Law:

Section:

Section 5 of the Income-tax Act, 1961 [Corresponding to section 4 of the Income-tax Act, 1922] - Income - Accrual of - Assessment year 1948-49 - Assessee-HUF carried on business of money lending, maintained accounts on cash basis - It commenced legal proceedings for recovery of debt against debtor - Case was decreed in assessee's favour and thus assessee was paid some amount in cash and for balance amount Government gave encumbered bonds to assessee - Whether income was received by assessee when bonds were received and not in subsequent assessment year when said bonds were in fact sold at less than their face value - Held, yes - Whether difference between amount due as principal and market value of bonds on date of receipt represented taxable income - Held, yes FACTS The assessee-HUF carried on the business of money lending and maintained account on cash basis. The assessee had commenced legal proceeding for recovery of the debt against the debtor. The case was decreed in favour of the assessee and the debtor was directed to make the payment to the assessee. The U.P. Encumbered Estates Act 25 of 1934 applied to the debtor. The assessee was paid some amount in cash by the debtor and for the balance the Government of the United Provinces gave eucumbered bonds to the assessee. The bonds were convertible into money. The assessee split up the amount of the face value of the bonds towards principal and interest accrued. In the return of income, the assessee did not disclose any receipt of income from interest due on the debt from the debtor. The assessee was duly assessed to tax on the income disclosed for the relevant assessment year. The assessee sold the bonds and the realised sum was disclosed in the return 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 ITO brought to tax the difference between the face value of the bonds and the principal amount as escaped income. On appeal the AAC confirmed the order of the ITO. On second appeal, the Tribunal confirmed the order of the AAC. On reference, the High Court held that the receipt of Encumbered Estate Bonds during the…

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