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M.L.M. Muthiah Chettiar and ors. Vs. Commissioner of Income-tax, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberReferred Case Nos. 59 of 1954, 33, 42, 43, 58, 59, 60, 64, 65, 75 and 82 of 1955, 97, 98, 102, 112,
Reported inAIR1959Mad158; [1958]33ITR567(Mad); (1959)2MLJ196
ActsIncome Tax Act, 1922 - Sections 3, 10 and 10(2)
AppellantM.L.M. Muthiah Chettiar and ors.
RespondentCommissioner of Income-tax, Madras
Appellant AdvocateP.R. Ranganathan, Adv. for G.R. Jagadisan, Adv., ;R. Kesava Aiyangar, ;S. Swaminathan, ;Subbaraya Aiyar, ;V. Sethuraman, ;S. Padhmanabhan, ;S.V. Subramanian, ;G. Vasantha Pai, ;K. Srinivasan, ;D.S. Me
Respondent AdvocateAdv. General and ;C.S. Rama Rao Sahib, Adv.
Cases ReferredBurma v. A. S. A. Concern
income-tax act (x of 1922)--japanese occupation of malaya--depreciation of japanese currency in relation to malayan currency--ordinance by malayan legislature--payment received by assessee in japanese currency--worth not their face value of--balance of original debt revived--obtaining of payments by assessee--assessment to tax--legal only in respect of interest received by assessee--payments by assessee in pursuance of ordinance--no deduction of principal paid--interest on money borrowed, necessary item of expenditure.; when malaya was in the occupation of the japanese, japan issued its own currency in dollars which circulated side by side with japanese currency in dollars. from 1943 the japanese currency began to depreciate and the rate of depreciation become almost a landslide and in.....1. certain facts and circumstances are common to all these cases and we shall set them out first.2. between february 1942 and september 1945 malava was under the occupation of the japanese. during this period the occupying power issued its own currency in dollars and this currency circulated side by side with the previous malayan currency which was also in dollars. in 1948 the malayan legislature enacted an ordinance to which let'erence will be made presently.the schedule to that ordinance shows that up-to the end of december, 1942, the new japanese currency and the old malayan currency circulated at par. in january 1943, the japanese currency began to depreciate and in december 1943, one hundred old malayan dollars were equivalent to 385 new japanese dollars. in 1944, the depreciation.....
1. Certain facts and circumstances are common to all these cases and we shall set them out first.

2. Between February 1942 and September 1945 Malava was under the occupation of the Japanese. During this period the Occupying Power issued its own currency in dollars and this currency circulated side by side with the previous Malayan currency which was also in dollars. In 1948 the Malayan Legislature enacted an Ordinance to which let'erence will be made presently.

The schedule to that Ordinance shows that up-to the end of December, 1942, the new Japanese currency and the old Malayan currency circulated at par. In January 1943, the Japanese currency began to depreciate and in December 1943, one hundred old Malayan dollars were equivalent to 385 new Japanese dollars. In 1944, the depreciation became more rapid with the result that in December 1944, one hundred old Malayan, dollars, were equal to 1850 new Japanese dollars.

From January 1945, the rate of depreciation be-came almost a landslide. On 1st August, 1945, one hundred old Malayan dollars were equal to 10500 new Japanese dollars. On 8th August, 1945, one hundred old Malayan dollars were equal to 55000 new Japanese dollars. By 13th August, 1945, the Japanese dollars ceased to have any value.

3. Soon after they reoccupied Malaya in September 1945, the British Government declared a moratorium on all private debts. A large number of Indian nationals were doing business in Malaya before the Japanese occupation, during the Japanese occupation and also thereafter and they sustained heavy losses during and on account of the occupation. In response to representations made on their behalf, the Government of India notified on 14th August, 1947 a scheme intended to give them a measure of relief. The main features of the scheme so far as here material were these :

(1) No assessce was under any obligation to accept the scheme; he was free either to opt for it or not. If he desired to opt for the scheme he was required to exercise his option within one month after he was informed of the scheme.

(2) The assessee was permitted to include in his expenses various items which would be inadmissible under the Indian Income-tax Act.

