Commissioner of Licome-Tax, Madras v. T.S.Pl.P. Chidambaram Chettiar (Dead) Through L.Rs.

Hegde J.-The first of these two appeals (both by certificate) viz. that filed by the Commissioner of Lncome Tax succe":'· and the second, that fileif by the legal representatives of the "''essee

fails. The facts as found by the Tribunal and set out in the stare-ment of the case, relevant for the purpose of these appeals are as follows:

The relevant assessment year is 1944-45, correspondiJ;.g to the accounting year ended on April 12, 1944. The assessee is one Chidambaram Chetti<1r (since deceased). The father of 1ihe assessee Palaniappa Chettiar was a mom~y lender. He had made various advances to .one Nallathambi Sakkarai Manradiar, who will hereinafter be referred to as the Pattayagar, a prominent land-lord-in Coimbatore District, on promissory notes. The total principal advanced by the. father of the assessee upto July 6, 1932 amounted to Rs. 1,38,535; The interest on the same came to Rs. 1,34,965. On July 6, 1932, a furtl1er advance of Rs. 2500 was made to the Pattayagar and for the amounts due from him, the Pattayagar executed a mortgage of some of his properties in favour. of the assessee's father for a sum of Rs. 2, 76,000. Till 1938, only a sum of Rs. 13,620 w11s paid by the mortgagor in part payment of th~ debt due from him. On December 14, 1940 the II!Ortgagee instituted a suit on the foot of the mortgage bond claiming a sum of Rs. 5,50,573 inclusive of principal and interest. On September 19, 1943, the claim was compromised and on October 5, 1943, a cgnipromise decree was passed for a sum of Rs. 3,50,500 in full satisfaction of the :mortgagee's claim. The decree amount was made payable on or before October 1, 1944. The debt under the compromise decree was subsequently dis- . charged.

For the assessment year 1944-45, the assessec .:.:hldambaram Ch11ttiar, as karta of his Undivided Hindu Family was assessed under s. 23(3) of the Income Tax Act, 1922 (to be hereinafter referred to as the Act), on February 12, 1946, on a total income of Rs. 78,556 which, on appeal was reduced to Rs. 53,153. When the assessment proceedings of the assessee were pending before the Income-ta2C Officer, Trichy, that Income-tax Officer received information~from the Ir.come-tu Officer, Erode that the mortgagor bad paid secretly to the mortgagee a sum of Rs. 1,50,000 during the year ended on A\>ri! -1; 1944 ~d that the same was not included in the compromise decree. When the Income-tax Officer asked the assessee about the same, be denied having received any amount secretly. Apart from the information conveyed by the Income-tax Officer, Erode, the Assessing Officer had no other material before him to show that any amount had been paid secretly by the mortgagor to the mortgagee. Hence on May 27, 1945, the Income-tax Officer made the following note in the order sheet :

"It is denied that there was any secret under-standing not to show the payment of Rs. 1,50,000. The

receipt of this amount is entirely denied ... The Income-tax Officer, Erode should be asked to give further details and to ask the Pattayagar {o produce evidence of the payment. In any event, this should come up for consi-deration only in the assessment year 1944-45 as only the exce~s over Rs. 2,76,000 plus legal expenses can be treated as interest income in the han<ls of the 115sessee and so, the asse~ment for 1944-45 should not 'be held up pending further investigation."

After sometime the Assessing Officer made further enquiry into the information given by the Income-tax Officer, Erode and thereafter he came to believe that a sum of Rs. 1,50,000 had escaped assessment by reason of. the omission of the assessee to disclose fully and truly all materia'l facts necessary for his assess-ment for the assessment year 1944-45. He accordingly issued a notice under s. 34(l)(a) on March 9,-1953. In reply to that notice, the asses see filed a return similar to the one filed by hlm earlier. He denied having received Rs. 1,50,000 secretly from the mortga-gor. The Income-tax Officer did not accept the plea of the assessee. He accordingly included an additional sum of Rs. 1,50,000 to the income of the assessee earlier determined for the assessment year 1944-45 and taxed him on that basis. In appeal, the Appellate Assistant Commis§ioner set aside the order of the Income-tax Officer and directed the Income-tax Officer to re-do the assessment after giving the assessee an opportunity to cross-examine the parties examined by the Income-tax Officer on the basis of whose statements he had come to the conclusion that a sum of Rs. 1,50,000 had been secretly paid to the mortgagee by the mortgagor. Thereafter the Income-tax Officer further in-quired into the matter; Pattayagar's books of account were got produced to prove that an additional sum of Rs. 1,50,000 had been paid to the assessee. Some witnesses were also examined in the presen.ce of the assessee to prove that fact. After doing ~ fresh order of assessment was made on the assessee under s. 23 3) read with s: ~4. His order Wa$ ajlirmed by the Appellate Ass tant Comm1ss1oner as well as by the Tribunal. At the instance of the assessee, the following three questions were submitted to the High Court under s. 66(1) of the Act.

