JUDGMENT
HARRIES, C.J. – This is a reference made under Section 66 (1) of the Indian Income-tax Act in which the Court is asked to express its opinion upon the following questions :-
(1) Where the source of income has been mentioned in previous assessment orders and is thus by implication within the knowledge of the department is the Income-tax Officer debarred from taking action under Section 34 if any fresh information about the income from that source having arisen and escaped assessment comes to his knowledge ?
(2) Whether it is necessary for the Income-tax Officer under Section 22 (2) read with Section 34 to give in the notice a detailed list of income which has escaped assessment and, if so, can the Income-tax officer in these proceedings, assess any other items of income which may have escaped assessment but were not included in the list given with the above notice ?
(3) Whether in the circumstances of this case Rs. 79,532 has been rightly assessed as the income for the assessment year 1939-40 ?
(4) Whether the sum of Rs. 5,249 was rightly assessed in the hands of the assessee when although assessment proceedings were started against the Receiver but only the quantity of income was determined and no tax was either levied on it or recovered from the Receiver ?
The reference was made at the instance of the assessee.
The assessee carried on the business of money-lending and also owned certain zamindary property.
On 10th August, 1908, certain properties were mortgaged by an estate known as the Searsole Estate to Messrs. Laik Banerjee & Co. for Rs. 1,00,000; interest on the mortgage money was to be paid at the rate of 7 per cent per annum. On the same date the mortgagors leased out the lands in question to the mortgage and it was provided that as far as possible the interest payable by the mortgagor on the mortgage was to be paid out of the rents and royalties payable by the mortgagee to the mortgagor under the lease.
On 9th February, 1920, the mortgagee and lessees interest was sold in execution of a decree which had been obtained against Messrs. Laik Banerjee & Co. by the father of the assessee. The assessee purchased both the mortgagee and the lessees interest for Rs. 1,10,000. It appears that the assessee became entitled to surrender the lease and eventually the lease was surrendered.
On 31st March, 1922, a suit was instituted on the original mortgage and on 31st July, 1928, a preliminary decree was made and on 25th February, 1929, the final decree was made.
On 4th August, 1930, the mortgaged property was put up for sale and was purchased for Rs. 59,000 and on 13th June, 1931, this sale was confirmed.
On 31st October, 1935, the mortgage obtained a personal decree against the mortgagor for Rs. 1,27,179 and on 4th January, 1939, this personal decree was satisfied by the mortgagor transferring another property to the decree-holder which was worth Rs. 50,000 and remitting the balance. The mortgagee of course was the assessee who had purchased the interest of the original mortgagee. It appears that in the mortgage suit the mortgagee admitted the receipt of Rs. 22,372 as interest and that was set-off as against the total claim which amounted to over Rs. 2,00,000, the balance after allowing for this interest being Rs. 1,85,139.
The learned Subordinate Judge who decided the case came to the conclusion that the mortgagee had received a further sum of Rs. 11,133-3-11 as interest and he directed that this sum would have to be credited as having been paid by the mortgagor.
During the pendency of the mortgage suit a Receiver was in possession who had collected rents and profits amounting to over Rs. 65,000. The decree of the learned Subordinate Judge directed that this sum should be paid to the mortgage and credited in the decree. This sum was actually paid to the assessee by two payments one of Rs. 24,394-8-0 on 16th January, 1929, and the balance by the payment of Rs. 40,632-14-9 on 18th January, 1930.
The Income-tax authorities seem to be of opinion that the assessee had treated all payments as being made into a suspense account and it is clear that in the years preceding 1939-40 the assessee had not included any of these payments in his returns of income.
The original assessment for the assessment year 1939-40 was made on 30th December, 1939, when none of the amounts to which I have made reference were included in the assessable income. Later it is said that the Income-tax Officer received information from the Searsole Estate and the assessee was served with a notice under Section 34 of the Indian Income-tax Act on 19th May, 1943, alleging that items of his income had escaped assessment. These items are set out at pages 2 and 3 of the paper book. The first three items are the items of Rs. 22,372, Rs. 11,133 and Rs. 65,027 to which I have already made reference. It will be seen that all these items are said to have been received in the years 1928, 1929 and 1930, the last receipt being the receipt of Rs. 40,632 being a part of the sum of Rs. 65,027 which was received on 18th January, 1930.
