Commissioner of IncomeTax, Madras Vs.
V. Mr. P. Firm, Muar  INSC 237 (26 October 1964)
26/10/1964 SUBBARAO, K.
CITATION: 1965 AIR 1216 1965 SCR (1) 815
R 1989 SC 611 (6) D 1989 SC1654 (15) RF 1992
SC 224 (11)
Income TaxDebtor and Creditor (Occupation
Period) Ordinance (Malaya Ord. No. XLII of 1948)Scope ofLiability to tax on
principle of estoppel.
The Japanese currency introduced into Malaya
during the Japanese occupation began to depreciate after January 1963, so that
debts paid off and received in that currency resulted in loss to the creditors.
The Government of India, by a notification issued in 1947, propounded a scheme
to give relief to Indian nationals carrying on business in Malaya, and the
Central Board of Revenue issued further instructions on the scheme. One of the
instructions was that if any creditors opted to accept the scheme, a recovery
subsequently made by them, with respect to the debt due to them was to be taken
as their income. In 1948, the Debtor and Creditor (Occupation Period) Ordinance
No. XLII of 1948, of Malaya was passed by the Malaya Legislature. Under that
Ordinance, payments made in Japanese currency were to be valued and scaled down
in accordance with its Schedule, so that a payment in Japanese currency would
be a valid discharge of a debt only to the extent of such revaluation.
A creditor could enforce his debt to the
extent not discharged and the debtor was under an obligation to discharge it to
that extent. On the questions as to (i) whether amounts, recovered by creditors
who had accepted the scheme, from their debtors, in terms of the Ordinance,
were liable to incometax; and (ii) whether the debtors could claim the payments
made by them as deductions, the High Court held, (i) that the assessees who had
received payments would not he liable to tax in respect of amounts they had
received towards principal, but they would be so liable in respect of moneys
which they had received towards interest;
and (ii) that those assessees who had made
payments towards the debts, would be entitled to deduct from their income, and
claim exemption from tax only such amounts as they had paid on account of
interest, but they would not be entitled to deduct any payment made on account
of principal. The High Court also gave directions that open payments should be
appropriated according to the law of appropriation of payments. The
Commissioner and a debtorassessee appealed to the Supreme Court.
HELD : The appeals should be dismissed.
(i) The creditorassessees were not' precluded
on the principle of "approbate and reprobate" from pleading that the
income they derived subsequently, by realisation of the revived debts, was not
taxable income. The doctrine was only a species of estoppel and cannot operate
against the statute. If a particular income is not taxable under the Incometax
Act, it cannot be taxed on the basis of estoppel or any other equitable
doctrine. [822 FH] (ii) Under the Ordinance, the discharged debts became
enforceable to the extent of the balance of the amount due after the scaling
down of the 816 payments, and the contention of the Revenue that the State
provided for compensation for the loss incurred by the creditorassessees could
not be accepted. [825 BE] (iii) The Incometax Officer could only impose income
tax on the income recovered by the assessees thereafter towards their debts if
such income was taxable under the provisions of the Act. So too in regard to
the payments made by the Assessees towards such debts, they could claim relief
by way of deduction only if such deductions were permissible under the Act.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 55, 888 and 889 of 1962 and 518 to 520, 722, 724, 725, 727 to 729 &
732 to 735 of 1963.
Appeals from the judgment dated August 19,
1958, of the Madras High Court in Referred Case No. 52, R. C. No. 90, 43 and
82, 33, 58 to 60, 64 and 65 of 1955 and 97, 98, 102, 112, 113 and 115 of 1956,
C. K. Daphtary, AttorneyGeneral, S. V. Gupte,
SolicitorGeneral, Gopal Singh, R. H. Dhebar and R. N.
Sachtliey, for the appellant (in C. A. No. 55
C. K. Daphtary, AttorneyGeneral, S. V. Gupte,
SolicitorGeneral, N. D. Karkhanis, R. H. Dhebar and R. N.
Sachthey, for the appellant (in C. As. Nos.
888889 of 1962 and 722, 724, 725, 728 to 729 and 732 to 735 of 1963) and for
the respondents (in C. As. Nos. 415 of 1962, 518 to 520 of 1963).
R. Ganapathy Iyer, for the appellants (in C.
A. Nos. 518 to 520 of 1963) and for the respondents (in C. As. Nos. 55 of 1962,
888 to 889 of 1962 and 729, 732 and 735 of 1963).
