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Ts. Pl. P. Chidambaram Chettiar (by Legal Representatives) Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 143 of 1963 (Reference No. 37 of 1963)
Reported in[1966]62ITR774(Mad)
AppellantTs. Pl. P. Chidambaram Chettiar (by Legal Representatives)
RespondentCommissioner of Income-tax, Madras.
Cases ReferredSmith v. Law Guarantee and Trust Society Ltd. Their Lordships
Excerpt:
- - on that view, he found that the assessee failed to disclose receipt of rs. i, therefore, set aside the order to enable the income-tax officer to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the department as well as after allowing him to cross-examine the parties whose statements the income-tax officer wants to make use of against the appellant. the appeal, and a further appeal by the assessee, failed. 1,50,000 would not be income of the assessment year 1944-45, but of 1945-46 and that, therefore, the second income-tax officer could not reasonably believe that the income had escaped assessment in the assessment year 1944-45. the second is that assuming that there was under-assessment and there was a failure on the part.....veeraswami, j. - this reference relates to the assessment year 1944-45 to the accounting year ended on april 12, 1944. the assessee is a money-lender at tiruchirapalli. his father, palaniappa chettiar, who was carrying on business at that place, had made various advances to nallathambi sakkarai manradiar, known as pattayagar, a prominent landlord in coimbatore district, on promissory notes which, in all, amounted to rs. 1,38,535 as on july 6, 1932, towards principal and rs. 1,34,965, towards interest. including a further cash advance of rs. 2,500, the pattayagar executed a mortgage on that day securing repayment of the aggregate amount of rs. 2,76,000. till 1938, only a sum of rs. 13,620 was paid by the mortgagor in part payment of the debt. on december 14, 1940, the mortgagee instituted.....
Judgment:

VEERASWAMI, J. - This reference relates to the assessment year 1944-45 to the accounting year ended on April 12, 1944. The assessee is a money-lender at Tiruchirapalli. His father, Palaniappa Chettiar, who was carrying on business at that place, had made various advances to Nallathambi Sakkarai Manradiar, known as Pattayagar, a prominent landlord in Coimbatore District, on promissory notes which, in all, amounted to Rs. 1,38,535 as on July 6, 1932, towards principal and Rs. 1,34,965, towards interest. Including a further cash advance of Rs. 2,500, the Pattayagar executed a mortgage on that day securing repayment of the aggregate amount of Rs. 2,76,000. Till 1938, only a sum of Rs. 13,620 was paid by the mortgagor in part payment of the debt. On December 14, 1940, the mortgagee instituted a suit to enforce the mortgage and recover Rs. 5,50,573, made up of the principal sum of Rs. 2,76,000 and interest of Rs. 2,88,193, less the sum of Rs. 13,620 paid by the mortgagor. In September, 1943, the suit was compromised and on October 5, 1943, a decree was passed in terms of the compromise according to which the mortgage was to receive Rs. 3,50,500, on or before October 1, 1944, in full satisfaction of his claim with interest at 3 per cent. per annum on amounts remaining unpaid. The debt under the compromise decree was discharged by payment partly in cash and partly by sale of the hypotheca to third parties with directions to the purchasers to pay the proceeds to the decree-holder. Some time before October 1945, Pattayagar died and his eldest son paid Rs. 78,405 on October 18, 1945, which was the sum still outstanding, and discharged the entire debt.

For the assessment year 1944-45 Chidambaram Chettiar, as the karta of his Hindu undivided family, was assessed under section 23(3) on February 12, 1946, on a total income of Rs. 78,556 which, on appeal, was reduced to Rs. 53,153. Before the original assessment order was made, the Income-tax Officer, who made it, had received information from the Income-tax Officer at Erode that the Pattayagar had paid the assessee a sum of Rs. 1,50,000 during the year ended April 12, 1944, and on March 28, 1945, the Income-tax Officer, in the course of the original assessment, raised this question. As the assessee denied the receipt, the Income-tax Officer made the following remarks on May 27, 1945, in his order-sheet for 1944-45 :

'It is denied that there was any secret understanding not to show the payment of Rs. 1,50,000. The receipt of this amount is entirely denied... The Income-tax Officer, Erode, should be asked to give further details and to ask the Pattayagar to produce evidence of the payment... In any event, this should come up for consideration only in the assessment year 1944-45 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so the assessment for 1944-45 should not be held up pending further investigation.'

