BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. Two questions have been referred for the opinion of the court. They are :
'(1) Whether, on the facts and circumstances of the case, the receipt by the assessee of the transferable U. P. Encumbered Estate Bonds amounted to receipt of interest included in the full value of the bonds on the date when the bonds were received ?
(2) Whether, on the facts and in the circumstances of the case, the proceedings under section 34(1)(a) and the resultant assessment were valid in law ?'
The case relates to the assessment year 1946-47, relevant to the previous year, which was the financial year 1945-46. The facts in brief are : the assessee is a Hindu undivided family. It carries on money-lending business. Its method of accounting is the cash basis. In the course of its money-lending business it lent a sum of Rs. 51,315 to one Swaleh Khan. The debtor was landlord within the meaning of the U. P. Encumbered Estates Act. A decree against the landlord-debtor was passed in favour of the assessee on September 29, 1943, for a sum of Rs. 1,09,500 which included both principal and the accumulated interest. In due course, in pursuance of the decree the Collector gave an award on March 29, 1945, offering to the assessee transferable U. P. government Encumbered Estates bonds of the face value of the decretal amount, in lieu of cash in full settlement of the assessees claim against the landlord-debtor. These bonds were accepted by the assessee on March 16, 1946, that is, within the accounting period relevant to the assessment year in question. Out of these bonds, on March 26, 1946, that is, still within the accounting period, the assessee sold bonds worth Rs. 80,000 for a sum of Rs. 79,228. The assessee credited the sale proceeds in his account books in the account of Mohammad Swaleh as follows :
Towards principal .
Towards interest .
The account of Mohammad Swaleh in the assessees ledger was squared up and no balance on account of interest was shown therein as still outstanding. The remaining bonds of the face value of Rs. 29,500 were thus held by the assessee outside the ledger account of the landlord-debtor. The amount of these bonds was neither credited to the suspense account nor to the capital account of the assessee. The amount represented by the value of these remaining bonds did not find a place in the balance-sheet drawn up by the assessee at the end of the accounting period. What the assessee, however, did was that in his cash book, where he made an entry regarding the sale proceeds of the bonds of the face value of Rs. 80,000, he added a note below the entry to the effect that the bonds sold were out of the bonds of the value of Rs. 1,09,500 received by it on account of the settlement of the debt. These bonds of the value of Rs. 29,500 were sold by the assessee on April 17, 1946, for Rs. 29,365 and the sale proceeds were credited in the accounts of the succeeding accounting period.
In the original assessment made by the Income-tax Officer on July 25, 1950, he included only a sum of Rs. 27,913 which stood credited in the interest account of Mohammad Swaleh in the assessees books but omitted to include therein the value of the remaining bonds which admittedly was also interest as the Income-tax Officer did not know that the total value of the bonds received by the assessee was Rs. 1,09,500. The want of knowledge of the Income-tax Officer was due to the fact that no entry regarding the receipt of the full amount of the bonds was made by the assessee in his investment account. It is also not the case of the assessee that the attention of the Income-tax Officer was drawn to the note made by the assessee in its cash book. Subsequently, the Income-tax Officer came to know that the assessee had concealed the receipt of further interest in the sum of Rs. 29,365 in the assessment year in question. Thereupon with the sanction of the Commissioner of Income-tax he issued a notice to the assessee on January 9, 1953, under section 34 and brought that additional amount of interest to the charge of tax by order dated January 9, 1954, under section 34(1)(a). The order was upheld in appeal by the Appellate Assistant Commissioner and in further appeal by the Income-tax Appellate Tribunal. Thereafter, the assessee asked for the statement of a case to this court and the case has accordingly been stated as mentioned above.