K. Srinivasan and R. Gopalakrishnan, for the
respondent (in C.A. Nos. 733 to 734 of 1963).
K. R. Chaudhuri, for the respondent (in C.A.
No. 724 of 1963).
A. V. Viswanatha Sastri, K. Parasaran, K.
Rajendra Chaudhuri and K. R. Chaudhuri, for the respondent (in C.A. No. 722 of
S. Swaminathan and M. S. Narasimhan, for the
respondents ,(in C.A. Nos. 725 and 728 of 1963).
817 The Judgment of the Court was delivered
by Subba Rao J. These 16 appeals are filed against the Judgment of the High
Court of Judicature at Madras and raise the question of the effect of the
Debtor and Creditor (Occupation Period) Ordinance No. XLII of 1948 of Malaya,
hereinafter called the Ordinance, on the liability of the assessee to pay
income tax in respect of preoccupation debts revived there under.
During the last World War Japan occupied
Malaya. During the period of their occupancy i.e., from February 1942 to
September 1945, they introduced their own currency in dollars. During that
period both the currencies were in vogue though there was a progressive
depreciation of Japanese currency in its relation to Malayan currency. On
September 5, 1945, the British Government reoccupied Malaya and introduced the
Malayan currency as legal tender in place of Japanese currency. The Indian
nationals, who were carrying on business in Malaya during the; period of
Japanese occupation, were hit adversely and suffered losses.
The Government of India came to their rescue
and by Notification dated August 14, 1947, they propounded a scheme to give
them relief by allowing them to set off the losses incurred by them during the
5 years relevant to the assessment years 194243 to 194647 against the profits
of the assessment years 194243 and 194142. We shall consider the scheme in some
detail at a later stage of the judgment.
On December 16, 1948, the Malayan Legislature
passed the Ordinance declaring that payments made in Japanese currency by
debtors to their creditors in respect of debts incurred prior to and during the
Japanese occupation were to be valued and scaled down in accordance with the
schedule appended to the Ordinance. We shall deal with Ordinance in some detail
at the appropriate place but the broad effect of the Ordinance was that though
a debt had been discharged fully by paying the amount due in Japanese currency,
the debt was revived in proportion to the depreciation of Japanese currency in
relation to the Malayan currency as laid down by the schedule. The creditor's
right to recover the debt to the said extent and the liability of the debtor to
pay the same revived.
As the question raised is one of law and does
not depend upon the peculiar facts of each case, we think it is enough if we
818 state briefly the facts of two cases, one illustrating the claim of an
assessee against the imposition of income tax in respect of the income he
realized by the revival of the debts and the other illustrating that of an
assessee to an allowance on the ground that he paid the scaled down debts over
The respondent in Civil Appeal No. 722 to 735
of 1963 is a firm carrying on business of money lending in Kampar in Federated
Malaya State. It applied for relief under the special scheme. It incurred loss
for the aforesaid four years of Rs. 1,33,125. For the years 194142 and 194243
it had a profit of Rs. 53,010 and Rs. 35,753 respectively. The said profits
were set off against the losses and the taxes paid by it for the years 194142
and 194243 were refunded to it. After the Ordinance was passed, in terms of
that Ordinance the respondent recovered 6,437 dollars during the previous year
ending April 12, 1952 corresponding to the assessment year 195253.
Civil Appeals Nos. 518 to 520 of 1963 deal
with the converse case. The appellant therein is a Hindu undivided family
carrying on, inter alia, a money lending business in its own village in Kaula
Kubbu Bharu and Parit Buntar in the Federated Malaya States. In the course of
its business it had taken moneys as deposits from various persons before April
12, 1942. During the period of occupation it discharged its liability to
various creditors but after the publication of the Ordinance it had to pay
again to creditors 6,214.58 dollars in the previous year ending April 12, 1950;
28,586 dollars for the previous year ending April 12, 1951; and 11,547 dollars
for the previous year ending April 12, 1952. The aforesaid amounts were claimed
by the appellant as deductions respectively for the assessment years 195051,
195152 and 195253.
The following tabular form at a glance gives
the claims of the assessees as creditors or debtors, as the case may be 819 1.
civil Appeal No. 2. R.C. No.
5. Assessment year
7. Issue for determination
1. 722 t0 735 of 1963 & 55 of 1962
2. 33 of 1955
3. Comm. of I.T., Madras 4. O. RM SP. SV.
6. $ 5739569
7. Creditor claims that the receipt is
capital and not revenue.
