# RAJA MOHAN RAJA BAHADUR v. THE COMMISSIONER OF INCOME-TAX, U.P

- **Citation:** [1967] 3 S.C.R. 482
- **Court:** Supreme Court of India
- **Decided:** 1967-04-06
- **Case number:** Civil Appeal No. 1395 of 1966
- **Bench:** J. c. SHAH, s. M. S!KRI ANO v. RAMASW~Ml
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/raja-mohan-raja-bahadur-v-the-commissioner-of-income-tax-u-p-4068
- **Pages:** 8

## Headnote

Jncome-tax-Assessee maintaining accounts on Ct1$h baris--Obtalning
decree for repayment of loan made to debtor to whom U.P. Encumbered
Estates .Act, 1934 applied-Receiving Interest in loon in U.P. Encumbered Bonds-Whether amounting to receipt of income on date when bonds
received.
The apJ?ellant, a Hindu undivided family, carried on the busin..,. of
money-lending and maintained its accounts on cash basis.
After
the
appellant had obtained a decree for the recovery of a Joan made to a
debtor, the latter obtained an order under the U.P. Encumbered Estates
Act 25 of 1934, applying the provisions of the Act to him. The Special
Judge, Sultanpur, thereafter passed an order for payment of the principal
sum and interest to the appellant.
Pursuant to this order the appellant
received in 1946 an amount in cash from the debtor and for the balance
the State Government gave to the appellant U.P. Encumbered
Estates
Bonds. While the cash amount received in 1946 was appropriated by the
appellant toward• the principal due, he split up the amount of the face
value of the bonds into two sums and credited one amount in the books
of account towards the balance of r,rincipal and the other amount to an
account styled as "interest accrued'. In submitting tl)e
return of the
taxable income for the assessment year 1948-49,
the appellant did not
disclose any ·receipt of income from interest due on the loans advanced
to the debtor and was duly assessed to tax on the income disclosed by
him.
In October 1948 the appellant sold the bonds and disclosed in the
return for the assessment year 1949-'50 as interest received during the
year of account the difference between the amount realised by sale of the
bonds and the amount due as principal. The Income-tax Officer issued
a notice under s. 34(1)(a) of the Income-tax Act, 1922 and brought to
tax the amount disclosed by the appellant as escaped income of the previous year relevant to the assessment year 1948-49.
This order was confirmed by
the Appellant Assistant Commissioner
as well "' by the Tribunal. The High Court, upon a reference, also
held in favour of the respondent.
In appeal to this Court it was contended on behalf of the appellant
that the accounts maintained by the appellant being on cash basIS, until
the appellant realised the value of the bonds, no interest was received by
him; that when a trader maintains accounts on cash basis, the receipt of
money alone can be taken into account in determining the taxable in·
come. It was contended in the alternative that the bonds i8"ued by the
Government merely amounted to a fresh promise by an agent of the
debtor to 1'"Y the amount of the bonds in instalments and by receiving
the bonds 1ncorpo·rating such a promise, no money or money's worth was
received by the creditor.
HELD : Dismissing the appeal; the Encumbered Estates Bonds were
by operation of the statute received ey the appellant in satisfa~tion pro
tanto of the liability of the debtor. They were a fresh security. Tbc
liability of the original debtor was substituted by an obligation uhde·rtaken
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MOHAN RAJA v. C.I.T. (Shah, l.J
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by the State : the bonds were convertible in terms of money : income
was therefore received by the appellant when the bonds were received.
Where the accounts are maintained on cash basis receipt of money or
money's worth and not accrual of the right to receive is the determining
factor. Therefore, if commercial assets are received by a trader maintain·
ing accounts on cash basis in satisfaction of an obligation, income which
is embedded in the value of the assets is deemed to be received; the receipt of income is not deferred till the asset is realised in terms of cash
or money. It makes no difference whether the receipt of a..ets is in
pursuance of an agreement or that the trader is compelled by law
to
accept the assets from the debtor. Once title of the trader to an asset
received is complete whether by consensual arrangement or by operation
o

## Text

RAJA MOHAN RAJA BAHADUR
v.
THE COMMISSIONER OF INCOME-TAX, U.P.