The first argument which learned counsel has addressed to us on this reference is that there was no 'omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment' and as such action under section 34(1)(a) was not justified. It is clear that in view of the facts and the circumstances of this case there is no force at all in this submission. The assessee omitted to make an entry with regard to the total value of the bonds received by him in full settlement of the debt. As seen above he omitted the mention of the total value of the bonds in its investment account or in the ledger account of this particular debtor or in its interest account. Mention of the difference between Rs. 1,09,500, the full value of the bonds, and Rs. 80,000, the value of the bonds which were sold, was also omitted from the suspense account, the capital account and the balance-sheet. All these various accounts were the appropriate and proper places where mention should have been made of the total value of the bonds received by the assessee. This was not done. The loan account of Mohd. Swaleh was squared up by entry of the sale proceeds of bonds of the value of Rs. 80,000. This would lead one to believe that bonds of the value of Rs. 80,000 were all that were received in settlement of the debt. No one, however careful, would look beyond these accounts to discover whether any other amount may also have been received in satisfaction of the liability. There was nothing at all in these entries to put the Income-tax Officer upon enquiry or to lead him to make further investigation. On the other hand the nature of the entries particularly the squaring up of the loan account of Mohd. Swaleh was such as to lull the Income-tax Officer into a state of complete belief. Merely because in the cash book where the entry of the sale proceeds of bonds of the face value of Rs. 80,000 was made, a note was recorded that the bonds sold came out of the bonds of the total value of Rs. 1,09,500 cannot be held to fasten the Income-tax Officer with the knowledge of that note. It is clear that the place where the note was made was not at all a proper or appropriate place for recording the information in the note. The Tribunal observed that there is not an iota of evidence that the attention of the Income-tax Officer was drawn to this note. Merely because the account books were produced before the Income-tax Officer and entries in appropriate accounts were scrutinised by him, knowledge of the contents of entries or information which lay embedded in the account books could not be attributed to the Income-tax Officer. There is plenty of authority for the proposition that merely because account books are produced before the Income-tax Officer, it does not necessarily follow that the Income-tax Officer has knowledge of particular entries which may lie embedded in those account books. This position has been made clear by the addition of an explanation to sub-section (1) of section 34 by amendment of this section in 1948. The Explanation is as follows :
'Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'
Prior, however, to the addition of this Explanation the position had always been understood to be the same as it is under the Explanation. In other words the addition of the Explanation has not made any change in the law. In view of what has been stated above it is quite clear that there was omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for its assessment for the year in question. It follows that the action taken under section 34(1) was perfectly valid and the second question referred to this court must, therefore, be answered in the affirmative and against the assessee.
The other question which now remains to be answered in this reference is whether the receipt of the bonds amounted to receipt of interest on the date when the bonds were received. This very question came up for consideration before this court in Commissioner of Income-tax v. Maheshwari Saran Singh, where it was held that the bonds being transferable, their receipt amounted to receipt of moneys worth. Accordingly if in the value of the bonds any amount was included on account of interest, such amount was received in moneys worth on the date of the receipt of the bonds. It was accordingly held that if the date of the receipt of the bonds fell within a particular accounting period, the value of the bonds representing interest was assessable in the assessment year relevant to the accounting period. No attempt was made by learned counsel for the assessee to argue that the case was in any way distinguishable or that there was any ground for reconsideration of the view expressed by this court in that case. Indeed it was not possible for learned counsel to address any such argument in view of the facts and the findings mentioned by the Income-tax appellate Tribunal in the statement of the case. It has been mentioned there that the bonds are transferable. The further facts mentioned by the Tribunal are that the Collector 'offered' to the assessee in settlement of the landlord-debtors liability of the bonds in question. The 'offer' was accepted by the assessee in full settlement of its claim against the debtor. Thus the bonds were not forced upon the assessee but were accepted by him willingly. The amount which was taxed under section 34(1)(a) was only Rs. 29,365 and not the full face value of the bonds, viz., 29,500. The bonds worth Rs. 80,000 were sold within ten days of their receipt. The remaining bonds could also have been sold at the same time if the assessee had so chosen. The reason why the assessee sold the remaining bonds in the next month was as observed by the Tribunal to split up the interest income to make it fall in two assessment years and not to have it assessed in the same year as it would have been, if all the bonds had been sold on March 26, 1946, and not some on that date and the remaining on April 17, 1946. The rule is firmly fixed that where in settlement of a claim a creditor accepts moneys worth or in other words payment in kind, it is just the same as if he has received cash payment and where he chooses to retain the thing which he has received it merely amounts to reinvestment of money in the thing acquired.