2. 52 of 1955
4. V. MR. Firm Muar
2. 58 of 1955
4. VP.AL. CT. Chidambaram chettiar
2. 59 of 1955
4. RM. P. Alagappa Chettiar
2. 60 of 1955
4. M. RM. SP. V. Venkatachalam Chettiar
2. 64 of 1955 3 do 4. RM. P. Alagappa
2. 65 of 1955
4. M. RM. SP. SM. Swaminathan Chettiar
6. $ 9006
2. 97 of 1956
4. M/s A.L.A. Firm
2. 98 of 1956
4. AR. M. M. Firm
2. 102 of 1956
4. S.M. RM. Meyyappa Chettiar & sons
5. 195051, 195152
6. $1119, $3214
2. 112 of 1956
4. AR. M. M. Firm (Penang) AR. M. M.
6. $2445 7 do
2. 113 of 1956
4. P. S. R. M. Annamalai Subramaniam Chettiar
6. $ 12004
2. 115 of 1956
4. M/s L. AR. Firm
1. 518 to 520 of 1963
2. 115 of 1956
3. O. V. R. SV. AP. Arunachalam Chettiar
4. Commissioner of Incometax, madras
5. 195152, 195253
6. $ 28, 586 $11, 574
7. Debtor claims deduction , On account of this
1. 888 & 889 of 1962
2. 90 of 1955
3. Commissioner of Income Tax, madras
4. O. R. M. O. M. A. M. Chidambaram Chettiar
5. 195152 & 195253
6. $ 6, 746 $664
7. Creditor claims that the receipt is
capital and not revenue.
Supp/649 820 The Incometax Officers held that
during the period of Japanese occupation the debts were discharged and that the
receipt of additional amounts under the Ordinance was in fact assessable to
tax. They also held that in the case of an assessee who was a debtor no
deduction was permissible on the ground that the amounts paid represented only
repayment of capital and not business expenditure. On appeal the Appellate
Assistant Commissioner held that the receipts by the assessee in respect of the
revived debts were only realization of the original amounts lent and,
therefore, could not be regarded as income. In the case of the claim for
deduction, he agreed with the view of the Incometax Officer. On further appeal
to the Tribunal, in the case of receipts it held that the assessee by claiming
benefits under the scheme and in including all its cash and Bank balances in
the Malayan business as part of the losses incurred therein in effect
indirectly wrote off the debts due to them and, therefore, the recoveries under
the Ordin ance were only a subsequent realization of the written off bad debts
and, therefore, assessable to incometax. In those appeals relating to
deductions, the Tribunal confirmed the orders of the Appellate Assistant
The High Court answered the questions
referred to it as follows:
(1) Where an assessee has received
repayments, he will not be liable to tax in respect of amounts he has received
as or towards principal, but he will be so liable in respect of moneys which he
has received as or towards interest.. Where only part of the debt has been
recovered, the assesse will be at liberty, subject to the law relating to
appropriation of payments, to appropriate the money he has received either
towards principal or interest. The assessment in respect of such receipts will
proceed on this basis, that is to say, if the payment has been lawfully
appropriated towards interest, will be liable to pay tax thereon. But if he has
lawfully appropriated it towards principal, he will not be liable to pay tax on
(2) Where an assessee has made payments, he
will be entitled to deduct them from his income and claim exemption from tax
for only such amounts as he has paid on account of interest. He will not be
entitled to deduct any payments on account of principal.
821 The Tribunal was directed to review the
assessment in the light of the said directions. The main reason given by the
High Court for giving the said answers was that the result of the Ordinance was
to revive the old debts and the question of the exigibility of the said income
to tax can only be decided on the provisions of the Incometax Act and not by
the terms of the scheme of the Ordinance. Hence the appeals.
The learned SolicitorGeneral, appearing for
the Revenue, raised before us the following three points: (1) Subs. (2) of s. 4
of the Ordinance on which reliance was placed by the High Court applies only to
preoccupation capital debts and the debts with which the appeals are concerned
are not pre occupation capital debts and, therefore, they are not revived
thereunder. (2) The assessees having taken benefit under the scheme propounded
by the Government of India which contained a condition that if any recoveries
subsequently made would be taken as income,, they are now precluded from contending
that the, amounts realized towards the revived debts are not taxable on the
principle of approbate and reprobate. And (3) on a reasonable construction of
the relevant sections of the Ordinance it should be held that there was no
revival of the debts but only that the State had provided for compensation for
the losses incurred during the occupation period by the assessees.