No further action would appear to have been taken up by the Income-tax Officer till the original assessment was completed in February, 1946. After further investigation, the Income-tax Officer acting under section 34(1)(a) and section 23(3) issued a notice to the assess dated March 9, 1953, in answer to which the assessee filed a return as before for the assessment year 1944-45 again denying receipt of the sum of Rs. 1,50,000. The Income-tax Officer proceeded on the basis that the assessees method of accounting was the Chetty system. Mainly relying on the entries in the account books of the Pattayagar, supported by the evidence of his agent, the Income-tax Officer found that the Pattayagar had paid the assessee in cash Rs. 10,000 on September 5, 1943, and Rs. 1,40,000 on September 28, 1943. There were also entries in the Pattayagars accounts of borrowal of two sums from third parties before they were paid over to the assessee. A sun of Rs. 1,00,000 came to the Pattayagar from K. R. Easwaramoorthy Gounder on September 24, 1943, which was evident from the account books of Easwaramoorthy Gounder and his withdrawal of Rs. 1,00,000 from the Imperial Bank of India, Tiruppur. The entries in Pattayagars accounts contained full details of the settlement which preceded the compromise decree. According to these entries, the claim in the mortgage suit was settled between the parties at Rs. 5,00,500 of which Rs. 1,50,000 was to be paid in cash before the next hearing of the suit and for the balance a compromise decree should be passed. A further detail found in the entries was that a sum of Rs. 34,840, which the Pattayagar, as receiver appointed in the suit, had deposited into court, might be drawn out by the decree-holder towards partial payment of Rs. 3,50,000. With reference to these entries and details, the Income-tax Officer concluded that the suit claim at the time of the compromise being about Rs. 6,50,000 and as the compromise decree covered a sum of Rs. 3,50,500, the assessee and the Pattayagar must have secretly agreed between themselves that the former should give up Rs. 1,50,000 and the latter should pay the remaining Rs. 1,50,000 to the assessee in cash. On that view, he found that the assessee failed to disclose receipt of Rs. 1,50,000 and brought it to tax. There was an appeal against his order which was allowed on a short point, namely :

'On perusing the Income-tax Officers grounds and the representatives arguments, I (Appellate Assistant Commissioner) find that the appellant has not been given an opportunity to cross-examine those parties whose statements have been made use of by the Income-tax Officer against the appellant. I, therefore, set aside the order to enable the Income-tax Officer to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the department as well as after allowing him to cross-examine the parties whose statements the Income-tax Officer wants to make use of against the appellant.' When the matter went back to the Income-tax Officer, he proceeded under section 23(3) and section 34, and after complying with the directions of the appellate officer, found over again that the assessee had received a sum of Rs. 1,50,000 in the accounting year and he did not bring the sum to his books and that there was thus a deliberate concealment of the income. The appeal, and a further appeal by the assessee, failed. Under section 66(1) of the Income-tax Act, the following questions have been referred to us :

'(1) Whether assessment under section 34 was valid and proper ?

(2) Whether the Income-tax Officer rightly acted in giving effect to the order of the Appellate Assistant Commissioner setting aside the assessment to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the department ?

(3) Whether Rs. 1,50,000 is taxable as income of the year of account ?' these questions were considered by the Tribunal but were found against the assessee.

A three-fold submission is made for the assessee on the first question. The first is that there was a determination in the original assessment order that the sum of Rs. 1,50,000 would not be income of the assessment year 1944-45, but of 1945-46 and that, therefore, the second Income-tax Officer could not reasonably believe that the income had escaped assessment in the assessment year 1944-45. The second is that assuming that there was under-assessment and there was a failure on the part of the assessee to disclose, there was no casual connection between the two. The third is that the only primary relevant fact being whether Rs. 1,50,000 was received in the accounting year, this was within the knowledge of the first Income-tax Officer and, therefore, there was no fresh information subsequent to February 12, 1946.

