Transferable government bonds received in discharge of interest can constitute taxable income when they represent money's worth.

Transferable Government bonds issued under the U.P. Encumbered Estates Act, when received in discharge of interest due on money lent, were treated as taxable income because they were saleable, represented money's worth, and extinguished the debtor's liability. Receipt of an equivalent of cash can amount to realisation of income, and income may be received in kind as well as in cash. The creditor's lack of choice to accept the bonds did not change the character of the receipt. The interest component was therefore assessable as income received during the year of account.

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Issues: Whether the receipt of transferable Government bonds issued under the U.P. Encumbered Estates Act in satisfaction of decrees for money lent, to the extent representing accumulated interest, amounted to receipt of income assessable to tax.

Analysis: The bonds issued under the statutory scheme were transferable, saleable, and represented money's worth. The liability of the original debtors stood discharged and the State assumed the obligation to pay the creditors. Receipt of an equivalent of cash is receipt of income, and income may be realised in kind as well as in cash. The fact that the creditor had no option but to accept the bonds did not alter the character of the receipt. The transaction was therefore not a mere substitution of one security for another, but a realisation of the interest due in a form capable of being converted into cash.

Conclusion: The receipt of the Government bonds in lieu of interest was taxable income and was rightly assessable in the hands of the assessees.

Final Conclusion: The references were answered in favour of the Revenue, with the amount representing interest brought to tax as income received during the year of account.

Ratio Decidendi: Where a creditor receives, in discharge of interest due, a transferable and saleable security constituting money's worth and the debtor's liability is extinguished, the receipt is income assessable to tax even though payment is not made in cash.

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