Two items are then shown as having been received later, namely, and item of Rs. 59,000 received on 4th August, 1930, being the proceeds of the sale of the mortgaged property in execution, and an item of Rs. 50,000 received on 4th April, 1939, which was the value of property transferred to the assessee in satisfaction of his personal decree.
All the receipts total Rs. 2,07,532. Against that amount is set off the cost of the loan as it is said, that is Rs. 1,10,000, which is what the assessee paid for the interest of the mortgagee and the lessee. There is a further deduction of Rs. 18,000 showing a balance of payments in favour of the assessee of Rs. 79,532.
According to the Income-tax authorities no tax had been paid upon this amount of Rs. 79,532 which the authorities treated as entirely income and the authorities claimed that in the circumstances this amount was income received by the assessee for the assessment year 1939-40 and as it had escaped assessment, the assessment was made under the provisions of Section 34 after notice had been served on the assessee.
A number of points appear to have been taken by the assessee before the Income-tax Appellate Tribunal, but Mr. Atul Gupta who has appeared for the assessee before us has limited his argument to one ground, namely, that an assessment could not be made under Section 34 of the Indian Income-tax Act because the income allege to have escaped assessment was income received more than eight years before the assessment was made.
To appreciate the point it will be necessary to set out the provisions of Section 34 of the Indian Income-tax Act as it existed in the year 1943. That section was as follows :-
“If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessed or have been assessed at too low a rate, or have been the subject of excessive relief under this Act, the Income-tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars thereof, at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principle officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of Section 22 and may proceed to assess or re-assess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.”
The assessment, under Section 34, of this income which it is said had escaped assessment, was made on 3rd March, 1944. But Mr. Gupta contends that no assessment could have been made because the income which it was sought to assess had been received by the assessee in the years 1928, 1929 and 1930 that is, long beyond eight years of the proceedings. On the other hand, the taxing authorities contend that this income was not received or did not become taxable until this mortgage transaction had been completed by the acceptance of property worth Rs. 50,000 on 4th January, 1939, in full discharge of all outstanding obligations. If course the income could not be said to have been received before January, 1939, there would be no force whatever in Mr. Guptas contention. But in our view the income sought to be assessed as having escaped assessment was income which had been paid and which had been received by the assessee in the year 1930 and earlier years.
The first item of income, namely, Rs. 22,372 was shown by the assessee as having been received in the plaint which he filed in the mortgage suit. That is shown as interest received and this plaint is dated 31st March, 1922. It is quite clear that that plaint shows actual receipts of this sum of Rs. 22,372 as interest as far back as the year 1922.
The next item, namely Rs. 11,133, is found by the learned Subordinate Judge in his judgment of 31st July, 1928, as having been received as interest by the assessee before that judgment was given. Clearly the finding is that the assessee had been paid and had received Rs. 11,133 as interest before the year 1928.
As I have already stated the other item of Rs. 65,027 is made up of two items, Rs. 24,394-8-0 and Rs. 40,632-14-9 paid by the Receiver under the directions contained in the decree of the learned Subordinate Judge to the assessee on 16th January, 1929, and 18th January, 1930. These two sums were admittedly received by the assessee as interest and this is clear from the order of the Income-tax Officer and the order of the Appellate Assistant Commissioner. In the assessment order of the Income-tax Officer states :-
“The assessment order for 1930-31 shows Last year, i.e., in 1928-29, it was found that the assessee realised Rs. 24,394-8-0 for interest from the Malias of Searsole, which was treated as amanat pending decision of the suit against them in the High Court. This year he has further realised on 10th January, 1930, Rs. 40,632-14-9 from the Malias in the same matter, which has also been treated as amanat as the appeal has not yet been decided.”
The Appellate Assistant Commissioner repeats this observation in his order and from this observation it is clear that the taxing authorities knew as far back as the year 1931 that the assessee had received two payments as interest on the principal sum secured by this mortgage.
