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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: T.S.P.L.P. CHIDAMEBARAM CHETTIAR (DEAD) THROUGHL. Rs.

DATE OF JUDGMENT21/01/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. GROVER, A.N.

CITATION:  1971 AIR 2074            1971 SCR  (3) 428

ACT: Income Tax Act, 1922, s. 34(1) (a) Requirements  of-Assessee not  disclosing  part  of  money  repaid  against  loan  and interest-If  undisclosed  amount  not  taxable  and  to   be presumed  adjusted  against  principal-System  of   accounts maintained by assessee-If relevant in relation to  concealed income.

HEADNOTE:  The  assessee’s father made various loans to P in 1932.   In  July,  1932 P executed a mortgage of some of his  properties  in  favour of the assessee’s father for a sum of Rs. 2 .  76  lakhs.   After  the  mortgagee  had  instituted  a  suit  in  December, 1940 claiming a sum of Rs. 5.50 lakhs inclusive of  principal  and interest, a compromise decree was  passed  in  October,  1943  for  a  sum  of  Rs.  3.50  lakhs  in   full  satisfaction of the mortgagee’s claim.  When  the income-tax assessment proceedings of the  assessee  for  the  assessment  year 1944 45 as  karta  of  his  Hindu  Undivided  Family  were  pending, the  Income  Tax  Officer,  Trichy,  received information from the Income  Tax  Officer,  Erode, that the mortgagor had secretly paid to the mortgagee  a  sum of Rs. 1.50 lakhs during the year ended on  April  1,  1944,  and  that  this was not included  in  the  compromise  decree.   As the assessee denied receiving this  amount  and  the  Assessing Officer had no other material before him,  he  made a note in the order sheet that the I.T.O., Erode should  be  asked to give further details, and in the  meantime  the  assessment for 1944-45 should not be held up.  On  receiving  further  information, the Assessing Officer came to  believe  that  a  sum of Rs. 1.50 lakhs had  escaped  assessment  and  after  issuing the assessee a notice under s. 34(1) (a),  he  included  the  additional sum and taxed him on  that  basis.  The Appellate Assistant Commissioner set aside the order and  directed the I.T.O. to re-do the assessment after giving the  assessee  an opportunity to cross-examine the  witnesses  on  the basis of whose statements he had reached his conclusion.  After examination of further witnesses and other evidence, a  fresh order of assessment was made on the, assessee under s.  23(3)  read  with  s.  34 and  this  was  affirmed  by,  the  Appellate Assistant Commissioner as well as by the Tribunal.  Although  the High Court, upon a reference, found  that  the

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assessment under s. 34 was valid and the I.T.O. had  rightly  acted  in  giving  effect  to the  order  of  the  Appellate  Assistant  Commissioner  to re-do the assessment,  it  held,  purporting  to  rely  on the decision in  C.I.T.  Bihar  and  Orissa v. Kameshwar duringthe  relevant accounting  year  was not taxable as the assessee maintainedhis    accounts  according to the Chetty system and must be presumed to  have  appropriated the amount towards the principal amount due  to  the mortgagor.  On  appeal to this Court by the assessee as well as  by  the  department,  HELD  : The assessee’s appeal must be dismissed and that  of  the Department allowed;  429  (i)There was no force in the contention that as the Income  Tax Officer had before him the information about payment  of  a  sum  of Rs. 1.50 lakhs at the time he  made  the  initial  assessment and did not choose to act on the information,  it  was not open to him thereafter to initiate proceedings under  s. 34.  On  the facts found, under assessment due to  non-disclosure  of  material facts was established.  At the time  he  issued  notice  under  s.  34(1) (a) on the basis  of  the  material  before  him, the Income-tax Officer could have  ’formed  the  necessary belief and stated in the notice that he had formed  such belief; the requirements of s. 34(1) (a) were therefore  fully satisfied. [432 F]  Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies  District  1,  Calcutta  and  anr.  [1961]  41,  I.T.R.  191;  referred to.  (ii)The  only ground on which the assessment order was  set  aside  by the Appellate Assistant Commissioner was that  the  assessee  had  not been given a proper  opportunity  to  put  forward his case.  He did not hold that the notice under  s.  34(1)(a) was invalid.  There was therefore no assessee under  s. 34(1) (a). [433 D]  (iii)The  High Court was in error in thinking that  the  decision of the JudicialCommittee in Kameshwar Singh’s case  had laid down the rule that whenever any amount is  received  by  a  creditor which he has not  specifically  appropriated  either towards the principal or the interest due to him, the  taxing  authorities  should  proceed on  the  basis  of  the  presumption  that  it has ,been  appropriated  towards  the  principal.   In the present case it was evident  that  after  secretly  receiving  the  amount  of  Rs.  1.50  lakhs,  the  creditor  did not enter it in his account-books with a  view  to  evade  tax.  If he intended to appropriate  that  amount  towards  the  principal, there was no. need for him  not  to  enter  that  receipt  in his accounts.  The  fact  that  the  assessee  was maintaining the Chetty system of accounts  was  immaterial  on  the  facts  of  the  case.   The  system  of  maintaining  accounts  is  wholly  irrelevant  because   the  receipt in question had not been entered in the accounts  at  all. [437 Al

