipt of the bonds fell within a particular accounting period, the value of the bonds representing interest was assessable in the assessment year relevant to the accounting period. No attempt was made by learned counsel for the assessee to argue that the case was in any way distinguishable or that there was any ground for reconsideration of the view expressed by this court in that case. Indeed it was not possible for learned counsel to address any such argument in view of the facts and the findings mentioned by the Income-tax appellate Tribunal in the statement of the case. It has been mentioned there that the bonds are transferable. The further facts mentioned by the Tribunal are that the Collector offered to the assessee in settlement of the landlord-debtors liability of the bonds in question. The offer" was accepted by the assessee in full settlement of its claim against the debtor. Thus the bonds were not forced upon the assessee but were accepted by him willingly. The amount which was taxed under section 34(1)(a) was only Rs. 29,365 and not the full face value of the bonds, viz., 29,500. The bonds worth Rs. 80,000 were sold within ten days of their receipt. The remaining bonds could also have been sold at the same time if the assessee had so chosen. The reason why the assessee sold the remaining bonds in the next month was as observed by the Tribunal to split up the interest income to make it fall in two assessment years and not to have it assessed in the same year as it would have been, if all the bonds had been sold on March 26, 1946, and not some on that date and the remaining on April 17, 1946. The rule is firmly fixed that where in settlement of a claim a creditor accepts moneys worth or in other words payment in kind, it is just the same as if he has received cash payment and where he chooses to retain the thing which he has received it merely amounts to reinvestment of money in the thing acquired. What was been actually argued in respect of the first question is that the system of accounting of the assessee was the cash basis. The bonds received by the assessee were not cash. Bonds of the face value of Rs. 29,500 were sold only on April 17, 1946, that is to say, in the succeeding accounting period relevant to the next assessment year, namely, 1947-48, and not the assessment year in question. Cash was received only by sale. Therefore, the amount of Rs. 29,365 was properly assessable only in the assessment year 1947-48 and not in the assessment year in question under section 34. The computation of income of an assessee has to be made on the basis of the system of accounting regularly employed by him. In this case the system of accounting being the cash basis, and cash having been received only in the succeeding year, the assessment of the amount in this year was illegal. This argument is based upon a misunderstanding of what is meant by the cash basis system of accounting as distinguished from the mercantile system of accounting. All that the cash basis means is that it is only actual receipts and disbursements that are brought into account. The distinction between this basis and mercantile basis is that in accounts on the latter basis actual receipts and disbursements are not necessary. It is sufficient that a right in respect of a certain amount may have been irrevocably acquired and similarly a liability irrevocably incurred. A cash basis of accounting is not confined to receipt of cash alone or to receipt of current coin or currency notes alone. It will still be a cash basis of accounting where payment is received in kind or in moneys worth : see Keshav Mills Ltd. v. Commissioner of Income-tax. Payment in kind or in moneys worth being convertible into cash or current coin at the will of the holder is treated to be equivalent to receipt of cash. It follows there is no force in the only argument addressed to us by learned counsel for the assessee and the first question also must therefore be answered in the affirmative and against the assessee.
(3.) THE reference shall be returned to the Income-tax Appellate Tribunal, Allahabad, with this answer under the seal of the court and the signature of the Registrar. The income-tax department shall be entitled to its costs which we assess at Rs. 200. M. C. DESAI C.J. - The present case is certainly covered by the case of Maheshwari Saran Singh and must be answered in the affirmative in accordance with the decision given therein. But I have serious doubts about the correctness of the decision. The bonds are transferable but they are not payable immediately. They are payable after twenty years and, so long as that period does not expire, they cannot be cashed, though they can be sold in a market. They are not accepted voluntarily by the creditors in lieu of cash but are forced upon them under the provisions of the Encumbered Estates Act. They have no choice in the matter; they cannot get cash in lieu of them. Income, within the meaning of the Income-tax Act, need not be in cash and can be in kind also. If an assessee receives interest in kind, i.e., accepts a certain property, or a certain benefit in lieu of interest, he is deemed to have received interest to the extent of the price or face value of the property or benefit agreed upon between the parties. For instance if in lieu of interest of Rs. 100 he receives a certain property or benefit of the value of Rs. 100 he is deemed to have received Rs. 100 in cash and is liable to pay income-tax on it. Having voluntarily received the property or benefit at a certain valuation he is stopped from contending either that the property or benefit has no value, or that its value is less than that what it is computed to be. For the purpose of the Income-tax Act he is deemed to have received Rs. 100 in cash and to have invested it in the purchase of the property or benefit. ;