1962 (7) TMI 46 - HC - Income Tax

Receipt of transferable U.P. Encumbered Estate Bonds constitutes interest. Validity of assessment under section 34(1)(a) upheld.

Seth Kishori Lal Babulal Versus Commissioner of Income-Tax, U.P.

The court held that the receipt of transferable U.P. Encumbered Estate Bonds by the assessee constituted the receipt of interest on the date of receipt. ... - Issues Involved:1. Whether the receipt of transferable U.P. Encumbered Estate Bonds amounted to the receipt of interest included in the full value of the bonds on the date when the bonds were received.2. Whether the proceedings under section 34(1)(a) and the resultant assessment were valid in law.Detailed Analysis:Issue 1: Receipt of Transferable U.P. Encumbered Estate Bonds as InterestThe court addressed whether the receipt of the U.P. Encumbered Estate Bonds by the assessee amounted to the receipt of interest on the date when the bonds were received. The assessee, a Hindu undivided family, received these bonds in full settlement of a debt from a landlord-debtor, with the bonds being accepted on March 16, 1946. The court referenced the case of Commissioner of Income-tax v. Maheshwari Saran Singh [1951] 19 I.T.R. 83, where it was held that the receipt of transferable bonds amounted to the receipt of money's worth. Therefore, any amount included in the value of the bonds on account of interest was considered received in money's worth on the date of receipt. The court concluded that the bonds were willingly accepted by the assessee in full settlement of the claim, and the value of the bonds representing interest was assessable in the relevant accounting period. Thus, the first question was answered in the affirmative and against the assessee.Issue 2: Validity of Proceedings under Section 34(1)(a)The second issue concerned the validity of the proceedings under section 34(1)(a) and the resultant assessment. The Income-tax Officer initially included only a portion of the interest in the original assessment, as the assessee had not disclosed the full value of the bonds received. The court noted that the assessee had omitted to make appropriate entries regarding the total value of the bonds in various accounts, which led the Income-tax Officer to believe that only bonds worth Rs. 80,000 were received. This omission constituted a failure to disclose fully and truly all material facts necessary for assessment. The court emphasized that merely producing account books does not equate to disclosure if the material facts are not evident or brought to the officer's attention. The court upheld the action taken under section 34(1)(a), deeming it valid, and answered the second question in the affirmative and against the assessee.Separate Judgment:M.C. Desai C.J. expressed doubts about the correctness of the decision in Maheshwari Saran Singh's case but agreed with the judgment due to the binding precedent. He highlighted that the bonds were not voluntarily accepted and were not payable immediately, distinguishing them from negotiable bonds. Despite this, he concurred with the majority view that the receipt of the bonds amounted to the receipt of interest and that the cash system of accounting did not preclude the assessment of income received in kind. He also addressed the applicability of section 34(1)(b), affirming that the Income-tax Officer could proceed based on new information, even if it pertained to facts existing at the time of the original assessment. Consequently, both questions were answered in the affirmative.Conclusion:The court concluded that the receipt of U.P. Encumbered Estate Bonds amounted to the receipt of interest on the date of receipt, and the proceedings under section 34(1)(a) were valid. Both questions referred to the court were answered in the affirmative, and the income-tax department was awarded costs of Rs. 200.