JUDGMENT:  CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  365  and  671 of 1967.  Appeals from the judgment and order dated January 6, 1966 of  the Madras High Court in Tax Case No. 143 of 1963 (Reference  No. 37 of 1963).  B  Sen, B. D. Sharma and R. N. Sachthey, for  appellant  (in  C.A.  No. 365 of 1967) and the respondent (in C A.. No.  671

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of 1967)’.  T.A.  Ramachandran and D. N. Gupta, for  the  respondents  (in C.A. No. 365 of 1967) and the appellants (in C.A  No.671  of 1967).  The Judgment of the Court was delivered by  Hegde   J.-The   first  of  these  two  appeals   (both   by  certificate)  viz. that filed by the Commissioner of  Income  Tax -    and  the  second,  that  filed  by   the   legal  representatives of assessee  430  fails.    The facts as found by the Tribunal and set out  in  the statement of the case, relevant for the purpose of these  appeals are as follows :  The  relevant assessment year is 1944-45,  corresponding  to  the  accounting year ended on April 12, 1944.  The  assessee  is one Chidambaram Chettiar (since deceased).  The father of  the assessee Palaniappa Chettiar was a money lender.  He had  made various advances to one Nallathambi Sakkarai Manradiar,  who  will  hereinafter be referred to as the  Pattayagar,  a  prominent  landlord  in Coimbatore District,  on  promissory  notes.   The total principal advanced by the father  of  the  assessee  upto July 6, 1932 amounted to Rs.  1,38,535.   The  interest on the same came to Rs. 1,34,965.  On July 6, 1932,  a further advance of Rs. 2500 was made to the Pattayagar and  for  the  amounts due from him, the  Pattayagar  executed  a  mortgage  of  some  of  his  properties  in  favour  of  the  assessee’s  father  for a sum of Rs. 2,76,000.   Till  1938,  only  a sum of Rs. 13,620 was paid by the mortgagor in  part  payment of the debt due from him.  On December 14, 1940  the  mortgagee instituted a suit on the foot of the mortgage bond  claiming  a sum of Rs. 5,50,573 inclusive of  principal  and  interest.  On September 19, 1943, the claim was  compromised  and on October 5, 1943, a compromise decree was passed for a  sum of Rs. 3,50,500 in full satisfaction of the  mortgagee’s  claim.   The  decree amount was made payable  on  or  before  October  1, 1944.  The debt under the compromise decree  was  subsequently discharged.  For  the assessment year 1944-45, the  assessee  Chidambaram  Chettiar,  as  karta  of  his  Undivided  Hindu  Family  was  assessed  under S. 23(3) of the Income Tax Act, 1922 (to  be  hereinafter  referred to as the Act), on February 12,  1946,  on a total income of Rs. 78,556 which, on appeal was reduced  to  Rs.  53,153.   When the assessment  proceedings  of  the  assessee were pending before the Income-tax Officer, Trichy,  that  Income-tax  Officer  received  information  from   the  Income-tax  Officer,  Erode  that  the  mortgagor  had  paid  secretly  to the mortgagee a sum of Rs. 1,50,000 during  the  year  ended  on  April 1, 1944 and that  the  same  was  not  included  in  the compromise decree.   When  the  Income-tax  Officer asked the assessee about the same, he denied  having  received  any amount secretly.  Apart from  the  information  conveyed  by  the Income tax Officer, Erode,  the  Assessing  Officer  had no other material before him to show  that  any  amount  had  been  paid secretly by  the  mortgagor  to  the  mortgagee.   Hence on May 27, 1945, the  Income-tax  Officer  made the following note in the order sheet  "It is denied that there was any secret understanding not to  show the payment of Rs. 1,50,000.  The  431  receipt  of this amount is entirely denied..  The  Incometax  Officer,  Erode should be asked to give further details  and  to  ask the Pattayagar to produce evidence of  the  payment.  In any event, this should come up for consideration only  in  the  assessment  year 1944-45 as only the  excess  over  Rs.  2,76,000  plus  legal expenses can be  treated  as  interest