We are not satisfied that there is substance in any of these submissions. Assuming - it is not necessary to decide on the view we take - that a factual finding or determination by the assessing authority in relation to any question as to the receipt of income or as to whether it can be taken into account in any particular year cannot be reopened by the same authority under section 34(1), it is not possible to accept the contention for the assessee that there was any such determination in this case by the first Income-tax Officer. He had no doubt information that the assessee was in receipt of Rs. 1,50,000 in the accounting year but as he himself stated in his order-sheet, there were not enough materials before him to establish the fact of receipt and further that it had escaped assessment. When he made it clear that in order to come to a conclusion it was necessary to get further materials both from the Income-tax Officer, at Erode and the Pattayagar as well as other sources, hardly would it be justifiable to impute to him a determination that the receipt was a fact and that it should be considered only in the following assessment year. His observation that only the excess over Rs. 2,76,000 plus legal expenses could be treated as interest or income in the hands of the assessee and, therefore, the sum of Rs. 1,50,000 should come up for consideration of the question, because, in point of fact, he was unable, on the materials before him, to arrive at a finding that the amount had been received. It was only when the second Income-tax Officer received, subsequent to the original assessment, an extract of the relevant entries from the account books of Pattayagar, supported by the oral statement and evidence of his agent, that he was in a position to find that the sum had been received by the assessee in the accounting year and that it had escaped assessment.

It cannot, therefore, be said that the second Income-tax Officer could not reasonably believe that the income had escaped assessment. The second ground to is based on the language of section 34(1) (a) which is that, for its application, the Income-tax Officer should have reason to believe that by reason of the omission or failure on the part of an assessee to disclose full and truly all material facts necessary for his assessment for a particular year, income, profits or gains chargeable to income-tax have escaped assessment for that year or have been under-assessed. The belief of the officer is as to escapement of income and the belief should not be a product of imagination or speculation. There must be reason to induce the belief. Further, the belief should be that, by reason of omission or failure on the part of the assessee to disclose fully and truly the material facts, income has escaped assessment in any particular year. Unless the escapement is as a consequent or result of such omission or failure, the provision will have no application. As rightly pointed out for the assessee, there should be a casual connection between the particular conduct of the assessee and the result, namely, income in consequence escaping assessment. But it is not necessary, in our opinion, that for invoking the jurisdiction under section 34(1) (a) and initiating action thereunder, omission or failure on the part of the assessee and escape of income from assessment should be found as a condition precedent. All that the section requires is that the Income-tax Office should have reason to believe that, as a result of omission or failure on the part of the assessee, income has escaped assessment in a particular year. Such a belief, as we think, could not of course be entertained by the Income-tax Officer if he had no reason to think that escapement was by reason of omission or failure on the part of the assessee.

It is urged, therefore, that the under-assessment, if any, was not due to any failure of the assessee to give all facts or any omission on his part to disclose material particulars and that, so far as he is concerned, he is still denying the receipt. If the Income-tax Officer had information, as it was alleged, that the assessee had received the sum, it was his duty, as the argument proceed, to have it investigated. Learned counsel for the assessee asked how could the revenue say that there was failure on the part of the assessee to disclose, when it had already been in possession of information as to the receipt and its escapement from assessment. He argues, therefore, that failure or omission on the part of the assessee did not result in under-assessment.

Learned counsel, as we said, as we said, is right in his legal submission as to the requirements to be satisfied for application of section 34(1) (a). As observed by the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, before the Income-tax officer assumes jurisdiction to start proceedings, two conditions must co-exist to invoke the jurisdiction, namely, (1) he must have reason to believe that there has been under-assessment, and (2) he must have reason to believe also that under-assessment has result from non-disclosure of material facts. It is also true that section 34(1) (a) should not be used for filling up the deficiency of the assessing authority in the original assessment proceeding : E. M. Muthappa Chettiar v. Commissioner of Income-tax. Whether there is failure or omission to disclose on the part of the assessee is a factual matter for determination in each case. But once all the primary facts are before the assessing authority, as was pointed out in Calcutta Discount Co. Ltd. v. Income-tax Officer, he requires no further assistance by way of disclosure. This court said in E. M. Muthappa Chettiar v. Commissioner of Income-tax :

'Cases sought to be brought within section 34(1) (a) should strictly fall within that provision and it is for the department to show that the necessary conditions for the exercise of jurisdiction are fully present. The department is not at liberty to take hold of any and every circumstance, call it non-disclosure of material facts and set the machinery of reassessment in motion. If this were to be permitted, there is every danger of this provision of law being used as an instrument of oppression against the assessee. The true position is that if the Income-tax Officer was left in the dark in respect of basic and crucial facts relevant to the assessment, he has jurisdiction to reopen the assessment and pass order of reassessment.'