What was been actually argued in respect of the first question is that the system of accounting of the assessee was the cash basis. The bonds received by the assessee were not cash. Bonds of the face value of Rs. 29,500 were sold only on April 17, 1946, that is to say, in the succeeding accounting period relevant to the next assessment year, namely, 1947-48, and not the assessment year in question. Cash was received only by sale. Therefore, the amount of Rs. 29,365 was properly assessable only in the assessment year 1947-48 and not in the assessment year in question under section 34. The computation of income of an assessee has to be made on the basis of the system of accounting regularly employed by him. In this case the system of accounting being the cash basis, and cash having been received only in the succeeding year, the assessment of the amount in this year was illegal.
This argument is based upon a misunderstanding of what is meant by the cash basis system of accounting as distinguished from the mercantile system of accounting. All that the cash basis means is that it is only actual receipts and disbursements that are brought into account. The distinction between this basis and mercantile basis is that in accounts on the latter basis actual receipts and disbursements are not necessary. It is sufficient that a right in respect of a certain amount may have been irrevocably acquired and similarly a liability irrevocably incurred. A cash basis of accounting is not confined to receipt of cash alone or to receipt of current coin or currency notes alone. It will still be a cash basis of accounting where payment is received in kind or in moneys worth : see Keshav Mills Ltd. v. Commissioner of Income-tax. Payment in kind or in moneys worth being convertible into cash or current coin at the will of the holder is treated to be equivalent to receipt of cash. It follows there is no force in the only argument addressed to us by learned counsel for the assessee and the first question also must therefore be answered in the affirmative and against the assessee.
The reference shall be returned to the Income-tax Appellate Tribunal, Allahabad, with this answer under the seal of the court and the signature of the Registrar.
The income-tax department shall be entitled to its costs which we assess at Rs. 200.
M. C. DESAI C.J. - The present case is certainly covered by the case of Maheshwari Saran Singh and must be answered in the affirmative in accordance with the decision given therein. But I have serious doubts about the correctness of the decision. The bonds are transferable but they are not payable immediately. They are payable after twenty years and, so long as that period does not expire, they cannot be cashed, though they can be sold in a market. They are not accepted voluntarily by the creditors in lieu of cash but are forced upon them under the provisions of the Encumbered Estates Act. They have no choice in the matter; they cannot get cash in lieu of them. Income, within the meaning of the Income-tax Act, need not be in cash and can be in kind also. If an assessee receives interest in kind, i.e., accepts a certain property, or a certain benefit in lieu of interest, he is deemed to have received interest to the extent of the price or face value of the property or benefit agreed upon between the parties. For instance if in lieu of interest of Rs. 100 he receives a certain property or benefit of the value of Rs. 100 he is deemed to have received Rs. 100 in cash and is liable to pay income-tax on it. Having voluntarily received the property or benefit at a certain valuation he is stopped from contending either that the property or benefit has no value, or that its value is less than that what it is computed to be. For the purpose of the Income-tax Act he is deemed to have received Rs. 100 in cash and to have invested it in the purchase of the property or benefit.
The law makes no distinction between his receive the property or benefit direct from the debtor and his receiving Rs. 100 from him and them investing it in the purchase of the property for benefit. But the same cannot be said in respect of his receiving Encumbered Estates bonds. He does not accept them voluntarily is certain and is not estopped from contending that his receiving them does not amount to his receiving in cash a certain amount and that their market value is not the same as their face value. The legal fiction, to which I have referred above, cannot be applied in this case. This aspect of the matter has not been considered at all by the learned judges who decided the case of Maheshwari Saran Singh. They have placed Encumbered Estates Act Bonds in the same class as negotiable bonds but without considering whether the facts that they are not payable immediately and that they are forced upon the creditor and not accepted willingly by him are sufficient for distinguishing between them and currency notes and cheques.
