1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922 at the instance of the Commissioner. Income-tax, Madhya Pradesh, and the question for decision is whether the assessee is liable to pay tax only at the reduced rates under the Part B States (Taxation Concessions) Order, 1950, on a sum of Rs. 2,96,143/-.
2. The question relates to the assessment for tax purposes in the assessment year 1951-52 of the assesses Badrinarayan Rameshwar, who was resident of Indore in the Part-B State of former Madhya Bharat, during the material period. One Pyarelal Sakseria who also resided in Indore, was indebted to the assesses to the extent of Rs. 18,07,968/-. Under an agreement entered into in1946 between Pyarelal Sakseria and M/s. Famous Pictures Ltd., of Bombay, Pyarelal Sakseria advanced Rs. 17 lakhs to the Company on certain terms and was entitled to receive from the said Company a sum of Rs. 21,75,357/- on 21-10-1950. Pyarelal Sakseria assigned on 21-10-1950 all his rights and obligations under the agreement to the assesses in fall satisfaction of the debt he owed to the assessee.
The deed of assignment was executed and registered at Indore. After deducting the amount in respect of the tax liability of Pyarelal Sakseria and the amount he owed to the assesses, the Income-tax Officer, Indore, assessed Badrinarayan Rameshwar on Rs. 2,96,143/- at full rates holding that the amount was received by the assesses as gains of his money-lending business in Part-A State that is at Bombay. The assessee appealed to the Appellate Assistant Commissioner, who upheld the view taken by the Income-tax Officer. He then went up in appeal before the Appellate Tribunal.
The tribunal took the view that by the assignment Badrinarayan Rameshwar only exchanged his investment in Indore for an investment in Bombay, and that the income of Rs. 2,96,143/- accrued to him at Indore and consequently it could be taxed only at the reduced rates under the Part-B States (Taxation Concessions) Order, 1950. Being dissatisfied with the result of the appeal before the tribunal, the Commissioner required the tribunal to refer to the High Court the question of law arising out of the tribunal's order holding that the income of Rs. 2,96,143/- was liable to tax at the reduced rates. The question, which the tribunal has referred to this Court for decision, has been formulated thus :
'Whether on the facts and circumstances of the case the sum of Rs. 296,143/- was liable to be taxed at the reduced rate as provided in Part-B States (Taxation Concessions) Order 1950 ?'
3. Learned Advocate General, appearing for the Income-tax Commissioner, contended that the tribunal was in error in thinking that by the assignment Badrinarayan Rameshwar received a new investment for an existing one; that in effect the assignment wiped off the whole indebtedness of Pyarelal Sakseria to the assesses by his acceptance in satisfaction of the debt a realisable asset, to wit, the rights of Pyarelal Sakseria against M/s. Famous Pictures Ltd., and that, therefore, the income of Rs. 2,96,143/- was received by the assesses in Bombay where the debtor Company and the realisable assets were. To support his contention, learned Advocate General relied on Raghunandan v. Commissioner of Income-tax, AIR 1933 PC 101 and Commissioner of Income-tax B. and O. v. Kameshwar Singh, AIR 1933 PC 108.
4. The contention advanced by the learned Advocate General must, in our opinion, succeed. The matter seems to us to be concluded by the decision of the Privy Council in AIR 1933 PC 101 (supra) and AIR 1933 PC 108 (supra). In those cases, it was observed by the Privy Council that income may be received in kind as well as in cash and that the equivalent of cash may be a receipt of income and further that a liability to pay interest, like a liability to make any other payment, may be satisfied by transference of assets other than cash and that a receipt of kind may be taxable income, but that for this to be so it was essential that what was received in kind should be the equivalent of cash or, in other words, should be money' worth.
In Raghunandan's case, AIR 1933 PC 101 (supra), the assesses accepted a new mortgage indischarge of a prior one and arrears of interest thereon. The Privy Council held that by accepting the new mortgage the assesses did not receive payment or the equivalent of payment of the principal and interest of the original mortgage, and that what happened was that he received a new and substituted security for an existing debt. It was observed :
'To give security for a debt is not to pay a debt. If the assessee had received payment in kind of the amount outstanding on the original mortgage, in the shape, say, of realisable shares or bonds, the case would have been different, but they merely received further and better security for their debt.' in the other case, AIR 1933 PC 108 it was held that when a mortgagee purchases at auction under a decree of the Court, the property which was the subject matter of the mortgage, then he can be said to have received the equivalent of the interest due on his mortgage'.
5. The Privy Council referred to the decisions in Califorman Copper Syndicate Ltd. v. Harris, (1904) 5 Tax Cas 159 and Westminster Bank Ltd. v. Osler, 1933 A.C. 139. In the former cases, a Company formed for the purpose inter alia of acquiring and re-selling mining property, first acquired and worked various mines and then it re-sold the whale to a second company receiving payment not in cash but in fully paid shares of the latter company. The Income-tax department took the view that the difference between the purchase price and the value of the shares was the profit assessable to income-tax. The Company contended that the case was one of substitution of one kind of capital for another and that in any case no tax could be levied until the value of these shares has been realised in money. The Court rejected this contention and held that the view taken by the Income-tax department was correct. Lord Trayner said as follows :
'But it was said that the profit -- if it was profit -- was not realised profit, and, therefore, not taxable. I think the profit was realised ..... Nodoubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash ...... In the case of 1933AC 189 (supra), the bank surrendered certain holdings in exchange for other Government securities and the taxing authorities claimed tax on the excess value of the substituted over the original securities. The question then arose whether these transactions were the equivalent of a realisation of the original holdings, and it was held that they were. Lord Ruckmaster pointed out. 'The exchange effected in the present case was in fact the exact equivalent of what would have taken place had instructions been given to sell the original stock and invest the proceeds in the new security:'
6. Applying the principle laid down in the above cases and by the Privy Council in the cases referred to earlier, it must be held that when the assessee acquired by assignment the rights of Pyarelal Sakseria against M/s Famous Pictures Ltd., he thereby received payment or the equivalent of payment of principal and interest of the loan he had advanced to Pyarelal Sakseria. The assignment was not merely an exchange between one type of investment for another. It operated as payment of the debt which Pyarelal Sakseria owed to the assessee. On 21-10-1950 the assessee was entitled to receive from Sakseria money or money's worth on account of the loan advanced. The transaction of assignment was on money basis.
The rights and obligations which Pyarelal Sakseria assigned to the assessee on 21-10-1950 were realisable assets. What the assessee received by the assignment represented the money originally advanced to Pyarelal Sakseria together with the accumulated profits on the loan advanced. It was in fact the money originally advanced with the accumulated profits in another form. The assessed must, therefore, be held to have received payment of Rs. 2,96,143/- in Bombay where the debtor M/s Famous Pictures Ltd. and the realisable assets were. If thus the assessee received the payment in Bombay, the income was clearly liable to tax at the Part-A States' rate.
7. On behalf of the assessee, it was submitted that under a clause of the agreement entered into between Pyarelal Sakseria and M/s. Famous Pictures Ltd., all payments and repayments had to be made at Indore and at no other place and that the deed of assignment between Pyarelal Sakseria and the assessee was executed at Indore, and, therefore, the income must be taken to have accrued in Indore, situated in a Part-B State. In our opinion, these circumstances do not in any way affect the position of the assignment operating on principle as a payment of the debt owed by Sakseria to the assessee. Our answer to the question referred to by the tribunal is, therefore, that the assesses is liable to pay lax on Rs. 2,96,143/- at the full rates and not at the confessional rates under the Part-B States (Taxation Concessions) Order, 1950. In the circumstances of the case, we make no order as to costs of this reference.