Law:

Section:

Section 4 of the Income-tax Act, 1961 [Corresponding to section 3 of the Indian Income-tax Act, 1922] - Income - Chargeable as - Assessment year 1943-44 - Whether when interest due on a previous advance is capitalised and fresh promise is made for payment of aggregate, there is no payment of interest any more than there is any payment of old principal - Held, yes - Whether it makes no difference whether fresh promise takes form of a promissory note or a bond or a mortgage, whether simple or usufructuary - Held, yes FACTS The assessee was a money-lender by profession and adopts the cash system of accounting. He has adopted the financial year as the accounting year. One 'S' was his debtor and 'S' went on executing bonds, promissory notes and mortgages in his favour from time to time. Two of these mortgages included not only cash advanced by the assessee at the time of the execution but also amounts due under previously executed promissory notes, bonds and mortgages (i.e., principals together with interest due up to the dates of the execution). On 2-3-1936, the assessee obtained a decree against 'S', together with future interest in proceedings under the Encumbered Estates Act and in execution of it, the property of 'S' was sold and the assessee realized certain amount. For the assessment year 1943-44, the income-tax authorities and the Tribunal ascertained the amount of interest included in the sum by deducting from it the aggregate of the principals advanced by him to 'S' from time to time and also some interest said to have been realized by him from 'S'. On reference : HELD Actually, no interest seemed to have been realized in cash by the assessee from 'S' previously. In some assessment orders for the previous assessment years the income-tax authorities treated capitalized interest as interest realized and assessed the assessee on the amount of it. So long as no interest was realized but was only capitalized by being added to the principal and being made the subject-matter of a new promissory note, bond or mortgage, there was nothing to be assessed. Both logic and precedents were against the view that capitalized interest was liable to be assessed. When a…

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