1964 (10) TMI 13 - SC - Income Tax

Supreme Court clarifies tax treatment on debtor-creditor transactions

Commissioner Of Income-Tax, Madras Versus V. MR. P. Firm, Maur.

The Supreme Court upheld the High Court's decision regarding the taxability of receipts under the Debtor and Creditor (Occupation Period) Ordinance. It ... Whether the result of the Ordinance was to revive the old debts and the question of the exigibility of the said income to tax can only be decided on the provisions of the Income-tax Act and not by the terms of the scheme of the Ordinance? Held that:- We hold, agreeing with the High Court, that under the Ordinance the discharged debts became enforceable to the extent of the balance of the amount due after the scaling down of the payments. If so, the Income-tax Officer could only impose tax on the income recovered by the assessees thereafter towards their debts if such income was taxable under the provisions of the Act. The High Court correctly held that the assessees who had received repayments would not be liable to tax in respect of amounts they had received towards principal but they would be so liable in respect of moneys which they had received towards interest. It further held that those assessees who had made payments towards the debts would be entitled to deduct from their income and claim exemption from tax only such amounts as they had paid on account of interest but they would not be entitled to deduct any payment made on account of principal. The High Court also gave a direction that in the case of open payments the respective amounts paid towards principal or interest should be ascertained in accordance with the law of appropriation of payments. Neither the learned Solicitor-General, who appeared for the revenue, nor the learned counsel, who appeared for the assessees, questioned the correctness of the said directions if the construction we placed on the Ordinance was correct. The directions given by the High Court will, therefore, stand. Appeal dismissed. Issues Involved:1. Taxability of receipts under the Debtor and Creditor (Occupation Period) Ordinance.2. Deductibility of payments made under the Ordinance.3. Application of the principle of 'approbate and reprobate' in the context of the scheme propounded by the Government of India.Detailed Analysis:1. Taxability of Receipts under the Debtor and Creditor (Occupation Period) Ordinance:The primary issue was whether the amounts recovered by assessees under the Ordinance, which revived debts paid off in depreciated Japanese currency, were taxable as income. The High Court concluded that repayments received by assessees towards principal amounts were not taxable, whereas amounts received as interest were taxable. The court emphasized that the Ordinance revived the old debts, and the taxability of the income derived from such recoveries must be determined based on the provisions of the Income-tax Act, not the Ordinance.The Supreme Court agreed with the High Court's interpretation, noting that the Ordinance regulated the pre-existing creditor-debtor relationship and did not create new legal relationships or provide compensation for losses. The court affirmed that the Income-tax Officer could only tax income recovered towards the revived debts if it was taxable under the Income-tax Act.2. Deductibility of Payments Made under the Ordinance:The second issue concerned whether payments made by assessees to discharge revived debts under the Ordinance were deductible from their income. The High Court held that assessees could only claim deductions for amounts paid as interest, not for amounts paid towards the principal. The Supreme Court upheld this view, stating that deductions could only be claimed if permissible under the Income-tax Act. The court also directed that in cases of open payments, the amounts paid towards principal or interest should be determined according to the law of appropriation of payments.3. Application of the Principle of 'Approbate and Reprobate':The revenue argued that assessees who benefited from the scheme propounded by the Government of India, which allowed them to set off losses incurred during the Japanese occupation against profits from earlier years, were precluded from contending that amounts realized from revived debts were not taxable. The scheme included a condition that any subsequent recoveries would be treated as income.The Supreme Court rejected this argument, clarifying that the doctrine of 'approbate and reprobate' is a form of estoppel and cannot override statutory provisions. If a particular income is not taxable under the Income-tax Act, it cannot be taxed based on estoppel or any equitable doctrine. The court emphasized that tax law does not accommodate equity; an income is either taxable under the statute or it is not.Conclusion:The Supreme Court dismissed the appeals, affirming the High Court's decision. The court held that receipts towards principal amounts were not taxable, while receipts towards interest were taxable. Payments made towards interest were deductible, but payments towards principal were not. The court also ruled that the principle of 'approbate and reprobate' could not be applied to tax non-taxable income. The directions given by the High Court regarding the appropriation of payments were upheld. The appeals were dismissed with costs, and one hearing fee was awarded.