1933 (1) TMI 26 - HC - Income Tax

Tax Court Rules on Notional Interest, Deductibility of Court Deposits, & Mortgage Profits

Raja Raghunandan Prasad Singh and another Versus Commissioner of Income-Tax, Bihar and Orissa

The court held that notional interest on a discharged bond was not taxable, as it was not realized income. The amount deposited as security in court was ... - Issues Involved:1. Taxability of notional interest on a discharged bond.2. Deductibility of the amount deposited as security in court.3. Deductibility of a decree amount obtained by a subsequent mortgagee.4. Unspecified issue (no argument offered by the assessees).5. Taxation of profits from the purchase of mortgaged property by the mortgagee.6. Date on which profits are deemed to have arisen.7. Deductibility of expenses for taking delivery of possession and effecting mutation.8. Correct method of computing the value of the acquired property.Detailed Analysis:1. Taxability of Notional Interest on a Discharged BondThe first issue questions whether notional interest on a first bond can be taxed in subsequent years after it has been discharged by a fresh bond. The appellants argued that the acceptance of a new mortgage in 1904, which included arrears of interest from a previous mortgage, should be treated as payment of those arrears in 1904. However, the court found that the new mortgage was merely a substitution of security and not a realization of the arrears of interest. The arrears of interest continued to retain their character and remained due until the judicial sales in 1924-25. The court held that the assessees did not receive payment of the arrears of interest in 1904 and were not liable to be taxed on this sum as income received in that year.2. Deductibility of Amount Deposited as Security in CourtThe second issue involves whether the amount deposited as security in court can be deducted in computing profits. The assessees deposited Rs. 3,20,633 in court pending a decision on a one-eighth share claim. The court ruled that this deposit was not a permissible deduction in computing the profits for the year 1925-26, as it was a contingent liability and not actual expenditure incurred in that year.3. Deductibility of Decree Amount Obtained by a Subsequent MortgageeThe third issue is whether the amount of a decree obtained by a subsequent mortgagee, held to be a prior charge, can be deducted from taxable income. The court found that the assessees were aware of this claim when they purchased the property and that no expenditure was made in the year 1925-26. Therefore, the amount of Rs. 1,50,818 was not a permissible deduction in computing the profits for that year.4. Unspecified IssueNo argument was offered by the assessees on the fourth issue, and the court's adverse decision stands.5. Taxation of Profits from the Purchase of Mortgaged Property by the MortgageeThe fifth issue addresses whether profits arising from the purchase of mortgaged property by the mortgagee are taxable. The court held that the purchase price exceeding the principal sum due under the mortgage represents a realization of interest. In this case, the excess amount of Rs. 15,31,965 over the principal sum of Rs. 10,33,135 was available to be set against arrears of interest, costs, and expenses. The court also decided that the arrears of interest included in the principal sum of Rs. 7,33,135 were realized only at the judicial sales, making them taxable income.6. Date on Which Profits Are Deemed to Have ArisenThe sixth issue concerns the date on which profits are deemed to have arisen. The court agreed with the Commissioner and the High Court that profits are realized on the confirmation of the sale, i.e., on 18th and 21st December 1925. The confirmation of the sale marks the completion of the realization process.7. Deductibility of Expenses for Taking Delivery of Possession and Effecting MutationThe seventh issue is whether expenses incurred in taking delivery of possession and effecting mutation can be deducted from taxable profits. The court ruled that these expenses are not deductible, as they were anticipated by the assessees when bidding for the property and do not qualify as expenditure incurred solely for earning profits or gains in the relevant year.8. Correct Method of Computing the Value of the Acquired PropertyThe eighth issue involves the correct method of computing the value of the property acquired by the assessees. The court held that the price bid at the public sale, Rs. 25,65,100, must be taken as the market value of the property, rejecting the assessees' contention to use the civil court's valuation of Rs. 17,13,701.ConclusionThe court agreed with the High Court's answers to all the questions raised in the appeal, affirming the decree of the High Court dated 17th August 1928, and dismissed the appeal. The respondent was awarded the costs of the appeal.