1950 (10) TMI 10 - HC - Income Tax

Government bonds under Encumbered Estates Act deemed taxable income

The court held that the receipt of U.P. Government bonds under the Encumbered Estates Act constituted assessable income, akin to the realization of ... - Issues Involved:1. Whether the receipt of U.P. Government bonds in lieu of decrees under the Encumbered Estates Act amounts to a receipt of interest as assessable income.2. Whether the accounting treatment of the bonds received, under a cash basis system, amounted to the realization of interest for determining assessable income.Issue-Wise Detailed Analysis:1. Receipt of U.P. Government Bonds as Assessable Income:The primary issue was whether the U.P. Government bonds received by the assessees in lieu of decrees under the Encumbered Estates Act constituted assessable income. The court examined the nature of these bonds, which included both principal and accumulated interest, and carried an interest rate of 3.5% per annum. The bonds were issued by the Collector to satisfy the decrees in favor of the creditors.The court referred to several precedents to determine if the bonds could be considered as income. It cited Westminster Bank, Ltd. v. Osler and Californian Copper Syndicate (Limited and Reduced) v. Harris, which established that receiving something equivalent to cash (money's worth) amounts to payment of interest. The court also referenced Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraja Kameshwar Singh of Darbhanga, where it was held that acceptance of assets in lieu of cash payment constituted receipt of income.The court concluded that the bonds were transferable and marketable, akin to Government Promissory notes, making them money's worth. Therefore, the receipt of these bonds was considered as the realization of interest income, making it assessable under the Indian Income-tax Act.2. Accounting Treatment and Realization of Interest:The second issue was whether the accounting treatment of the bonds under a cash basis system amounted to the realization of interest. The court noted that the assessees followed the cash system of accounting and credited the bonds received to their debtor's account, treating the interest portion as income.The court discussed the principle that income could be received in kind and cited Raja Raghunandan Prasad Singh and Another v. Commissioner of Income-tax, Bihar and Orissa, affirming that receipt of money's worth is equivalent to receiving cash. The court emphasized that the bonds were issued by the government, which assumed the debtor's liability, thus constituting a payment of interest.The court also referred to Cross (Inspector of Taxes) v. London Provincial Trust, Ltd., which highlighted that receiving money's worth instead of money could constitute income if it represented a realized or realizable profit. The court concluded that the bonds were not merely a substitution of security but a payment of interest income.Conclusion:The court held that the receipt of U.P. Government bonds issued under Section 30 of the Encumbered Estates Act in lieu of interest due was a receipt of income during the year of account and was assessable to income-tax. The references were answered accordingly, and the Commissioner was entitled to costs assessed at Rs. 400 in each case.