Compromised debt and fresh mortgage treated as separate obligations; interest remained assessable as income

Interest on a debt compromised by decree was treated as assessable where the debtor-creditor relationship had ended and the decree recorded satisfaction of the liability. The Court held that a fresh mortgage taken in favour of the karta's sons created a new debt in their favour and did not operate as substituted security for the assessee. On those facts, the interest liability stood discharged, and no actual physical receipt was required for tax treatment. The amount was therefore assessable as the assessee's income, and the Revenue succeeded.

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Issues: Whether the sum of Rs. 64,020 representing interest was assessable in the assessee's hands for the assessment year 1956-57 where the underlying debt was stated to have been satisfied by compromise and a fresh mortgage was taken in favour of the karta's sons.

Analysis: The assessee maintained accounts on cash basis, but the Court found that the debtor-creditor relationship between the assessee and the borrower had come to an end by the compromise decree, which expressly recorded that the amount had been satisfied. The subsequent mortgage in favour of the sons of the karta created a new debt in their favour and did not amount to a substituted security for the assessee. On those facts, the interest liability stood discharged and there was no need for an actual physical receipt to treat the amount as received for tax purposes.

Conclusion: The sum of Rs. 64,020 was assessable as income of the assessee; the question was answered in the negative, in favour of the Revenue and against the assessee.

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