It is conceded that the debtors own promise to pay the debt is not payment of it; but it does not follow from it that another persons promise to pay is payment. The reason for holding that the debtors own promise to pay later on is payment may very well apply to another persons promise also. In the case of the debtors own promise, it is not a payment because of the nature of benefit or advantage the creditor gets and not because of the identity of the promisor.
Marketability is not the test of payment, if a thing is forced upon the receiver. No debtor has a right to force upon the creditor a thing which cannot be immediately converted into money, though it can be sold, and compel him to realise its value by selling it in the market. If a creditor is forced by the law to receive a thing, which cannot be immediately converted into money, it seems to me unfair to treat him as if he had received the face value of it. There further arises the question of the price that the thing would fetch in an open market. The decision in the case of Maheshwari Saran Singh, though it impliedly compels the creditor to sell the Encumbered Estates Act Bonds in an open market, does not consider what he realises as their price and threats him as if he had realised the face value of the bonds. Now it stands to reason that if a bond of the face value of Rs. 100 is payable after 20 years, i.e., the holder will get Rs. 100 after 20 years, its present day value cannot possibly be Rs. 100 unless it carries interest of not less than the market rate of interest. If a creditor, who receives a bond of the face value of Rs. 100 sells it at once in an open market, he will receive less than Rs. 50 as its price. To force him to accept a bond of the market value of only Rs. 90 as a thing of the value of Rs. 100, and to assess him to income-tax on Rs. 100 would, it seems to me, be an act of great injustice. Such an act of injustice is not contemplated by any provision of Income-tax Act.
I, would, therefore, like to have the case of Maheshwari Saran Singh reconsidered by a larger Bench but my learned brother agrees with it and I individually cannot disagree with it and cannot refer it to a larger Bench. I am, therefore, compelled to agree to the answer proposed by my learned brother.
There is no substance in the contention advanced on behalf of the assessee that since he adopts cash system, and not mercantile system, of accounting he cannot be deemed to have realised the interest so long as he has not cashed the bonds. The essence of the cash system of accounting is not that income becomes assessable only when it is reduced to cash. If a payment is received in kind, it is income even though it remains in kind and is not converted into cash; the cash system of accounting, does not require that it will not be treated as income so long as the payment remains in kind. In the mercantile or accrual system of accounting, income is deemed to have been received even though in fact it has not been received, if it has accrued or becomes due. This applies to payment in cash as well as to payment in kind. Had the assessee voluntarily accepted the bonds in lieu of the interest due to him or if he could realise the full value in cash at once from the Government, which had issued them, he would undoubtedly be deemed to have received the interest even though the system of accounting was cash.
This question really involves two question, (i) whether the receipt of the bonds amounts to receipt of interest and (2) if yes, whether it amounts to receipt of interest of the face value of the bonds or of their market value. The first question was undoubtedly raised before the Tribunal but not the second question. The assessee denied the very proposition that the receipt of the bonds is equal to the receipt of interest; still he should have, in the alternative, raised the second question. When there are two alternative defences, both must be raised.
That the bonds have a market value lower than the face value is a question of fact it was the duty of the assessee to contend before the Tribunal that even if the receipt of the bonds was taken to be receipt of interest, he should be deemed to have received interest of the market value of the bonds and not of their face value. He cannot raise this question now in this reference. No question can be referred to us with does not arise out of the Tribunals order. The question cannot be deemed to arise out of the Tribunals order merely because the Tribunal treated the assessee as having received interest of the face value of the bonds. The Tribunal took the face value of the bonds because it was never represented before it that the bonds had any other value, such as market value, which might be considered instead of the face value.