(3) The losses suffered by the assessee during the five years relevant to the assessment years, 1942-43 to 1946-47 were all to be aggregated.

(4) The assessee was permitted--reversing the usual procedure fixed in the Indian Income-tax Act to carry this aggregated loss backwards and set it off against his profits for the assessment year 1942-43.

(5) If there was any loss still unabsorbed the assesses was permitted to carry this toss -- again backwards -- to the year 1941-42.

(6) Any excess tax found to have been paid after recomputing the income of the assessee by carrying his losses backwards would be refunded to him.

(7) The loss could not be carried forward.

(4) The Central Board of Revenue issued further instructions in respect of the scheme:

(1) Where proper and complete accounts existed the profit and loss was to be determined in accordance with the accounts. Where proper accounts were not available a comparison of the balance sheets at the beginning and at the close of the period was to be made for determining the profit.

(2) Appreciation or depreciation or loss of capital assets was to be ignored.

(3) Where a debtor of the assessee repaid him in Janapenese currency the amounts so paid would not be treated as an asset of the assessee and would be excluded from the assets side in the balance sheet. This was however subject to one important qualification, viz., "if any recovery is subsequently made, it will be taken as income."

In like manner, where an assessee had paid his debts in Japanese currency the debts would be treated as having been satisfied to the extent of the payment and excluded from the liabilities side in the balance sheet. This too was subject to the proviso that "if the payments made are not recognised by the Court and as a result of the Court's orders a further payment has to be made, this payment will be taken into account in the assessment of the year in which the payment is made."

4. Any tangible asset taken in satisfaction of debts and subsisting at the close of the period would be valued at a reasonable rate.

5. It may be explained here that the scheme proceeds on the basis that Japanese currency whe- ther kept in the till or in the Rank was of no value after September 1945.

6. On 16-12-1948 the Malayan Legislature passed the Ordinance of which mention was made earlier, and, that Ordinance took effect from 1-10-1949. It was intended to regulate the relationship between debtors and creditors in respect of debts incurred (1) prior to the Japanese occupation and (2) during the Japanese occupation. Subject to certain provisions, Section 3 directed that any prc-occupa- tion debt which remained wholly unpaid at the time the Ordinance commenced was to be paid in full.

Subject again to certain provisions and conditions, payment of a pre-occupation debt, either in Malayan currency or in Japanese currency, made before 31-12-1943, was to be a valid discharge to the extent of the face value of the payment. In other cases payments in Japanese currency were to be revalued and scaled down in accordance with the schedule annexed to the Ordinance.

A debtor who had paid any debt in depreciated Japanese currency was required to pay over again a certain amount to be ascertained by the application of the schedule. Section 13 expressly ex- cluded from the scope of the Ordinance agreements made between a creditor and a debtor after the end of the occupation period for the purposes of-

"(a) valuing any payment made during the occupation period in respect of a pre-occupation debt or an occupation debt (whether accrued due or not); or

(b) providing for payment or settlement of any pre-occupation debt or occupation debt or part thereof; or

(c) determining the rate for payment of any such interest as is_ referred to in Sub-section (1) of Section 10 of this Ordinance.''

7. The cases now before us fall into two categories. On the strength of the Ordinance several assessees were able to obtain or enforce further payments in respect of debts which had been discharged wholly or in part by payment in Japanese currency, and on all these sums, they have been assessed to tax. The assessees questioned the legality of the levy.

What is the extent of their liability to pay tax on these amounts is the question raised by one category of cases. On the other side, in pursuance of the very same Ordinance, the assessees were re-quired to make further payments to their creditors. In respect of such payments what relief from tax are the assessees entitled to? That is the real question raised in the second category of cases.

8. The facts in R. C. No. 59 of 1955 may be taken as typical of the cases in the first category. The assessee in that case was a resident firm with] a money-lending business in Kampar in Malaya. Between 1942 and 1945, the assessee realised various amounts in Japanese currency. The assessee also opted for the Special Scheme notified by the Government of India, and, for purposes of the scheme the loss of the assessee was computed at $ 85,200 being the equivalent of Rs. 1,33,125.