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income  in the hands of the assessee and so, the  assessment  for   1944-45  should  not  be  held  up   pending   further  investigation."  After  sometime the Assessing Officer made  further  enquiry  into the information given by the Income-tax Officer,  Erode  and thereafter he came to believe that a sum of Rs. 1,50,000  had  escaped  assessment by reason of the  omission  of  the  assessee  to  disclose fully and truly  all  material  facts  necessary  for his assessment for the assessment year  1944-  45.   He  accordingly issued a notice under s.  34(1)(a)  on  March 9, 1953.  In reply to that notice, the assessee  filed  a return similar to the one filed by him earlier.  He denied  having  received Rs. 1,50,000 secretly from  the  mortgagor.  The  Income-tax  Officer  did not accept  the  plea  of  the  assessee.  He accordingly included an additional sum of  Rs.  1,50,000  to the income of the assessee  earlier  determined  for the assessment year 1944-45 and taxed him on that basis.  In  appeal, the Appellate Assistant Commissioner  set  aside  the order of the Income-tax Officer and directed the Income-  tax  Officer  to  re-do  the  assessment  after  giving  the  assessee   an  opportunity  to  cross-examine  the   parties  examined  by  the Income-tax Officer on the basis  of  whose  statements  he had come to the conclusion that a sum of  Rs.  1,50,000  had  been secretly paid to the  mortgagee  by  the  mortgagor.   Thereafter the Income-tax Officer  further  in-  quired  into the matter; Pattayagar’s books of account  were  got produced to prove that an additional sum of Rs. 1,50,000  had  been  paid to the assessee.  Some witnesses  were  also  examined in the presence of the assessee to prove that fact.  After doing so, a fresh order of assessment was made on  the  assessee  under  s. 23(3) read with s. 34.   His  order  was  affirmed by the Appellate Assistant Commissioner as well  as  by  the  Tribunal.   At the instance of  the  assessee,  the  following  three questions were submitted to the High  Court  under s. 66(1) of the Act.  "(1)  Whether  assessment  under section 34  was  valid  and  proper. ?  (2)  Whether the Income-tax Officer rightly acted in  giving  effect to the order of the Appellate Assistant  Commissioner  setting aside the assessment to re-do the same according  to  law  after Living an opportunity to the appellant  to  place  all his cards before the Department ?  432        (3) Whether Rs. 1,50,000 is taxable as  income        of the year of account ?"  The High Court answered the first two questions against  the  assessee and the third question against the Department.  The  legal  representatives of the assessee are  challenging  the  High  Court’s ,,decision on the first two questions and  the  Commissioner is challenging the High Court’s decision on the  third question.  We  shall  first take up the assessee’s  appeal.   There  is  hardly any merit in that appeal.  It was urged on behalf  of  the  representatives of the assessee that as, even when  the  original  assessment proceedings for the relevant year  were  before  the  Income-tax  Officer,  he  had  before  him  the  information given by the Incometax Officer, Erode, but  yet,  he  did  not choose to act on that information, it  was  not  open to him thereafter to initiate proceedings under s.  34.  We are unable to accept this contention.  On the facts found  by  the  Tribunal,  it is established  that  the  assessee’s  father  had clearly suppressed the receipt of  Rs.  1,50,000  from  the  mortgagor.  The assesses had a duty  to  disclose  fully  and  truly  all  material  facts  necessary  for  his  assessment.   Herein we are not dealing with. a case  coming

