1962 (8) TMI 82 - HC - Income Tax

Court rules State not liable for debts under U.P. Encumbered Estates Act.

RAMJI LAL RAIS Versus INCOME-TAX OFFICER, C-WARD, MEERUT.

RAMJI LAL RAIS Versus INCOME-TAX OFFICER, C-WARD, MEERUT. - [1963] 49 ITR 167 (All) Issues Involved:1. Liability for debts and interest under the U.P. Government Encumbered Estates Act, 1934.2. Taxability of surplus from U.P. Government Encumbered Estate Bonds.3. Appropriation of a sum received during execution proceedings.Detailed Analysis:Issue 1: Liability for Debts and Interest under the U.P. Government Encumbered Estates Act, 1934The first question addressed whether the liability for debts and interest due from Wahiduddin passed to the U.P. Government with the decree by the special judge under the U.P. Encumbered Estates Act. The court answered this question with an emphatic 'no.' The court clarified that Section 14(7) of the Encumbered Estates Act provides for the passing of a simple money decree by the special judge, which is deemed to be a decree of a court of competent jurisdiction but not capable of being executed within Uttar Pradesh except as provided in the Act. Section 18 extinguishes the previously existing rights of the creditor, substituting them with a right to recover the amount of the decree in a specified manner. The court emphasized that the debt due to the creditor is not extinguished; only the right to the security is extinguished. The debtor remains liable, and there is no substitution of the State as a debtor. The court concluded that the liability to satisfy the decree continues to rest on the original debtor, not the State.Issue 2: Taxability of Surplus from U.P. Government Encumbered Estate BondsSince the first question was answered in the negative, the second question did not arise. The court noted that they were required to answer this question only if the first question was answered in the affirmative.Issue 3: Appropriation of a Sum Received During Execution ProceedingsThe third question addressed whether the receipt of Rs. 58,266 in April 1935 during the execution proceedings was rightly treated by the Tribunal as a receipt towards the principal of the debt. The court answered this question with a 'yes.' The court found that the assessee did not appropriate the receipt towards interest when it was received. Since the money was received in execution of a decree, there was no question of the debtors appropriating it towards the principal or interest. The right to appropriate vested in the assessee, who did not show the receipt as interest in his accounts or tax return for the relevant year. The court held that the assessee was bound by his act of treating the receipt as towards the principal when he submitted his return for the assessment year 1936-37. The court found no merit in the assessee's claim that he had a right to appropriate the receipt towards interest only when he received the bonds from the State of U.P. The court also rejected the assessee's reliance on Order XXXIV, rule 13, of the Civil Procedure Code, which deals with the application of proceeds from the sale of mortgaged property, stating that it was not applicable in this case.The court referred to previous judgments, including the case of Mst. Munno Bibi v. Commissioner of Income-Tax, which held that payments should first go towards interest and costs, then towards the principal. However, the court distinguished the present case, noting that the assessee had treated the disputed sum as a receipt towards the principal in his tax return and could not now claim otherwise. The court also cited the Privy Council decision in Commissioner of Income-tax v. Kameshwar Singh, which held that what the assessee chooses to treat as income may well be taken as income.Conclusion:The court's answers to the three questions were:1. No.2. Does not arise.3. Yes.The court directed that a copy of the judgment be sent to the Income-tax Appellate Tribunal and ordered the assessee to pay the respondent's costs of the reference, assessed at Rs. 200.