The assessee had made a profit of Rs. 35,753 and Rs. 35,010 for the assessment years 1942-43 and 1941-42 respectively. As the losses exceeded the total profits for those two years those profits were treated as nil and the tax paid by the assessee for those two years was refunded to him. After the Ordinance took effect the assessee collected $6437 during the year ended 12-4-1952. The Income-tax Officer observed:

"These are amounts recovered from debtors who discharged their loans during the occupation period. Since these loans were discharged earlier any second receipt from such debtors are only Income assessable to tax."

On this reasoning he held that the assessee was liable to pay tax.

9. The Appellate Assistant Commissioner allowed the appeal which the assessee preferred before him. The reasons he gave were:

"In this case in accordance with that Ordinance what he received from the debtors had to be scaled down and the difference had to be realised in normal currency. That came to $6437. It was only a realisation of the original amounts lent. It is not income."

The department appealed to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal for these reasons:

"In the computation made by the assessee for purposes of chiming benefits under the scheme, It included and claimed all its cash and bank balances in Malayan business as part of the losses incurred therein. These case and bank balances included the recoveries in full in the then Japanese currency of the debtors in question. In our opinion, this claim constitutes by itself a write-off of the debtors, though indirectly, with the result that subsequent recoveries thereof amount to only bad debt recoveries normally assessable. The Appellate Assistant Commissioner's order is consequently set aside and the sum of $6437 is accordingly restored to the assessment.''

10. The assesses then came to this court and at his instance this Court required the Tribunal to state a case on the following question of law,

"Whether on the tacts and in the circumstances of the case the recovery of the sum of $ 6437 could be deemed to be the recovery of had debts as viewed by the Appellate Tribunal and assessable as such".

11. It is unnecessary for us to summarise the facts in the other cases falling in this category since, as we have already explained, the facts here are typical and illustrative, and the questions raised in those references notwithstanding differences in phrasing are also in substance the same.

12. R. C. N. 43 of 1955 is a case in the second category and the facts there were as follows: The assessee was carrying on a money-lending business at Kualakubbu Bharu and Paritbuntar in Federated Malay States. The assessee borrowed various sums of money before 12-4-1942, on which date the Japanese occupied the country. Some of these debts were repaid in full in Japanese currency.

After the country was reoccupied by the British and the Ordinance was issued, the assessee had to make various further payments to his creditors. The further payments that he had to make amounted to $ 28,586-72 for the year ended 13-4-1951 and $ 11,574-31 for the year ended 12-4-1952. The assessee claimed that these amounts were legitimate deductions from his income and should not be assessed to tax. The Income-tax Officer overruled the objection remarking.

"Payments to creditors whose accounts have been settled during the occupation period and who have claimed again under Debtor Creditor Ordinance. These are only repayments of capital." The Appellate Assistant Commissioner dismissed the asscssee's appeal holding that,

"Payments to creditors on account of the Debtor-Creditor Ordinance amounted to oniy repayments of the original loans taken and therefore they will not be admissible losses for income-tax purposes."

The Tribunal agreed with the view of the department :

"By virtue of the provisions of the Ordinance, the repayment of creditors during the occupation period in Japanese currency was not accepted as full discharge in certain circumstances but limited to the scale laid down in the schedule thereto. In this view, the amount due and outstanding, which had subsequently been repaid, can only be said to represent a liability of the business as at the date of reoccupation, even though in the books, such a liability did not appear. The repayments to creditors in both the years presently in question are consequently of a capital nature and cannot therefroe be deducted from the profits. The argument that the payments in question have been necessitated by the incidental loss incurred on account of fluctuations in exchange rates is hardly tenable, as no exchange rates are involved in the present consideration".

13. At the instance of the assessee the Tribunal referred the following question for the decision of this Court;

"Whether the payments of $ 28,586 and $ 11,547 arc deductible from the foreign profifs of assessment years 1931-52 and 1952-53 respectively.''

The questions raised in the other references in this group are the same in substance.

14. No long arguments based on the special scheme propounded by the Government of India were advanced before us, and so the scheme itself can be dealt with very briefly.

