TaxTMI 
TaxTMI 
1958 (8) TMI 48
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....urselves, as far as possible, to the facts relevant to that question. 2. The assessee is a resident firm with a money-lending business carried on at Kampar in the Federated Malay States. As the enemy was in occupation of the said country during the period 1942 to 1945, the monetary transactions of payments and realisations recorded in the books of the business were in Japanese currency then in circulation. On re-occupation of the territory on September 5, 1945, Japanese currency ceased to be legal tender, and, in its place, Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired and obligations incurred during enemy occupation. The Debtor and Creditor (Occupation Period) Ordinance, 1948 (hereinafter referred to as the "Ordinance"), was enacted by the Legislative Council on December 16, 1948, to regulate all the monetary transactions in the Federated Malay States during enemy occupation, to which was attached a schedule containing a sliding scale of the value of occupation currency during the relevant years, to scale down the occupation currency to the Malayan currency with a ....
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....d in the total incomes for assessment years 1942-43 and 1941-42 respectively were, in accordance with the aforesaid special scheme, reduced to nil and the excess taxes paid refunded to the assessee. 5. In the aforesaid business at Kampar in Federated Malay States, the assessee in the usual course had made recoveries from its various money- lending debtors during the period of enemy occupation. By virtue of the aforesaid Ordinance, Annexure 'A', which entitled some of these recoveries to be scaled down at rates specified in the schedule attached thereto, the debts being revived to that extent, the assessee actually collected $ 6,437 during the year ended April, 12 1952, the "previous year" for assessment year 1952-53. 6. The Income-tax Officer, included the aforesaid amount of $ 6,437 in the assessment, holding that since these loans were discharged earlier, any second receipts from such debtors were only income assessable to tax. 7. The Appellate Assistant Commissioner accepted the assessee's contention that such receipts were capital in nature and not, therefore, taxable, in the appeal before him against the aforesaid assessment, holding in paragraph 1 of his ....
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....ncy thereafter when the enemy was in occupation of the territory and thereby their balances were wiped off the books. 3. On re-occupation of the territory on 5th September, 1945, the Japanese currency in circulation during the occupation period ceased to be legal tender and in its place Malayan currency was introduced. The Malayan Government forthwith declared a moratorium keeping in abeyance the enforcement of all the financial rights acquired during the enemy occupation. This was followed by the Debtor and Creditor (Occupation Period) Ordinance, 1948, hereinafter referred to as "Ordinance," enacted on 16th December, 1948, to regulate all the financial transactions in the Federated Malay States during enemy occupation and to which a schedule containing a sliding scale of the value of occupation currency to scale down the occupation currency to the Malayan currency was attached to adjust rights and obligations in the manner provided for in the aforesaid Ordinance. The aforesaid Ordinance with the aforesaid schedule is annexure 'A' and forms part of the case. It is not printed, but copies thereof are undertaken to be produced by the assessee before their Lordships at the ....
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....ee was under no legal obligation to make the aforesaid second payment and also that it represented only re-payments of capital and not an expense of the business. 7. The appeals before the Appellate Assistant Commissioner against both the aforesaid assessments were dismissed. A copy of the Appellate Assistant Commissioner's order for assessment year 1951-52 setting out his detailed reasoning and conclusions is annexed hereto as annexure 'B' and forms part of the case. 8. In the further appeals to the Tribunal which followed, it was contended that the payments in question represented losses, that arose in the usual course of, and were incidental to, the money-lending business of the assessee and alternatively losses due to fluctuations in exchange rates, and in either view, they were legitimate deductions. The Tribunal, however, by its consolidated order, dated 5th April, 1954, a copy whereof is annexed hereto as annexure 'C' and forms part of the case, held that the discharge of the liabilities during the enemy occupation period was infructuous and not a discharge at all, except to the extent of the values of the occupation payments scaled down in accordan....
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....any value. Soon after they reoccupied Malaya in September, 1945, the British Government declared a moratorium on all private debts. A large number of Indian nationals were doing business in Malaya before the Japanese occupation, during the Japanese occupation and also thereafter and they sustained heavy losses during and on account of the occupation. In response to representations made on their behalf the Government of India notified on August, 14, 1947, a scheme intended to give them a measure of relief. The main features of the scheme so far as here material were these: (1) No assessee was under any obligation to accept the scheme; he was free either to opt for it or not. If he desired to opt for the scheme he was required to exercise his option within one month after he was informed of the scheme. (2) The assessee was permitted to include in his expenses various items which would be inadmissible under the Indian Income-tax Act. (3) The losses suffered by the assessee during the five years relevant to the assessment years 1942-43 to 1946-47, were all to be aggregated. (4) The assessee was permitted--reversing the usual procedure fixed in the Indian Income-tax Act--....
