Appropriation of payments: creditor may credit an open decree payment to principal, not necessarily first to interest.

Where a debtor makes no direction on appropriation of an open payment received in execution of a decree, the creditor may apply it to any lawful debt due and payable, including principal, unless surrounding circumstances require a different inference. The usual preference for setting payments first against interest is not an absolute rule, and Order 34 Rule 10 CPC was held inapplicable. Applying the appropriation principles reflected in sections 59 and 60 of the Indian Contract Act, the receipt could validly be treated as principal rather than interest, so it was not taxable as income from interest and no referable question of law survived.

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Issues: Whether an amount received by the assessee in execution of a decree, in the absence of any direction by the debtor, could validly be appropriated towards principal instead of interest, and consequently whether the amount was taxable as income from interest.

Analysis: The amount in question was received without any specific appropriation by the debtor. The general rule governing appropriation of payments is that, where the debtor does not intimate the manner of appropriation and no surrounding circumstances indicate otherwise, the creditor may appropriate the payment at his discretion to any lawful debt actually due and payable. The rule ordinarily favours first adjustment against interest where no appropriation is made, but the authorities relied upon do not lay down any absolute obligation on the creditor to credit such payment only towards interest. Order 34, Rule 10 of the Code of Civil Procedure had no application to the case, and the principle embodied in sections 59 and 60 of the Indian Contract Act, 1872 supported the creditor's right to appropriate the payment towards principal.

Conclusion: The assessee was entitled to appropriate the amount towards principal, and the sum was not taxable as income from interest.

Final Conclusion: The application for a reference was rejected because no referable question of law survived on the appropriation of the payment, and the assessee's treatment of the receipt was upheld.

Ratio Decidendi: In the absence of any direction by the debtor and in the absence of circumstances compelling a different inference, a creditor may appropriate an open payment towards principal under the general rule of appropriation of payments, rather than being bound to credit it first towards interest.

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