The first question had not been raised at any
stage of the proceedings before the Tribunal and the High Court. Nor does it find
a place in the statement of case. We cannot, therefore, allow the learned
Counsel to raise it for the first time before us.
Nor has the second question been raised in
the High Court in the form in which it is presented before us. The scheme
propounded by the Government of India, inter alia, contains the following
(i) No assessee was under any obligation to
accept the scheme. If he desired to opt for the scheme be was required to give
option with one month after he was informed of the scheme.
(ii) An assessee was permitted to include in
his expenses certain items which would be inadmissible under the Indian Incometax
(iii) The losses suffered by an assessee
during the five years relevant to the assessment years 194243 to 194647 were to
822 (iv) An assessee was permitted to carry
the aggregated loss backward and set it off against his profits for the
assessment year 194243.
(v) Any loss still unabsorbed could be
carried backward to the year 194142.
(vi) Any excess tax found to have been paid
after recomputing the income of an assessee by carrying his loss backward could
be refunded to him.
(vii) The loss could not be carried forward.
The Central Board of Revenue issued further
instructions on the above scheme by its letter dated December 1, 1947. One of
the instructions was that debts due to the assessee if paid in Japanese
currency would be taken to have been satisfied to that extent and excluded from
the asset side in the balance sheet, provided that if any recovery was
subsequently made, it was to be taken as income. Briefly stated, under the
scheme the losses suffered by an assessee during the assessment years 194243 to
194647 were set off against his profits for the assessment years 194243 and
194142 and any unabsorbed loss could not be carried forward. The debts
discharged in Japanese currency were excluded from the assets side in the
balance sheet but the authority reserved for itself the right to treat any
recoveries subsequently made as income. The contention is that the assessees
having opted to accept the scheme, derived benefit thereunder, and agreed to
have their discharged debts excluded from the asset side in the balance sheet
subject to the condition that subsequent recoveries by them would be taxable
income, they are now precluded, on the principle of "approbate and
reprobate", from pleading that the income they derived subsequently by
realization of the revived debts is not taxable income. The doctrine of
"approbate and reprobate" is only a species of estoppel; it applies
only to the conduct of parties. As in the case of estoppel, it cannot operate
against the provisions of a statute. If a particular income is not taxable
under the Incometax Act, it cannot be taxed on the basis of estoppel or any
other equitable doctrine. Equity is out of place in tax law; a particular
income is either exigible to tax under the taxing statute or it is not. If it
is not the Income tax Officer has no power to impose tax on the said income.
The decision in Amarendra Narayan Roy v.
Commissioner of Incometax, West Bengal(1) has no bearing on the question raised
(1) A.I.R. 1954 Cal. 271.
823 before us. There the concessional scheme
tempted the assessee to disclose voluntarily all his concealed income and he
agreed to pay the proper tax upon it. The agreement there related to the
quantification of taxable income but in the present case what is, sought to be
taxed is not a taxable income. The assessee in such a case can certainly raise
the plea that his income is not taxable under the Act.
We, therefore, reject this plea.
To appreciate the third argument it is
necessary to notice the relevant terms of the Ordinance. The Ordinance was
issued by the Malayan Government to regulate the relationship between the
debtor and creditor in respect of debts incurred prior to and during the period
of the enemy occupation of the territories comprising the federation of Malaya.
The relevant sections of the Ordinance read:
Section 4. Discharge during occupation period
of preoccupation debts :
(1) Subject to the provisions of subs. (2) of
this section, where any payment was made during the occupation period in
Malayan currency or occupation currency by a debtor or by his agent or by the
Custodian or a liquidation officer purporting to act on behalf of such debtor,
to a creditor, or to his agent or to the Custodian or a Liquidation Officer
purporting to act on behalf of such creditor, and such payment shall be a valid
discharge of such preoccupation debt to the extent of the face value of such
(2) In any case (a) where the acceptance of
such payment in occupation currency was caused by duress or coercion; or (b)
where such payment was made after the thirtyfirst day of December 1943, in
occupation currency in respect of a pre occupation capital debt, exceeding two
hundred and fifty dollars in amount, which (i) was not due at the time of such
or (ii) if due, was not demanded by the
creditor or by his agent on his behalf and was not payable within the
occupation period under a time essence contract;
824 (iii) if due and demanded as aforesaid
was not paid within three months of demand or within such extended period as
was mutually agreed between the creditor or his agent and the debtor or his
agent; or (c)......... such payment shall be revalued in accordance with the
scale set out in the Schedule to this Ordinance and shall be a valid discharge
of such debt only to the extent of such revaluation.
