Debtor liability under the Encumbered Estates Act remains with the debtor, and receipt character in accounts binds later tax treatment.

A decree under section 14(7) of the U.P. Government Encumbered Estates Act, 1934 does not transfer the original debtor's liability to the State; it merely enables recovery of the decretal amount, while the debtor remains liable and the Act's machinery proceeds on that basis. In the income-tax context, an assessee who did not consistently appropriate an execution receipt towards interest in his accounts or return could not later re-characterise it as interest. The receipt was therefore treated as having been taken towards principal, and the assessee was bound by the character he had earlier assigned to it.

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Issues: (i) Whether, on the passing of a decree under section 14(7) of the U.P. Government Encumbered Estates Act, 1934, the liability of the original debtor stood transferred to the State of Uttar Pradesh. (ii) Whether the assessee could treat the sum realised in 1935 as appropriated towards interest, so that the later receipt of bonds should be treated differently for income-tax purposes.

Issue (i): Whether, on the passing of a decree under section 14(7) of the U.P. Government Encumbered Estates Act, 1934, the liability of the original debtor stood transferred to the State of Uttar Pradesh.

Analysis: Section 14(7) merely authorises the special judge to pass a simple money decree for the amount found due, while section 18 extinguishes only the creditor's pre-existing security rights and substitutes a right to recover the decretal amount in the manner prescribed by the Act. The original debt is not extinguished, the debtor remains liable, and the Act nowhere contemplates substitution of the State as debtor. The subsequent machinery in sections 22 to 24 also proceeds on the footing that the original debtor continues to be the debtor and remains responsible for satisfaction of the decree.

Conclusion: The liability did not pass to the State, and the answer to the first question was in the negative.

Issue (ii): Whether the assessee could treat the sum realised in 1935 as appropriated towards interest, so that the later receipt of bonds should be treated differently for income-tax purposes.

Analysis: The assessee received the amount in execution but did not appropriate it towards interest in his accounts or return; instead, he treated it as reducing principal and thus represented it to the taxing authorities as capital receipt. While the general law of appropriation recognises the creditor's right in dealings with the debtor, that position could not be used against the income-tax authorities after the assessee himself had adopted a contrary treatment. The Court distinguished the authorities relied upon under the Contract Act and held that, on these facts, the assessee was bound by his own earlier treatment of the receipt. The amount was therefore to be taken as received towards principal, not interest.

Conclusion: The assessee could not re-appropriate the receipt towards interest, and the answer to the third question was in the affirmative.

Final Conclusion: The reference was answered mainly against the assessee: the State was not substituted as debtor, and the disputed receipt was rightly treated as principal in the earlier accounting treatment, so the revenue assessment on the later receipt stood.

Ratio Decidendi: A decree under the U.P. Government Encumbered Estates Act, 1934 does not transfer the debtor's liability to the State, and for income-tax purposes an assessee is bound by the character he has himself given to a receipt in his accounts and return when the amount has not been appropriated consistently as interest.

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