April 6, 1967
[J. c. SHAH, s. M. S!KRI ANO v. RAMASW~Ml, JJ.J
Jncome-tax-Assessee maintaining accounts on Ct1$h baris--Obtalning
decree for repayment of loan made to debtor to whom U.P. Encumbered
Estates .Act, 1934 applied-Receiving Interest in loon in U.P. Encumbered Bonds-Whether amounting to receipt of income on date when bonds
received.
The apJ?ellant, a Hindu undivided family, carried on the busin..,. of
money-lending and maintained its accounts on cash basis.
After
the
appellant had obtained a decree for the recovery of a Joan made to a
debtor, the latter obtained an order under the U.P. Encumbered Estates
Act 25 of 1934, applying the provisions of the Act to him. The Special
Judge, Sultanpur, thereafter passed an order for payment of the principal
sum and interest to the appellant.
Pursuant to this order the appellant
received in 1946 an amount in cash from the debtor and for the balance
the State Government gave to the appellant U.P. Encumbered
Estates
Bonds. While the cash amount received in 1946 was appropriated by the
appellant toward• the principal due, he split up the amount of the face
value of the bonds into two sums and credited one amount in the books
of account towards the balance of r,rincipal and the other amount to an
account styled as "interest accrued'. In submitting tl)e
return of the
taxable income for the assessment year 1948-49,
the appellant did not
disclose any ·receipt of income from interest due on the loans advanced
to the debtor and was duly assessed to tax on the income disclosed by
him.
In October 1948 the appellant sold the bonds and disclosed in the
return for the assessment year 1949-'50 as interest received during the
year of account the difference between the amount realised by sale of the
bonds and the amount due as principal. The Income-tax Officer issued
a notice under s. 34(1)(a) of the Income-tax Act, 1922 and brought to
tax the amount disclosed by the appellant as escaped income of the previous year relevant to the assessment year 1948-49.
This order was confirmed by
the Appellant Assistant Commissioner
as well "' by the Tribunal. The High Court, upon a reference, also
held in favour of the respondent.
In appeal to this Court it was contended on behalf of the appellant
that the accounts maintained by the appellant being on cash basIS, until
the appellant realised the value of the bonds, no interest was received by
him; that when a trader maintains accounts on cash basis, the receipt of
money alone can be taken into account in determining the taxable in·
come. It was contended in the alternative that the bonds i8"ued by the
Government merely amounted to a fresh promise by an agent of the
debtor to 1'"Y the amount of the bonds in instalments and by receiving
the bonds 1ncorpo·rating such a promise, no money or money's worth was
received by the creditor.
HELD : Dismissing the appeal; the Encumbered Estates Bonds were
by operation of the statute received ey the appellant in satisfa~tion pro
tanto of the liability of the debtor. They were a fresh security. Tbc
liability of the original debtor was substituted by an obligation uhde·rtaken
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MOHAN RAJA v. C.I.T. (Shah, l.J
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by the State : the bonds were convertible in terms of money : income
was therefore received by the appellant when the bonds were received.
Where the accounts are maintained on cash basis receipt of money or
money's worth and not accrual of the right to receive is the determining
factor. Therefore, if commercial assets are received by a trader maintain·
ing accounts on cash basis in satisfaction of an obligation, income which
is embedded in the value of the assets is deemed to be received; the receipt of income is not deferred till the asset is realised in terms of cash
or money. It makes no difference whether the receipt of a..ets is in
pursuance of an agreement or that the trader is compelled by law
to
accept the assets from the debtor. Once title of the trader to an asset
received is complete whether by consensual arrangement or by operation
of law, he receives the income embedded
in the value of the assets.
[486D-F]
Californian Copper Syndicate (Limited and Reduced) v. Harris (Survevor of Taxes), 5 T.C. 159, referred to.
Although the uovernment had the ri~ht to recover the amount due
under the bonds from the land-holder, it did not, on that account, become
the agent of the land-holder for payment of his dues. Even if the Government was unable to· recover the money from the land-holder, the liability undertaken by it under the bond remained unimpaired. [487C-D]
Crosa (H. M. Inspector of Taxes) v. London and Provincial Trust
Ltd. 21 T.C. 705, distinguished.
What was taxable was only that income which represented the difference between the amount due as principal and the market value of the·
bonds at the date of receipt, [488E-F]
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1395 of
1966.
Appeal from the judgment and decree dated July 10, 1962
of the Allahabad High Court in Income-tax Reference No. 445
of 1959.
Bishan Narain and Govind Saran Singh, for the appellant.