1. (a) : Where any such payment as it
mentioned in subsection (2) of section 4 of this Ordinance was made in
occupation currency during any month or on any day mentioned in the first
column of the scale set out in paragraph 3 of this Schedule, such payment shall
be revalued by taking the number of dollars in occupation currency set out
opposite such month or day in the second column of the said scale as equivalent
to one hundred dollars Malayan currency, and so in proportion for any portion
of such payment amounting when revalued, to less than one hundred dollars
(b) Where any such payment was made in
occupation currency on or after the thirteenth day of August 1945, the value of
such payment shall be taken to be nil.
2. (a) : In the case of an unsatisfied
occupation debt or part thereof which falls to be revalued under section 6 of
this Ordinance such debt or part thereof shall be revalued at the appropriate
date as provided in the said section or subsection by taking the number of
dollars in occupation currency mentioned opposite such month or day in the
second column of the scale set out in paragraph 3 of this Schedule as
equivalent to one hundred dollars Malayan currency, and so in proportion for
any portion of such debt amounting, when revalued to less than one hundred
dollars Malayan currency.
(b)When any such debt or part of a debt fell
due for payment on or after the thirteenth day of August 1945,its value shall
be taken to be nil.
3. Sliding scale of the value of occupation
We have not allowed the Solicitor General to
contend that subs. (2) of S. 4 of the Ordinance does not apply to the debts in
825 question as throughout the proceedings of this case it was assumed that it
applies to the said debts. During the Japanese Occupation both the Japanese
currency and the Malayan currency were in vogue. In January 1943 the Japanese
currency began to depreciate and by August 13, 1945, it ceased to be of any
value. During that process of devaluation debts were paid off and received in
Japanese currency which resulted in loss to the creditors. To regulate the
relationship between creditors and debtors.
during that period the said Ordinance was
passed by the Malayan Legislature on December 16, 1948. Under the said
Ordinance payments in Japanese currency were to be valued and scaled down in
accordance with the Schedule appended to the Ordinance. If a debtor had paid
his debt in depreciated Japanese currency, he was required to pay over again a
certain amount to be ascertained by the application of the provisions of the
Schedule. In terms subs. (2) says that the payment in Japanese currency shall
be a valid discharge of such debt only to the extent of such revaluation. When
the payments made towards debts were scaled down, the debts were revived in
regard to the balance of the debt. After the making of the Ordinance, the
creditor could enforce his debt to the extent not discharged and the debtor had
the obligation to discharge the same. On the express terms of the Ordinance it
is impossible to accept the contention that the State provided for compensation
for the losses incurred by the assessees. indeed the State did not pay any
compensation at all. The legal relationship of the creditor and debtor was not
created by the Ordinance but it was regulated on the basis of the preexisting relationship.
We, therefore, hold, agreeing with the High
Court, that under the Ordinance the discharged debts became enforceable to the
extent of the balance of the amount due after the scaling down of the payments.
If so, the Income tax Officer could only impose tax on the income recovered by
the assessees thereafter towards their debts if such income was taxable under
the provisions of the Act.
So too, in regard to the payment made by the
assessees towards such debts they could claim relief by way of deductions only
if such deductions were permissible under the Act.
The High Court held that the assessees who
had received repayments would not be liable to tax in respect of amounts they
had received towards principal but they would be so liable in respect of moneys
which they had received towards interest. It further held that those assessees
who had made payments towards the 826 debts would be entitled to deduct from
their income and claim exemption from tax only such amounts as they had paid on
account of interest but they would not be entitled to deduct any payment made
on account of principal. The High Court also gave a direction that in the case
of open payments the respective amounts paid towards principal or interest
should be ascertained in accordance with the law of appropriation of payments.
Neither the learned Solicitor General, who appeared for the Revenue, nor the
learned counsel, who appeared for the assessees, questioned the correctness of
the said directions if the construction we placed on the Ordinance was correct.
The directions given by the High Court will, therefore, stand. In our view, the
High Court gave correct answers to the questions referred to it.
In the result the appeals are dismissed with
costs. One hearing fee.