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....n 3 directed that any preoccupation debt which remained wholly unpaid at the time the Ordinance commenced was to be paid in full. Subject again to certain provisions and conditions, payment of a pre-occupation debt, either in Malayan currency or in Japanese currency, made before December 13, 1943, was to be a valid discharge to the extent of the face value of the payment. In other cases payments in a Japanese currency were to be revalued and scaled down in accordance with the schedule annexed to the Ordinance. A debtor who had paid any debt in depreciated Japanese currency was required to pay over again a certain amount to be ascertained by the application of the schedule. Section 13 expressly excluded from the scope of the Ordinance agreements made between a creditor and a debtor after the end of the occupation period for the purposes of-- "(a) valuing any payment made during the occupation period in respect of a pre-occupation debt or on occupation debt (whether accrued due or not); or (b) providing for payment or settlement of any pre-occupation debt or occupation debt or part thereof; or (c) determining the rate for payment of any such interest as is referred to in sub....
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....437. It was only a realisation of the original amounts lent. It is not income." The Department appealed to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal for these reasons: "In the computation made by the assessee for purposes of claiming benefits under the scheme, it included and claimed all its cash and bank balances in Malayan business as part of the losses incurred therein. These cash and bank balances included the recoveries in full in the then Japanese currency of the debtors in question. In our opinion, this claim constitutes by itself a write-off of the debtors, though indirectly, with the result that subsequent recoveries thereof amount to only bad debt recoveries normally assessable. The Appellate Assistant Commissioner's order is consequently set aside and the sum of $ 6,437 is accordingly restored to the assessment." The assessee then came to this court and at his instance this court required the Tribunal to state a case on the following question of law: "Whether on t....
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....lity of the business as at the date of reoccupation, even though in the books, such a liability did not appear. The repayments to creditors in both the years presently in question or consequently of a capital nature and cannot therefore be deducted from the profits. The argument that the payments in question have been necessitated by and the incidental loss incurred on account of fluctuations in exchange rates is hardly tenable, as no exchange rates are involved in the present consideration." At the instance of the assessee the Tribunal referred the following question for the decision of this court: "Whether the payments of $ 28,586 and $ 11,547 are deductible from the foreign profits of assessment years 1951-52 and 1952-53 respectively." The questions raised in the other references in this group are the same in substance. No long arguments based on the special scheme propounded by the Government of India were advanced before us, and so the scheme itself can be dealt with very briefly. From a purely legal point of view the scheme was in the nature of and constituted an of....
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.... It directed that though occupation notes whose face value aggregated to a certain amount had been paid, still those notes would be treated as having been worth only a fraction of their face value. It further provided that the amount of the fraction should be ascertained in accordance with the schedule appended to the Ordinance. This meant that to the extent that the Ordinance declared that there had been no valid discharge, the original debt was revived. Thus, if X had borrowed 1010 dollars from Y before the occupation and if in discharge of that debt X paid 1010 Japanese dollars in July, 1944, to Y the debt would be wiped out under the law as it then stood. The Ordinance, however, directed that this payment of $ 1010 was to be treated as a payment only of 100 Malayan dollars. This meant that the debt was revived to the extent of $ 910. Putting the matter in general terms, what the Ordinance did was to restore the original debt to the extent that it abridged or abrogated the discharge that had been made in Japanese currency. From this it would follow that repayments subsequently made in discharge of the debt that was thus resuscitated would have to be treated as partaking of the s....
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....ndents pursuant to the provisions of the Act of 1948 must be regarded as an additional payment voluntarily made to them for wool supplied for appraisement, or, if the compulsory acquisition could properly be described as a sale, a voluntary addition made by the Commonwealth to the purchase price of the wool. It was in the respondent's hands a trade receipt of an income nature, and formed part of their assessable income under section 25 of the Income-tax Assessment Act, 1936-49, as 'gross income derived directly or indirectly from all sources whether in or out of Australia...........which is not exempt income,' and was accordingly liable to tax." The other case is reported in Sevrene (H.M. Inspector of Taxes) v. Dodswell*. The facts are thus summarised in the first paragraph of the headnote: "The respondent was granted a licence to mill flour in October, 1941, and carried on the trade of flour milling until September, 1945. As he had not been a miller at the outbreak of War, he was not entitled to the benefit of a remuneration agreement whereby millers were compensated by the Ministry of Food for losses incurred under wartime arrangements for the purchase of wheat and....
