Judgment
As delivered
PETITIONER:COMMISSIONER OF INCOME-TAX, MADRAS
Vs.
RESPONDENT:T.S.P.L.P. CHIDAMEBARAM CHETTIAR (DEAD) THROUGHL. Rs.
DATE OF JUDGMENT21/01/1971
BENCH:HEGDE, K.S.BENCH:HEGDE, K.S.SHAH, J.C.GROVER, A.N.
CITATION:1971 AIR 2074 1971 SCR (3) 428
ACT:Income Tax Act, 1922, s. 34(1) (a) Requirements of-Assesseenot disclosing part of money repaid against loan andinterest-If undisclosed amount not taxable and to bepresumed adjusted against principal-System of accountsmaintained by assessee-If relevant in relation to concealedincome.
HEADNOTE:The assessee's father made various loans to P in 1932. InJuly, 1932 P executed a mortgage of some of his propertiesin favour of the assessee's father for a sum of Rs. 2 . 76lakhs. After the mortgagee had instituted a suit inDecember, 1940 claiming a sum of Rs. 5.50 lakhs inclusive ofprincipal and interest, a compromise decree was passed inOctober, 1943 for a sum of Rs. 3.50 lakhs in fullsatisfaction of the mortgagee's claim.When the income-tax assessment proceedings of the assesseefor the assessment year 1944 45 as karta of his HinduUndivided Family were pending, the Income Tax Officer,Trichy, received information from the Income Tax Officer,Erode, that the mortgagor had secretly paid to the mortgageea sum of Rs. 1.50 lakhs during the year ended on April 1,1944, and that this was not included in the compromisedecree. As the assessee denied receiving this amount andthe Assessing Officer had no other material before him, hemade a note in the order sheet that the I.T.O., Erode shouldbe asked to give further details, and in the meantime theassessment for 1944-45 should not be held up. On receivingfurther information, the Assessing Officer came to believethat a sum of Rs. 1.50 lakhs had escaped assessment andafter issuing the assessee a notice under s. 34(1) (a), heincluded the additional sum and taxed him on that basis.The Appellate Assistant Commissioner set aside the order anddirected the I.T.O. to re-do the assessment after giving theassessee an opportunity to cross-examine the witnesses onthe basis of whose statements he had reached his conclusion.After examination of further witnesses and other evidence, afresh order of assessment was made on the, assessee under s.23(3) read with s. 34 and this was affirmed by, theAppellate Assistant Commissioner as well as by the Tribunal.Although the High Court, upon a reference, found that theassessment under s. 34 was valid and the I.T.O. had rightlyacted in giving effect to the order of the AppellateAssistant Commissioner to re-do the assessment, it held,purporting to rely on the decision in C.I.T. Bihar andOrissa v. Kameshwar duringthe relevant accounting yearwas not taxable as the assessee maintainedhis accountsaccording to the Chetty system and must be presumed to haveappropriated the amount towards the principal amount due tothe mortgagor.On appeal to this Court by the assessee as well as by thedepartment,HELD : The assessee's appeal must be dismissed and that ofthe Department allowed;429(i)There was no force in the contention that as the IncomeTax Officer had before him the information about payment ofa sum of Rs. 1.50 lakhs at the time he made the initialassessment and did not choose to act on the information, itwas not open to him thereafter to initiate proceedings unders. 34.On the facts found, under assessment due to non-disclosureof material facts was established. At the time he issuednotice under s. 34(1) (a) on the basis of the materialbefore him, the Income-tax Officer could have 'formed thenecessary belief and stated in the notice that he had formedsuch belief; the requirements of s. 34(1) (a) were thereforefully satisfied. [432 F]Calcutta Discount Co. Ltd. v. Income-tax Officer, CompaniesDistrict 1, Calcutta and anr. [1961] 41, I.T.R. 191;referred to.(ii)The only ground on which the assessment order was setaside by the Appellate Assistant Commissioner was that theassessee had not been given a proper opportunity to putforward his case. He did not hold that the notice under s.34(1)(a) was invalid. There was therefore no assessee unders. 34(1) (a). [433 D](iii)The High Court was in error in thinking that thedecision of the JudicialCommittee in Kameshwar Singh's casehad laid down the rule that whenever any amount is receivedby a creditor which he has not specifically appropriatedeither towards the principal or the interest due to him, thetaxing authorities should proceed on the basis of thepresumption that it has ,been appropriated towards theprincipal. In the present case it was evident that aftersecretly receiving the amount of Rs. 1.50 lakhs, thecreditor did not enter it in his account-books with a viewto evade tax. If he intended to appropriate that amounttowards the principal, there was no. need for him not toenter that receipt in his accounts. The fact that theassessee was maintaining the Chetty system of accounts wasimmaterial on the facts of the case. The system ofmaintaining accounts is wholly irrelevant because thereceipt in question had not been entered in the accounts atall. [437 Al
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 365 and671 of 1967.
