Realisation of interest and auction value rules in mortgage sales: taxable income arose only on confirmation of sale.

Income is recognised only on actual realisation or receipt of cash equivalent: substitution of a fresh mortgage for an earlier one did not amount to payment of arrears of interest, so the arrears were taxable only when later realised on judicial sale. Court deposits made against disputed claims, and amounts later decreed to a prior mortgagee, were not deductible because no actual expenditure had been incurred in the relevant year. Where a mortgagee purchased the mortgaged property at judicial sale, any excess of the bid price over the principal debt represented realised interest, accruing only when the sale became absolute on confirmation. Post-sale expenses for delivery of possession and mutation were not deductible. The bid price at public auction was accepted as the proper value absent contrary evidence.

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Issues: (i) Whether arrears of interest included in a fresh mortgage were realised, and therefore taxable, when the old mortgage was discharged and the new security accepted; (ii) whether amounts deposited in court to protect a claimed share in the property, and amounts subsequently decreed in favour of a prior mortgagee, were deductible in computing profits; (iii) whether purchase by a mortgagee of the mortgaged property at a judicial sale yielded taxable income, and if so when the income arose; (iv) whether expenses incurred in taking delivery of possession and effecting mutation were deductible; and (v) whether the bid price at the judicial sale represented the correct value of the property acquired.

Issue (i): Whether arrears of interest included in a fresh mortgage were realised, and therefore taxable, when the old mortgage was discharged and the new security accepted.

Analysis: Income is taxable only when it is actually realised or when what is received is the equivalent of cash. A mere substitution of one security for another does not amount to payment. The acceptance of a new mortgage, even though it included the arrears of interest due under an earlier mortgage and the earlier mortgage was discharged, did not amount to receipt of money or money's worth representing those arrears. The debt remained outstanding and the interest retained its character until realisation by sale.

Conclusion: The arrears of interest were not taxable in the year of the fresh mortgage and were realised only on the later judicial sales.

Issue (ii): Whether amounts deposited in court to protect a claimed share in the property, and amounts subsequently decreed in favour of a prior mortgagee, were deductible in computing profits.

Analysis: The deposits were made with knowledge of the adverse claims and were not expenditure actually incurred in the relevant accounting year. They were contingent in nature at the time of purchase and did not form part of the price paid for acquiring the property for profit computation. The later decree in favour of the prior mortgagee likewise did not create a deductible outgoing in the year under assessment, since no actual expenditure had been incurred in that year.

Conclusion: Neither the court deposit nor the subsequent decree amount was allowable as a deduction.

Issue (iii): Whether purchase by a mortgagee of the mortgaged property at a judicial sale yielded taxable income, and if so when the income arose.

Analysis: When a mortgagee purchases the mortgaged property at a judicial sale, the purchase price operates in satisfaction of the decree debt to the extent permissible by set-off. To the extent that the purchase price exceeds the principal sum due, there is realisation of interest and hence taxable income. The process of realisation is completed only when the sale becomes absolute on confirmation, not on the date of decree or the date of auction sale. The retrospective vesting provision does not alter the date of realisation.

Conclusion: The transaction produced taxable income to the extent of realised interest, and the relevant date of accrual was the date of confirmation of the sale.

Issue (iv): Whether expenses incurred in taking delivery of possession and effecting mutation were deductible.

Analysis: Such expenses were incurred after the sale had become absolute and were part of the costs of completing title and possession. They were not expenditure laid out wholly and exclusively for earning the taxable profit from the transaction in the accounting year. They were part of the purchaser's post-sale obligations and not a deduction from the profits realised on the purchase transaction.

Conclusion: The expenses were not deductible.

Issue (v): Whether the bid price at the judicial sale represented the correct value of the property acquired.

Analysis: The price bid at a public judicial sale is the best evidence of market value where no contrary evidence is produced. The valuation made by court commissioners did not displace the actual price obtained in the auction, especially where the bidding itself reflected the risks and claims attached to the property.

Conclusion: The bid price was the proper value to adopt for the property.

Final Conclusion: The assessment was substantially upheld, the taxable element was confined to realised interest on confirmation of sale, and the appeal failed.

Ratio Decidendi: For income-tax purposes, a debt is realised only when cash or its equivalent is actually received or when a judicial sale becomes absolute on confirmation, and the auction bid price is the correct measure of the property's value absent contrary evidence.

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