RAJA MOHAN RAJA BAHADUR Vs. COMMISSIONER OF INCOME TAX U P

JUDGEMENT

(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.

(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.