Appeals from the judgment and order dated January 6, 1966 ofthe Madras High Court in Tax Case No. 143 of 1963 (ReferenceNo. 37 of 1963).
B Sen, B. D. Sharma and R. N. Sachthey, for appellant (inC.A. No. 365 of 1967) and the respondent (in C A.. No. 671of 1967)'.
T.A. Ramachandran and D. N. Gupta, for the respondents(in C.A. No. 365 of 1967) and the appellants (in C.A No.671of 1967).
The Judgment of the Court was delivered byHegde J.-The first of these two appeals (both bycertificate) viz. that filed by the Commissioner of IncomeTax - and the second, that filed by the legalrepresentatives of assessee430fails. The facts as found by the Tribunal and set out inthe statement of the case, relevant for the purpose of theseappeals are as follows :
The relevant assessment year is 1944-45, corresponding tothe accounting year ended on April 12, 1944. The assesseeis one Chidambaram Chettiar (since deceased). The father ofthe assessee Palaniappa Chettiar was a money lender. He hadmade various advances to one Nallathambi Sakkarai Manradiar,who will hereinafter be referred to as the Pattayagar, aprominent landlord in Coimbatore District, on promissorynotes. The total principal advanced by the father of theassessee upto July 6, 1932 amounted to Rs. 1,38,535. Theinterest on the same came to Rs. 1,34,965. On July 6, 1932,a further advance of Rs. 2500 was made to the Pattayagar andfor the amounts due from him, the Pattayagar executed amortgage of some of his properties in favour of theassessee's father for a sum of Rs. 2,76,000. Till 1938,only a sum of Rs. 13,620 was paid by the mortgagor in partpayment of the debt due from him. On December 14, 1940 themortgagee instituted a suit on the foot of the mortgage bondclaiming a sum of Rs. 5,50,573 inclusive of principal andinterest. On September 19, 1943, the claim was compromisedand on October 5, 1943, a compromise decree was passed for asum of Rs. 3,50,500 in full satisfaction of the mortgagee'sclaim. The decree amount was made payable on or beforeOctober 1, 1944. The debt under the compromise decree wassubsequently discharged.
For the assessment year 1944-45, the assessee ChidambaramChettiar, as karta of his Undivided Hindu Family wasassessed under S. 23(3) of the Income Tax Act, 1922 (to behereinafter referred to as the Act), on February 12, 1946,on a total income of Rs. 78,556 which, on appeal was reducedto Rs. 53,153. When the assessment proceedings of theassessee were pending before the Income-tax Officer, Trichy,that Income-tax Officer received information from theIncome-tax Officer, Erode that the mortgagor had paidsecretly to the mortgagee a sum of Rs. 1,50,000 during theyear ended on April 1, 1944 and that the same was notincluded in the compromise decree. When the Income-taxOfficer asked the assessee about the same, he denied havingreceived any amount secretly. Apart from the informationconveyed by the Income tax Officer, Erode, the AssessingOfficer had no other material before him to show that anyamount had been paid secretly by the mortgagor to themortgagee. Hence on May 27, 1945, the Income-tax Officermade the following note in the order sheet"It is denied that there was any secret understanding not toshow the payment of Rs. 1,50,000. The431receipt of this amount is entirely denied.. The IncometaxOfficer, Erode should be asked to give further details andto ask the Pattayagar to produce evidence of the payment.In any event, this should come up for consideration only inthe assessment year 1944-45 as only the excess over Rs.2,76,000 plus legal expenses can be treated as interestincome in the hands of the assessee and so, the assessmentfor 1944-45 should not be held up pending furtherinvestigation."
