Courtney-Terrell, C.J:— In this case we have to decide certain points raised in a letter of reference dated 13th February 1928 by the Commissioner of Income-tax under Section 66(2) of the Income-tax Act of 1922.

2. The assessee was the late Maharajadhiraja of Darbhanga who died on 3rd July, 1929. The Income-tax Act does not contemplate assessment of the heirs of a deceased in respect of income received by him during his lifetime. Learned counsel appeared before us for the heirs on behalf of whom an order for their substitution for the deceased assessee had been obtained. A preliminary question was raised by the Advocate General as to whether, having regard to the Act, the heirs were entitled to be heard. On this point it is sufficient to say in the first place that this proceeding is not a suit and no question of abatement arises. We have to deal with a reference which we should have to decide, whether or not the assessee or his heirs appeared. Secondly the heirs are directly interested in the result since they are entitled to any refund of tax and even if this had been a suit and the question of parties material we would not in our discretion have decided it without hearing counsel for the heirs; if necessary as amici curiae. Accordingly we have heard the arguments on behalf of the heirs.

3. The points raised are concerned with the income received by the assessee during the year ending in September 1925 corresponding to the Fasli year 1332. The deceased was a nobleman of great wealth whose income was received from various sources including agricultural rent, money lending, and share dealing, and the first point concerns that part which he derived from money lending transactions. It was his custom to secure the loans by mortgages and when the debtor in any case made payment it was recorded in what has been called a “deposit” or “general” register without any allocation between principal and interest. In the ordinary course of such a business the creditor would decline to accept any instalment as being in respect of principal if any sum equal to or in excess of the instalment paid had accrued due in respect of interest, although if he chose to take a course so advantageous to the debtor he would be at liberty so to do. As against the debtor he would be entitled to appropriate any payment to the discharge of interest to the extent that it was equal to or in excess of the interest due at the date of the payment. On the other hand he might deliberately choose first to wipe off the liability of the debtor to repay the principal and thus reduce his liability to pay interest on outstanding capital and when the capital has been so repaid only such amount as might still be outstanding in respect of interest will remain due. The question therefore of what proportion of any instalment has been received by the creditor by way of interest and what proportion by way of repayment of capital is a matter of fact in the case of each payment and depends upon the actual state of affairs as between debtor and creditor. The assessee besides his “deposit account” kept an account which has been called an “interest” or “loan” ledger. Prom time to time he would make an entry in the “interest” ledger referring to the payments which had been entered in the deposit ledger, purporting by such entry to appropriate a part or the whole of such payments to the satisfaction of interest. This interest ledger, so the Commissioner finds, has not been kept up to date and in many cases accounts in the deposit ledger have been completely closed in respect of individual loan transactions and no corresponding entries are to be found in the interest ledger. Moreover any entry in the interest ledger was not necessarily made in the same year as the receipt of and entry in the deposit ledger, of the payment to which it relates. The excuse given by the assessee for not keeping the interest entries up to date, viz., that his officials had not found time to classify how much was interest and how much was capital is manifestly absurd and was an additional and excellent reason why the Income-tax Officers should have (as they clearly did) treated his accounts with complete distrust. In the assessment made in respect of the income of the years preceding 1331 the assessee did not produce any deposit ledger. He merely produced the interest ledger and claimed to be assessed or the entires therein shown.

4. The assessee can of course only be assessed upon interest as income, and subject to corrections made in the quantum for assessment he was so assessed. In 1332 which was concerned with the income of 1331 ending in September 1924 the assessee for the first time produced his deposit account together with the interest account, and the income-tax authority took the sum shown in the interest account but considered in view of the state of the accounts and other facts that it did not show what was really the sum received by way of interest. He therefore referred to the deposit account and took the whole of the payments which were entered there as having been made in the year 1331 and in the absence of any evidence of appropriation to interest, where any particular payment did not exceed the amount due in respect of interest he assumed that the ordinary course of business had been followed and added the total to the amount shown as entered in the interest ledger and assessed the assessee on the total. The assumption as to the course of business followed was reasonable and is justified by the judgment of the Privy Council delivered by Lord Buckmaster in Meka Vankatadri Appa Rao v. Parthasarathi Appa Rao (1). This method was again followed in respect of the year 1332. The methods of accounting adopted by the assessee are described in the letter of reference and one of the questions to be decided though not the first in numerical order is:

“Assessee's method of accounting in respect of receipts of interest from loans being as described above was the assessing officer's action in calculating the profit and gains of the previous year as he has done according to law?”

5. A great deal of argument has been addressed to us upon the difference between accounts on a cash basis and accounts on a mercantile system and the broad distinction is well understood. If the assessee had at any time presented his accounts on a mercantile basis we should have been, able to survey his money-lending business in respect of any year as a whole by means of a proper balance sheet and profit and loss accounts, but no such presentment of his business affairs has ever been attempted. Whether by design or through sheer ignorance of accounting, those who managed his affairs set forth accounts for the years in question in an almost uninetelligible form in spite of every opportunity given to them by the income-tax authorities. The accounts such as they are of the assessee whether as presented before or since the year 1331 cannot be called mercantile accounts in any sense of the word. He was at liberty if he so chose to prepare mercantile accounts showing the position of his money-lending business as a whole from year to year. Or he could prepare a cash account of each transaction so that it could be considered separately and, the income, if any, from it might be displayed and assessed. The assessee if he adopted the latter course would be obliged to present his accounts in such a way as to show the real nature of each transaction and whether any instalment on account was received and appropriated as in respect of interest or in respect of capital. The, question whether or not the accounts disclosed by the assessee do or do not disclose his true income is itself a question of fact: see James Cycle Co., Ltd. v. The Commissioners of Inland Revenue (2), behind which this Court cannot go and there is a very definite finding in this case that the income cannot be deduced from the accounts disclosed. Moreover, there are distinct findings supported by the assessee's own auditors that the accounts do not constitute honest disclosure of the facts.