T. V. Viswanath Iyer, R. Ganapathy Iyer, S. P. Nayyar for
R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
S~, J. The appellant, a Hindu undivided family, carries on:
the .business of money-lending, and maintains its accounts on cash
basis. The appellant commenced an action in the i::'.ivil Court for
a decree for recovery of Rs. 2,58,000/- due by Nisar Ahmad
Kh~n: Taluqdm of Mohana Estate. The action was carried to the
Jud1c1~l Committee of the Privy Council and was ultimately decreed in favour of the appellant. Nisar Ahmad Khan then obtained
un~er the U.P., 1:lncumbered Estates Act 25 of 1934 an order applying the provmons of the Act to him. The Special Judge, Sultanpur, passed an order for payment of Rs. 5,00,992/- to the appel~
lant. Pursuant to the order the appellant received in 1946
Rs. 1,54,692/- from the debtor and for the balance the Government of the United Provinces gave to the appellant Encumbered
Estates bonds of the face value of Rs. 3,46,300/-. The amount
484
SUPREME COURT REPORTS
(1967] 3 S.C.R.
received in the year 1946 was appropriated by the appellant towards the principal due. The appellant split up the amount of the
face value of the bonds into two sums of Rs. 2,22,097 /9/11 and
Rs. 1,24,202/6/1, and credited the first amount in the books of
account towards the balance of principal and the second amount
to an account styled "Interest Accrued"
In submitting the return
of his taxable income for the assessment year 1948-49 the appellant
.did not disclose any receipt of income from interest due on the
loans advanced to Nisar Ahmad Khan. The appellant was duly
assessed to tax 011 the income disclosed by him. In October 1948
the appellant sold the Encumbered Estates bonds and realized a
total sum of Rs. 3,21,600/-, and disclosed in the return for the
.assessment year 1949-50 as interest received during the year of
account the difference between the amount realized by sale of the
bonds and the amount due as principal. The Income-tax Officer
issued a notice under s. 34(1)(a) of the Indian Income-tax Act and
brought to tax the difference between the face value of the bonds
and the amount due as principal as escaped income of the previous
year relevant to the assessment year 1948-49. The order was confirmed by the Appellate Assistant Commissioner and the Incometax Appellate Tribunal. The Tribunal then submitted three questions to the High Court of Judicature at Allahabad of which the
following were canvassed before us :
"(2) Whether, the receipt of Encumbered Estate
Bonds during the previous year 1947-48 amounted to
receipt of cash during that previous year and not during
the previous year I 948-49 when the Bonds were in fact
sold at less than their face value ?
(3) Whether in the circumstances of the case, the
mere receipt of the Encumbered Estate Bonds was tantamount to receipt of income assessable in the year
1948-49 ?"
The High Court answered the questions in the affirmative. Against
the order passed by the High Court, with certificate, the appellant
has appealed to this Court.
The scheme of the U.P. Encumbered Estates Act 25 of 1934
and the form of the bonds issued in satisfaction of the liability of
the debtors may be briefly summarised.
Under the U.P. Act a
"landlord" may apply to the Collector stating the amount of. his
debts and requesting that the provisions of thP. Act be applied to
him. The Collector entertains the petition and transfers it to the
Special Judge.
The landlord then submits a written statement
giving the list of his creditors and the list of his assets. Notices
are published by the Special Judge and the creditors are called
upon to submit their written claims. On the claims for debts secur- ·
ed or unsecured duly proved, simple money decrees are passed in
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MOHAN RAJA v. c.1. T. (Shah, J.)
48 5
favour of the creditors. The Special Judge then determines the
properties belonging to the landlord and prepares a list of the pro·
perties and a list of the debts adjudged to be due by the landiord
ranking the same in order of priority and then sends the decrees
to the Collector for execution. If the amount due by the debtor is
less than the instalment value of his proprietary rights in land, the
Collector is enjoined to direct the landlord to pay with land revenue
dues such amount to the Provincial Government in instalments
with future interest at a rate determined by the Provincial Government. If the Collector has proceeded under s. 27 he has to give
to each creditor a bond or bonds bearing interest at the prescribed
rate for the amount due to him payable in instalments within a
period not exceeding 20 years. The form of the bond is as follows :
"The Governor of the United Provinces hereby promises to pay to ...... or order at any Treasury-in the
United Provinces or at the General Treasury at Fort
William or at Bombay on the . . . . . . day of ..... .