Learned counsel for the assessee says that the primary fact, namely, that the assessee was in receipt of Rs. 1,50,000 was before the assessing officer, before he completed the assessment for the assessment year 1944-45, though the receipt was denied by the assessee and that if he required further materials, he should have asked for the same or proceeded with his investigation before completing the assessment and not completed the assessment and postponed investigation and gathering of materials. If the primary fact was before the assessing authority, it could not then be said, according to learned counsel for the assessee, that there was any omission or failure on the part of the assessee to disclose that fact; so the escapement, if any, could not truly be said to be the consequence of any omission or failure of the assessee to disclose. A part of the argument is not without some force. The first Income-tax Officer did have the information before he completed the assessment for 1944-45 that the assessee had received a large sum in the accounting year which he had not shown in his return, and it was his duty to have further investigated into it so that he might be able to come to a definite conclusion on it before completing the assessment. It, however, appears that he did not proceed with the investigation then and there because he was of opinion that, in any case, the receipt, if true, would be relevant for consideration only in the following year of assessment. In the circumstances, can it be said that there was failure or omission on the part of the assessee to disclose There can be only one answer to this question and that is against the assessee. Throughout he kept on denying the receipt, though he is not now in a position to dispute the factual finding of all the authorities below in respect of it. The duty to disclose is laid by the law on the assessee; and the duty is to disclose fully and truly all the material facts necessary for the assessment for a particular year. When the assessee denied the fact of receipt, it cannot be said that he discharged that duty. It is not any information that the department may have as to receipt that will dispense with the necessity of the assessee to discharge his duty. It is obvious from the order-sheet of the first Income-tax Officer that, as a matter of fact, beyond the information that there was payment by the Pattayagar to the assessee of a sum of Rs. 1,50,000 in the accounting year, there was no further material on which the information could be substantiated. Further, even if there was information as to the receipt, on the materials before him, the first Income-tax Officer had no reason to think that it had escaped assessment. The assessee could successfully avoid section 34(1) (a) only if he could show that not only the first Income-tax Officer had information as to the receipt but also as to the factum of its escapement from tax :

Chatturam Horilram Ltd. v. Commissioner of Income-tax. On the facts in this case, there is no doubt that the assessee failed to disclose fully and truly the material facts relating to the sum of Rs. 1,50,000 and the information with the first Income-tax Officer before he completed the original assessment was inconclusive and was not such as to enable him to find, as a fact, that the assessee had received the sum. The second ground of the assessee in relation to the first question fails.

The next contention is that there was no fresh information in respect of the sum of Rs. 1,50,000 subsequent to February 12,1946, when the original assessment was completed and section 34(1) (a) could not, therefore, be properly invoked. It is said that the primary relevant fact is whether the assessee was in receipt of the amount and that was within the knowledge of the assessing authority before that date, and if that were so, it is impossible to say that there was fresh or subsequent information so as to justify action under section 34(1). The argument for the assessee goes so far as to suggest that in the circumstances neither clause (a) nor clause (b) of section 34(1) would be applicable. The revenue in this case has not relied on clause (b); and, in fact, the first and second orders under section 34 proceeded on the basis that there was omission or failure on the part of the assessee to make full and true disclosure of all material facts.

In our opinion, the revenue was, in the circumstances, justified in doing so. It is not necessary to reiterate that in the original assessment proceedings and before and after the proceedings under section 34, the assessee persisted in his denial of the receipt, and the insufficient material in the form of a communication from the Income-tax Officer, Erode, to the assessing officer did not establish the fact of omission or failure on the part of the assessee to make a true disclosure. It was only when, after the original assessment, the copy of the relevant entries of the accounts of the Pattayagar, the statement and evidence of his agent were recorded that the revenue could possible find on the question of omission or failure of the assessee. As already mentioned and as pointed out in Chatturam Horilram Ltd. v. Commissioner of Income-tax, it is not any information for purposes of clause (a) of section 34(1) that will suffice but it must be such material as will show that not merely the assessee was in receipt of income in an accounting year, which he omitted or failed to disclose, but such income had also escaped assessment. Even assuming that the department had information before making the original assessment that the assessee was in receipt of the income, which as we said, the department, on the material in its hands, at the time of the original assessment could not decide, that information certainly was inadequate to justify a conclusion that the income had escaped assessment. The information consisting of the copy of the entries in the Pattayagars accounts and the statement and evidence of his agent which alone showed the full particulars and circumstances of the receipt and proved that the assessee had failed to disclose the income and the same had escaped assessment, was received by the department subsequent to the original assessment. On facts, the assessee is not correct in his contention that there was no fresh information received by the department subsequent to February 12,1946.

