1. A very interesting question arise on this reference as to the proper construction to be placed on the expression 'receivable' used in Section 8 of the Income-tax Act. The assessee is a Hindu undivided family and we are concerned with the assessment year 1945-46. The relevant account year was Samvat 2,000, the corresponding English dates being October 30, 1943, to October 17, 1944. One of the sources of income of the assessee was interest on 5% 1945-55 tax-free war loan of the case value of Rs. 14 lacs. Interest on these securities was payable on the April 15 and October 15 every year. These securities were lodged with the Imperial Bank of India. October 15, 1944, was a holiday, October 16 was working day and and 17 October 18, were again Diwali holidays. The Imperial Bank collected the interest in respect of these half year on the October 21, 1944. The Income-tax department treated these half-yearly income which was received by the Imperial Bank on the October 21, 1944, as the income of the assessee for the assessment year 1945-46. The contention of the assessee was that this income should be included in the assessment year 1946-47. The Tribunal has accepted the contention of the Commissioner and rejected the contention of the assessee.
2. Now turning to Section 8, it provides that tax shall be payable by the assessee under the head 'interest on security' in respect of the interest receivable by in on any security of the Central Government or of the State Government, and the view taken by the Tribunal is that 'receivable' does not mean 'received' but means 'capable of being received', and the contention is that all though the interest might have been in fact received on the October 21 it was capable of being received on the October 15 and therefore the income in respect of this head must be taxed in the assessment year 1945-46 and not 1946-47. On a first impression there seems to be considerable force in the contention of the Department. Undoubtedly the language used by the Legislature is 'receivable' and not 'received' and we are asked to draw the necessary inference that the legislature was attempting to tax interest on securities not when it was received, but when it was capable of being received. But when one looks a little more closely into the scheme of the Act, it is clear that 'receivable' in this case does not mean 'capable of being received'. Section 8 was enacted to provide that tax was payable not on the actual amount received by way of interest on securities, but on the amount to which the assessee was entitled on the face of the securities. Therefore the legislature had to draw a distinction between the amount actually received and the amount which was receivable according to the tenor of the securities, and it is from that point of view the expression 'receivable' has been used by the Legislature. When we turn to Section 18, it provides for deduction of tax at source. Sub-section (3) provides that the person responsible for paying any income chargeable under the head 'interest on securities' shall, at the time payment, deduct income tax on the amount on the interest payable at the maximum rate. Therefore the liability cast upon the person paying interest to deduct tax is at the amount of payment. Sub-section (4) on that section provides that all sums deducted in accordance with the provisions of this section shall, for the purpose of computing the income of the assessee, be deemed to be income received. Here again, it is only when sums are deduced under Sub-section (3), and they are only deducted at the time of interest, that those sums become the income of the assessee and are deemed to be income received by him. Under Sub-section (7), is there is a default of the person who has to pay interest in deducting the tax, he is deemed to be the assessee in default in respect of the tax. So this liability is also imposed when default is committed at the time of the payment of the interest. Section 19 makes the income-tax payable by the assessee direct when it has not been deducted in accordance with the provision of Section 18, in other words, when income-tax has not been deducted at the time of the payment the interest to the assessee. What is more important is consideration of the charging section, Section (4) of the Act. Section (8) after all is a machinery section. It provides the mode of computation of income under a particular head. But before anything can become income liable to tax, it must fall under section (4), and the question is, when does the interest on security become income liable to tax. Until it becomes income it can not attract any tax to it.
3. Now, two views are possible. It may be contended that interest on security is not income until it is received and become liable to tax under Section 4(1)(a). The other is that interest on security accrues or arises to the assessee at the date when interest becomes payable and is liable to tax under Section 4(1)(b). We have the very high authority of the Privy Council in St. Lucia Usines and Estates company Ltd. v. Colonial Treasurer of St. Lucia, that the words 'income arising or accruing' are not equivalent to the words 'debts arising or accruing', and there Lordships point out that there must be a coming into satisfied the word 'income'. Therefore, if there is a debt due or if there is a debt arising or accruing, it is not income which arises or accuse. Therefore, if the contention of the Department is that interest was due by the Government of the assessee, the mere fact that that debt was due did not make the debt the income of the assessee. Till the debt came in it did not become income, and therefore in the case of the debt it only becomes income when it has been paid and received by the assessee. Therefore, although on the October 15 debt was due by the Government and the Government were liable to pay interest to the assessee, that debt did not become the income of the assessee till it was discharged and received by the assessee which was on the October 21, 1944. In that particular case to which reference has just been made, the appellants sold their properties in Lucia and interest had to be paid upon the part of the purchase price. This was to be paid in 1921, but it was not paid, and the question arose whether the appellants were liable to pay income-tax on the interest not received by them in the year 1921. It is true that in this case not only the debtor was not paid in 1921, but the debtors was not in a position to pay the debt and refused to pay it. It may be said that in this particular case there was no unwillingness on the part of Government to pay interest due by them on the October 15. But in our opinion that is not the point on which the case in the Privy council can be distinguished. The real ratio of that decision that debt due is not the sane as the income or arising with in the meaning of the Income-tax Act.
4. There is also decision of the Madras High Court in Arunachalam Chettiar & Son v. Commissioner of Income-tax, Madras. There the assessee was entitled to the receive interest on his securities on the March 15. He sold the securities on the March 30 without having collected the interest and he sold the securities at a premium taking into consideration the interest to which he was entitled and which he had not collected, and the question was whether this premium must be considered as interest on securities taxable under Section 8 on income taxable under Section 10, and the full Bench of the Madras High Court held that the sum in question was the receipt from the assessee's business which should be brought into computation of his income under Section 10. It is clear that if the solicitor-general's contention were correct, then as interest had become due on the March 15 and as at that date the assessee was the holder of Government securities, the interest on securities would have been his income under Section 8.
5. The Tribunal has taken the view in their order that in the past the assessee had maintained the mercantile system of accounting and that is one reason why in the opinion of the Tribunal the assessee is liable to pay tax on the interest when it becomes due and not when it is actually received. With respect to the Tribunal, the error which it has fallen into is in overlooking the provisions of Section 13. Under that section a method of accounting may be employed by an assessee for the purpose of Section 10 and 12, and if a method is adopted which is known as the mercantile method, then his income would be assessed on that basis. In other words, a merchant may employ the mercantile method and compute his income on the basis of debts due and liable to the paid rather than the cash method by which he would show his income in accordance with money actually received by him. When the first method is adopted the liability to pay tax would be on the accrual basis and not on the receipt basis. But it must not be forgotten that Section 13 applies to Section 10 and 12. There can be no mercantile method basis as far as Section 8 is concerned. As far as Section 8 is concerned, interest on securities only becomes 'income'. when it is actually received and not when it is due or capable of being received by the assessee.
6. The result therefore is that we must answer the question submitted to us as follows : 'Assessment year 1946-47'. Commissioner to pay the costs. Reference answered accordingly.