19 ...... on the application of the holder, or earlier
at the entire option of the Government of the United
Provinces, the sum of . . . . . . and in the meantime to
pay at the said Treasury interest on such sum at the rate
of three and one-quarter per cent, per annum, such interest to be paid half yearly on the 20th day of February
and the 20th day of August in every year, commencing
from the 20th day of ..... 19 . . . . . on which date the
whole interest due from the date hereof shall be paid."
On February 26, 1948 the appellant received Encumbered Estates
Bonds of the face value of Rs. 3,46,300/ •. The appellant appropriated bonds of the face value of Rs. 2,22,097/9/11 towards the
principal and costs due, and appropriated the remaining bonds of
the value of Rs. 1,24,202/6/1 towards "interest accrued due" in
the debtor's account. The departmental authorities and the Tribunal held that the receipt by the appellant of bonds of the face
value exceeding the principal amount of the debt due constituted
receipt of interest. The High Court agreed with that view.
Counsel for the appellant submitted that the accounts maintained by the appellant being on cash basis, until the appellant realised
the value of the bonds no interest was received by the appellant.
Counsel asserted that when a trader maintains account on cash
basis receipt of money alone may be taken into account in determinillg the taxable income. In the alternative Counsel urged that
the bond issued by the Government under the U.P. Encumbered
Estates Act merely amounted to promise by an agent of the debtor
to pay the amount of the liond in instalments and by receiving the
bonds incorporating such a promise no money or money's worth
is received by the creditor.
48fi
SUPREME COURT REPORTS
[1967) .3 S.C.R.
Under s. 4 of the Income-tax Act, 1922, the total income of
any previous year of a resident assessee includes all income, profits
and gains from whatever sources derived which are received or are
deemed to be received in the taxable territories in such year by or
on behalf of such person, or accrue or arise or are deemed to
accrue or arise to him in the taxable territories during such year,
or accrue or arise to him without the taxable territories during such
year, or having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of
April, 1933, are brought into or received in the taxable territories
by him during such year. The Act does not contain much guidance
as to cases in which tax is to be levied on income received, and
cases in which tax is to be levied on income accrued or arisen.
Section 13 however requires that income, profits and gains for the
purposes of ss. 10 and 12 shall be computed in accordance with
the method of accounting regularly employed by the assessee. If
accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised, income
embedded in the receipt is. deemed to arise or accrue. Where the
accounts are maintained on cash basis receipt of money or money's
worth and not the accrual of the right to receive is the determining
factor. Therefore, if commercial assets are received by a trader
maintaining accounts on cash basis in satisfaction of an obligation,
income which is embedded in the value of the assets is deemed to
be received : the receipt of income is not deferred till the asset is
realized in terms of cash or money. It makes no difference whether
the receipt of assets is in pursuance of an agreement or that the
trader is compelled by law to accept the assets from the debtor
Once title of the trader to an asset received is complete, whether by
a consensual arrangement or by operation of law, he receives the
income embedded in the value of the asset. In Californian Copper
Syndicate (Limited and Reduced) v. Harris (Surveyor of
Taxes(-'1) Lord Trayner in dealing with a case of assessment to
income tax of a Company formed for the purpose, inter alia, of
acquiring and reselling mining property resold the whole of its
assets to a second Company and received payment in fully paid
shares of the purchasing Company, observed :
"A profit is realised when the seller gets the price he
has bargained for. No doubt here the price took the form
of fully
paid shares in
another company, but, if
there can be no realised profit, except when that is paid
in cash, the share8 were realisable and could have been
turned into cash, if the Appellants had been pleased to do
so.
I cannot think that Income Tax is due or not
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MOHAN RAJA v. c.r.T. (Shah, J.)
according to the manner in whicn the person making the
profit pleases to deal with it."
487
Counsel for the appellant contended that the bonds were intended
to renew the promise to pay the amount due by the debtor through
his agent, and by the renewal of the promise even if the original
liability was extinguished and a fresh liability was substituted, no
income was received by the appellant.
We are unable to agree with that contention. The Government of the State undertook to pay the amount of the bonds in
satisfaction of the liability of the debtor.
The liability of the
original debtor was extinguished and a fresh obligation was undertaken by the State Government in substitution of the original
liability. The Government had the right to recover the amount
due under the bonds from the landholder, but on that account
the Government did not become the agent of the landholder for
payment of his debts.
