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Lalbhai Dalpat Bhai Vs. Commissioner of Income-tax, Bombay North, Kutch and Saurashtra, Baroda - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Ref. No. 38 of 1951
Judge
Reported inAIR1952Bom457; (1952)54BOMLR573
ActsIncome-tax Act, 1922 - Sections 4, 4(1), 8, 10, 12, 13, 18, 18(3), 18(7) and 19
AppellantLalbhai Dalpat Bhai
RespondentCommissioner of Income-tax, Bombay North, Kutch and Saurashtra, Baroda
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateC.K. Daphtary, Solicitor-General and ;G.N. Joshi, Adv.
Excerpt:
- - [1] a very interesting question arises on this reference as to the proper construction to be placed on the expression 'receivable' used in section 8, indian income-tax act......interest in respect of this half year on 21-10-1944. the income tax department treated this half yearly income which was received by the imperial bank on 21-10-1944, 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 the tax shall be payable by the assessee under the head 'interest on securities' in respect of the interest receivable by him 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.....
Judgment:

Chagla, C.J.

[1] A very interesting question arises on this reference as to the proper construction to be placed on the expression ''receivable' used in Section 8, Indian 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 2000, the corresponding English dates being 30-10-1943, to 17-10-1944. One of the sources of income of the assessee was interest on 5 per cent. 1945-55 tax-free war loan of the face value of Rs. 14 lacs. Interest on these securities was payable on April 15 and October 15 every year. These securities were lodged with the Imperial Bank of India. 15-10-1944 was a holiday. October 16 was a working day, and October 17 and 18 were again Divali holidays, The Imperial Bank collected the interest in respect of this half year on 21-10-1944. The Income Tax Department treated this half yearly income which was received by the Imperial Bank on 21-10-1944, 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 the tax shall be payable by the assessee under the head 'Interest on securities' in respect of the interest receivable by him 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 although the interest might have been in fact received on October 21, it was capable of being received on October 15 and therefore the income in respect of this head must be taxed in the assessment year 1945-46 and not 1945-47. 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 that 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 of payment, deduct income-tax on the amount of the interest payable at the maximum rate. Therefore, the liability cast upon the person paying interest to deduct tax is at the moment of payment. Sub-section (4) of 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 deducted under Sub-section (3) and they are only deducted at the time of payment of interest, that those sums become the income of the assessee and are deemed to be income received by him. Under Sub-section (7), if there is a default on the part 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 a 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 provisions of Section 18, in other words, when income-tax has not been deducted at the time of the payment of the interest to the assessee. What is more important is a 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 interest on security become income liable to pay tax. Until it becomes income it cannot 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 becomes liable to tax under Section 4(1)(a). The other view 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 Co. v. St. Lucia (Colonial Treasurer), (1924) A.C. 508 at p. 512 that the words 'income arising or accruing' are not equivalent to the words 'debts arising or accruing', and their Lordships point out that there must be a coming in to satisfy 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 accrues. Therefore, if the contention of the Department is that interest was due by the Government to 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 a debt it only becomes income when it has been paid and received by the assessee. Therefore, although on October 15 the 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 assesses which was on 21-10-1944. In that particular case to which reference has just been made, the appellants sold their property in Lucia and interest had to be paid upon 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 debt was not paid in 1921, but the debtor 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 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 is that a debt due is not the same as income accruing or arising within the meaning of the Income-tax Act.

[4] There is also a decision of the Madras High Court in Arunachalam Chettiyar & Son v.Commr. of Inc. Tax, Madras : [1935]3ITR464(Mad) . There the assessee was entitled to receive interest on his securities on March 15. He sold the securities on 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 or income taxable under Section 10, and a 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 taxable under Section 10. It is clear that if the Solicitor General's contention were correct, then as interest had become due on 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 purposes of Sections 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 be paid rather than the cash method by which he would show his income in accordance with moneys 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 only applies to Sections 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.

[7] Answer accordingly.


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