6. If the assessee had been able to show that in the case of any particular instalment although it was less than the interest which had accrued due at that date yet that he had in fact been so generous to the debtor as to accept a part or the whole thereof in discharge of principal, then the officer should and would have omitted such part from assessment, but giving the assessee credit for common sense and business method he must in the absence of evidence to the contrary be assumed to have appropriated the whole of such an instalment to the discharge of interest. I would therefore answer the general question set forth in para. 16* of the letter of reference in the affirmative.

7. It now becomes necessary to examine particular cases and I will take first that question which is asked at the end of para. 8 which has reference to the case of Damodar Das. This man was in 1331 a debtor of the assessee who had some years before obtained two decrees against him in respect of principal and interest on loans. The debtor had from time to time in previous years made payments by way of instalments, and such instalments were recorded in the deposit account. But in no case was any corresponding entry made in the interest account. In 1331 the debtor had paid Rs. 38,091 and the officer under the method described above had treated the whole of this as interest and assessed it as income. In the year 1332 the debtor paid the assessee two separate sums the one of Rs. 3,400 and the other of Rs. 2,78,000. Up to the end of this year the total amount of interest which had accrued due was Rs. 3,09,281. The assessee says that he is entitled to wait until any time he chooses before making an appropriation, and before the officer he claimed, as to the payment made in 1332, to appropriate the earlier payment of Rs. 3,400 and a small portion that is to say Rs. 18,816 of the larger payment to interest, and stated that the balance of the larger payment was to be relegated to the discharge of capital. He attempts to justify this by alleging that the larger payment was the final payment to be obtained from the debtor from whom though much was still owing nothing more was to be expected and that being so he could now balance his account against Damodar Das, and that treating Rs. 2,59,184 as the capital, he was entitled to treat the whole of the previous payments including the payments of Rs. 38,091 in 1331 which had already been assessed for that year and the payments of Rs. 3,400 and Rs. 18,816 in 1332 which he admitted as assessable, as having been made in respect of interest.

8. Now if the creditor had really discharged the debtor by reason of the “final” payment or if he had shown that in spite of a large balance being legally recoverable it had been necessary to close the account and the account had in fact been closed, he might reasonably have claimed to balance total receipts against a capital and to be taxed on such portion received as was interest only, but in the absence of such proof the general principle must be applied and having regard to the fact that in 1331 he stated that the payment in that year was by way of interest and the payments even after those of 1332 had failed to discharge the large amount of interest due without having regard to the principal I can see no reason for holding that the payment of Rs. 2,78,000 was received otherwise than by way of interest. There is the further point that the Commissioner states in his judgment para. 14 that the assessee said that the whole debt was cleared in 1333 and asked to be allowed to wait until that year would be under consideration to appropriate and classify. This further goes to show that his statement that the final payment was made in 1332 is positively erroneous. The question asked is:

“In the circumstances of this case what portion of the amount received from Damodar Das Burman in the previous year is legally taxable.”

9. To this I would answer that the whole payment of Rs. 2,78,000 was taxable, so that excluding the amount of Rs. 18,816 already admitted tax should be assessed on Rs. 2,71,190.

10. The next question is concerned with receipts from one Amar Nath Bose a judgment-debtor who had in previous years made payments to the assessee on account. In the year 1332 he paid to the assessee a sum of Rs. 1,38,955. In the interest account the assessee purports to appropriate Rs. 20,000 out of this sum to interest and he also entered a sum of Rs. 1,40,107 in the interest account as having been received in year prior to the year 1332 on account of Interest. Now out of this sum of rupees 1,40,107 a sum of Rs. 80,000 had been received in the year 1331 and had already been taxed and the department makes no claim to tax it again. But as to the balance of Rs. 60,107 the department claims tax. The assessee contends that it was received in years prior to 1331 and contends that by reason of S. 34 of the Act the claim of the department is time-barred. He says that the payments of the earlier years were expressly exempted from taxation in years prior to 1331 as not having been received on account of interest and cannot now be taxed merely because in the year 1332 they have been transferred to the interest account. An examination, however, of the final order of the Assistant Commissioner in 1330 as to the income of 1329 shows that this was not the fact. The officer found the accounts of the assessee to be in a highly unsatisfactory condition and he did not believe in them. He scrutinized the realisations to see what the original amount of the principal of each transaction was and he assessed the assessee on an estimate of profits only, and a similar course was followed as to 1331 as to the income of 1330. The taxation was not levied on all the realizations but on such part thereof as the officer thought should be allocated to interest and so treated as income. He took the amounts appropriated to interest in the interest account and added such amounts as had been received in the year, which, by the system, I have earlier described he was entitled to consider to be interest. It is clear therefore that the payments amounting to Rs. 60,107 have never before been appropriated to interest or taxed as income and the assessee is for the first time in 1332 making such appropriation. Following the judgment of Lord Dunedin in Commissioner of Taxes v. The Melbourne Trust, Limited (3), they must be treated as income received in the year of appropriation. Never having been treated as non-taxable and excluded, they are not time-barred. The question is:

“What is the amount of profits aud gains arising out of the payments made by this judgment-debtor legally taxable in this year?”

11. I would answer that the sum of Rs. 60,107 is so taxable.

12. The next question relates to a payment of Rs. 25,670 from a Col. Lewellyn entered in the deposit account. The assessee asserted at the hearing on appeal before the District Commissioner acting as Assistant Commissioner, and not until then that this was a final payment and was appropriated to the capital of the loan. He could not produce any intelligible statement of the loan transaction or of the payments which had preceded the one in question. Before this Court his learned counsel could offer no better account. The Assistant Commissioner treated the payment as income and assessable. The question propounded is “Whether the Assistant Commissioner's action in this matter is authorized by law” The contention to the contrary is practically unarguable and the answer should be in the affirmative.

13. The next question is concerned with the return made by the assessee of income derived from the purchase of mortgaged properties under mortgage decree sales. The assessee admitted a receipt of Rs. 4,364 under this head in the previous year. The assessee had a suit register but made no attempt to keep it up to date. In respect of the year 1330 the assessee showed no income under this head. The officer assessed him at six lakhs which sum was reduced to two lakhs on appeal. In respect of the year 1331 he admitted a receipt of Rs. 20,069 to which the officer added three lakhs and the assessee did not appeal and in respect of the year under assessment the officer on appeal has added one lakh to the assessee's return. The question is:

“Whether the assessing officer was right in making an estimate of Rs. 1,04,364 under this head as he has done.”