Clause (a) of section 34(1) does not use the word 'information' which occurs only in clause (b). What 'information' in clause (b) means and includes, it is difficult and also not expedient to comprehensively define. Obviously it is of wide import and may comprehend a variety of things including new facts, the correct position of law or a new aspect of it or even perhaps a legislative enactment compelling a retrospective deeming and so forth. The Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax held that the word 'information' in its plain grammatical meaning included information as to facts and information as to the state of the law. It was also pointed out that sections 33B and 35 did not limit the amplitude of the word. Observed the Supreme Court at page 6 :

'..... it would be unreasonable to limit it to information as to the facts on the extraneous consideration that some cases of assessment which need to be revised or rectified on the ground of mistake of law may conceivably be covered by sections 33B and 35. Beside, the application of these two sections is subject to the limitations prescribed by them; and so the fact that the said sections confer powers for revision or rectification would not be relevant and material in construing section 34(1) (b).... We would accordingly hold that the word information in section 34(1) (b) includes information as to the true and correct state of the law and so would cover information as to relevant judicial decisions.'

On that view, it was held that the decision of the Supreme Court there in question should be treated as information within section 34(1) (b). In the course of its judgment, the Supreme Court adverted to the position that under the Explanation to section 34 the fact that with due deligence material facts could have been discovered by the Income-tax Officer from the account books or other evidence produced by the assessee before him would not constitute disclosure. Learned counsel for the assessee contended, on the strength of Ananthalakshmi Ammal v. Commissioner of Income-tax, that a change of opinion of the Income-tax Officer on a factual matter did not amount to definite information within the meaning of section 34 to enable him to exercise the power thereunder. But, we have already held that the Income-tax Officer in the course of the original assessment proceedings did not in his order-sheet express any definite or conclusive opinion; nor could he do so on the scanty materials before him at the time as to the factum of the receipt and its escapement from tax. Our attention was invited to a number of decisions as to what constituted information for purposes of section 34 in the context of the particular facts but we think it unnecessary to specifically refer to them not only because they were decided on the language of the section as it stood at the relevant time of those decisions but the power in this case was exercised not under clause (b) as we said but under clause (a). The stress in that clause is not on receipt of subsequent information giving rise to a belief in the Income-tax Officer that the income, profits or gains chargeable to tax had escaped assessment in a year but on the omission or failure on the part of the assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for assessment for that year. This clause impliedly places a duty on the assessee to make a full disclosure and if the Income-tax Officer has reason to believe that there has been such failure or omission and, as a result, the income, profits or gains chargeable to tax had escaped assessment, he would be justified in invoking his jurisdiction under that clause.

We have already referred to Calcutta Discount Co. Ltd. v. Income-tax

Officer in which the Supreme Court has held that the jurisdiction under clause (a) arises if both the conditions, (1) the Income-tax Officer having reason to believe that the income has been under-assessed, and (2) such under-assessment occurred by reason of omission or failure on the part of the assessee to make a return of his income under section 22 or omission or failure on his part to disclose fully and truly all material facts necessary for his assessment for that year, are satisfied as a condition precedent. We are of opinion that this twin requisite is satisfied in this case and the jurisdiction in section 34(1) (a) has been properly invoked. The first question under reference should, therefore, be answered in the affirmative.

We think there is very little substance in the second question for our consideration. The contention of the assessee is that, having regard to the terms in which the Appellate Assistant Commissioner set aside the first order of the Income-tax Officer under section 34, the second order under that provision, inasmuch as no fresh notice was given under section 34, is invalid and without jurisdiction. The Appellate Commissioner in setting aside the order said :

'I therefore set aside the order to enable the Income-tax Officer to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the department...'

