SAHAI J. - This reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), has been made at the instance of the Commissioner of Income-tax, U. P., Lucknow, by the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad (hereinafter referred to as 'the Tribunal'). The question referred to this court for its opinion reads :
'Whether, on the facts and in the circumstances of the case, the Tribunal acted rightly in holding that the sum of Rs. 64,020 was not assessable as income of the assessee in the assessment year 1956-57 ?'
The assessee is a Hindu undivided family and the reference relates to the year 1956-57 for which the previous year is the year ending on March 31, 1956.
It is clear from the statement of the case submitted by the Tribunal that the assessee was maintaining its accounts on cash basis. For the assessment year 1956-57 the only source of income to the assessee is said to be interest on securities. The assessee had advanced large amounts of money to Messrs. M. K. M. O. Sugar Mills (Private) Limited, Munderwa, District Basti. For the assessment year to which these proceedings relate a sum of Rs. 3,05,830 (principle) and another sum of Rs. 64,020 (interest), in all a total of Rs. 3,69,850, was due to the assessee from Messrs. M. K. M. O. Sugar Mills (Private) Ltd. The assessee filed a suit for the recovery of this amount. This suit was compromised by the parties and a compromise decree was passed which contained the following recital :
'This whole amount has been satisfied by the simple mortgage in favour of plaintiffs sons dated February 8, 1956.'
The Income-tax Officer taxed the assessee on Rs. 64,020, the amount which had accrued as interest to the assessee on the sum advanced to Messrs. M. K. M. O. Sugar Mills (Private) Ltd. The assessee appealed to the Appellate Assistant Commissioner of Income-tax but without success. He, however, succeeded in the second appeal before the Tribunal, which held that the sum of Rs. 64,020 was not received by the assessee during the year of assessment and for that reason was not assessable.
As already pointed out earlier at the instance of the Commissioner of Income-tax the present reference has been made.
We have heard Sri R. L. Gulati on behalf of the Commissioner of Income-tax, U. P., and Sri Raja Ram Agrawal on behalf of the assessee. Mr. Gulatis contention is that, inasmuch as the effect of the compromise decree was to terminate the relationship of debtor and creditor between the assessee and Messrs. M. K. M. O. Sugar Mills (Private) Ltd., the debt inclusive of the interest was satisfied and there was thus a constructive payment of the interest.
Mr. Raja Ram Agrawals contention on the other hand is that the debt was not actually wiped out and it continued to exist though in the name of the sons. He contended that it was clearly a case of substituted security. Mr. Raja Ram has placed reliance on the following cases :
(1) Commissioner of Income-tax v. Maharajadhiraja Kameshwar Singh,
(2) Raja Raghunandan Prasad Singh v. Commissioner of Income-tax,
(3) Commissioner of Income-tax v. Raja Bahadur Kamakshya Narayan Singh,
(4) Inland Revenue Commissioners v. Oswald,
(5) Fakir Chand v. Commissioner of Income-tax.
In the present case it is clear from the facts stated by the Tribunal that the relationship of debtor and creditor between the assessee and Messrs. M. K. M. O. Sugar Mills (Private) Ltd. had come to an end. The operative portion of the decree clearly shows that the amount of debt had been satisfied (the decree uses the word 'satisfied'). It is true that another mortgage deed was executed in favour of the sons of the karta of the assessee. The result of this transaction was that a new debt came into existence payable by Messrs. M. K. M. O. Sugar Mills (Private) Ltd. to the sons of the karta of the assessee. We would like to point out that the assessee in the present case is not the karta of the Hindu undivided family but the Hindu undivided family itself. Consequently, if another mortgage deed had been executed in favour of the sons of the karta of the assessee it cannot be said that there is any relationship of debtor and creditor between the assessee and Messrs. M. K. M. O. Sugar Mills (Private) Ltd. All the cases relied upon by the learned counsel for the assessee are distinguishable as they were cases of substituted security and the present is not. It is a case where the debt stood fully satisfied.
Mr. Raja Ram Agarwal also contended that inasmuch as there was cash system adopted by the assessee, unless there had been actual physical payment, the sum of Rs. 64,020 could not be assessed in the hands of the assessee. We do not agree with the learned counsel. The law does not require that there should be an actual physical transaction and inasmuch as the debt liability of Messrs. M. K. M. O. Sugar Mills (Private) Ltd. came to an end and the debt of the assessee stood fully satisfied, it must be held that there was constructive payment of Rs. 64,020. We, therefore, find no substance in the contention of the learned counsel.
For the reasons mentioned above we would answer the question referred to us in the negative in favour of the department and against the assessee. We assess a sum of Rs. 200 by way of costs of these proceedings in favour of the department and we fix the fee of the learned counsel for the department at the same figure.
Question answered in the negative.