After sometime the Assessing Officer made further enquiryinto the information given by the Income-tax Officer, Erodeand thereafter he came to believe that a sum of Rs. 1,50,000had escaped assessment by reason of the omission of theassessee to disclose fully and truly all material factsnecessary for his assessment for the assessment year 1944-
45. He accordingly issued a notice under s. 34(1)(a) onMarch 9, 1953. In reply to that notice, the assessee fileda return similar to the one filed by him earlier. He deniedhaving received Rs. 1,50,000 secretly from the mortgagor.
The Income-tax Officer did not accept the plea of theassessee. He accordingly included an additional sum of Rs.1,50,000 to the income of the assessee earlier determinedfor the assessment year 1944-45 and taxed him on that basis.In appeal, the Appellate Assistant Commissioner set asidethe order of the Income-tax Officer and directed the Income-tax Officer to re-do the assessment after giving theassessee an opportunity to cross-examine the partiesexamined by the Income-tax Officer on the basis of whosestatements he had come to the conclusion that a sum of Rs.1,50,000 had been secretly paid to the mortgagee by themortgagor. Thereafter the Income-tax Officer further in-quired into the matter; Pattayagar's books of account weregot produced to prove that an additional sum of Rs. 1,50,000had been paid to the assessee. Some witnesses were alsoexamined in the presence of the assessee to prove that fact.After doing so, a fresh order of assessment was made on theassessee under s. 23(3) read with s. 34. His order wasaffirmed by the Appellate Assistant Commissioner as well asby the Tribunal. At the instance of the assessee, thefollowing three questions were submitted to the High Courtunder s. 66(1) of the Act.
"(1) Whether assessment under section 34 was valid andproper. ?
(2) Whether the Income-tax Officer rightly acted in givingeffect to the order of the Appellate Assistant Commissionersetting aside the assessment to re-do the same according tolaw after Living an opportunity to the appellant to placeall his cards before the Department ?
432(3) Whether Rs. 1,50,000 is taxable as incomeof the year of account ?"
The High Court answered the first two questions against theassessee and the third question against the Department. Thelegal representatives of the assessee are challenging theHigh Court's ,,decision on the first two questions and theCommissioner is challenging the High Court's decision on thethird question.
We shall first take up the assessee's appeal. There ishardly any merit in that appeal. It was urged on behalf ofthe representatives of the assessee that as, even when theoriginal assessment proceedings for the relevant year werebefore the Income-tax Officer, he had before him theinformation given by the Incometax Officer, Erode, but yet,he did not choose to act on that information, it was notopen to him thereafter to initiate proceedings under s. 34.We are unable to accept this contention. On the facts foundby the Tribunal, it is established that the assessee'sfather had clearly suppressed the receipt of Rs. 1,50,000from the mortgagor. The assesses had a duty to disclosefully and truly all material facts necessary for hisassessment. Herein we are not dealing with. a case comingunder s. 34(1)(b). All that we have to see is whether therequirements of s. 34(1)(a) are satisfied. This Court inCalcutta Discount Co. Ltd. v. Income-tax Officer, CompaniesDistrict I, Calcutta and anr., (1) ruled that to conferjurisdiction on the Income-tax Officer to take action underS. 34, ( 1 ) (a), two conditions must be satisfied viz. ( 1) he has reason to believe that there was under-assessmentand (2) that he must have reason to believe that the under-assessment has resulted from nondisclosure of materialfacts. On the facts found, under assessment is establishedand it is also established that the under assessment was dueto non-disclosure of material facts. There can be no doubtthat at the time he issued notice under s. 34(1)(a) on thebasis of the material before him, the Income-tax Officercould have formed the necessary belief. In the noticeissued he says that he had formed that belief. In ouropinion the requirements of S. 34(1)(a) are fully satisfied.The fact that there was some vague information before theIncome-tax Officer that the assessee's father had secretlyreceived a sum of Rs. 1,50,000 from the mortgagor was byitself not sufficient to bring to tax that amount parti-cularly in view of the fact that the assessee had stoutlydenied that fact and the court records did not support thatinformation. It is true that the Income-tax Officer couldhave made further enquiry into the matter but the fact thathe did not make any further enquiry does not take the caseout of S. 34(1)(a) particularly when the assessee had failedto place truly and fully all the material 'facts before him.The remark of the Income-tax Officer that "in(1) [1961] 41 I.T.R. 191433any event this (the receipt of Rs. 1,50,000) should come upfor consideration only in the assessment year 1944-45 asonly the excess over Rs. 2,76,000 plus legal expenses can betreated as interest income in the hands of the assessee andso, the assessment for 1944-45 should not be held up pendingfurther investigation" in the order sheet does not amount toa decision taken by him. It may be noted that those remarkswere not made in the order assessing the income of theassessee. It must also be remembered that the Income-taxOfficer, at the time he made those remarks was not satisfiedabout the correctness of the information given by theIncome-tax Officer, Erode. Hence those remarks must betreated as casual observations and not a decision taken onthe basis of facts found.