14. It is the duty of an assessee to keep and present his accounts to show the actual income made by him. If he fails to do this he must put up with the estimate by the officer made to the best of his ability. The case of Raja Raghunandan Prasad Singh v. Commissioner of Income-tax (4) recently decided by a Full Bench of this Court settled finally the question of principle and the only point here is one of quantum. Learned counsel for the assessee has argued that the officer is not entitled to make a guess without evidence, and I agree with that contention, but in this case the state of affairs in the previous years coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions afford ample material for the assessment made. I would answer the question in the affirmative.

15. The next question is concerned with a transaction between the assessee and one Ganesh Singh. According to the finding Ganesh Singh the debtor in 1332 owed the assessee a sum of 32 lakhs as principal and Rs. 6,09571 as interest in respect of a loan without security. In that year the assessee and the debtor made a fresh arrangement to deal with the outstanding debt. The assessee took over a colliery, shares, bills receivable by the debtor, the benefit of a decree, a transfer of a loan to a company and handnotes from third parties at a valuation in respect of each item so taken over. This cleared off Rs. 20,74,973 and the debtor executed fresh handnotes in respect of the balance of Rs. 17,34,596. The department contends that this transaction discharged the liability for capital and interest of the loan and that the assessee is liable to assessment on the amount of the interest which must be taken to have been received when the conveyance was executed (as it was) in 1332.

16. But in every case the real nature of the transaction must be looked at and in my opinion this transaction was in effect and substance the acceptance of a proposal by the debtor which might be expressed in these words:

“As to this amount of Rs. 38,09,569 which I owe you, I will hand over to you a quantity of valuable property which shall discharge the liability to the amount which it may in fact be worth and as to the balance I shall have to continue to owe it, but in order to record the amount still due I will execute fresh handnotes to the amount of that balance.”

17. The assessee contends that the transaction cannot be considered closed until the balance of liability represented by these notes has been realized or written off as a bad debt.

18. Now it is true that a debt may be discharged by consideration other than cash, and that in taking account of profit and loss on a loan liability discharged by such consideration the true value of the consideration must be taken into account. It is also true that a handnote is in itself a valuable security capable of valuation and not differing in this respect from a colliery or shares. Further it is quite possible that the assessee might be unable in law to sue on the old debt but might be forced after the transaction to rely upon his new handnotes. But none of these propositions of law alters the real nature of the transaction which in my opinion is, on the facts found, as I have described. If the debtor had not executed the handnotes, the assessee if he accepted the other items of consideration could only have sued the debtor for the balance. The real nature of the transaction, which is the test to be applied, is not affected by the fact that the assessee was given an additional weapon in the form of the handnotes for the recovery of the balance from the debtor. The case of Raja Raghunandan Prasad Singh v. Commissioner of Income-tax , was decided for reasons which have no bearing here and I do not think that it helps the assessee. In my opinion his real strength lies in relying upon the Court to ascertain the real nature of the transaction, however it may have been concealed by the method of book-keeping. This is not a matter of the distinction between the mercantile and the cash systems of book-keeping. Throughout, the money lending affairs of the assessee have been recorded and treated on a system which is sui generis. The case of Raja Raghunandan Prasad Singh proceeded upon the cash basis strictly so called and it has no application one way or the other. The question is not formally put in the letter of reference, but for the sake of convenience may be stated whether the interest can be considered to have been received and assessable, and in my opinion such question must be answered in the negative. If, on the other hand, I am wrong about this, there is the further question whether the income was received in 1331 or 1332. It is conceded on both sides that the instrument of transfer was executed and dated on 29th April 1925, that is in 1332 and that the title to the assets conveyed passed on that date. Had the amount of interest been assessable it would have been assessable in respect of 1332.

19. The next point is concerned with a claim by the assessee to make a certain deduction of Rs. 74,982 in respect of the revenue account of the Kakora colliery. This colliery was one of the assets taken over in discharge of Ganesh Singh's liability but it has here to be considered under another aspect. The original lessees from the owner of the colliery sublet their right to Ganesh Singh and by the instrument of transfer dated 29th April 1925 Ganesh Singh transferred his right to the assessee on the same terms. Under the terms of the original lease the lessee is bound to pay a minimum royalty of Rs. 1,422 a month to the landlord. When the assessee came into possession of the colliery he found that certain arrears of the minimum royalty were still due in respect of the tenancy prior to the date when he took it over, although the transfer had expressly stated that the colliery was transferred to the assessee free of incumbrances. In order to be able to carry on the colliery the assessee in 1332 paid up the arrears amounting to Rs. 67,872 the liability to pay having been incurred before 1332 the year of assessment. The question for decision is:

“Whether the Assessee is legally entitled to deduct the arrears of royalty which had accrued in previous years up to the date of his taking possession.”

20. Now it is true that in some cases the royalty based upon the amount of mineral raised may be treated as a capital expenditure that is to say, as part of the purchase price for the mineral. On the other hand this royalty is a minimum royalty, that is to say the tenant has to pay it whether or not he raises any coal at all, and moreover if the assessee fails in any year to extract sufficient coal to enable the royalty to be paid upon the amount so raised he will have an opportunity in later years to recover that coal which will have remained under the ground and thereupon will have to pay royalty which will be liable to tax. It has been decided: see Munindra Chandra Nandi v. Secretary of State for India (5) and in the matter of Raja Jyoti Prasad Singh Deo of the Kashipur in the district of Manbhum (6) that a receiver of royalty is assessable, therein following Lord Blackburn's decision in Countless v. Black (7) that a royalty may properly be considered as rent. It is further to be noticed that since the previous tenants have not paid the rent for the period of the arrears they have not been able to make a deduction in their account under the expenses heading for that period. In addition to the contention that the royalty should be considered as capital expenditure and not as rent the Department urge that inasmuch as the rent accrued due in the years prior to 1332 that it cannot be considered as having been paid in that year. Furthermore it is argued that it is open to the assessee to recover the amount of the arrears paid by him from his transferrer Ganesh Singh. But having regard to the normal course of business in mining leases it may be assumed that the rent was not a mere personal liability but that the strict fulfilment of the obligation to pay the minimum was a condition without which further mining operations could not be effected. Moreover although the rent cannot properly be deducted until it has in fact been paid I see no reason why if paid in arrears it should not be deducted as though it had accrued in the year in which it was paid. It was a liability in the nature of a charge in the year 1332 and in that year it was paid. I would therefore answer the question in the affirmative.