The other payments received were Rs. 59,000 from the sale of the mortgaged property and Rs. 50,000 being the value of the property received in full satisfaction of the balance of the claim. The actual principal amount was Rs. 1,00,000. So the receipts of these two sums of Rs. 59,000 and Rs. 50,000 only covered the principal leaving Rs. 9,000 towards the balance of interest. However if the three sums which I have already mentioned, namely Rs. 22,372, Rs. 11,133 and Rs. 65,027, were received as interest beyond eight years of this assessment under Section 34 then there is no question that the assessment on the sum of Rs. 79,532 under that section is illegal.
It appears that there was an appeal pending in the mortgage suit. That appeal has now been disposed of. But there is at the moment an appeal from the decree of the High Court pending before the Supreme Court. The question involved is whether or not the provisions of the Bengal Money-lenders Act apply to this transaction. It seems that the assessee did not disclose in his returns the receipt of any of these sums. It is equally clear that the Income-tax authorities knew that the sums had been received. They certainly knew that the two sums making up the total of Rs. 65,027 had been received as interest because the assessment order actually recites that fact and refers to earlier assessment orders in which that fact is stated. It seems that the assessee when questioned, defended his attitude in not disclosing these amounts by saying that they were not yet taxable as the litigation had not concluded. The taxing authorities appear to have accepted that view and did not claim to tax these amounts until the year 1939 when it could be said that the transaction was concluded by reason of the acceptance of a property worth Rs. 50,000 in full satisfaction of the mortgage claim.
Mr. Guptas contention is that these amounts having been paid and received as interest were liable to tax immediately they were received. It was wholly immaterial what view the assessee took. The fact that he wrongly claimed that they could not be assessed does not justify the authorities in not assessing this income. The Income-tax authorities claimed that as the assessee did not treat these payments as income for the purposes of assessment then the taxing authorities could accept that position and claim to tax these items when the transaction was completed. The Appellate Tribunal deals with the matter in these words :-
“In our opinion, the above course of conduct, as pointed out by the departmental representative, clearly goes to show that the items of receipts which had been made the subject matter of assessment by the Income-tax Officer were never treated as receipt by the appellant in the years in which they were received or adjusted through courts and have been only finally adjusted when the entire transaction of loan has come to an end on 4th of January, 1939.”
In short, the contention is that until the assessee treated these payments as income for the purposes of assessment they could not be so treated by the authorities and assessed. Reliance apparently was placed upon a well-known decision of their Lordships of the Privy Council, Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraja of Darbhanga, in which it was held that for the purposes of the Indian Income-tax Act, 1922, the income derived by an assessee during a particular year from interest on loans may properly be computed, having regard to the proviso to Section 13, as consisting in part of the sums actually received in that year and in part of sums carried by the assessee to income account in that year out of receipts in previous years which he has held in suspense account and of which no part has been previously returned as income or taxed. Further, where the assessee has received a sum on account of principal and interest due without an appropriation by the debtor, the Income-tax Officer can appropriate the sum first to outstanding interest, although the assessee in his accounts has not credited any receipt of interest.
Dr. Gupta on behalf of the taxing authorities has contended that this case concludes the matter. But in my view this decision has no application whatsoever to the facts of the case before us. In the Privy Council case their Lordships laid down that if money is paid by a debtor to a creditor on account without any appropriation towards principal or interest, the creditor can appropriate and if he does appropriate in a particular year then he cannot complain that the amount so appropriated in that year as interest is assessable to income-tax in that year. Further their Lordships held that if there is no appropriation the Income-tax authorities can properly appropriate the amount paid if less than the amount due for interest. The facts of the present case are entirely different. The three payments of interest to which I have referred were payments of interest as such. In the plaint Rs. 22,000 odd is acknowledged as having been received as interest then he has received it, no matter how he attempts to show the receipt in his books. A creditor cannot deny the receipt of interest where he has actually been paid the interest as such by not showing in his books the receipt of the money as interest. If a person has been paid and he has accepted the payment as interest then no book-keeping can ever alter the nature of that payment.
The next amount of Rs. 11,000 odd was found by the learned Subordinate Judge to have been received by the assessee as interest before the year 1928 and that ends that matter. The assessee could not by any manipulation of his books establish that he had not received the interest before the year 1928. The other two payments making up Rs. 65,000 odd were actually paid to the assessee by the Receiver and were admittedly paid, as the assessment order shows, as interest. No manipulation of the books by the assessee could alter the nature of these payments. In all the payments the money was paid as interest and received as interest and therefore Maharajadhiraja of Darbhangas case can have no application.