We see no substance in the contention that the Income-taxOfficer did not give effect to the order of the AppellateAssistant Commissioner when the latter asked him to reassessthe income of the assessee. The only ground on which theassessment order was set aside by the Appellate AssistantCommissioner was that the assessee had not been given aproper opportunity to put forward his case. The AppellateAssistant Commissioner did not hold that the notice issuedby the Income-tax Officer under s. 34(1)(a) was an invalidnotice. Therefore there was no need for the IncometaxOfficer, Trichy to issue a fresh notice to the assesseeunder s. 34(1)(a) as contended on behalf of the assessee'srepresentatives. All that the Income-tax Officer had to dowas to afford proper opportunity to the assessee to showthat in fact he had not received the aforementioned sum ofRs. 1,50,000. That opportunity had been given.In view of our above conclusion Civil Appeal No. 671 of 1967fails and the same is dismiss ed.
Now coming to the appeal filed by the Commissioner ofIncome-tax, the High Court came to the conclusion that thesum of Rs. 1,50,000 received by the assessee during therelevant account year must be presumed to have beenappropriated by the assessee towards the principal amountdue to the mortgagor and hence the same cannot be consideredas an income of the assessee during that year. The assesseewas maintaining his accounts in accordance with what isknown as Chetty system of accounts. The material on recordshows that according to the Chetty system of accounts, thecreditor appropriates a receipt first towards the cost oflitigation, then towards the principal amount due and thebalance towards the arrears of interest. The High Court wasof the view that the sum of Rs. 1,50,000 secretly receivedby the creditor must be deemed to have been kept insuspense. As the debator had not given any direction aboutthe appropriation of that amount it was open to the creditorto appropriate the same434towards the principal amount and further he must be presumedto have appropriated that amount towards the principalamount before s. 34 proceedings were started against himfirstly because of the system of accounts maintained by himand secondly because every one must be deemed to have actedin a manner least disadvantageous to him. In support ofthis conclusion reliance was placed by the High Court on thedecision of the Judicial Committee in The Commissioner ofIncome-Tax, Bihar and Orissa v. Kameshwar Singh(1). In thatcase, nature of several receipts by the assessee came up forconsideration. For our present purpose we need only referto two of them. One Damodar Das Burman owed to the assesseein the Fasli year 1332 Rs. 3,09,281. During the currency ofthe debt the debtor had made regular payments to theassessee over a number of years, the total of which paymentswas not stated. Those payments were entered in the depositregister maintained by the assessee but no allocationthereof were made as between principal and interest, and nopart of those payments were carried to the interest registermaintained by the assessee. Consequently no part of thesepayments was subjected to tax until the Fasli year 1331, inwhich year for the first time the Income-tax Officer came toknow about the deposit register maintained by the assesse,e.In that year, the deposit register showed a receipt of Rs.38,091 and on this the officer claimed and was paid tax onthe footing that it was attributable to interest and not toprincipal. The result is that against the total interest onthe debt, viz. Rs. 3,09,281, no sums had been attributed bythe assessee to interest out of the payments made to him bythe debtor. But the Income-tax Officer had himself treatedthe sum of Rs. 38,091 received in the year Fasli 1331 asinterest and taxed it accordingly. That left Rs. 2,71,190as the balance of the total interest on the debt, during itscurrency towards which balance the assessee made noattributions of interest out of the payments received by himfrom the debtor during its currency. No tax accordingly hadbeen paid in respect of any of these receipts other than onRs. 38,091. Therefore the question before the Court was howin those circumstances should be received of Rs. 2,78,000 inthe Fasli year 1332 be treated. Dealing with that questionthe Judicial Committee observed :
"Now, where interest is outstanding on a principal sum dueand the creditor receives an open payment from the debtorwithout any appropriation of the payment as between capitaland interest, by either debtor or creditor, the presumptionis that the payment is attributable in the first instancetowards the outstanding interest........ This presumption isno doubt operative primarily in questions between debtor andcreditor, but(1) [1933] 2 I.T.R. 94.