'Re-do', according to the assessee, means 're-do from the inception', that is to say, it amount to a direction to the Income-tax Officer to start afresh by serving notice again under section 34. Learned counsel for the assessee also urges that when the first order of the Income-tax Officer under section 34 was set aside with a direction to re-do, and re-do according to law, that again means the Income-tax Officer must re-do with a fresh notice under that section. In support of the contention, reference is made to K. S. Firm v. Commissioner of Income-tax, which was concerned with the second proviso to section 34(3); it was held there that the proviso did not enable the department to make an assessment without initiating proceedings under section 34 and it merely removed the time-limit fixed by sections 34(1) (a) and 34(1) (b). We are unable to accept the contention for the assessee; nor do we think that the decision relied on supports the contention. It is true that if no notice is issued under section 34(1), proceedings for reassessment under that provision would be invalid. But it is not in dispute that such a notice was given before the Income-tax Officer made an order in the first instance under section 34. Before the appellate authority, there was no question of the invalidity of the notice. Admittedly, when the notice was served before the first order under section 34 and under that provision it was a valid notice, in our opinion, the terms in which the Appellate Assistant Commissioner set aside the order and gave direction to the Income-tax Officer to re-do according to law do not imply or have the effect that the notice also was annulled or quashed. The ground of the appellate order setting aside the first order of the Income-tax Officer was that the latter had relied on ex parte statements of certain persons without giving an opportunity to the assessee to test their veracity by cross-examination and to place his materials to establish his case. That being the case, the fact of the Appellate Assistant Commissioner setting aside the first order under section 34 and directing the Income-tax Officer to re-do according to law does not call for a fresh notice or make such a notice a condition to the valid exercise of power under section 34.

That takes us to the last question. A part of the argument for the assessee is based on section 13 of the Income-tax, 1922, and the rest on the principle applicable to appropriation of a part of the payment towards a debt covered by a settlement in relation to the debt. Throughout, the method of accounting maintained by the assessee and his father has been mentioned by the revenue as the 'Chetty system for money-lending and mercantile for others'. The assessee belong to the Nattukottai Chetty Community. It is generally known that the Chetty system usually adopted by the community is a combination of mercantile and cash basis of accounting, and the latter to those parties outside the community. Where part payments were made by such third parties, the practice appears to be for the Nattukottai Chetty community, under the Chetty system of accounting, to credit them towards principal and the balance, if any, towards interest. In his second order, the Income-tax Officer, however, stated that normally, in the Chetty system of accounting, interest credited is always debited to the account and vaddi chittais are issued and as such, the assessment of Rs. 1,50,000 in the year of account was in order. The Appellate Assistant Commissioner dealt with the receipt of the sum as an open payment from the debtor and treated it as income of the accounting year on the view that, in a case, where neither the debtor nor the creditor makes any appropriation of the payment as between principal and interest, the department was entitled to treat the payment as applicable to the outstanding interest and assess it as income. The Tribunal noticed the assessees contention that, according to the Chetty system, when money was received from a debtor, credit was given to court expenses, then towards capital due, and the balance left, if any, was treated as interest, but considered that it would not avail the assessee, for 'when the mortgage was taken in 1932, Rs. 1,34,965 was interest due till then, but this together with principal due was included in the mortgage, which means that the assessee has adopted the mercantile system and has no case for bringing in aid the Chetty system of maintenance of account.' We are unable to appreciate what precisely the Tribunal meant by this observation. If it meant that because the entire amount due both for principal and interest was consolidated and a mortgage was taken in 1932 securing the same, it necessarily followed that the assessee had adopted the mercantile system which will, in our opinion, be clearly wrong, for that would be the case even if the cash system had been adopted. The mortgage for the entire debt cannot, as we think, in any case justify the Tribunals inference that the assessee had adopted the mercantile system. As we said, the department itself had proceeded, at the earlier stages, on the basis, and quite rightly, that the assessee had adopted the Chetty system, which is a combination of the mercantile and cash basis. It is true that none of the departmental authorities would appear to have expressly addressed itself to the question and decided as to the method of the assessees accounting. But section 13 enjoins a duty on the assessing authorities to determine the method of accountings regularly employed by an assessee and assess income, profits and gains in accordance with such method of accounting. The section says that 'income, profits and gains shall be computed for the purpose of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee.' A departure is permissible only in cases covered by the proviso to the section, that is to say, if no method of accounting is regularly employed, or if the method employed by the assessee is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot be properly deduced therefrom; it is only then that a computation can be made upon such basis and in such manner as the Income-tax Officer may determine. In making an assessment, therefore, necessarily the method of accounting regularly employed or the true basis on which income, profits and gains can be determined had to be decided and if there is no express decision, the question must be deemed to have been decided. In that sense, the non-exercise of the power under section 3 must be taken to imply a decision as to the method of accounting adopted by the assessee whose assessment has been completed.