Question No. 2 should be answered in the affirmative. It was admitted by counsel of both the parties that the amended provision of section 34(1)(b) applied because the notice under section 34 was issued by the Income-tax Officer on January 9, 1953. The question is whether the Income-tax Officer had information in his possession in consequence of which he had reason to believe that income had escaped assessment. Here certain income had escaped assessment for the year (assuming that his view about the assessability was correct). The income was assessable but had not been assessed when the original assessment order was passed. Thus the first requirement for the applicability of the provisions of section 34(1)(b) was fulfilled. The next requirement is that the Income-tax Officer must have reason to believe that the income had escaped assessment and, therefore, issued a notice contemplated by section 34. Thus the second requirement also existed. The third and last requirement is that the Income-tax Officers belief must have arisen from information in his possession. It is settled that the information contemplated by section 34 is not confined to information about the facts and includes information about the law. It is also settled that the information need not be received from another person. It can be received from a document, and that the information need not be oral and can be written. The information may be possessed not only by the Income-tax Officer, who had passed the regional order of assessment, in which he had failed to tax the income in question but also by his successor. Anything that informs or brings to notice or enlightens is information. That a certain view taken of the facts or of the law applicable to them is erroneous is information and this information can be received either by the Income-tax Officer, who had passed the original assessment order, or his successor, either from the Supreme Court or from the High Court or from Appellate Tribunal or from the Appellate Assistant Commissioner through judgments delivered by them on appeal or reference, either against the original assessment order or against some other assessment order against another assessee or from books of law including law journals. Therefore, if on reading any document, whether a judgment or a text book or a law journal, the Income-tax Officer or his successor learns that a mistake of fact or law had been committed be him or his predecessor, it is a case of his having information in his possession, and if the information relates to escape of income from assessment, section 34(1)(b) applies and he acquires jurisdiction to issue a notice. It is true that for the applicability of section 34(1)(b) there must be both information and belief that income has escaped assessment; the provision expressly speaks of the existence of a belief as resulting from the information in possession. It can, therefore, be said that belief formed without information will not do and will not justify the Income-tax Officers issuing a notice under section 34. If the Income-tax Officer without oral or written information from any source thinks that he had made a mistake in not including certain income in the assessment order originally made by him, it is not a case of his forming the belief on the basis of information in his possession. The information contemplated by the provision must have been received by him after the income has escaped assessment; it is only then that the information can result in the belief that the income had escaped assessment. If without any information from any source an Income-tax Officer merely on a second thought or reflection thinks that he had made a mistake and that the income had escaped assessment, he is not entitled to proceed under the provision because though he had the belief, it did not result from any information possessed by him. That is why it has been said that mere change of opinion does not justify a proceeding under section 34(1)(b) or that the information must be a new information not possession at the time of the escape of the income from assessment. Information is knowledge of a fact (the existence of a law is a fact); a fact can exist without its existence being known to all persons or to some persons. A person may not be aware of a fact even though it exists and can certainly obtain information of its existence later. It is, therefore, not correct to say that an Income-tax Officer cannot act on a fact if it had existed before he passed the original assessment order; if he had no knowledge of it when he getting information of it. Therefore, even if the decision in Maheshwari Saran Singhs case existed at the time when the original assessment order was passed, if the Income-tax Officer was not aware of it when he passed it and became aware of it later and realised that certain income had escaped assessment, he could proceed under section 34(1)(b). The law that receipt of the Encumbered Estates Act Bonds in lieu of interest is actual receipt of interest existed when the original assessment order was passed, but the Income-tax Officer was not aware of it and he did not assess this income. When he or his successor later came to know of the decision, it amounts to his receiving information in possession; when he read it or was told about it by some one, he became acquainted with the fact that the income was assessable. It did not amount to a mere change of opinion. He certainly changed his opinion about the assessability of the income, but it was on the basis of information that this court had declared the income to be assessable. He could proceed even if he did not change his own opinion in the matter and did not agree with the decision of this court; since he felt that he was bound by it he could form the belief that the income had escaped assessment. Even if the Income-tax Officer when passing the original order of assessment had seen and even tick-marked the entry in the assessees accounts about the receipt of the bonds, if he did not include the amount of the bonds in the assessable income because he thought at the time that it was not assessable, he could, when later he read Commissioner of Income-tax v. Maheshwari Saran Singh or was told about it and thus learnt that the income was assessable, issue a notice for reassessment under section 34(1)(b).
I, therefore, agree that both the questions be answered in the affirmative.
Questions answered in the affirmative.