15. From a purely legal point of view the scheme was in the nature of and constituted an offer by the Government of India which when accepted by the assessee brought into existence an agreement between the Government and the assessee. But, the liability of the assessees in these cases -- and in fact of all persons -- to pay Indian income-tax is created by the provisions of the Indian Income-tax Act.

The amounts on which the tax has to be paid, the rates at which the tax has to be computed and the reliefs which assessees are entitled to, must all be determined in accordance with the provisions of the Indian Income-tax Act and the relevant Finance Acts. If, under these Acts, no liability to pay tax. arises in respect of any sums of money which the, assessee may have received, he cannot be required; in assessment proceedings to pay tax on that amount: merely because he has opted for the scheme notified by the Government of India whereunder such sums are to be treated as bis income.

This is because of the general rule that liability to pay a tax like the income-tax must be created by statute and cannot be founded on agreement. Rights and liabilities arising from the fact that a particular assessee has accepted the scheme or offer made by the Government of India cannot be enforced as if they arose under the indian Income-tax Act; such rights and liabilities since they arise from contract must be adjusted or enforced otherwise. To put it in another wav, the scheme stands outside the Act.

16. When during the course of hostilities an enemy Sovereign Power brings any territory under its occupation and during such occupation it issues its own currency, such currency would ordinarily be legal tender and has got to be accepted in payment of obligations. Payments in such currency would therefore pro fanto discharge a debt. But in the present case the Japanese authorities issued their notes in such large numbers and in such a manner that the value of the currency depreciated rapidly and steeply till a stage was reached when it was worth nothing at all.

The British Government which returned to Malaya first declared a moratorium and then enacted the Ordinance. The result of the Ordinance was to reopen debts and obligations which would otherwise have been treated as discharged in whole or in part because of the payments made in Japanese currency. The legislature declared that payments made in Japanese currency would be treated us valid payments only in a fractional degree.

It directed that though occupation notes whose face value aggregated to a certain amount had been paid, still those notes would be treiated as having been worth only a fraction of their face value. It further provided that the amount of the fraction should be ascertained in accordance with the schedule appended to the Ordinance. This meant that to the extent that the Ordinance declared that there had been no valid discharge, the original debt was revived.

Thus, if X had borrowed 1010 dollars from Y before the occupation and if in discharge of that debt X paid 1010 Japanese dollars in July 1944 to Y the debt would be wiped out under the law as it then stood. The Ordinance, however, directed that this payment of $1010 was to be treated as a payment of only 100 Malayan dollars. This meant that the debt was revived to the extent of $910.

Putting the matter in general terms, what the Ordinance did was to restore the original debt to the extent that it abridged or abrogated the dis-charge that had been made in Japanese currency. From this it would follow that repayments subse-quently made in discharge of the debt that was thus, resuscitated would have to be treated as partaking _ of the same character as the original debt.

If the original debt revived by the Ordinance comprised only the principal, the repayment received would have to be regarded as receipt on account of the principal. If it comprised only interest the repayment would have to be regarded as receipt on account of interest. If the original debt comprised both principal and interest and was paid in full there would have been a receipt on account of both principal and interest. But if the repayment was only partial then there would be a receipt on account of principal or interest according as the amount has been lawfully appropriated to one head or the other.

17. The learned Advocate General cited two cases to show that payments made in connection with an obligation, payments which at one time were net contemplated at all, must be treated as payments on account of the original obligation and treated for tax purposes as such.

18. The first is reported in Taxation Commr. of Australia v. Squatting Investment Co. Ltd. 1954 A. C. 182. The material facts there were as follows. A company called the Squatting Investment Company Ltd. carried on business as growers of Wool in Australia during the years 1939 to 1946 inclusive. The wool they produced was compulsorily acquired by the Commonwealth of Australia in order that the Australian Government might be able to carry out certain commitments which it had entered into with the Government of the United Kingdom.

One term of the agreement between the two Governments was that they would divide equally between them any profit arising from the re-sale of the wool outside the United Kingdom. The company duly received the. whole of the compensation moneys due to it under the Regulations. The resale by the United Kingdom of part of the wool it had thus acquired resulted in large profits.