21. The next point for consideration is concerned with claim by the assessee to the benefit of an alleged loss of Rs. 78,000 in respect of the working of two indigo concerns. To establish this loss certain accounts were put in before the assessing officer which were held by him to be unintelligible, and he held that no such loss was established. On appeal before the Commissioner, the assessee contended that the accounts put in by him did in fact establish a loss. The Commissioner sent back the case for a further report and for the assessee to have an opportunity of producing the detailed accounts, with a view if possible to establish the loss which he persistently alleged. The assessee asked that when the assessing officer's report should be forthcoming that he might be heard upon it. When, however, the Commissioner received the assessing officer's report he made his decision without a further hearing of the assessee. The assessee complains that in so doing the Commissioner was breaking a well known rule of natural justice that a party should not have a decision against him upon materials upon which he has had no opportunity of addressing the tribunal. The only-point for consideration therefore is whether the assessing officer's report contained any new materials, and an examination of that report shows very conclusively that such further materials, if any, as had been put before the assessing officer had entirely failed to shake him in his original view that the accounts were unintelligible and did not disclose the alleged loss. The assessing officer was fortified in his original view by the report of the auditors employed by the assessee to investigate the accounts of the two concerns in which they say:

“We have not been able to verify the results of various concerns; the figures shown in the accounts are mere receipts and payments.”

22. The report therefore is of a negative and not an affirmative character and contains nothing new. The real object of the assessee was frankly admitted before us by the learned counsel on his behalf who stated that he wished to go behind the report and to show that if the very voluminous so called accounts were properly examined wit not he aid of further skilled assistance which was not before the assessing officer the assessing officer might have come to a different conclusion. In order, however, to take advantage of the general principle and to show that he has been denied natural justice the assessee must establish that, the report itself contained new material and this he has signally failed to do. The question is put as follows:

“Whether the Commissioner acting as the appellate authority can legally reject the appeal on this point without hearing the assessee on the assessing officer's report and giving the assessee an opportunity to meet the allegations made in that report.”

23. Having regard to the nature of the report in this case the Commissioner was, in my opinion, right in the course taken by him.

24. A final question arose on the matter of jurisdiction. The assessee argues under S. 64, sub-S. (2) of the Act that the assessment order must be made in Darbhanga, that is to say, in the area where the assessee is ordinarily assessed by the Income-tax Officer but under S. 5, sub-S. (4), the Commissioner directed that the powers conferred on the Income-tax Officer were to be exercised by the Assistant Commissioner. The actual hearing took place at Patna with, the consent of the asseseee and the only point is the assessee's objection is that the signature of the Assistant Commissioner was actually appended not in Darbhanga but in Patna. This point was not raised in the petition of appeal to the Commissioner or while arguing the case on appeal. It is of no merit and has no substance and the question:

“Whether the assessment made by the assessing officer in this case being made at Patna and not at Darbhanga is a valid assessment,”

25. Should be answered in the affirmative.

Das, J.:— I entirely agree. I propose to deal with two of the points which have been argued before us, one on behalf of the Crown by the Advocate General, the other on behalf of the assessee by Mr. Pugh. The point made on behalf of the Crown is that, the assessee being dead, the proceedings have abated and that nothing more can be doue. The Advocate General was aware of the decision of Sankey, J. (as he then was, in Smith v. Williams (8) to the effect that where the proceedings have once commenced, they must go forward until adjudicated upon, notwithstanding the death of the assessee after the commencement of the proceedings, and that if there be no procedure entitling the legal representative of the assessee to continue the proceedings, the Court will mould a convenient form of procedure to meet the case. The Advocate General, however, contended that the English statute is so radically different from the Indian statute in regard to the rights and liabilities of the legal representative of the assessee that it is impossible that the decision in Smith v. Williams can apply to the facts of this case.

26. Now it does appear that whereas in England the Crown is at liberty to proceed against the estate of the assessee in the event of the assessee dying before the assessment is complete, there is no provision in the Indian Statute for the assessment to income-tax of the estate of a deceased person. But does it follow that the case before us does not attract the operation of the rule which was so carefully formulated in the case to which I have referred? I think not; for the decision in the English case rests on the principle that it is not possible to apply the common law doctrine of abatement to proceedings of this nature, since the whole of the procedure connected with income-tax matters is the creature of statute, and not on the principle that, as there is power to proceed against the estate of the deceased assessee in the matter of assessment, so there must be power to continue proceedings of this nature against such estate. The case was not argued from this footing and was not decided on this footing. It was decided on the footing, as I have just said, that there is no abatement in these proceedings, and that if there is, the proceedings are not dead, but are suspended only and are capable of being revived, and that where the act procedure is not provided by the statute, the Judge must himself mould a convenient form of procedure to give effect to the manifest intention of the legislature that there should be a hearing of, and an adjudication upon every case started in this way.

27. This being the position, the English case will have direct application if it is clear that the statute contemplates a final adjudication upon a case stated under S. 66. In my judgment, there is no doubt that it does. Para. (1) gives liberty to the Commissioner to draw up a statement of the case and refer it with his own opinion thereon to the High Court, either on his own motion, or on reference from any income tax authority subordinate to him if a question of law arises in the course of any assessment. Para. (2) confers a power on the assessee to require the Commissioner to refer to the High. Court any question of law arising out of an order under S. 31 or S. 32, provided he satisfies certain conditions clearly specified, and it provides that.