"(1) Whether assessmeut under section 34 wa:s valid

and proper?

(2) Whether the Income-tax Officer rightly acted in

giving effect to the order of the Appellate Assis-tant Commissioner setting aside the assessment to re-do the. same. acpording to law after. giving an opportnmty to the appellant to place all his cards before the Department ?

(3) Whether Rs. 1,50,000 is taxable as income of

the year of account ?"

The High. Court answered the first two questions against the assessee and the third question against the Department. The legal representatives of the assessee are challengip.g the High Court's decision on the first two questions and the Commissioner is chal • lenging the High Court's decision on the third question.

'

We shall first take up the assessee's appeal. There is hardly any merit ih that appeal. It was urged on behalf of the represen-tatives of the assessee that as, even ·when the original assessment proceedings for pie relevant year were before the Income-tax Officer, 'he had before him the information giyen by the Income-tax Officer, Erode, but yet, he did not choose to act on that infor-mation, it was not open to him thereafter to initiate proceedings under s. 34. We are unable to accept this contention. On the facts found by the .Tribunal, ill is established that the assessee's father 1'ad clearly suppressed the receipt of Rs. 1,50,000 from the mortgagor. The assessee had a duty to disclose fully and truly o all material facts necessary for his assessment. Herein we are not dealing with a case coming under s. 34(1 ){b). All that we have to see is whether the requirements of s. 34(1)(a) are satisfied. This Court in Calcutta Discount Co. Ltd. v. Income-Un: Officer, Companies District I, Calcutta and anr., (') ruled that to confer jurisdiction on the Income-tax Officer to fake action under s. 34, ( 1) (a), two conditions must be sa~isfied viz. ( 1) he has reason to believe that there was under-assessment and (2) that h,,. :nust have reason to believe that the under-assessment has resulted from non-disclosure of material facts. On the facts found, underassessment is established and it is also established that the underassessment was due to non-disclosure of material facts. There can be no doubt that at the time he issued notice under s. 34(l)(a) on the basis of the material before him, the Income-tax Officer could have formed the necessary belief. In the notice issued he says that he had formed that belief. In our opinion the requirements of s. 34(1)(a) are fully satisfied. The fact that there was some vague information before the Income-tax Officer that the assessee's father had secretly received a sum of Rs. 1,50,000 from the mort-gagor was by itself not sufficient to bring to tax that amount parti-cularly in view of the fact that the assessee had stoutly denied that fact and the court records did not support that information. It is true that the Income-tax Officer could have made further enquiry into the matter but the fact that he did not make any further en-quiry does not ta\:e the case out of s. 34(1)(a) particularly when the assessee had failed to place truly and fully all the material facts before him. The remark of the Income-tax Officer that "in any event this (the receipt of Rs. 1,50,000) should come up for consideration only in the assessment year 1944-45 as only the ex- .i cess over Rs. 2, 7 6,000 plus legal expenses can be treated as in- -r terest income in the hands of the assessee and so, the assessment I for 1944-45 should not be held up pending further investigation"

in the order sheet does not amount to a decision taken by him. It may be noted that those remarks were not made in the order assessing tile income of the assessee. It must also be remembered that the Income-tax Officer, at the time he made th'.ose remarks was not satisfied about the correctn~s of the information given by the Income-tax Officer, Erode. Hence those remarks must be treated as casual observations and not a decision taken on the basis of facts found.

We see no substance in the contention that the 1ncome4ax Officer did not give effect to the order of the Appellate AssiStant Commissioner when the latter asked him to reassess the income of the assessee. The only ground on which the assessment order was set aside by the Appellate Assistant Commissioner was that the assessee had not been given a proper opportunity to put forward his case. The Appellate Assistant Commissioner did not hold that the notice issued by the Income-tax Officer under s. 34(l)(a) was an invalid notice. Therefore there was no need for the Incomc-tax Officer, Trichy to issue a fresh notice to the assessee under J. 34(1)(a) as contended on behalf of the assessee's representatiwa. All that the Income-tax Officer had to do was to afford proper opportunity to the assessee to show that in fac;t he had not received the aforementioned sum of Rs. 1,50,000. That opportunity had been given.

In view of our above conclusion Civil Appeal No. 671 of 1967 fails and the same is dismissed.

