(The judgment of the Court was delivered by the Honble the Chief Justice).
The petitioner is the managing member of an undivided Hindu family and as such he has been assessed to income-tax for the year 1937-38. The family belongs to the Nattukottai Chettiar community and carries on a money-lending business. In the year 1913 the petitioners father advanced Rs. 2,15,000 to Bangaru Ammal, the Zamindarini of Thevaram, on the security of the Zamindari. The loan was not repaid and in 1925 the petitioner was compelled to file a suit in the Court of the Subordinate Judge of Dindigul to enforce payment of the amount then due. Accumulations of interest, it was said, had brought the figure up to Rs. 5,49,683 but this was denied. A compromise was eventually agreed upon and a decree was passed by the Subordinate Judge embodying the terms of settlement. Under this decree the debtor was to pay to the petitioner a sum of Rs. 3,75,000 in full settlement of all claims on or before July 31, 1931. In the meantime this sum was not to carry interest. In the event of the amount not being paid by the due date the Zamindari was to become the absolute property of the petitioners family. By this decree a receiver was appointed and it was a term of the compromise that any moneys which the petitioner received from the receiver should be set off against the Rs. 3,75,000 and that the debtor should only be responsible for the balance. It was, however, stipulated that in the event of the balance not being paid the whole of the Zamindari would still become the property of the petitioners family. From July 28, 1928, the date of the compromise decree, to July 31, 1931, Rs. 42,000 was paid into Court by the receiver as the net rent collections for that period. This amount was later on paid to the petitioner. The sum due to be paid to the petitioner under the terms of the compromise decree on July 31, 1931 was not paid and in consequence his family became the absolute owners of the Zamindari. The estate was not, however, handed over to the petitioner until February 2, 1933.
The Zamindarini died on December 14, 1930 and her heir was her mother Errammal. Errammal died on February 2, 1933, leaving a will by which she purported to bequeath the Zamindari to one Thangaswami Naicker, who with two others challenged the right of the petitioner to obtain possession of the estate. The case was carried to this Court and the litigation did not end until September 31, 1936, when the title of the petitioners family to the property was finally decided. Until this had happened the account books of the petitioner showed the Zamindarini as the debtor, but the title of the petitioners family having been confirmed he closed this account and opened one under his own name transferring to that account the moneys he had received in connection with the loan.
In assessing the petitioner as the manager of the family for the year 1937-38 the Income-tax authorities have included the profits which they calculated has been made out of this mortgage transaction. The profit has been calculated at the sum of Rs. 2,57,998, less Rs. 84,700 which had been received towards the loan before 1924. The petitioner objected to an assessment being made on this basis and he requested the Commissioner of Income-tax to refer to this Court, under the provisions of Section 66 of the Income-tax Act, the questions raised by him. In accordance with this request the Commissioner has referred the following questions :-
'(1) Whether the sum of Rs. 42,000 deposited in the Court between July 1928 and July 1931 and withdrawn by the petitioner and adjusted as income in the year of account is agricultural income.
(2) Whether the entire income excluding the sum of Rs. 84,700 interest realised in 1915 to 1923 from this transaction as a whole can be said to have accrued, arisen or been received in the year of account.'
The petitioners case with regard to the first question is this : He says that as the Rs. 42,000 represents rents which the receiver collected from the tenants of the agricultural lands of the Zamindari this cannot be taxed, income from agriculture being exempt. If the petitioner were the owner of the Zamindari when these moneys were collected there would be force in the contention, but he was not, nor was his family. These moneys were paid into Court by the receiver in reduction of the amount due under the mortgage and the total sum was paid over to the petitioner for this purpose. The petitioner was not even in the position of a usufructuary mortgagee. He held a simple mortgage and the title to the estate claimed by him did not vest until after all these moneys had been collected and paid into court in reduction of the mortgage debt. There is no substance at all in the petitioners contention here. It has been suggested that the decision of the Privy Council in Commissioner of Income-tax v. Maharajadhiraj of Darbhanga (1935) 14 Pat. 623; 3 I.T.R. 305 has application, but this cannot be accepted. That case had reference to a usufructuary mortgage and, as I have already mentioned, the petitioner was never in the position of a usufructuary mortgagee.
The second question also must be answered in favour of the Income-tax authorities. Year by year from 1926-27 until the year of assessment 1937-38 the petitioner was pressing the Income-tax authorities not to take into account any sums received by him on account of this mortgage, but to leave the position open until the matter had been concluded. When the petitioners agent produced from the Income-tax Officer the accounts in respect of the year 1926-27 it was found that no interest in respect of the loan to the Zamindarini had been debited and it was contended by the assessee that as the loan was the subject-matter of litigation no payment of interest should then be taken into account. This contention was accepted. In the year of assessment 1929-30 the Income-tax Officer discovered that the petitioner had obtained a decree against the Zamindarini, but the Income-tax Officer was induced to stay action by the statement that no execution proceedings had been taken and that when the decretal amount was realized the income thereby received would be accounted for in his books. In the assessment year 1930-31 no accounts were produced for the year of account. The petitioners agent here represented that proceedings for the recovery of the decretal amount had not been taken and that it would be sometime before any money was realized on the loan. The accounts for the assessment year 1931-32 showed that a sum of Rs. 38,865 had been received in the previous year. The contention then raised was that unless the decretal amount was realised in full no part of the realization could be taken as profit. For the assessment years 1932-33 and 1933-34 the accounts again showed receipts on account of this mortgage. Thereupon the petitioners agent represented that there was an understanding between the department and the petitioner that interest should be taken into account only when the entire amount was repaid. On this representation the Income-tax Officer took no portion of the moneys received in these two years as income assessable in those years.
Notwithstanding that the petitioner induced the Income-tax authorities to agree to the assessment being made when the transaction was closed, he now says that as the amounts paid to him in cash were received by him more than three years before the year of account they are not assessable to tax. To say the least, it is not an honest contention to put forward in view of the representations made by him from year to year. But without taking into consideration the honesty or dishonesty of the petitioner or the effect of his representations it is clear that he is not entitled in law to escape assessment on the profit which was made out of this mortgage transaction. On his own showing this transaction did not close until the High Court had given its decision in 1936 and therefore it was not until that year profits could properly be calculated. In these circumstances the Income-tax authorities were fully entitled to assessee on that basis. The question whether the profit calculated by the department is excessive does not arise in this reference, but the Court has been given to understand that in other proceedings the petitioner intends to challenge the figure arrived at by the Income-tax authorities.
There is one other point which requires to be dealt with. The petitioner says that in any event he should be allowed to deduct the Rs. 42,000 referred to in the first question as that sum was paid into Court in reduction of the Rs. 3,75,000. In raising this point the learned advocate for the petitioner overlooks the fact that under the terms of the compromise decree his client got the whole of the Zamindari plus the Rs. 42,000. The Rs. 42,000 is part of the profit which was made out of the transaction, and therefore no deduction can be allowed.
For the reasons indicated we answer the first question referred in the negative, and the second question in the affirmative. The petitioner must pay the costs of this reference, Rs. 250.
Reference answered accordingly.