“The Commissioner shall……. draw up a statement of the case and refer it with his own opinion thereon to the High Court.”

28. Para. (3) gives the assessee liberty to apply to the High Court, if the Commissioner refuses to state the case on the ground that no question of law arises, and it provides that.

“The High Court, if it is not satisfied of the correctness of the Commissioner's decision, may require the Commissioner to state the case and refer it, and….the Commissioner shall state and refer the case accordingly.”

29. So far the legislature has been at pains to make it clear that both the assessee and the income-tax authority have the right to have a question of law arising out of an assessment decided by the High Court. Para. (5) clearly provides for a hearing of, and an adjudication upon the case as stated by the Commissioner, and it directs the High Court to send to the Commissioner a copy of its judgment, and it provides in distinct terms: “the Commissioner shall dispose of the case accordingly.” The proviso to para. (7) enacts that:

“If the amount of an assessment is reduced as a result of such reference, the amount overpaid shall be refunded with such interest as the Commissioner may allow.”

30. In my judgment the legislature has said very distinctly that once a reference has been made under para. (1) or an application has been made either under para. (2) or para. (3) the proceedings have commenced, and that once the proceedings have commenced they must go forward until a final decision is reached by the High Court, provided that there is a question of law arising out of the assessment. If this be the position (as, I think, it is), then the, English case to which I have referred has direct application, and I must hold that we are bound to adjudicate upon the case as stated, by the Commissioner, notwithstanding the fact that the assessee is now dead.

31. The other question arises with reference to a loan of Rs. 3,20,00,00 advanced by the assessee to Kumar Ganesh Singh. The Income-tax Officer assessed the assessee on the sum of Rs. 6,09,571 said to be the interest realized by the assessee from Ganesh Singh during “the previous year.” I take from the statement of the case as to what actually happened:

“In the year in question the assessee took over from the debtor in satisfaction of this amount,”

that is to say, the amount advanced together with the accrued interest thereon:

“The following items of property moveable or immovable.

Rs. (1) The Kajora Colliery valued at 7,37,339 (2) Shares in different companies valued at …… 94,125 (3) Bills receivable by the above brokers …… 48,809 (4) Decree …… 1,42,594 (5) Transfer of loan to the Agra United Company … 10,00,000 (6) Pro-notes and hand notes … 52,106 (7) Hand notes from Kumar Ganesh Singh …… 17,34,596 Rs. 38,09,569”

32. It will be noticed that the assessee took properties of the value of Rs. 20,74,973 and the promise of the debtor to pay him on demand the sum of Rs. 17,34,596 in satisfaction of his claim for Rs. 38,09,571. The question which arises on these facts is, can it be said that the assessee has earned a profit of Rs. 6,09,571 since it is clear that the assessee has not actually realised that sum, either actually or notionally? The view of the department has been very clearly put in the order of the Commissioner dated 24th May 1927. “In my opinion,” says the Commissioner:

“The correct way to view the transaction is that the assessee has accepted in lieu of an original sum advanced without security plus interest which has accrued up to date property-moveable and immovable and valuable securities equal to the total amount of principal plus interest and prima facie worth the valuation made by the assessee. Therefore, in my view, the original capital plus interest has been satisfied, and an amount equal to the amount of interest which has accrued has rightly been taken as interest realised in the year.”

33. Now we ave not concerned with what the position may be as between the debtor and the creditor. The sole question from the point of view of the income-tax administration is, can it be said that an income of Rs. 6,09,571 has accrued or has arisen or has been received so as to attract the operation of the Income-tax Act. We know that there must be an in coming to satisfy the test of income. That “incoming” may be actual, as when the sums are actually realised and go to swell the assets of the assesee or it may be notional, as when the sums are not actually realised but are treated in the accounts as having been “realized.” It is not suggested in this case that the accounts show the realization of this sum of money by the assessee. In order to succeed, then, the Crown must establish that the sum of Rs. 6,09,571 was actually received by the assessee.

34. The Advocate General puts his point thus: It is not necessary, so he argues, that actual money should be received to satisfy the test of income. It is sufficient, he contends, that the assessee has received either money or money's worth. He might have taken a picture, a plate, or a piece of jewellery in full satisfaction of his claim; and it can make no difference, according to the argument of the Advocate General, that, instead of taking a picture, a plate, or a piece of jewellery, the assessee has chosen to take a promissory note from his debtor. The answer to the argument is that, once the creditor has accepted a picture, plate or a piece of jewellery from the debtor, the liability of the debtor is at an end; and the article which the creditor has taken from the debtor represents, according to the valuation put upon it by the former, the entire sum of money due to him. But when a creditor has taken a promissory note from a debtor, the consideration being a sum of money already due to him, the liability of the latter is not necessarily at an end, and it is open to the creditors under certain circumstances to sue for the original consideration:

“When a cause of action for money is once complete in itself whether for goods sold, or for money lent, or for any other claim, and the debtor then gives a bill or note to the creditor for payment of the money at a future time, the creditor, if the bill or note is not paid at maturity, may always, as a rule, sue for the original consideration, provided that he has not endorsed or lost or parted with the bill or note, under such circumstances as to make the debtor liable upon it to some third person Sheikh Akbar v. Sheikh Khan (9).”

35. I have no doubt whatever that the taking of a promissory note in consideration of a debt already due is not the same thing as the taking of a picture, a plate, or a piece of jewellery in satisfaction of one's claim. In the latter case the liability is extinguished; in the former case the liability remains.