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under  s. 34(1)(b).  All that we have to see is whether  the  requirements  of s. 34(1)(a) are satisfied.  This  Court  in  Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies  District  I,  Calcutta and anr., (1) ruled  that  to  confer  jurisdiction on the Income-tax Officer to take action  under  S. 34, ( 1 ) (a), two conditions must be satisfied viz. (  1  )  he has reason to believe that there was  under-assessment  and (2) that he must have reason to believe that the  under-  assessment  has  resulted  from  nondisclosure  of  material  facts.  On the facts found, under assessment is  established  and it is also established that the under assessment was due  to non-disclosure of material facts.  There can be no  doubt  that  at the time he issued notice under s. 34(1)(a) on  the  basis  of  the material before him, the  Income-tax  Officer  could  have  formed  the necessary belief.   In  the  notice  issued  he  says  that he had formed that  belief.   In  our  opinion the requirements of S. 34(1)(a) are fully satisfied.  The  fact that there was some vague information  before  the  Income-tax  Officer that the assessee’s father had  secretly  received  a  sum of Rs. 1,50,000 from the mortgagor  was  by  itself  not  sufficient to bring to tax that  amount  parti-  cularly  in view of the fact that the assessee  had  stoutly  denied that fact and the court records did not support  that  information.   It is true that the Income-tax Officer  could  have made further enquiry into the matter but the fact  that  he  did not make any further enquiry does not take the  case  out of S. 34(1)(a) particularly when the assessee had failed  to place truly and fully all the material ’facts before him.  The remark of the Income-tax Officer that "in  (1)  [1961] 41 I.T.R. 191  433  any event this (the receipt of Rs. 1,50,000) should come  up  for  consideration  only in the assessment year  1944-45  as  only the excess over Rs. 2,76,000 plus legal expenses can be  treated as interest income in the hands of the assessee  and  so, the assessment for 1944-45 should not be held up pending  further investigation" in the order sheet does not amount to  a decision taken by him.  It may be noted that those remarks  were  not  made  in the order assessing the  income  of  the  assessee.   It must also be remembered that  the  Income-tax  Officer, at the time he made those remarks was not satisfied  about  the  correctness  of the  information  given  by  the  Income-tax  Officer,  Erode.  Hence those  remarks  must  be  treated  as casual observations and not a decision taken  on  the basis of facts found.  We  see no substance in the contention that  the  Income-tax  Officer  did not give effect to the order of  the  Appellate  Assistant Commissioner when the latter asked him to reassess  the  income of the assessee.  The only ground on  which  the  assessment  order was set aside by the  Appellate  Assistant  Commissioner  was  that the assessee had not  been  given  a  proper  opportunity to put forward his case.  The  Appellate  Assistant  Commissioner did not hold that the notice  issued  by  the Income-tax Officer under s. 34(1)(a) was an  invalid  notice.   Therefore  there  was no need  for  the  Incometax  Officer,  Trichy  to issue a fresh notice  to  the  assessee  under  s. 34(1)(a) as contended on behalf of the  assessee’s  representatives.  All that the Income-tax Officer had to  do  was  to  afford proper opportunity to the assessee  to  show  that  in fact he had not received the aforementioned sum  of  Rs. 1,50,000.  That opportunity had been given.  In view of our above conclusion Civil Appeal No. 671 of 1967  fails and the same is dismiss ed.  Now  coming  to  the appeal filed  by  the  Commissioner  of  Income-tax,  the High Court came to the conclusion that  the

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sum  of  Rs. 1,50,000 received by the  assessee  during  the  relevant  account  year  must  be  presumed  to  have   been  appropriated  by the assessee towards the  principal  amount  due to the mortgagor and hence the same cannot be considered  as an income of the assessee during that year.  The assessee  was  maintaining  his accounts in accordance  with  what  is  known as Chetty system of accounts.  The material on  record  shows  that according to the Chetty system of accounts,  the  creditor  appropriates a receipt first towards the  cost  of  litigation,  then towards the principal amount due  and  the  balance towards the arrears of interest.  The High Court was  of  the view that the sum of Rs. 1,50,000 secretly  received  by  the  creditor  must  be deemed  to  have  been  kept  in  suspense.  As the debator had not given any direction about  the appropriation of that amount it was open to the creditor  to appropriate the same  434  towards the principal amount and further he must be presumed  to  have  appropriated  that amount  towards  the  principal  amount  before  s. 34 proceedings were started  against  him  firstly because of the system of accounts maintained by  him  and secondly because every one must be deemed to have  acted  in  a  manner least disadvantageous to him.  In  support  of  this conclusion reliance was placed by the High Court on the  decision  of the Judicial Committee in The  Commissioner  of  Income-Tax, Bihar and Orissa v. Kameshwar Singh(1).  In that  case, nature of several receipts by the assessee came up for  consideration.   For our present purpose we need only  refer  to two of them.  One Damodar Das Burman owed to the assessee  in the Fasli year 1332 Rs. 3,09,281.  During the currency of  the  debt  the  debtor  had made  regular  payments  to  the  assessee over a number of years, the total of which payments  was not stated.  Those payments were entered in the  deposit  register  maintained  by  the  assessee  but  no  allocation  thereof were made as between principal and interest, and  no  part of those payments were carried to the interest register  maintained  by the assessee.  Consequently no part of  these  payments was subjected to tax until the Fasli year 1331,  in  which year for the first time the Income-tax Officer came to  know about the deposit register maintained by the assesse,e.  In  that year, the deposit register showed a receipt of  Rs.  38,091  and on this the officer claimed and was paid tax  on  the footing that it was attributable to interest and not  to  principal.  The result is that against the total interest on  the debt, viz.  Rs. 3,09,281, no sums had been attributed by  the assessee to interest out of the payments made to him  by  the debtor.  But the Income-tax Officer had himself  treated  the  sum  of Rs. 38,091 received in the year Fasli  1331  as  interest  and taxed it accordingly.  That left Rs.  2,71,190  as the balance of the total interest on the debt, during its  currency   towards  which  balance  the  assessee  made   no  attributions of interest out of the payments received by him  from the debtor during its currency.  No tax accordingly had  been paid in respect of any of these receipts other than  on  Rs. 38,091.  Therefore the question before the Court was how  in those circumstances should be received of Rs. 2,78,000 in  the Fasli year 1332 be treated.  Dealing with that  question  the Judicial Committee observed :  "Now,  where interest is outstanding on a principal sum  due  and  the creditor receives an open payment from  the  debtor  without any appropriation of the payment as between  capital  and interest, by either debtor or creditor, the  presumption  is  that the payment is attributable in the  first  instance  towards the outstanding interest........ This presumption is  no doubt operative primarily in questions between debtor and