435in their Lordship's view, the Income-= Officer, finding thatthe assessee received a payment from his debtor of Rs.2,78,000 in the year Fasli 1332 and that the assessee hadnot up till then credited himself as having received, anyinterest receipts to the Revenue Authorities was entitled inthe circumstances to treat this sum of Rs. 2,78,000 asapplicable to the outstanding interest to the extent of Rs.2,71,190 and accordingly to treat the payment to that extentas income of the assessee in the year of payment."From the facts noted above, it is clear that whatpresumption should be drawn in regard to appropriation of anopen payment depends on the circumstances of a case. Now weshall proceed to deal with the second receipt namely thatfrom Kumar Ganesh Singh. In the Fasli year 1332 KumarGanesh Singh owed the assessee 32 lacs as principal and Rs.6,09,571 as interest, or a total of Rs. 38,09,571 in all, inrespect of an unsecured loan. In that year the assessee andhis debtor entered into an arrangement whereby, as theCommissioner stated "the assessee took over from the debtorin satisfaction of this amount the following items ofproperty movable. or immovable:-
1. The Kajora Colliery valued atRs.7,37,339/-
2. Shares in different companies valued atRs.94,125/-
3. Bills received by the above brokers (i.e. GaneshSingh'sfirm)Rs.48,809,-
4. DecreeRs.1,42,594/-
5. Transfer of loan to the Agra United Co.Rs.10,00,000/-
6. Pronotes and hand-notes (of third parties)S.
7. Hand-notes from Kumar Ganesh SinghRs.17,34,596-
Rs. 38,09,569/ The question for decision was whether as a result of the above 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 amounting to Rs. 20,74,973 may perhaps reasonably enough be regarded as the equivalent of cash, but the seventh item of Rs. 17,34,596 consisting of the debtor's own promissory notes, was clearly not the equivalent of cash. A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attributes. 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 :
436 "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. In 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 indebetedness whereby certain assets were accepted in part satisfaction and promissory notes were taken for the balance. The basis of the presumption, namely, that it is to the creditor's advantage to attribute payments to interest in the first place, leaving the interest-bearing capital outstanding, is gone. Moreover, if the question were one between Kumar Ganesh Singh and the assessee, i.e.,- between debtor and the creditor, the assessee might up to the last moment appropriate 'the Rs. 20,74,973 to capital account...... Their Lordships have also not omitted to bear in mind the provisions 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 liability and that the capital debt now stands discharged to that extent. No part of the sum of Rs. 20,74,9 73 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 of settlement of the debt was relied upon as one of the circumstances, for finding out the meaning of appropriation, it was by no means a conclusive circumstance. Evidently their Lordships bore in mind the possibility of the assessee not being able to realise the debts under the hand-notes. Under those circumstances it was 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."
437 In our opinion the High Court was in error in thinking that the decision of the Judicial Committee in Kameshwar Singh's case(1) has laid down a firm rule that whenever an assessee receives a payment and does not appropriate the same either towards the principal or interest, he must be deemed to have appropriated the same towards the principal. The decision in question, in our opinion, does not lay 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 taxing 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 3 lakhs. The compromise decree was for Rs. 3,50,500. The creditor secretly received Rs. 1,50,000/-. He does not enter the same in his account books. Evidently he did not enter the same in his account- books with a view to evade tax. If he intended to appropriate that amount towards the principal, there was 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 question referred to the High Court in favour of the Revenue namely that the receipt of Rs. 1,50,000/- is taxable as income of the year of account. The assessee shall pay the costs of these appeals-hearing fee one set. Civil Appeal 365 of 1967 allowed.
Civil Appeal 671 of 1967 dismissed-
R.K.P.S. (1) [1933] 2 I.T.R.94.