36. It was then urged that the promissory note executed by Ganesh Singh is a negotiable instrument and therefore a valuable security; and that, as it must be deemed to have some value, it was clearly the duty of the assessee to value it before the Income-tax Officer; and that, as he failed to do so, he must now be bound by the value put on it by the Income-tax Officer. If I am right in taking the view that the execution of the promissory note did not extinguish the liability of Ganesh Singh on the original consideration, then this question does not arise; for the liability still remaining, the promissory note clearly does not operate as a payment. Two cases have been referred to, and it is right that I should deal with them. In Californian Copper Syndicate v. Harris (10), the facts were these: The appellant company was formed, as it appeared to the Commissioner with a view to re-sell the property acquired by it. It resold a property that had been acquired and worked by it at a profit; the purchase money being received by it, not in cash, but in fully paid up shares of the company buying the property. The main question canvassed in the case was whether the transaction did not amount to a substitution of one form of investment for another so as to take the case out of the Income-tax Act. We are not concerned with that aspect of the case. But it appears to have been also argued that as actual cash was not received, there was no profit, in the contemplation of the law which, could be assessed to income-tax. In dealing with this point, Lord Trayner said as follows:

“But it was said that the profit, if it was profit, was not realized profit, and, therefore, not taxable. I think the profit was realized. A profit is realised when the seller gets the price he has bargained for. No doubt here the-price took the form of fully paid shares in another company, but, if there can be no-realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so. I cannot think that income-tax is due or not according to the manner in which the person making the profit pleases to deal with it. Suppose, for example, a seller made a profit on a trade transaction, but leaves the price (including the profit) in the hands of the buyer at so much per cent interest. That he so deals with it, rather than take the cash into his own pocket, would not affect the claim of the revenue for the tax payable on the profit. No more, in my opinion, does it affect the liability for the tax that the appellants left their profit in the hands of the company they sold to and took the company's shares as their voucher.”

37. It will be noticed that the case was one of sale, the price being received by the vendor company, not in cash, but in fully paid up shares which, as Lord Trayner was careful to point out were realisable and could have been turned into cash.” The first answer to the arguments founded on this case is that there was no doubt whatever, in the case cited, that the liability of the purchaser company was at an end, once they paid the price in fully paid up shares, so that it followed that consideration was received by the vendor company. In the present case, the liability of the debtor was not at an end, so that it could not be said that the payment was made. The second answer is that although there is a recognized market for purchase and sale of shares, so that “the shares were realizable and could have been turned into cash,” I know of no market in Darbhanga where promissory notes can be bought and sold. The Advocate General rather-insisted that there is one passage in the judgment just cited which exactly applies to the facts of this case, the passage in which the learned Judge suggests that if a seller made a profit on a trade transaction, but left the price (including the profit) in the hands of the buyer at so much per cant interest, the profit made but not actually received is assessable to income-tax. For myself I would always resist every attempt that may be made to isolate passages from the judgments of eminent Judges, take them out of their setting, and to apply them to cases arising under wholly different circumstances. I have no difficulty whatever in understanding the passage if read with the context which shows that, in that case, the profit had actually been earned and received, not, it is true, in cash, but in shares “which were realizable and could have been turned into cash”; but I suggest with great respect, that it has no application to a case where the profits have not been realized and the old liability has not been extinguished.

38. The decision in the other case relied upon: The Scottish and Canadian General Investment Company Limited v. A. Easson (11) is to the same effect and does not materially advance the case of the Crown. The appellant company held certain 5 per cent mortgage bonds of the Western Canada Power Company, Limited. The latter company was unable to meet the coupons which fell due for payment on 1st January 1916, in respect of the interest on the bonds for the half year from 1st July 1915. A re-organization of the finance of the debtor company took place which involved the formation of a new company. The appellant company surrendered its holding of bonds of the old company, with the unpaid coupons attached, and received in exchange 5 par cent bonds of the new company of equivalent face value bearing interest from 1st July 1917, together with an issue of ten years 7 per cent debentures of the new company, equal in face value to 10 per cent of the face value of the surrendered bonds. It was held by the Lord President that the face value of the ten years 7 per cent debentures was the precise equivalent of the two years interest at 5 per cent on the original holding of bonds for the two years which elapsed between 1st July 1915 and 1st July 1917. This being the position, the only question was whether income-tax could be levied on those debentures. It was held that income-tax could be levied, for though the interest was not received in cash, “the debentures themselves were saleable and had a value on the market.” As the Lord President pointed out:

The question is just one of ascertaining the profits and gains of the company, and if, instead of receiving cash, the company get a saleable security, that saleable security is just part and parcel of the company's profits and gains.”

39. The principle established in the case is clear enough; but, in my judgment, it has no application here, since it has not been established that the promissory notes in question have “a value on the market.” I therefore agree that the question with reference to the transaction with Ganesh Singh should be answered in favour of the assessee.

40. With regard to the other question argued before us, I entirely agree with the judgment of my Lord, and have nothing further to add.

Kulwant Sahay, J.:— This is a reference under Section 66(2) of the Income-tax Act (1922). The assessment relates to the income of the assessee in the Fasli year 1332, ending in September 1925. The tax levied on account of income-tax and super-tax is Rs. 13,25,987-5-0 on an assessed income of Rs. 33,37,204.

41. The objections of the assessee relate to matters which may be classified under eight heads; viz., (1) income derived on the foot of two decrees passed in favour of the assessee against one Damodar Das Barman; (2) income derived on account of realization of the debt due from one Amar Nath Bose; (3) income derived from a debt due from one Col. Lewellyn; (4) income derived from mortgage execution sales; (5) income derived from the transaction with one Kumar Ganesh Singh; (6) income derived from the Kajora Colliery; (7) losses incurred by the assessee in certain indigo concern; and lastly a point is raised as regards the jurisdiction of the Income-tax Officer to make the assessment.

42. In order to understand the nature of some of the objections it is necessary to set out the system of accounting adopted by the assessee. It appears that the assessee keeps a register known as the deposit register in which he enters all sums received from his debtors without any specification as to whether the sums received were on account of principal or interest. He also keeps an account known as the loan account. In this account he transfers from time to time sums entered in the deposit-register which he appropriates on account of interest on the debts received by him. It has been found by the Commissioner that the interest account is nob keep up to date and the entries in the interest account are not necessarily made in the year in which the money has actually been received by the aseessee. He also found as a fact that in several cases although the account had been closed in respect of particular transactions no entries have yet been made in the interest account. The assessee did not produce his deposit register when assessments were made by the Income-tax Department for the income of the years previous to the income of the year 1331 Fasli. On those occasions he merely produced his interest account and the Income-tax Department assessed his income on the basis of the entries made in the interest account. He produced his deposit register for the first time when assessment was made on the income of the year 1331 Fasli. On this occasion the Income-tax Officer found on examining the books that huge sums of money entered in the deposit register had not been transferred to the interest account. He had to find out what was the interest on the loans actually realized by the assessee in the year 1331 Fasli. He could not rely upon the entries made in the interest account and he had to find out the actual amount realized on account of interest in the year under consideration. He found that large sums had been kept in the suspense account to the detriment of revenue. He, therefore, in that year found to the best of his ability what ought to be considered to be receipt on account of interest and he accordingly made his assessment on the sum which he considered ought to be taken as received on account of interest. In the year under consideration in the present reference the assessee produced his deposit register as well as his loan register in which the interests were entered.

