Encumbered Estates Bonds: receipt in discharge of debt counts as income, but taxable value is limited to market value excess.

Encumbered Estates Bonds received in complete discharge of a debt were treated as receipt of income when received, because under the cash basis the decisive factor is receipt of money or money's worth and the bonds were a convertible substitute security replacing the original liability. The taxable amount was limited to the real income embedded in the transaction, measured by the excess of the bonds' market value over the principal due, rather than any notional face-value difference. The receipt therefore triggered taxation in the year of receipt, but only on a market-value basis.

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Issues: Whether Encumbered Estates Bonds received in satisfaction of a debt constituted receipt of income when the bonds were received, and whether the taxable income was limited to the difference between the principal due and the market value of the bonds at the date of receipt.

Analysis: Under the Income-tax Act, 1922, income is taxable either on receipt or on accrual, and where the assessee maintains accounts on cash basis the decisive factor is receipt of money or money's worth. When a trader receives commercial assets or a substitute security in complete discharge of a debtor's liability, the income embedded in the value of those assets is received at that point and is not postponed until the asset is later converted into cash. The Encumbered Estates Bonds were not a mere promise by the debtor to pay later; by operation of the statute they replaced the original liability with a fresh obligation of the State and were convertible into money, so their receipt amounted to receipt of income. At the same time, only the real income represented by the excess of the market value of the bonds over the principal amount due was taxable, not the full face value difference without reference to market value.

Conclusion: Receipt of the bonds was receipt of income in the year of receipt, and the Revenue's contention substantially succeeded, though the taxable amount was confined to the market value basis.

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