Now coming to the appeal filed by the C<>mmissi~ of Income-tax, the High Court came to the conclusion that the sum of Rs. 1,50,000 received by the assessee during the relevant account year must be presumed to have been appropriated by the assessee towards the principal amount due to the mortgagor and hence the same cannot be considered as an income of the assessee during that year. The assessee was maintaining his account!I in accordance with what is known as Chetty system of accounts. The material on record shows that according to the Chetty system of accounts, the creditor appropriates a receipt first towards the cost of litigation, then towards the principal amount due .and the balance towards the arrears of interest. The High Court was of the view that the sum of Rs. 1,50,000 secretly received by the creditor must be deemed to have been kept in suspense. As the debator had not given any direction about the appropriation of that amount it was open to the creditor to appropriate the same 14·-J.817Sl'pC1;71 towards the principal amount and further he must be presumed to have appropriated that· amount towards the principal amount be-fore s. 34 proceedings were started against him firstly because of the system of accounts maintained by !rim and secondly because every one must be deemed to have, i\Cled in a manner least dis-advantageous to him. In support of this conclusion reliance was placed by the High Court on the decision of the Judicial Committee in The Commissioner of Income-Tax, Bihar and Orissa v. Kameshwar Singh('). In that case, nature of several receipts by the assessee came up for consideration. For our present purpose we n~d only refer to two of them. One Damodar Das Burman owed to the assessee in *e Fasli ye11r 1332 Rs. 3,09,281. ])(Iring the currency of the debt the debtor had made regular payments to .t!te assessee over a number of years, the total of which payments \VBS .not stated. Those payments were entered in the deposit i:egister maintained by the assessee but no allocation thereof were made as betw.een principal and interest, and no part of those payments were carried to the interest register maintained by the assessee. Conse-quently""11D part of these payments was subje<'ted to tax until the Fasli year 1331, in which year for the first time the Income-tax Officer c~me to know about the deposit register maintained by the assessee. In that year, the deposit register showed a receipt of Rs.-38,091 and on this the officer claimed and was paid tax on the footing that it was attributable1 to interest and not to principal. The result is that against the total interest on the debt, viz. :Rs. 3,09,281, no sums had been attributed by the assessee to interest out of the payments made to him by the debtor. But the Income-tax Officer had himself treated the sum of Rs. 38,091 received in the year Fasll 1331 as interest and taxed it accordingly. That left Rs. 2, 7l,190 as the balllJ!l.ce of the total interest on the debt, during its currency towards which balance the assessee made . no attributions of interest out of the payments received by him from the debtor during its currency. No tax accordingly had been paid in respect of any of these receipts other than on Rs. 38,091. Theref_ore the question before the Court was how in those circum-stances should be received of Rs. 2,78,000 itn the Fasli year 1332 be treated. Dealing with that question the Judicial Committee observed:

"Now, where interest is outstanding on a principal sum due and the creditor receives an open payment from the debtor without any appropriation of the pay-ment as betweeri capital and interest, by either debtor or creditor, the presumption is that the payment is attribu-table in the first instance towards the outstanding in-terest. . . . . . . . This presumption is no doubt operative primarily in questions between debtor and creditor, but

in their Lordship's view, the Income-tax Officer, finding that the assessee received a payment from his debtor of Rs. 2,78,000 in the year i:<asli 1332 and that the assessee had not up till then credited himself as having received any interest receipts to the Revenue Authorities was CJI• titled in the circumstances to treat this sum of Rs. 2, 78,000 as applicable to the outstanding interest to the extent of Rs. 2,71,190 and accordingly to treat the payment lo that extent as income of the assessee in the year of payment."

From the facts noted above, it is clear that what presumption should be drawn in regard to appropriation of an open payment depends on the circumstances of a case. Now we shall proceed to deal with the second receipt namely that from Kumar Guesh Singh. In the Fasli year 1332 Kumar Ganesh Singh owed the assessee 32 lacs as principal and Rs. 6,09,571 as interest, or a total of R1i. 38,09,571 in all, in respect of an unsecured loan. In that year the assessee and his debtor entered into an arrangement whereby, as the Commissioner stated "the assessee-took over from the debtor in satisfaction of this amount the following items of property movable or immovable :-

J. The Kajora Colliery valued· at Rs. 7.31.339:. 2. Shares in different companies valued at Rs. 94.125/· 3. Bills received by the abo\'C brokers (i.r. Gan(sh Singh"s

firm) Rs. 4818091-4. Decree Rs. 1,42,594/- 5. Tra.nsfcr of loan to the Aer~ United Co. Rs. 10.00.ocr,- 6. Pronotcs and hand-norcs (of third partic~) Rs. 52. IC)f'- 7. Hand-notes fron1 Kumar Ganesh Singh ____ Rs. 17.34.59~/- ~--- .....,..__ Rs. 38.09.569/· The question for decision was whether as a result of the abo~~ settlement, it could be said that in the account year the assessee had received a sum of Rs. 6,09,571-due to him as interest. The Judicial Committee came to the conclusion that the first six items mentioned above amountiing to Rs. 20,74,973 may perhaps reaaonably enough be regarded as the equivalent of cash, but the seventh item of Rs. 17,34,596 consisting of the debtor's ownpro-missory notes, was clearly not the equivalent of cash. A debtor who gives his creditor a promissory note fpr' t'l.te sum he owes caa in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attriliu~ The next question was whether the receipt of Rs. 20,74,973 can be said to include a receipt of interest of Rs. 6,09,571 ? The Judicial Committee answered that question thus :