Dr. Gupta suggested that the assessee treated these payments as being payments into a suspense account. But as I have pointed out, they were received by the assessee as payments of interest and if they were received as such the nature of the payments could not thereafter be changed by treating them as being payments into a suspense account. It appears to me quite clear on the facts of this case that the three payments to which I have made reference were payments of interest received by the assessee as interest. The fact that he claimed that as the mortgage litigation had no ended the amounts were not assessable is to my mind wholly immaterial. He had received these amounts – all of them – by 4th January, 1930, and they should have been assessed in the years in which they were received. It cannot possibly be said in my view that these amounts were not received or treated as received as interest until the assessment year 1939-40 and as they were received more than eight years before proceedings under Section 34 of the Indian Income-tax Act, no assessment could be made under that section. It seems to me clear that these sums were received by the assessee as income well beyond eight years of the assessment under Section 34 and therefore the assessment of Rs. 79,532 to tax in the assessment year 1939-40 was illegal.
It was suggested that though it might be said that the receipts of Rs. 22,000 odd and Rs. 11,000 odd were receipts of interest the same could not be said of the two payments making up Rs. 65,000 odd. The decree of the learned Subordinate Judge directs this sum of Rs. 65,000 odd to be credited in the decree, but it does not in terms state whether it was to be credited against principal or interest. Dr. Gupta suggested that this payment made on account generally and as there had been no appropriation before the year 1939-40 to the taxing authorities could appropriate this sum as against interest in that year and tax it as interest arising in that year. However, the orders of the Income-tax Officer and the Appellate Assistant Commissioner make it clear that the taxing authorities admitted that this payment of Rs. 65,000 was towards interest and in the orders it is expressly stated that the two payments making up Rs. 65,000 were payments of interest. It is therefore not open to Dr. Gupta now to suggest that these were payments on account generally.
In any event it appears to me that if they could not be regarded as payments without any appropriation, the Court would be entitled to presume that they were payments towards interest. In Maharajadhiraja of Darbhangas case Lord Macmillan who delivered the judgment of the Board observed at page 157 :-
“Now, where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the payment as between capital and interest by either debtor or creditor, the presumption is that the payment is attributable in the first instance towards the outstanding interest : Venkatadri Appa Rao v. Parthasarathi Appa Rao. This presumption is no doubt operative primarily in questions between debtor and creditor, but in their Lordships view, the Income-tax Officer, finding that the assessee received a payment from his debtor of Rs. 2,78,000 in the year fasli 1332 and that the assessee had not up till then credited himself as having received any interest or disclosed or accounted for any interest receipts to the revenue authorities, was entitled in the circumstances to treat this sum of Rs. 2,78,000 as applicable to the outstanding interest to the extent of Rs. 2,71,190 and accordingly to treat the payment to that extent as income of the assessee in the year of payment.”
It follows therefore that if this payment of Rs. 65,000 was a payment on account generally then the Court would presume that it was a payment towards interest because the interest due at the dates of payment considerably exceeded the total sum of Rs. 65,000. However I do not think it is necessary to pursue this point, because as I have said the taxing authorities admit in the orders to which I have made reference that these payments were payments of interest and that appears to me to conclude the matter.
It is therefore clear that the three receipts amounting in all to over Rs. 98,000 were receipts of interest beyond eight years of this assessment. The sums could not be assessed under Section 34 and if these amounts are eliminated then quite clearly the assessment on the sum of Rs. 79,532 under Section 34 cannot be sustained.
The answer therefore to question (3) must be in the negative.
Mr. Atul Gupta has addressed no argument to us on the matters raised in question (4) and he agrees that that question should be answered in the affirmative.
Question (1) appears to us to be purely hypothetical question and in any even, having regard to the view which we expressed on question (3), it is conceded that question (1) does not really arise and does not require an answer.
Question (2) also does not arise having regard to our answer to question (3) and it is also conceded that that question need not be answered in these proceedings.
The assessee will be entitled to the costs of these proceedings. Certified for two Counsel.
BANERJEE, J. – I agree.
Reference answered accordingly.