Maharaja Kamakhya Narain Singh vs Commissioner of Income Tax

Manohar Lall, J.—In this case the Commissioner of Income Tax, Bihar, has been called upon to state a case u/s 66 (3), Income Tax Act, upon the question "whether in the circumstances of this case the sum of Rs. 88,756 is assessable to Income Tax in the year of assessment 1938-39 under the Income Tax Act, 1922. The facts found by the Commissioner are these: The assessee, Raja Bahadur Kamakhya Narain Singh of Ramgarh, was assessed by the Income Tax officer on his income from different sources comprising among others royalties received from various lessees for working the coal mines located on his estate. When these leases were granted the assessee was a minor and his estate was being administered by the Court of Wards. Upon the assessee attaining majority he took charge of his estate during the accounting year, 1937-38. One of the lessees is the well known firm of Messrs. Bird and Co., who paid to the assessee daring the accounting year a total royalty of Rs. 1,38,965. Out of this sum, Rs. 50,209-14-3 was paid by them during the, first portion of the previous year 1937-38 when the estate was still in charge of the Court of Wards. They paid Rs. 88,756 in the latter part of that year when the assessee had himself assumed charge of the estate. This is the sum in question in these proceedings. In the return filed for the assessment year 1938-39 which related to the previous year 1937-38 the assessee showed and included only Rs. 50,209-14-3 but not the sum in question.

The assessee''s contention was that he was not bound to pay any Income Tax on this amount because he had kept this in a suspense account for the reason that there was certain dispute between the lessee and the assessee with regard to the correct amount of royalty which was payable for the period. The assessee stated further that as he was thinking of repudiating the leases granted by the Court of Wards to Messrs. Bird and Co., he was advised that he should not enter the sum as royalty in his account books otherwise his right to forfeiture would be jeopardised in the civil Courts. It appears that by an arrangement made by the Court of Wards with Messrs Bird and Co. they used to credit the amount of royalty from time to time in the account of the assessee in the Imperial Bank at Calcutta. The lessee had made the payment of the sum in question in the same way by depositing the amount to the account of the assesses in the Imperial Bank, Upon the finding of the Commissioner that sum had been operated upon by the assessee by his agreeing to have it mixed up with the other amounts to his credit in the Bank; but the account was operated upon not in the previous year but in the following year. Upon these facts Mr. P.R. Das, who appears for the assessee contends that the assessee has never received the sum in question because he has kept it in a suspense account and also because the sum had been received by the Bank who is a debtor to the assessee for this sum and the receipt, if at all, was a receipt by the Bank and not by the assessee.

Reliance is placed upon the case of this Court in Maharajadhiraja of Darbhanga Vs. Commissioner of Income Tax, where Kulwant Sahay, J. observed at p. 289: "It is clear from the method of accounting adopted by the assessee that no appropriation was made by the assessee on account of interest in the previous years and the whole of the amounts received was kept by him in a suspense account. A creditor is entitled to keep the amounts received by him from his debtor in suspense and in case the creditor bona fide keeps the amount in suspense he is entitled to say that he is not liable to assessment so long as the appropriation has not been made and the account has not been settled; but if it is found that the suspense account is not kept bona fide the Income Tax Department would be entitled to find for themselves what was the amount received on account of interest." It will, be noticed that in that case the question for consideration was whether the assessee who had received sums of money from his debtor Damodar Das in liquidation of the large debt due from him was entitled to be taxed upon so much of the receipt as could be called interest in the year of assessment. The assessee had been receiving payment from time to time but he used to enter these in a deposit register and not in the interest account. In the year of assessment two sums of Rs. 3400 and Rs. 2,78,000 were paid by the debtor to the assessee who wanted to treat only Rs. 3400 as interest received, and out of the second sum he contended that only Rs. 18,816 was on account of interest and the balance on account of principal. But the Commissioner of Income Tax found that "the total amount of interest which has accrued to the assessee on account of this debt up to the end of the year 1332 is Rs. 3,09,281. Out of this sum only Rs. 38,091, which was the amount received in the year 1331, was assessed to Income Tax in that year. The Income Tax Officer has given a credit for this sum of Rs. 38,091 and has held that as the payment in the year 1332 exceeded the balance of the total interest tax should be assessed upon the whole of the balance of the interest."

Upon these facts, it is clear that the dispute in that case was how much was to be treated as interest and how much was to be treated as principal in a sum which had been received by the assessee. The assessee had not made any appropriation in the earlier years because be kept the sum received in suspense account. When he made the appropriation the Income Tax Officer was held justified to override his appropriation and force him to make an appropriation for a larger sum towards the interest than what the assessee himself had done. In other words, the Income Tax Department was held not bound by the appropriation of the assessee. I do not see how this case helps assessee in this case. There is no dispute in the present case that any portion of the amount received is principal or interest. There is also no dispute that the amount has been received, but the assessee contends that he is not bound to appropriate it when there is a dispute pending between him and the lessee who paid him the amount. But what is the dispute between the assessee and his lessee? The answer is given by the Commissioner: "The purpose for which it is entered by the assessee in the ''suspense'' account is not that there is any doubt that it is ''income,'' but that there is doubt whether this is sufficient income from the lessees. The assessee thinks that he should get something more than the sum which he has already got and for the purpose of realisation of the extra amount he contemplates a suit. The result of the suit cannot affect this sum, but there is a chance of his getting a decree for an extra amount, which will however be taxed in the year in which that extra amount is realised. The dispute in this case is whether this amount is ''minimum royalty'' or not. There is no dispute that it is not ''income.'' The Income Tax department has a right to go into account books and find out whether a particular item has been properly treated by the assessee as income or not." A little later on at the same paga (p. 13) he states:

It is quite immaterial from the Income Tax point of view, that the assessee chose to treat the money received as deposit and kept it in "suspense", in his account books and did not take it to the "royalty" account in the accounting year in question. He had some dispute with the lessee with regard to the question of the quantum of royalty. His claim was to get more royalty from them. There was no doubt at all in the mind of the lessees (Bird & Co.) who bad treated the sum as payment of "Royalty." The assessee''s claim was merely that it was not in full satisfaction of his dues, as it was not calculated in a particular way. He did not refuse or refund the money to Bird & Co, which he could have done if he did not want to keep it as his income or if he wished to repudiate the lease. He allowed the money to remain in his account with the Imperial Bank, which he has been operating. All this shows that the so-called "suspense" account was not really a suspense account in its true sense so far as this sum is concerned.

In my opinion upon the facts which I have just referred to, it follows that the assessee received this sum as his income and that it was mixed up with the other sums to his credit in the Imperial Bank over which he had complete control. He had complete control over this sum also as is shown by his'' operating upon it in the next year.

The next contention of Mr. P.R. Das is that the sum was never received by him but was only received by his banker, who to that extent was a debtor of the assessee and the sum could only be said to be received by him when he operated upon the amount, and, therefore, he never received the sum in the accounting year. Reliance was placed upon Halsbury''s Laws of England, Edn. 2, Vol. 1, paragraph 1305, which deals with the receipt of money on current account under the heading "Business of Banking" and is as follows: "Save as regards the following of trust funds into his hands, receipt of money by a banker from or on account of his customer constitutes him merely a debtor of the customer although the obligation to repay only arises-upon demand and repayment need only be made at the branch at which the account is kept. He is not'' a trustee for the customer and the latter has no right to enquire into or question the use made of the money by the banker." But this rule only deals with the situation which arises between a banker and his customer and has nothing to do with the situation which arises when a debtor pays money to the account of his creditor in a bank at the request of the creditor, as in this case. It has been found that by an arrangement with the Court of Wards the lessee used to pay money to the Imperial Bank to the account of the assessee. After he took charge of the estate the assessee wrote a letter to Messrs, Bird & Co., not to pay in future the royal, ties into his bank account because he was disputing the exact amount of royalties due from them. It has been found that before this letter was received by the lessee they paid in the sum in question to the account of the assessee in the Imperial Bank. The assessee has neither returned the money to the lessee nor has kept it in a separate account in the bank with a direction that it will not be operated upon until the assessee and Messrs. Bird & Co, agreed that it should be so operated upon, but on the other hand, as stated already, be himself operated upon it in the next year, he could also operate upon it earlier if he liked. The assessee knew or must have known all the time that this sum which had been paid by the lessee has been mixed up with other dues in his own account in the Imperial Bank. In truth the matter is set at rest by the observations of Lord Lindley in the well known case in Gresham Life Society v. Bishop 1902 A.C. 287 at "First, let us consider what is meant by the receipt of a sum of money. My Lords I agree with the Court of appeal, that a sum of money may be received in more ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction, does not prove any receipt whatever else it may be worth."

Can it be doubted that amongst business men the payment by Messrs. Bird & Co., to the account of the assessee in the Imperial Bank at the request of his authorised agent was not a receipt of the sum in question by the assessee and that the payer was not fully discharged of his debt to the assessee if this was the only sum which is ultimately found to be payable by the lessee to the assessee or pro tanto if a larger sum is found due by the lessee to the assessee? If the argument of the assessee was correct, it is open to him to bring another suit against Messrs. Bird & Co., for recovery of the very sums which they have deposited to his credit in the Imperial Bank.

Mr. P.R. Das argued that if it is held in this case that the assessee had received the sum in question and pays tax upon it, his civil right in the litigation which he proposed to start, as has been stated by the Commissioner, or which he has actually started, as it is stated by the assessee, will be jeopardised. It will be enough to state that any decision that will be arrived at in this proceeding, will have no effect, whatsoever, in deciding the ultimate rights of the parties in the civil Courts. The question in this case is a question between the Crown and the assessee and the decision of this question is entirely irrelevant to a decision of the question that may arise between the assessee and the lessee.

For these reasons I agree with the Commissioner that the answer to the question stated above should be in the affirmative. The assessee must pay the costs of the Commissioner. Hearing fee is assessed at Rs. 250, The Commissioner will also be entitled to retain the sum of Rs. 100 which is in deposit as the fee for making the reference.

Harries C.J.

I agree.