These profits were distributed in accordance with an Act passed for the purpose in 1948. The Squatting Investment Company Ltd. received its share of these profits in pursuance of the Act. The Commissioner of Taxation claimed that the amounts so received by the company were liable to tax. The High Court of Australia negatived the claim of the Commissioner. On appeal the Privy Council held :

"that having regard to the whole history of the matter, the sum received by the respondents pursuant to the provisions of the Act of 1948 must be regarded as an additional payment voluntarily made to them for wool supplied for appraisement, or, if the compulsory acquisition could properly be described as a sale, a voluntary addition made by the Commonwealth to the purchase price of the wool. It was in the respondents' hands a trade receipt of an income nature, and formed part of their assessable income under Section 25 of the Incometax Assessment Act, 1936-49 as 'gross income derived directly or indirectly from all sources whether in or out of Australia ..... which is not exempt income, and 'was accordingly liable to tax."

19. The other case is reported in Severne (H M. Inspector of Taxes) v. Dadswell, (1955) 35 Tax Cas. 649. The facts are thus summarised in the first paragraph of the headnote : "The respondent was granted a licence to mill flour in October 1941 and carried on the trade of flour milling until September 1945. As he had not been a miller at the outbreak of War, he was not entitled to the benefit of a remuneration agreement whereby millers were compensated by the Ministry of Food for losses incurred under wartime arrangements for the purchase of wheat and sale of flour. Having, however, been informed by the Ministry in 1943 and twice later that the remuneration of millers who had begun milling during the period of control was under consideration, he made a claim in 1949 on the same basis as that laid down in the remuneration agreement and received payments in settlement." The assessee contended that the sums received in 1949 were not trading receipts but ex gratia payments. Alternatively ho contended that they were received after the cessation of his trade and that if it was a debt arising at the date of the cessation its value at that date was nil. The Commissioners upheld the assessee's contention. On appeal the court held,

"If on the discontinuance of a trade a payment for work already done has not been finally settled, accounts can be reopened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter."

We may at this stage also refer to the decision in A.M.K.M.K. v. Periannan Chettiar, 1955 A. C 230 The material facts in that case were as follows: The appellants and the respondents were both of them money-lenders carrying on business in Penang. They had dealings with each other on current account as from February 1939. They continued to operate on the account during the period the country was under Japanese occupation. The account was closed on or about 6th August 1945.

The question arose as to in what order payments made by the debtor to the creditors should be applied. The Privy Council held that by reason of Section 8 of the Ordinance a payment during the occupation period was to be deemed to have been applied first to any debit balance which arose during the occupation period.

Each subsequent payment during the occupation period must be treated as having been applied first to any debit balance that arose during the occupation period and existed at the time of the payment, and subject thereto, must be treated as having been applied in reduction of the preoccupation debt. Each payment applied in the latter manner was a valid discharge of such preoccupation debt to the extent of the face value of such payment, subject, of course, to provisions for scaling down.

20. In seeking an answer to the questions that arise on these references it is as well to begin by examining the simplest possible case. Let us take the case of a money-lender who has got a capital of one lakh of rupees. He employs no borrowed money in his business. He lends the entire amount of one lakh of rupees at ten per cent per annum and all the loans he makes are repaid at the end of the year, which means, he would have received in all Rs. 1,10,000. But, we compute his profits at Rs. 10,000; that is to say from the aggregate sum of Rs. 1,10,000 that our money-lender has received we deduct the principal amount he has advanced.

In other words, we ignore the amount he has recieved from his debtor in repayment of the principal. Now, if we do not do that and treat the entire sum of Rs. 1,10,000 that has come into his hands as a revenue receipt and require him to pay tax on the whole of that sum, a very absurd situation would arise. But, in substance, this is exactly what the income-tax Officer and the Tribunal have dune in the cases which fall in the first category in our series. From this simple illustration it will be plain that when computing the profits of a money-lender, we must not take into account the moneys he has received back on account of the principal he originally lent.

21. Let us now complicate the position by supposing that out of the loans our money-lender has advanced a sum of Rs. 2000 and interest thereon is found to be irrecoverable. In such a situation in order to ascertain his true profits, what we do is to deduct the irrecoverable amount of Rs. 2000 from the interest recovered on the other loans which our money lender has made.