But the third question under reference, in the circumstances of this case, ought, in our opinion, to be decided more with reference to the correct principle applicable to appropriations of an open payment. In deciding this question, the circumstance that the receipt of the sum of Rs. 1,50,000 had not been brought into the accounts of the assessee could make no difference to the fact that when it is established and there is nothing to show that it had been appropriated either towards principal or interest, the payment should be regarded as an open payment.

If it was a matter between a creditor and his debtor, in the absence of the debtor exercising preference, it may be presumed that the creditor has appropriated it towards outstanding interest and then only to the principal. But this rule of appropriation has, in our view, no application where it is a question between an assessee and the revenue. In such a case, the intention of the assessee must be presumed to be in favour of an appropriation least disadvantageous to himself. This proposition has the authority of the Privy Council in Commissioner of Income-tax v. Kameshwar Singh. There the Board observed :

'Moreover, if the question were one between Kumar Ganesh Singh and the assessee, i.e., between debtor and creditor, the assessee might up to the last moment appropriate the Rs. 20,74,973, to capital account : (Cory Brother & Co. v. Owners of the Turkish Steamship Mecca), and there is authority for the proposition that in a question with the revenue the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself : Smith v. Law Guarantee and Trust Society Ltd. Their Lordships have also not omitted to bear in mind the provisions of sections 60 and 61 of the Indian Contract Act, though these were not relied on in arguments as applicable to the case.'

In that case, in the year of account a certain debtor owed the assessee Rs. 32 lakhs as principal and Rs. 6,09,571 as interest, that is, a total of Rs. 38,09,571, as an unsecured loan. In that year, the assessee and his debtor entered into an arrangement, whereby the former took over from the latter in satisfaction of the amount certain immovable properties and also hand-notes from the debtor to the value of Rs. 17,34,596. The question was whether the interest of Rs. 6,09,571 could be considered to have been received in the accounting year and to be assessable as such. The revenue was of the opinion that, when rightly viewed, the transaction amounted to acceptance by the assessee from the debtor in lieu and satisfaction of the capital and interest due to him, of assets and securities, prima facie, worth the valuation put upon them and that, as the assessee had thus received payment in kind of the interest due to him in full, he should be assessed accordingly. The High Court Did not accept that view. One of the arguments for the Crown before the Board was that assuming that the hand-notes from the debtor did not constitute receipt of income, the value of the properties adjusted partly against the debt and amounting to Rs. 20,74,973 should be treated as moneys worth and that, as this sum far exceeded the total amount of interest due, it must be treated as applicable in the first place to the discharge of the debtors liability for interest. In support of this argument, reliance was placed on the presumption that the creditor is presumed to apply payments received from the debtor towards extinction of the claims towards interest before capital claims. The Board rejected the argument on two grounds, one of which is that contained in the observations above extracted by us from the judgment of the Board. The other ground was this :

'Here there was an arrangement affecting the whole indebtedness whereby certain assets were accepted in part satisfaction and promissory notes were taken for the balance. The basis of the Presumption, namely, that it is to the creditors advantage to attribute payments to interest in the first place, leaving the interest bearing capital outstanding, is gone.'

Counsel for the assessee before us relied on the second ground as well and contended that the sum of Rs. 1,50,000 must be taken to have been received as part payment towards the settlement which eventually took the from of a compromise decree. But it is argued for the revenue that the factual question whether this sum of Rs. 1,50,000 formed part and parcel of the settlement has not been investigated and that, therefore, the assessee is not entitled to rely on the second ground of the Board which we mentioned. On the view we have taken, it seems to us to be unnecessary to rest our judgment on a ground analogous to the second ground of the Board, though we are inclined to think that the third question referred to us is wide enough to cover this aspect whether the sum of Rs. 1,50,000 formed part of the compromise or settlement and, therefore, should be regarded as a payment towards capital. We are content to rest our decision on the ground that where a certain sum received has not been brought into the assessees account, and, therefore, it is not possible to attribute to the receipt any particular method of accounting and there is no appropriation of the sum so received, and it is, therefore, an open payment by a debtor to the creditor, in a question between the assessee or taxpayer and the revenue, the presumption laid down by the Board that the taxpayer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself is applicable. The assessee must, therefore, succeed on the third question.

We answer the first two questions against the assessee and the third question in his favour and against the revenue. The assessee is entitled to his costs. Counsels fees, Rs. 250.


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