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....simplest possible case. Let us take the case of a money-lender who has got a capital of one lakh of rupees. He employs no borrowed money in his business. He lends the entire amount of one lakh of rupees at ten per cent. per annum and all the loans he makes are repaid at the end of the year, which means, he would have received in all Rs. 1,10,000. But, we compute his profits at Rs. 10,000; that is to say, from the aggregate sum of Rs. 1,10,000 that our money lender has received we deduct the principal amount he has advanced. In other words, we ignore the amount he has received from his debtor in repayment of the principal. Now, if we do not do that and treat the entire sum of Rs. 1,10,000 that has come into his hands as a revenue receipt and require him to pay tax on the whole of that sum, a very absurd situation would arise. But, in substance, this is exactly what the Income-tax Officer and the Tribunal have done in the cases which fall in the first category in our series. From this simple illustration it will be plain that when computing the profits of a money-lender, we must not take into account the moneys he has received back on account of the principal he originally lent. L....
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....one, if any, will be the actual profits. No doubt, when we prepare a statement of assets and liabilities, we certainly bring into the account the principal amounts involved in the transactions; we would show on the one side the principal outstanding and similarly on the other side the principal repayable. But, and it is important to bear this in mind, amounts which come into a statement of assets and liabilities do not all of them enter into the reckoning when we have to ascertain the profits. From all this, one simple conclusion emerges plainly. When we have to compute or ascertain the profits a money-lender has made, we do not take notice of the moneys he has received in repayments of principal, nor conversely do we take notice of the moneys he has repaid on account of principal. From this it follows that the sums which a money-lender has received in repayment of the principal cannot be subject to tax. Conversely, he cannot claim that the amounts he has repaid as principal should be differently treated and that the amounts so repaid should be deducted from his profits. The two items, that is, repayments of principal received by the money-lender and repayments of principal made....
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.... The view that the assessee was under no obligation to pay is clearly unsustainable. The obligation to repay was created by a statutory enactment and could not be avoided. The other mistake which the Department and the Tribunal fell into in dealing with this category of cases was that they overlooked the difference between payments made towards interest on the money borrowed and payments made in repayment of the principal borrowed. Interest on money borrowed is a necessary item of expenditure, as essential and as unavoidable as the rent for the premises occupied by the business or the rent paid for a godown or the hire paid for a lorry for the transport of goods. When we look at the matter from a business point of view it will be seen that interest is nothing more than hire charges for money. Certain other contentions were put forward during the arguments and to some of these reference must now be made. In several judgments it has been observed that a "money-lender's stock-in-trade consists of the money which he has for the purpose of carrying on his business." In computing the profits or loss of a business all the moneys a trader receives by disposal of his goods or war....
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....ould be made on account of old debts could be obeyed only by disposing of the stock-in-trade. In fact, this argument is illustrative of the danger of pressing the analogy between money and stock-in-trade too far. It must next be remembered that for purposes of tax, the source from which an assessee has to pay is not very important. The argument of Mr. Vasantha Pai also overlooks the fact that the effect of the Ordinance was to revive the old debt. It may be that at the time he paid the money, the assessee thought that he had discharged the debt. But the Legislature thought it fit to decree otherwise. Mr. Pai next said that the effect of the statute was to impose an extra liability on the assessee and the payment of a statutory liability is a legal item of expense. The argument would have been good if the Ordinance had been a taxing statute. But it was not that. Mr. Pai next said that we may treat the payments as losses occasioned by fluctuations in currency and in this connection he referred to the case in Commissioner of Income-tax v. A.S.A. Concern*. But we can see no points of similarity between that case and the ones before us. On behalf of the assessee in R.C. No. ....
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....n placed before us for the first time in the form of an affidavit we cannot naturally investigate them here. That will have to be done by the Tribunal. We answer the questions raised by these references as follows: A: Where an assessee has received repayments, he will not be liable to tax in respect of amounts he has received as or towards principal; but he will be so liable in respect of moneys which he has received as or towards interest. Where only part of the debt has been recovered, the assessee will be at liberty, subject to the law relating to appropriation of payments to appropriate the money he has received either towards principal or interest. The assessment in respect of such receipts will proceed on this basis; that is to say, if the payment has been lawfully appropriated towards interest, the assessee will be liable to pay tax thereon. But if he has lawfully appropriated it towards principal, he will not be liable to pay tax on it. Statements have been filed before us in some cases showing how much has been received on account of interest and how much on account of principal. It will be for the Tribunal to check the correctness of these statements and revise the ....