That is under this express Statutory provision in Section 10 (2)(xi) of this Act. The position would then he this. Interest earned by Rs. 98000 at 10 per cent is Rs. 9800. Deduct Rs.2000 which is irrecoverable and is lost. Profit Rs. 7800. It will he appreciated that even in this case when computing profits, we do not take into account moneys received in repayment of the principal amount.

22. Now, let us suppose that our money-lender uses no capital of his own but trades with borrowed money; that is to say, he has borrowed one lakh of rupees at 4 per cent, and has lent out the whole of it at ten per cent. If, at the year, ho gets hack all the moneys he has lent and also repays all the moneys he has borrowed, he would have made a profit of Rs. 10,000 less Rs. 4000, that is to say, Rs. 6000.

Even at this stage, for computing the true profits of our money-lender, we do not take into account the moneys ho has received in repayment of the principal. Nor, on the other hand, do we take into account the moneys he has repaid by way of principal. In actual practice, no doubt, all the moneys which our money-lender has lent out will not be repaid in the course of the same year and similarly he will not have repaid in the course of the same year all the moneys he has borrowed.

So, let us go another step forward and suppose that in the course of the year our money-lender has received by way of repayment only Rs. 50,000 of the principal he has lent and interest thereon. He would then have received in all Rs. 55000. Let us suppose that he has in his turn repaid Rs. 52000 to the person from whom he borrowed money. This means that his profit for the year would be Rs. 5000 less Rs. 2000, that is to say, Rs. 3000. Even now, we do not take into account the moneys received in repayment of principal and the moneys paid back in repayment of principal.

If in this particular case, any debt has become irrecoverable, the amount cf that debt will be deducted from the sum of Rs. 3000 and the balance alone, if any, will be the actual profits. No doubt, when we prepare a statement of assets and liabilities, we certainly bring into the account the principal amounts involved in the transactions; we would show on the one side the principal outstanding and similarly on the other side the principal repayable. But and it is important to bear this in mind amounts which come into a statement of assets and liabilities do not all cf them enter into the reckoning when wo have to ascertain the profits.

23. From all this, one simple conclusion emerges plainly. When we have to compute or ascertain the profits a money-lender has made, we do not take notice of the moneys be has .received in repayment of principal, nor conversly do wo take notice of the moneys he has repaid on account of principal. From this it follows that the sums which a moneylender has received in repayment of the principal cannot be subject to tax.

Conversely, he cannot claim that the amounts he has repaid as principal should be differently treated and that the amounts so repaid should be deducted from his profits. The two items, that is, repayments of principal received by the money-lender and repayments of principal made by the moneylender must both of them be excluded. When a debt has become a bad debt, the amount of that debt is deducted from the profits, under the specific terms of Section 10(2)(xi) of this Act.

24. The reason given by the Income-tax Officer for treating the entire amount received by the asses- see in pursuance of the Ordinance as income proceeds on A misconception of the legal and factual position. He overlooked the fact that the payments were made in a depreciated currency and that though the payments discharged the debts in accordance with the law at the time the payments were made, the result of the Ordinance was to revive the old debt. By missing these facts he was inclined to take the view that the subsequent payments were in the nature of accretions to profits which, of course, they were not.

25. The Appellate Assistant Commissioner appreciated correctly the legal implications of the Ordinances but the mistake he made was in not dis-tinguishing receipt on account of principal from receipts on account of interest. The Tribunal took the view that the moneys received in pursuance of the Ordinance must be considered to be in the nature of bad debt recoveries. It seems to us that this view is erroneous.

A bad debt is a debt which has become irrecoverable owing to the financial position of the debtor or for other reasons, but debts repaid in occupation currency cannot be described as bad debts. The payments made validly discharged the debts. They were therefore not cases of irrecoverable debts, but of debts discharged in accordance with the law in force at the time.