43. The system of accounting kept by the assessee was not the cash system as it is generally known: it was a peculiar system in which the actual realizations in the year were noted and the sums received were kept in suspense for a number of years. The Income-tax Department was bound under S. 13 of the Act to compute the income, profits and gain of the assessee in accordance with the method of accounting regularly employed by the assessee, but if the method employed is such that in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom the law authorizes him to make a computation upon such basis and in such manner as the Income-tax Officer may determine. In the present case, having regard to the findings arrived at by the Commissioner, the Income-tax Officer was justified in adopting the method that he did in order to find out the actual income, profits and gains of the assessee on account of money-lending business.

44. As regards the first item, viz., the debt due from Damodas Das the facts found are these: A large sum of money was due from Damodar Das on the foot of two decrees and Damodar Das had been making payments to the assessee over a number of years. All these payments were entered by the assessee in the deposit register and nothing had been transferred to the interest account. In the year 1332 two sums of Rs. 3,400 and Rs. 2,78,000 were paid by Damodar Das to the assessee. The assessee wants to treat the first payment of Rs. 3,400 as interest and out of the second sum of Rs. 2,78,000 he claims that only Rs. 18,816 was on account of interest and the balance on account of the capital. The Commissioner has found that the total amount of interest which has accrued to the assessee on account of this debt up to the end of the year 1332 is Rs. 3,09,281. Out of this sum only Rs. 38,091, which was the amount received in the year 1331, was assessed to income-tax in that year. The Income-tax Officer has given a credit for this sum of Rs. 38,091 and has held that as the payment in the year 1332 exceeded the balance of the total interest, tax should be assessed upon the whole of the balance of the interest. The question is whether the Income-tax Officer was justified in doing so. The objection on the part of the assessee is that by adopting the method which has been adopted by the Income-tax Department they have assessed tax on the income received not only in the prior to that. Having regard to the facts found, I am of opinion that the Income-tax Officer was justified in assessing tax upon the entire amount of interest found due. It is clear from the method of accounting adopted by the assessee that no appropriation was made by the assessee on account of interest in the previous years and the whole of the amounts received was kept by him in suspense account. A creditor ??? entitled to keep the amounts received by him from his debtor in suspense and in case the creditor bona fide keeps the amount in suspense he is entitled to say that he is not liable to assessment so long as the appropriation has not been made and the account has not been settled but if it is found that the suspense account is not kept bona fide the Income-tax Department would be entitled to find for themselves what was the amount received on account of interest. I am of opinion that the method adopted by the Income-tax Officer was correct and the assessment on this head was according to law.

45. The second item is the transaction with one Amar Nath Bose. It appears that in 1332 Fasli he made a payment to the assessee of the sum of Rs. 1,38,955. Out of this sum the assessee in that year transferred a sum of Rs. 20,000 to the interest account and the balance was kept in the deposit account. In the interest account of this year the total amount shown against this debtor is Rs. 1,60,107 made up of the sum of Rs. 20,000, which he had transferred to the interest account in 1332 out of the payment of Rs. 1,38,955, and of Rs. 1,40,107, which represented a transfer from the deposit account of the years prior to 1332. The Income-tax Officer has charged to tax in the year 1332 the entire amount of Rs. 1,60,107, less a sum of Rs. 80,000, which was taxed in the preceding year 1331. The question propounded is. What is the amount of profits and gain arising out of the payments made by this judgment-debtor legally taxable in this year? The objection of the assessee is that the sum of Rs. 1,40,107, cannot be taxed in the year under consideration inasmuch as this was a payment in the years prior to 1332. He contends that the Income-tax Officer in making the assessment upon the income of the year 1331 had, assessed tax only upon the sum of Ss. 80,000 and by doing so had exempted the balance from tax and, as the balance had thus escaped taxation, it could not be taxed in the year under consideration.

46. Now, it is clear that having regard to the method adopted in making the assessment on the income of the year 1331, there was no exclusion of any amount received as interest. In that year the Income-tax Officer proceeded on the actual receipt of the year 1331. He did not come to any finding as regards the income received in the years prior to 1331. When the interest account was produced before the Income-tax Officer during the present assessment it was discovered that the sum of Rs. 1,40,107 was appropriated by the assessee on account of interest in that year. The reason why this sum was shown in the interest account of this year appears to be that the assessee wanted to change his system of accounting from the cash system into the mercantile system. He made an application to the Income-tax Officer to allow him to change his system of accounting. The Income-tax Officer very properly stated that he wanted to satisfy himself that by this change of system there would be no detriment to the revenue. After certain proceedings the assessee withdrew his application to change his system of accounting, but he had already made entries in the interest account on the mercantile system and this showed the sum of Rs. 1,40,107 as interest realized by him on account of the debt in question. It is clear having regard to the facts found that there was no exclusion by the Income-tax Officer of any sum in the assessment for the income of the year 1331 and that, therefore, the Income-tax Officer was justified in taking into account the sum of Rs. 1,40,107, on account of interest in making the assessment of the transaction in question; and the assessment is legal and justifiable.

47. Item 3 relates to a sum of Rs. 12,835, out of a sum of Rs. 25,670, received by the assessee from Col. Lewellyn. The assessee wanted to treat the whole of this amount as realization of principal and, therefore, exempt from taxation. The Income-tax Officer has taken half of this sum as representing interest. The question is whether he was justified in doing so. The learned Commissioner is of opinion that as the assessee had completely failed to prove that the whole or any part of the payment represented payment of capital, and the onus thereof was upon him, the assessing officer acted reasonably and the best of his judgment in treating half the amount received as interest. I am of opinion that the view taken by the Commissioner is correct.

