Alfred Henry Lionel Leach, C.J.
1. The assessee was a partner in a money lending firm carrying on business in Rangoon. The firm was dissolved and as his share of the assets the assessee was allotted two debts due by a customer of the firm. These debts were secured on mortgages of immovable properties. In the first place the customer was given an advance of Rs. 40,000 and in respect of this sum a first mortgage of the properties was created. Later he was given a further advance of Rs. 10,850, which was secured by a second mortgage of the same properties. As the result of the arrangement entered into on the dissolution of the partnership the assessee became the lender of the two sums and entitled to realize the security which had been given. He filed a suit against the debtor, but as he considered that the properties were not worth more than Rs. 50,000, he limited his claim to this amount. With interest the amount due on the first mortgage was Rs. 71,220. He waived Rs. 21,220 of the interest due and asked for a decree on the first mortgage for Rs. 50,000. He regarded the second loan, that is, the loan of Rs. 10,850, as being irrecoverable and accordingly he did not ask for a decree in respect of this amount.
2. For the assessment year 1938-39 the assessee has been assessed on an income of Rs. 22,394. Included in this sum is Rs. 19,260 which the Income-tax Officer regarded as being the amount of the net profits of the assessee's business in Burma for the year of account. The assessee says that the Income-tax Officer here erred as he should have reduced the amount by Rs. 10,850, the loss which he had suffered in respect of the second mortgage. This claim was disallowed and the reasons set out in the case submitted to this Court by the Commissioner are that in the assessee's books the two mortgage debts are debited against the debtor in a single folio and that as he only expected to recover Rs. 50,000 from the debtor there was no loss in respect of the second loan of Rs. 10,850 except to the extent of Rs. 850, which had been allowed. What has apparently operated in the mind of the Commissioner is that the suit was filed to recover a sum of Rs. 50,000 which was roughly the amount of the two principal sums of Rs. 40,000 and Rs. 10,850. It would seem that the Commissioner has had regard to what he considers to be the substance of the matter, not the strict legal position. This the Commissioner is not entitled to do and the Privy Council has protested against assessments being made on such a basis. In the recent case of the Bank of Chettinad Ltd. v. The Commissioner of Income-tax, Madras (1940) 2 M.L.J. 851 : I.L.R. (1941) Mad. 89 (P.C.) the Board considered it necessary once more to protest against the suggestion that in revenue cases 'the substance of the matter' may be regarded as distinguished from the strict legal position, and reference was made in the judgment to the disapproval of this doctrine expressed in Inland Revenue Commissioners v. Westminster (Duke) (1936) A.C. 1.
3. Now what is the strict legal position here? The assessee was entitled to bring a suit against his debtor for the purpose of recovering the amounts due on both the mortgages. If he had sued on both the mortgages he would have been entitled to appropriate in the first place the proceeds of the sale of the immovable properties to the principal and interest due on the first mortgage. Only if they were sufficient to discharge both the principal and interest due on the first mortgage could there be any appropriation towards the second mortgage. It has not been suggested that the assessee erred in regarding Rs. 50,000 as being the outside, value of the mortgaged properties. It has been stated at the Bar that at the sale which took place in pursuance of the decree which was eventually obtained the properties did not realize more than Rs. 27,000. But be this as it may, it must for the purposes of this case be taken that at all material times the total security was not worth more than Rs. 50,000 and the debtor had no other property. Therefore, there could be nothing left for the discharge of the second mortgage, which means that the assessee has in truth and in fact lost Rs. 10,850 on the second transaction without taking into consideration his loss of interest on this sum. The loss had been ascertained in the year of account and the assessee was entitled to have it taken into consideration in calculating his income for the purpose of taxation.
4. For these reasons we answer the question referred in the affirmative. As the assessee has succeeded he will be awarded costs which we fix at Rs. 250. The deposit of Rs. 100 will be refunded.