26. As the analysis we attempted earlier will have shown, the view of the Department and the Tribunal that the assessee was not entitled to claim any deduction in respect of the payments it made to its creditors is erroneous. The Incometax Officer appears to have assumed without enquiry that the repayments were only on account of capital. Paragraph 6 of the reference which the Tribunal made to this court (R. C. No. 43 of 1955) runs:

"The Income-tax Officer refused both the aforesaid deductions for identical reasons, viz, that the assessee was under no legal obligation to make the aforesaid second payment and also that it represented only repayments of capital and not an expense of the business."

The view that the assessee was under no obligation to pay is clearly unsustainable. The obligation to repay was created by a statutory enactment and could not be avoided.

27. The other mistake which the Department and the Tribunal fell into in dealing with this category of cases was that they overlooked the difference between payments made towards interest on the money borrowed and payments made in repayment of the principal borrowed. Interest on money borrowed is a necessary item of expenditure, as essential and as unavoidable as the rent for the pre-mises occupied by the business or the rent paid for a podown or the hire paid for a lorry for the transport of goods. When we look at the matter from a business point of view it will be seen that interest is nothing more than hire charges for money.

28. Certain other contentions were put forward during the arguments and to some of these reference must now be made. In several judgments it has been observed that a "money-lender's stock-in-trade consists of the money which he has for the purpose of carrying on his business." In computing the profits or loss of a business all the moneys a trader receives by disposal of his goods or wares are brought to one side of the account and all the moneys he spends on acquiring the goods or wares are brought into the other side of the account.

On this basis it was suggested on behalf of the assessees who had been required to make further payments in pursuance of the Ordinance that what- ever sums a money-lender has to pay to his creditor must be treated as a permissible deduction. Now, though several decisions speak of a moneylender's stock-in-trade as consisting of his money the expression is only descriptive and we must be careful not to push the analogy too far.

A trader is concerned to sell his goods or wares and he does not expect or even want to see them back. A money-lender, on the other hand, docs not sell his stock-in-trade, he only lends it. Or, to put in a different way, he only hires out his money. He not only expects but also wants to get back his wares; if he did not get them he would go bankrupt.

29. R. C. No. 59 of 1954 is a case in the second category, that is to say, a case where the assessee had to make further payments in pursuance of the Ordinance.

Mr. Vasantha Pai, who appeared for the asses-see argued : During the period the country was occupied by the Japanese, Japanese currency was the only legal tender. Towards the middle of 1943, the Japanese withdrew the Malayan currency and jn fact they made it an offence for anyone to be in possession of the Malayan currency. The asses-see could not therefore carry on his business except in Japanese currency. The assessee repaid in Japanese currency and so discharged his liability.

The direction in the subsequent statute that part of the money should be paid over again could be obeyed only by taking it out of the stock-in-trade of the assessee and as the assessee has thus parted with his stock-in-trade, he is entitled to treat so much of that stock-in-trade as a loss. The argument is ingenious but untenable. First of all, it may be observed that no material has been placed before us on the basis of which we can say that Japanese currency was the only legal tender.

It may be that the Japanese made trafficking in currency an offence. But we have not been shown anything to justify the view that during the period the country was occupied by the Japanese, mere possession of Malayan currency was an offence. Nor do we think it right to say that the direction in the Ordinance that further repayments should be made on account of old debts could be obeyed only by disposing of the stock-in-trade. In fact, this argument is illustrative of the danger of pressing the analogy between money and stock-in-trade too far.

30. It must next be remembered that for purposes of tax, the source from which an assessee has to pay is not very important. The argument of Mr. Vasantha Pai also overlooks the fact that the effect of the Ordinance was to revive the old debt. It may be that at the time he paid the money, the assessee thought that he had discharged the debt. But the Legislature thought it fit to decree otherwise.

31. Mr. Pai next said that the effect of the statute was to impose an extra liability on the assessee and the payment of a statutory liability is a legal item of expense. The argument would have been good if the Ordinance had been a taxing statute. But it was not that.

32. Mr. Pai next said that we may treat the payments as losses occasioned by fluctuations in currency and in this connection he referred to the rase in Commr. of Income-tax. Burma v. A. S. A. Concern, 1937-5 ITR 456 : (AIR 1937 Rang 257 (SB)). But we can see no points of similarity between that case and the one before us.

