Taxation of mortgage realisation turns on actual receipt, sale confirmation, and the non-deductibility of post-accrual expenses.

Unpaid mortgage interest is treated as taxable only when actually realised or otherwise brought home as income; a mere debt due, even with compound-interest stipulations, does not by itself amount to accrued income. In an execution sale where the mortgagee purchases the mortgaged property, the taxable profit arises only when the sale becomes absolute on confirmation, not merely on decree or auction. Amounts deposited as security, prior encumbrance liabilities, and later delivery or mutation expenses are not deductible if they are contingent, arise after the profit accrues, or are not incurred in earning the income. Sale proceeds were not required to be appropriated differently on the facts stated, and the revenue's computation was upheld.

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Issues: (i) whether unpaid mortgage interest accrued as taxable income despite not being actually realised and despite compound-interest stipulations; (ii) whether the amount secured by the mortgagee's purchase of mortgaged property in execution was a capital transaction or a realisation of taxable profit, and at what date such profit arose; (iii) whether amounts deposited as security, prior encumbrance liabilities, and later expenses of delivery and mutation were deductible in computing income; and (iv) whether sale proceeds had to be appropriated first to interest or to principal for income-tax purposes.

Issue (i): whether unpaid mortgage interest accrued as taxable income despite not being actually realised and despite compound-interest stipulations.

Analysis: The income was assessed on the cash basis, and there was no actual realisation of interest from year to year. A mere debt due is not the same as income accrued. Interest payable under the mortgage bonds did not cease to be interest because it was carried forward or carried interest on itself. The principle that income must involve a real coming in was applied, and the authorities on compound interest showed that adding unpaid interest to the account did not convert it into capital.

Conclusion: The unpaid interest remained taxable income when realised, and the contention that it had already ceased to be assessable failed.

Issue (ii): whether the amount secured by the mortgagee's purchase of mortgaged property in execution was a capital transaction or a realisation of taxable profit, and at what date such profit arose.

Analysis: The mortgagor's property represented money advanced together with accumulated profit in another form. The purchase in execution did not alter the character of the realised sum into capital merely because the creditor bought the property himself. Under the execution-sale scheme, title and effective realisation arose only when the sale became absolute, since the sale remained liable to be set aside until confirmation. The profit was therefore not treated as arising at the date of decree or sale, but only when the sale became absolute. Expenses incurred after that point, including delivery and mutation costs, were not expenses incurred in earning the profit.

Conclusion: The transaction was not a mere capital conversion for tax purposes; the profit arose only on confirmation of sale, and post-confirmation possession expenses were not deductible.

Issue (iii): whether amounts deposited as security, prior encumbrance liabilities, and later expenses of delivery and mutation were deductible in computing income.

Analysis: Security furnished for a pending claim was not expenditure incurred for earning income, but only a contingent protection against a possible future loss. Likewise, a later decree recognising a prior charge had not yet resulted in actual expenditure within the relevant assessment year. The subsequent costs of taking possession and mutation likewise arose after the taxable profit had accrued and were not part of the cost of earning it.

Conclusion: These amounts were not allowable deductions in the assessment year in question.

Issue (iv): whether sale proceeds had to be appropriated first to interest or to principal for income-tax purposes.

Analysis: The taxable gain on the mortgage realisation was the excess of the amount realised over the capital advanced. The Court was not persuaded that, on the material before it, the revenue's appropriation of the realised sum first toward interest should be displaced in the manner contended for by the assessees. On the facts stated, the profit component remained assessable as income.

Conclusion: The assessee's challenge to the revenue's method of computation failed.

Final Conclusion: The reference was answered substantially against the assessees, with the revenue's view upheld on the decisive tax questions and costs awarded against the assessees.

Ratio Decidendi: For income-tax purposes, unpaid interest remains taxable when it is actually realised or otherwise brought home as income, and in an execution sale by the decree-holder the taxable profit arises only when the sale becomes absolute, not merely on decree or auction sale.

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