Even if the Government was unable to
recover the money from the landholder, the liability undertaken
by the Government under the bond remained unimpaired.
The
bond was a security for l'ayment of the debt which completely
replaced the original liability of the debtor.
The decision in Cross (H.M. Inspector of Taxes) v. London
and Provincial Trust Ltd. (1) on which counsel for .the appellant
relied has, in our judgment, no application to this case. In 1932
the Brazilian Government suspended payment of interest on
Government bonds for a period of three years and issued interestbearing funding bonds in exchange for the interest coupons. The
London and Provincial Trust Ltd. which held among its investments Brazilian bonds received funding bonds which it sold from
time to time.
It was held that by issuing the funding bonds the
Government of Brazil did not pay interest and the assessee Bank
received no interest when it received the funding bonds. Sir Wilfrid
Greene, M.R. observed :
"It is not open to question that income can be in the
form of money's worth.. Nor is it open to question that
1f 1!Je ~older of a security, the contractual income· from
which 1s money, receives from the person liable 'to pay
!hat money some thing of money's worth (e.g., goods)
instead of the money, such goods are income arising
~rom the securi.ty.: . . . On the other hand, wherG there
1s a mere substttut10n of a promise to pay at a later date
for the obligation to m~ke an interest payment presently
due, the owner of security cannot be said to have receiv____ ed income from it. In such a case, . . . . the payment
(I) 21 T.C. 705.
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488
SUPREME COURT REPORTS
[1967] 3 S.C.R.
. has been postponed instead of being made on its due
date. Nor do I see how it can make any difference if
upon the true reading of the transaction the original obligation is extinguished and the promise to pay at a later
date is accepted in its place."
MacKinnon, L.J., observed at p. 721 :
"It is quite true that income may arise by the receipt
of money's worth as well as by the receipt of money.
And it is equally true that a debtor may pay his debt by
giving the promise of a third party to pay : . . . . But
I am satisfied that there can never be payment of his
debt by a debtor by giving his own promise to pay at a
future date.
And I am equally satisfied that, though
income arises to a creditor from a debtor's paying his
debt income does not arise by the debtor's promising that
he will pay his debt later on."
But the Encumbered Estates Bonds were by operation of the statute received by the appellant in satisfaction pro tanto of the
liability of the debtor. They were a fresh security. The liability
of the original debtor was substituted by an obligation undertaken
by the State : the bonds were convertible in terms of money.
Income was therefore received by the appellant when the bonds
were received.
It is necessary to state that the income-tax authorities have
brought to tax the difference between the face value of the bonds
and the principal which remained due in the relevant previous
year. But what was taxable was only that income which represented the difference between the amount due as principal and the
market value of the bonds (which were payable in twenty instalments) at the date of receipt. It is true that before the Incometax Appellate Tribunal this question was not expressly pressed.
The appellant did however contend that no part of the difference
between the face value of the bonds and the principal amount due
was taxable and the third question referred by the Tribunal was
sufficiently comprehensive to justify consideration of the plea that
a part of the difference only was taxable. Having regard to the
argument presented before the Tribunal and the amplitude of the
question referred, the High Court was in error in refusing to consider whether only a part of the difference between the face value
of the bonds and the principal amount due to the appellant was
taxable.
Counsel appearing on behalf of the Department concedes that what was taxable was only the difference between the
principal amount due and the market value of the bonds when
received in the year of account, and he has agreed that the necessarx adjustments will be made by the Department in that· behalf.
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In that view, we do not think it necessary to modify the answer
recorded by the High Court on the third question.
It is also necessary to observe that in the year 1949-50 the
appellant had submitted a return disclosing the difference between
the amount received by sale of the bonds and the principal amount
due as income received in the previous relevant year.
Whether
that income was brought to tail: pursuant to the return cannot be
ascertained from the record.
Counsel for the Department has
stated that it is not the object of the Department to levy tax in
respect of the same income twice. He has agreed that if tax has
been levied in respect of the difference between the principal and
the realized value of the bonds disclosed in the return for the
assessment year 1949-50, appropriate adjustments will ·be made
in that behalf. In view of the statements made at the Bar we do
not think it necessary to give any directions in that behalf also.
The appeal is dismissed. There will be no order as to costs
in this Court.
RK.P.S.
Appeal dismissed.