33. On behalf of the assessee in R. C. No. 64 of 1955, Mr. Subbaraya Iyer put forward this argument. One Palaniappa Chettiar owed the assessee $ 40,500 being the principal of a pre-occupation debt. On 15th August, 1944, 16th August, 1944 and 17th August, 1944, Palaniappa Chettiar repaid $ 40,000 in Japanese currency. As on 12th April, 1945, the account showed that 5000 was still due. Palaniappa Chettiar died on 10th September, 1945.

Lakshinanan Chettiar the executor of his Will, and the assessee, entered into an agreement on 15th February, 1950, whereby the sum payable by the estate of Palaniappa Chettiar on account of principal and interest was fixed at $ 46,052-48. Out of this, the interest was $ 5686-88. The balance of the principal therefore should be S 40,365.60. (In the affidavit filed in this Court, however, the amount is shown as $ 40,500).

Some twenty days before this agreement, that is to say, on 25th January, 1950, Lakshmanan Chettiar, the executor, paid $ 5000 which was adjusted against the principal as subsequently ascertained on 15th February, 1950. On 1st July, 1950, there was a partition between the two coparceners of the family of the assessee and one half of the debt was taken by each of the coparceners. This agreed debt was not recovered in the year of account, but the income was returned for assessment on the Chetti system of accounts.

34. Mr. Subbaraya Aiyar further stated that the amount due from Palaninppa Chettiar was not put forward as a loss in the claim made under the scheme and stressed that in consequence the moneys received on this account should not be treated as income.

35. In the affidavit filed in this Court it is stated that the loss actually claimed by the assessee for the four (sic) assessment years 1942-43 to 1946-47 exceeded the total of his profits for 1942-43 (sic) and 1941-42. By adding this particular item to his losses, the assessee therefore did not stand to gain anything. It may be, therefore, that he left it out for that reason. But whatever that may be, it does not follow that because the assessee did not include this amount as a loss in respect of the scheme period, the amount that since came into his hands is not an assessable item of receipt.

So far as the agreement dated 15th February, 1950 is concerned, the arrangements then entered into would undoubtedly be valid in view of Section 13 of the Ordinance. But as the allegations in that regard have been placed before us for the first time in the form of an affidavit we cannot naturally investigate them here. That will have to he done by the Tribunal.

36. We answer the questions raised by these references as follows :

A : Where an assessee has received repayments, he will not be liable to tax in respect of amounts be has received as or towards principal; but he will be so liable in respect of moneys which he has received as or towards interest, where only part of the debt has been recovered, the assessee will be at liberty, subject to the law relating to appropriation, of payments to appropriate the money he has received either towards principal or interest.

The assessment in respect of such receipts will proceed on this basis; that is to say, if the payment has been lawfully appropriated towards interest, the pssessee will be liable to pay tax thereon. But if he has lawfully appropriated it towards principal, he will not be liable to nay tax on it. Statements have been filed before us in some cases showing how much has been received on account of interest and how much on account of principal.

It will be for the Tribunal to check the correctness of these statements and revise the assessments on the basis of the direelions we have now given. In all these cases, the assessees will be entitled to their costs. Counsel's fee : Rs. 250 in esch case. The cases in this category are : R. C. Nos. 33, 58, 59, 60, 64 and 65 of 1955 and R. C. 97, 98, 102, 112, 113 and 115 of 1956.

B : Where an assessee has made payments, ho will be entitled to deduct from his income and claim exemption from tax for only such amounts as he has paid on account of interest. He will not he entitled to deduct any payments on account of principal. In this category of cases too, statements have been filed in certain cases. The Tribunal will have to check and verify them and revise the assessments in the light of our directions. In all these cases, the assessees will pay the costs of the Department Counsel's fee : Rs. 250 in each case. The cases in this category are: R. C. Nos. 59 of 1954, 42, 43, 73 and 82 of 1955 and 64 of 1957.

37. In all these cases, as a further investigation of the factual position is necessary, the Tribunal should give both the assessees and the department a further opportunity of plaacing before the Tribunal such material as is available to them.

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