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creditor, but  (1)  [1933] 2 I.T.R. 94.  435  in their Lordship’s view, the Income-= Officer, finding that  the  assessee  received  a payment from his  debtor  of  Rs.  2,78,000  in the year Fasli 1332 and that the  assessee  had  not  up till then credited himself as having  received,  any  interest receipts to the Revenue Authorities was entitled in  the  circumstances  to  treat this sum of  Rs.  2,78,000  as  applicable to the outstanding interest to the extent of  Rs.  2,71,190 and accordingly to treat the payment to that extent  as income of the assessee in the year of payment."  From   the  facts  noted  above,  it  is  clear  that   what  presumption should be drawn in regard to appropriation of an  open payment depends on the circumstances of a case.  Now we  shall  proceed to deal with the second receipt  namely  that  from  Kumar  Ganesh  Singh.  In the Fasli  year  1332  Kumar  Ganesh Singh owed the assessee 32 lacs as principal and  Rs.  6,09,571 as interest, or a total of Rs. 38,09,571 in all, in  respect of an unsecured loan.  In that year the assessee and  his  debtor  entered  into an arrangement  whereby,  as  the  Commissioner stated "the assessee took over from the  debtor  in  satisfaction  of  this amount  the  following  items  of  property movable. or immovable:-        1.  The Kajora Colliery valued atRs.7,37,339/-       2.   Shares in different companies valued atRs.94,125/-       3.   Bills  received by the above brokers (i.e.  Ganesh  Singh’s    firm)Rs.48,809,-       4.   DecreeRs.1,42,594/-       5.   Transfer of loan to the Agra United Co.Rs.10,00,000/-       6.   Pronotes and hand-notes (of third parties)S.       7.   Hand-notes from Kumar Ganesh SinghRs.17,34,596-              Rs. 38,09,569/  The  question  for decision was whether as a result  of  the  above settlement, it could be said that in the account  year  the  assessee had received a sum of Rs. 6,09,571-due to  him  as interest.  The Judicial Committee came to the  conclusion  that  the first six items mentioned above amounting  to  Rs.  20,74,973  may perhaps reasonably enough be regarded as  the  equivalent  of cash, but the seventh item of  Rs.  17,34,596  consisting of the debtor’s own promissory notes, was clearly  not the equivalent of cash.  A debtor who gives his creditor  a  promissory  note for the sum he owes can in no  sense  be  said to pay his creditor; he merely gives him a document  or  voucher  of debt possessing certain legal  attributes.   The  next  question was whether the receipt of Rs. 20,74,973  can  be  said to include a receipt of interest of Rs. 6,09,571  ?  The Judicial Committee answered that question thus :  436  "He (Counsel for the Crown) relied on the already invoked in  the  case  of Damodar Das Burman above, that a  creditor  is  presumed to apply payments received from his debtor  towards  the  extinction  of interest claims before  capital  claims.  But the situation which their Lordships are now  considering  differs  materially from that which existed in the  case  of  Damodar  Das  Burman.   In  that  case,  apart  from   other  specialities  there  was no settlement, but merely  an  open  payment to account.  Here there was an arrangement effecting  the whole indebetedness whereby certain assets were accepted  in part satisfaction and promissory notes were taken for the  balance.   The basis of the presumption, namely, that it  is  to  the  creditor’s  advantage  to  attribute  payments   to  interest  in the first place, leaving  the  interest-bearing  capital  outstanding,  is gone.  Moreover, if  the  question