"He (Counsel for the Crown) relied on the already invoked in the case of Damodar Das Burman above, that a creditor is presumed to apply payments received from his debtor towards the extinction of interest claims before capital claims. But the situation which their Lordships are now considering differs materially from that which existed in the case of Damodar Das Burman. Jn that case, apart from other specialities there was no settlement, but merely an open payment to account. Here there was an arrangement effecting the whole inde-betedness whereby certain assets were' accepted in part satisfaction and promissory notes were taken for the balance. The basis of ihe presumption, namely, that it is to 'he, creditor's advantage to attribute payments to . interest in! the first place, leaving the interest-bearing capital outstanding, is gone. Moreover, if the question we!'Q' ·one between Kumar Ganesh Singh and the asses-see, i.e. between debtor and the creditor, the assessee might UJ? to the last moment appropriate the Rs. 20, 7 4,973 to capital account . . . . . . Their Lord-ships have also not omitted to bear in mind the provi- -sions of ss. 60 and 61 of the Indian Contract Act, though these were not relied on in argument as applicable to the case. In the result their Lordships are of opinion that having regard to the nature of the transaction, the assessee is entitled to say that he has accepted the first six items in discharge pro tanto of his debtor's capital !iabr-' lity and that the capital debt now stands discharged to that ' extent. No part of the sum of Rs. 20,74,973 accordingly was received by the assessee as taxable income in the year of computation."

Here again we notice that the conclusion drawn by the Judicial Committee depended on the facts and circumstances before them. Though the factum qf settlement of the debt was relied upon as one of the circumstances, for finding out the meaning of appro-priation, it was by no means a conclusive circumstanre. Evidently their Lordships bore in mind the possibility of the ass~ee not being able to realise the debts under the hand-notes. Under those circumstanci:s it w'as advantageous to the assessee to appropriate , the money value of the properties received towards _the capital, otherwise there was a possibility of his having to pay income-tax on a receipt which ultimately may not prove to be an income. It is under those circumstances-their Lordships observed :

"that in a question with the revenue the tax-payer is entitled to appropriate payments as between capital and interest in the manner least disadvantageous to himself."

In our opinion the High Court was in error in thinking that the decision o{ the Judicial Committee in Kameshwar Singh's re-case ( 1) has laid down a firm rule that whenever an ·assessee ceives a payment and does not appropriate the saip.e either towards the principal or interest, he must be deemed to have appropriated the same towards the p(incipal. The decision in question, in our opinion, does not Jay down the rule that whenever any amount is received by a creditor which he has not specifically appropriated either towards the principal or the interest due to him, the taxin~ authorities should proceed on the basis of the presumption that it has been appropriated towards the principal. On the facts of that case it was clear that it was advantageous to the creditor to appropriate the receipt towards the principal. But turning to the facts of the present case the total amount due to the assessee was over 6 lakhs. Out of that the principal amount was less than ~ lakhs. The compromise decree was for Rs. 3,50,500. The creditor secretly received Rs. 1,50,0001-. He does not enter the same in his account books. Evidently he did not enter the same in his accoujtt-books with a view to evade tax. H he intended to appropriate that amount towards the principal, there ·i.x._as no need for him not to enter that receipt in his accounts. Obviously he appropriated the amount towards the interest due to him and that is why he did not enter that receipt in the accounts so as to facilitate evading payment of tax on that amount. The fact that the assessee was maintaining Chetty system of accounts is immaterial on the facts of the case. The system of maintaining accounts is wholly irrele-vant because the receipt in question had not been entered in the account at all. Hence, in our opinion, the High Court erred in answering the third question against the Department.

We accordingly allow Civil Appeal No. 365 of 1967 and answer the third q_Qestion referred to the High Court in favour of the Revenue namely that the receip¥of Rs. 1,50,000/ ·is taxable as income of the year of acoount. The assessee shall pay the costs of these api;eals-hearing fee one set.

R.K.P.S. Civil Appeal 365 of 1967 allowed.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 365 and 671 of 1967.

Appeals from the judgment and order dated January 6, 1966 of the Madras High Court ial Tax Case No. 143 of 1963 (Refer-ence No. 37 of 1963).

B. Sen, B. D. Sharma and R. N. Sachthey, for the appe!Jant (in C.A. No. 365 of 1967) and the respondent (in C.A. No. 671 of 1967).

T. A. Ramachandran and D. N. Gupta, for the responent~ (in C.A. No. 365 of 1967) and the appella,nts (in C.A. No. 671 of 1967).