M. C. DESAI. - The Income-tax Appellate Tribunal, Delhi Bench, has at the instance of the assessee referred a statement of the case to this court for answering the following question :
'Whether, when the assessee accepted from the debtor usufructuary mortgages on January 25, 1919, and May 13, 1931, including arrears of interest on prior loans, he there by in effect received payment of such arrears of interest, and, if so, whether the said amounts were assessable for the year 1943-44 ?'
The facts that give rise to the question are as follows :
The assessee is a money-lender by profession and adopts the cash system of accounting. He has adopted the financial year as the accounting year. One Shamsher Ali was his debtor since 1911 and Shamsher Ali went on executing bonds, promissory notes and mortgages in his favour from time to time. One of the mortgages executed in his favour was of 1919 for Rs. 20,000, and the next was of 1931 for Rs. 22,000. Both these mortgages included not only cash advanced by the assessee at the time of the execution but also amounts due under previously executed promissory notes, bonds and mortgages (i.e., principals together with interest due up to the dates of the execution). On March 2, 1936, the assessee obtained a decree against Shamsher Ali for Rs. 63,815-8-0 together with future interest at 3 1/2% in proceedings under the Encumbered Estates Act and in Execution of it, the property of Shamsher Ali was sold and the assessee realised on April 1, 1942, Rs. 72,227-13-8. The question that has been referred to us relates to the income-tax assessed on the assessee for the assessment year 1943-44 on a part of this sum.
There is no doubt that only the interest realised by the assessee is assessable and not anything received on account of the principal. The income-tax authorities and the Tribunal ascertained the amount of interest included in the sum of Rs. 72,227-13-8 by deducting from it the aggregate of the principals advanced by him to Shamsher Ali from time to time and also some interest said to have been realised by him from Shamsher Ali Actually, no interest seems to have been realised in cash by the assessee from Shamsher Ali previously. In some assessment orders for the previous assessment years the income-tax authorities treated capitalised interest as interest realised and assessed the assessee on the amount of it. So long as no interest was realised but was only capitalised by being added to the principal and being made the subject-matter of a new promissory note, bond or mortgage, there was nothing to be assessed. Both logic and precedents are against the view that capitalised interest is liable to be assessed. When a debtor, from whom principal and interest thereon are due to the creditor, makes a fresh promise in the form of a fresh promissory note, bond or mortgage to repay the principal and the interest within a certain time and to pay future interest on the aggregate, he certainly does not repay the interest that had accrued previously. When he makes a fresh promise to pay the old principal and interest it means that they have not been paid. When he undertakes to pay them at a future date, it is quite the opposite of saying that they were paid to him on the date of the promise itself. Making a promise is certainly not payment and, similarly, repeating a promise does not amount to implementing it. When the interest due on a previous advance is capitalised and a fresh promise is made for payment of the aggregate, there is no payment of the interest anymore than there is any payment of the old principal. It makes no difference whether the fresh promise takes the form of a promissory note or a bond or a mortgage, whether simple or usufructuary. In none of the cases is the capitalisation of interest equal to payment of it. When a usufructuary mortgage contains a stipulation, as the two mortgages under consideration contained, that the usufruct of the property would be set off only against the future interest and not against any part of the principal, the realisation of usufruct by the mortgagee may include realisation of the future interest but not the past interest which had already been capitalised. Neither the old principal nor the old interest is paid through the usufruct; the usufruct is in lieu of only the future interest on the aggregate of the old principal and the old interest, payable under the fresh contract of the mortgage. There is very high authority in support of this view (we are surprised that in spite of it the Tribunal has referred this question to us as one of law arising out of its order) and we may refer to Commissioner of Income-tax v. Maharajadhiraja Kameshwar Singh of Darbhanga, Raja Raghunandan Prasad Singh v. Commissioner of Income-tax, Inland revenue Commissioners v. Oswald and Commissioner of Income-tax v. Raja Bahadur Kamakhaya Narayan Singh. In the first case Lord Macmillan observed at page 108 :
'A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attributes'.
In the second case lord Macmillan observed at pages 119-120 :
'What happened was that the assessees received a new and substituted security for an existing debt. To give security for a debt is not to pay a debt. If the assessees had received payment in kind of the amount outstanding on the original mortgage, in the shape, say, or realizable shares or bonds, the case would have been different, but they merely received further and better security for their debt. It is, in their lordships view, quite immaterial that the assessees discharged the original mortgage and all liability under it, for that was merely an incident in the transaction whereby the new security was substituted for the old. Their Lordships accordingly hold that the assessees did not by virtue of the transaction of 1904 receive payment of the arrears of interest....'
The second case was followed by the Privy Council in the case of Raja Bahadur Kamakhaya Narayan Singh, he head-note of which reads as follows :
'Where the holder of the patni rights under an estate was unable to pay the patni rent due to the estate for several years with the result that the rent and interest on arrears of rent amount to a certain sum and the holder of the rights thereupon executed a usufructuary bond in favour of the assessees under which they were put in possession of certain agricultural property for the purpose of realising the sum due to them :
Held, that the bond was merely a security for the debt and no taxable income accrued to the assessees.'
In Oswalds case the House of Lords followed the decision in Raghunandan Prasad Singhs case and laid down, in the words of Lord Thankerton :
'It is clear that the interest due may be paid in moneys worth in such a way as to discharge the debtors liability for the interest.... In my opinion there was no discharge of the debtors liability for the overdue interest, and the result of the arrangement was the improvement of the security and an increased liability for interest by the overdue interest being made to carry interest.... the taxpayer must really, and not merely nationally, have paid the interest; there must be payment such as to discharge the debt; the payment must be a fact, not a fiction' (page 43).
We, therefore, hold that when the assessee accepted from Shamsher Ali the two usufructuary mortgages he did not there by receive payment of any interest. He received interest only when he realised Rs. 72,000 and odd in the liquidation proceedings under the Encumbered Estates Act. The assessable income was rightly calculated by the Tribunal be deducting from the sum realised the aggregate of the principals advanced by the assessee to Shamsher Ali from time to time in the past. Whatever part of Rs. 72,227-13-8 was found to be the income from interest it was assessable in the assessment year 1943-44. We, therefore, answer the first limb of the question in the negative and the second limb in the affirmative.
We direct that a copy of this judgment shall be sent to the Tribunal under the signature of the Registrar and the seal of the court as required by section 66(5) of the Income-tax Act. We further direct that the assessee shall pay to the opposite party his costs of this reference which we assess at Rs. 200.