Judgement

Consolidated Appeals and Cross-appeal (No. 75 of 1931) from a judgment of the High Court (November 25, 1929) on questions referred to the Court under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.

The questions referred related to an assessment under the above Act made upon the Maharajadhiraja of Darbhanga, since deceased and represented by his eldest son, for the year 1926-7. With two exceptions the questions were as to profits from money-lending transactions, tax being chargeable thereon under s. 12, as income from " other sources." The year in which the profit was assessable was that ending September 30, 1925. Two main matters for determination were (1.) whether, having regard to the manner in which the assessee had kept his books, the method adopted by the income-tax officer in assessing the interest received in the year was lawful; (2.) as to appropriation between principal and interest where (a) sums had been received in running account against principal and interest, and (b) where realizable assets and promissory notes of the debtor had been taken in satisfaction of principal and interest. A further question which arose was &s to the profits chargeable under s. 10, from working a leasehold colliery taken over by the assessee —namely, whether the assessee was entitled under s. 10, sub-s. 2, to an allowance in respect of a sum paid by the assessee for dead-rent (described in the lease as royalties) accruing before he had possession.

The material facts and the questions referred appear from the judgment of the Judicial Committee.

The case stated was argued before Terrell C.J., Das J. and Kulwant Sahay J., and the proceedings are reported at I. L. R. 9 Pat. 240, where the case stated is fully set out.

The commissioner of taxes was appellant as regards two of the questions, and the assessors representative as to the rest.

1932. Oct. 31 ; Nov. 1, 3, 10. Dunne K.C. and R. P. Hills for the commissioner. It is well settled that a payment in respect of principal and interest, if un-appropriated between them by the debtor, is attributable first to interest; that rule has been applied in India Venkatradi Appa Row v. Parthasarathi Appa Row. (( 1921) L. R. 48 I. A. 150, 153.) The High Court rightly applied that rule to payments of cash, but it should also have been applied as to the assets taken over from Ganesh Singh. Even if the debtors promissory notes could not be taken as cash, the realizable assets were equivalent to cash— Commissioner of Taxes v. Melbourne Trust, Ld. ([ 1914] A. C. 1001.)—and should have been attributed to the outstanding interest. The assessee was not entitled to deduct from the colliery profits the sum paid for arrears of royalties. Even if the royalties were " rent " within the meaning of s. 10, sub-s. 2, of the Act, the sum paid was not a permissible allowance thereunder. It was not rent due from the assessee and did not accrue in the year of assessment. It was not shown that the assessee could not have recovered the sum from the borrower who transferred free from incumbrances. The pay ment was really on capital account; it represented an overvaluation upon transfer of the colliery Royal Insurance Co. v. Watson ([ 1897] A. C. 1.); John Smith db Co. v. Moore. ([ 1921] 2 A. C. 13.)

Law Rep. 60 Ind. App. 146 ( 1932- 1933) Commissioner of Income-Tax V. Maharajadhiraja of Darbhanga 37

Latter K.C. (with him Wallach and H. W. Williams) for the assessee. Having regard to the fact that the assets were taken over from Ganesh Singh in complete discharge the assessee was entitled to have the realizable assets applied towards the principal Smith v. Law Guarantee and Trust Society, Ld. ([ 1904] 2 Ch. 569.); Cory Brothers & Co. v. Owners of the “Mecca" ([ 1897] A. C. 286.); English Life Assurance Co. v. Lord Advocate. ([ 1910] A. C. 143.) The arrears which the assessee paid, though described as royalties, were fixed or dead-rent and were distrainable In re Roundwood Colliery ([ 1897] 1 Ch. 373, 389.) ; Da