1. The Income-tax Appellate Tribunal has referred the following question under Section 66(1) of the Indian Income-tax Act, 1922:
'Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that the interest receipts of Rs. 11,029 and Rs. 21,572 were not assessable in the hands of the assessee family ?'
The assessee is a Hindu undivided family carrying on business under the name and style of Messrs. Hira Lal & Sons, Meerut. It instituted a suit against the Government claiming damages for breach of contract. The trial court decreed the suit for Rs. 68,454. In 1950, the decretal amount was realised by the assessee. It was credited by it in its account books in a separate account called the amanat khata. The interest earned on the amount in that account was also credited in the same account. The assessee offered the interest in its return of income for the purposes of income-tax, and was in fact taxed on that income until the assessment year 1960-61. The total interest so taxed for the period ending with that assessment exceeded Rs. 1,00,000. Meanwhile, against the decree of the trial court, the Government had preferred an appeal to this court. On April 8, 1960, this court allowed the appeal, set aside the decree of the trial court and dismissed the suit. Against the High Court decree the assessee appealed to the Supreme Court. It is now not disputed between the parties that the appeal has since been dismissed. Upon the decree of this court dismissing the suit, the Government filed an execution application for refund of Rs. 68,454 along with interest. The assessee did notdispute its liability to refund the principal amount mentioned in the execution application but refused to concede that the entire interest earned on that amount was payable to the Government. It offered to pay to the Government an amount representing interest at the rate of 6% for the period during which the money had remained with it. That dispute is pending decision in this court.
2. In assessment proceedings for the assessment years 1961-62 and 1962-63, for which the relevant previous years and the years ending on March 31, 1961, and March 31, 1962, the assessee claimed a deduction of Rs. 11,029 and Rs. 21,572 respectively as interest which had accrued during the relevant previous years in the amanat khata. The claim did not find favour with the Income-tax Officer who included the amounts in the total income of the assessee. The assessee appealed to the Appellate Assistant Commissioner but was not successful. The Appellate Assistant Commissioner took the view that no liability had arisen during the previous years for refunding the amounts to the Government and, moreover, the assessee had not made any entry in its account books regarding any such liability. The assessee then filed a second appeal before the Appellate Tribunal. The appeals have been allowed on the finding that the assessee had become liable to refund the decretal amount along with the interest under Section 144 of the Code of Civil Procedure and that the liability for the refund accrued during the relevant previous years and further that the accrual of the liability was not dependent upon the assessee making any entry in its account books. The case is now in reference before us.
3. The first question is whether the liability of the assessee to repay the amount recovered by it from the Government together with interest, can be said to have accrued on the date when the High Court allowed the appeal by the Government, set aside the trial court decree and dismissed the suit. In our opinion, it did. There can be no doubt that when the trial court decree was set aside by the High Court and the suit was dismissed, the assessee was bound to restore to the Government the advantage it had received under the trial court decree. Section 144 of the Code of Civil Procedure provides :
'144. Where and in so far as a decree or an order is varied or reversed, the court of first instance shall, on the application of any party entitled to any benefit by way of restitution or otherwise, cause such restitution to be made, as will, so far as may be, place the parties in the position which they would have occupied but for such decree or order or such part thereof as has been varied or reversed; and, for this purpose, the court may make any orders, including orders for the refund of costs and for the payment of interest, damages, compensation and mesne profits, which are properly consequential on such variation or reversal.'
An application was made under Section 144 by the Government and upon that application the court was in law obliged to make an order directing restitution. There was no discretion in the matter. The court was bound to make an order. The assessee was under a legal obligation to effect restitution, and the obligation arose automatically on the reversal of the erroneous decree of the trial court. In Bhagwant Singh v. Sri Kishen Das : 4SCR559 , the Supreme Court explained the content of the doctrine of restitution embodied in Section 144 of the Code, and in Binayak Swain v. Ramesh Chandra Panigrahi : 3SCR24 elaborated :
'At the time of the application for restitution, therefore, the appellant was entitled to restitution, because on that date the decree in execution of which the properties were sold had been set aside. We are of opinion that the appellant is entitled to restitution notwithstanding anything which happened subsequently as the right to claim restitution is based upon the existence or otherwise of a decree in favour of the plaintiff at the time when the application for restitution was made. The principle of the doctrine of restitution is that on the reversal of a decree, the law imposes an obligation on the party to the suit who received the benefit of the erroneous decree to make restitution to the other party for what he has lost. This obligation arises automatically on the reversal or modification of the decree and necessarily carries with it the right to restitution of all that has been done under the erroneous decree ; and the court in making restitution is bound to restore the parties, so far as they can be restored, to the same position they were in at the time when the court by its erroneous action had displaced them from.'
The liability to effect the restitution arises automatically, and it arises on the date when the trial court decree is reversed by the appellate court. In the present case, it arose on April 8, 1960. It is urged on behalf of the revenue that the assessee had meanwhile proceeded in appeal to the Supreme Court and, therefore, it must be taken to be disputing its liability. To our mind, that may be true so far as the merits of the dispute in the suit were concerned, but the obligation of the assessee to effect restitution cannot be in doubt. The obligation extended to placing the Government in the same position, as far as possible, in which it would have stood but for the trial court decree. That would extend to the payment of interest, which has been considered by the Privy Council in Guran Ditta v. T. R. Ditta as part of the normal relief given in restitution. The assessee conceded in the execution proceedings that he was liable to pay to the Government interest at the rate of 6% on the amount received by it from the Government under the trial court decree. The assessee followed the mercantile system of accounting, and it is now settled law that that system 'brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed'. (Keshav Mills Ltd. v. Income-tax Officer : 23ITR230(SC) and Commissioner of Income-tax v. Gajapathy Naidu : 53ITR114(SC) . It was not a contingent liability. It was a liability which had accrued. It was a liability which was admitted by the assessee, at least in the amount quantified at the rate of 6%. And it is in that measure that the Appellate Tribunal has allowed the claim to deduction.
4. The next question is whether the assessee was entitled to the deduction of the interest claimed even though it had not made the necessary entries in its account books. Ordinarily, an assessee maintaining his accounts on the mercantile system is entitled to deduction only if the appropriate debit entry has been made in the account. But that, it seems to us, is not an absolute rule. The liability arose by virtue of Section 144 of the Code, and we do not see why it should be taken as not having accrued merely because of the omission of the assessee to enter the liability in its account books. The liability arose because of the operation of law. It could not be denied merely because it was not entered in the accounts. Its existence did not depend upon entries being made in the assessee's books. The omission of the assessee to make the entries in its books merely rendered the accounts inaccurate. We are in agreement with the Appellate Tribunal that the absence of entries in the account books cannot deprive the assessee of his right to the deduction. The Appellate Tribunal is right in the view taken by it, and we answer the question referred in the affirmative.
5. The assessee is entitled to its costs which we assess at Rs. 200. Counsel's fee is assessed in the same figure.