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were one between Kumar Ganesh Singh and the assessee, i.e.,-  between  debtor and the creditor, the assessee might  up  to  the  last moment appropriate ’the Rs. 20,74,973  to  capital  account...... Their Lordships have also not omitted to  bear  in  mind  the  provisions of ss. 60 and  61  of  the  Indian  Contract Act, though these were not relied on in argument as  applicable  to the case.  In the result their Lordships  are  of  opinion  that  having  regard  to  the  nature  of   the  transaction,  the  assessee is entitled to say that  he  has  accepted  the first six items in discharge pro tanto of  his  debtor’s  capital  liability and that the capital  debt  now  stands  discharged  to that extent.  No part of the  sum  of Rs.  20,74,9 73 accordingly was received by the assessee  as  taxable income in the year of computation."  Here  again  we  notice that the  conclusion  drawn  by  the  Judicial ,Committee depended on the facts and  circumstances  before  them.  Though the factum of settlement of  the  debt  was relied upon as one of the circumstances, for finding out  the  meaning  of  appropriation,  it  was  by  no  means   a  conclusive circumstance.  Evidently their Lordships bore  in  mind  the  possibility  of the assessee not  being  able  to  realise  the  debts  under  the  hand-notes.   Under   those  circumstances  it  was  advantageous  to  the  assessee   to  appropriate  the  money  value of  the  properties  received  towards,  the capital, otherwise there was a possibility  of  his having to pay income-tax ;on a receipt which  ultimately  may  not  prove  to  be  an  income.   It  is  under   those  circumstances their Lordships observed :  "that  in  a  question with the  revenue  the  tax-payer  is  entitled  to  appropriate payments as  between  capital  and  interest in the manner least disadvantageous to himself."  437  In our opinion the High Court was in error in thinking  that  the decision of the Judicial Committee in Kameshwar  Singh’s  case(1) has laid down a firm rule that whenever an  assessee  receives a payment and does not appropriate the same  either  towards the principal or interest, he must be deemed to have  appropriated  the same towards the principal.  The  decision  in question, in our opinion, does not lay down the rule that  whenever  any amount is received by a creditor which he  has  not  specifically appropriated either towards the  principal  or  the- interest due to him, the taxing authorities  should  proceed  on  the basis of the presumption that it  has  been  appropriated  towards the principal.  On the facts  of  that  case it was clear that ’it was advantageous to the  creditor  to  appropriate  the  receipt towards  the  principal.   But  turning  to the facts of the present case the  total  amount  due  to  the  assessee was over 6 lakhs.  Out  of  that  the  principal  amount  was less than 3  lakhs.   The  compromise  decree was for Rs. 3,50,500.  The creditor secretly received  Rs.  1,50,000/-.  He does not enter the same in his  account  books.  Evidently he did not enter the same in his  account-  books  with  a  view  to  evade  tax.   If  he  intended  to  appropriate that amount towards the principal, there was  no  need  for  him not to enter that receipt  in  his  accounts.  Obviously  he appropriated the amount towards  the  interest  due to him and that is why he did not enter that receipt  in  the  accounts so as to facilitate evading payment of tax  on  that  amount.   The fact that the assessee  was  maintaining  Chetty system of accounts is immaterial on the facts of  the  case.  The system of maintaining accounts is wholly  irrele-  vant because the receipt in question had not been entered in  the  account at all.  Hence, in our opinion, the High  Court  erred   in   answering  the  third  question   against   the  Department.

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We accordingly allow Civil Appeal No. 365 of 1967 and answer  the  third question referred to the High Court in favour  of  the  Revenue  namely that the receipt of Rs.  1,50,000/-  is  taxable  as  income of the year of  account.   The  assessee  shall pay the costs of these appeals-hearing fee one set.  Civil Appeal 365 of 1967 allowed.  Civil Appeal 671 of 1967 dismissed-  R.K.P.S.  (1)  [1933] 2 I.T.R.94.  438