48. Item 4 relates to mortgage execution sales. It appears that the assessee sometimes purchased properties in execution of mortgage decrees. In the year under consideration the assessee admitted the sum of Rs. 4,364 as receipt under this head. The Income-tax Officer was not satisfied that this was the only sum received by him in the year under assessment and he added a sum of Rs. 1,00,000, to this sum and assessed the tax upon the sum of Rs. 1,04,364. Having regard to the facts set out by the Commissioner, the Income-tax Officer appears to be justified in doing so. It is contended that this is a pure guess not based upon any evidence, and the Income-tax Officer was bound to proceed upon some evidence in making the assessment. No doubt it is a guess; but under the circumstances set out in the referring order of the Commissioner, I am of opinion that it was for the Income-tax Officer to make the assessment to the best of his ability and it is not open to us upon this reference to say that he was not justified in doing so.

49. Item 5 is the transaction of Kumar Ganesh Singh Kumar Ganesh Singh was a member of a firm of brokers and it appears that a sum of Rs. 32,00,000, was due to the assessee from him for which there was no security. Kumar Ganesh Singh appears to have settled his account with the assessee in this way, he transferred to the assessee a colliery, shares in different companies, bills receivable by him, decrees held by him against third persons, and loans due to him from third persons, all of which were valued at a sum of Rs. 20,00,000 and odd. For the balance of the amount due from him on account of principal and interest, which latter sum was calculated at Rs. 6,09,571, Kumar Ganesh Singh gave handnotes to the assessee for the sum of Rs. 17,34,596. The total of the valuations of the colliery, of the shares, of the bills etc., transferred to the assessee and the sum of Rs. 17,34,596 for which hand-notes were given, came to Rs. 38,09,569. The Income-tax Officer treated the whole of this sum as payment by Kumar Ganesh Singh to the assessee. He, therefore, assessed tax upon the sum of Rs. 6,09,571 which was the amount of interest found to be payable by Kumar Ganesh Singh to the assesses. The question is whether this was justifiable under the law. The objection of the assessee is that this was not an income which accrued to him within the meaning of the law upon which tax could be assessed. It is argued on behalf of the department that, although the payment was not in cash, it was a payment of money's worth and the department was therefore justified in assessing the amount to tax. On behalf of the assessee reference was made in this connexion to the decision of this Court in Raja Raghunandan Prasad Singh v. The Commissioner of Income-tax known as the Monghyr Case. In that case it was held that interest on a mortgage cannot be said to accrue to the assessee as it falls due every year but it accrued within the meaning of Section 4 of the Income-tax Act, when it is actually received and that the words “income arising or accruing” are not equivalent to the words “debts arising or accruing” as to give them that meaning is to ignore the word “income” and there must be a “coming in” to specify the word income, and reliance was placed upon the decision in St. Lusia Usines and Estates Co. Ltd. v. Colonial Treasurer of St. Lucia (12). Having regard to the true nature of the transaction, I am of opinion that the Income-tax Department was not justified in assessing tax upon this transaction. The transaction was merely a substitution of one debt for another and there was no accrual of income in order to justify an assessment to tax. On examining the true nature of the transaction I find that no income accrued to the assessee which is liable to taxation.

50. I am aware that income need not necessarily be an income of cash but it may be in the nature of something other than cash; but in the present case there was no income as the sum of Rs. 17,00,000, and odd for which the handnotes were given were only an acknowledgment of a previous debt and not actual payment to the assessee. A further question is raised under this head as to whether the income, if any, was liable to assessment in the year 1332, or in the previous year. Having regard to the facts found by the Commissioner, I am inclined to hold that the income, if it accrued at all, accrued in the year 1332 and falls due every year and would be liable to assessment if it was treated as an income under the law. As regards item 6, it appears that a colliery known as the Kajora Colliery was transferred by Kumar Ganesh Singh to the assessee in settlement of his debt. The colliery was demised under a lease under which the lessee was bound to pay a minimum royalty of Rs. 1,422 per month to the superior landlord. In making the transfer to the assessee Kumar Ganesh Singh had represented that there were no arrears due and that the colliery was free from encumbrance. In going to take possession, however, the assessee discovered that a sum of Rs. 74,982 was due to the superior landlord on account of minimum royalty for the period prior to his taking possession of the colliery and he paid this sum to the superior landlord. The question is whether he is entitled to claim deduction for this payment. The Commissioner has found that the minimum royalty is an allowable deduction but the sum paid by the assessee on account of the arrears of the minimum royalty cannot be deducted as under the terms of the transfer the assessee would be entitled to recover the sum from Kumar Ganesh Singh. I am of opinion that the sum paid by the assessee on account of the arrears of royalty represented the sum which he was bound to pay in order to be able to work the colliery. It is contended on behalf of the Department that there is nothing to show that this sum was a charge upon the colliery and that it is possible that the sum was personally due from Kumar Ganesh Singh. Having regard to the usual terms of leases of this nature one is entitled to assume that the assessee was unable to work the colliery without payment of the arrears and that it was incumbent upon him to pay the arrears in order that he might continue working the colliery. If the assessee succeeds in realizing the sum from Kumar Ganesh Singh he would no doubt be liable to pay the tax thereupon, but so long as he is not able to realize the amount from Ganesh Singh he is justified in demanding a deduction on this amount. I am therefore of opinion that the assesses was not liable to taxation under this, item and I would answer the question accordingly.

51. As regards item 7, the assessee claims a sum of Rs. 78,000 on account of loss which he alleges he incurred in certain indigo concerns. The Commissioner has found that the assessee has failed to prove such loss. The accounts produced, by him are hopelessly unintelligible and it has been found impossible to discover from the accounts whether there has been any loss. The Commissioner, after hearing the appeal against the assessment made by the Income-tax Officer, asked for certain reports from the Income-tax Officer. Before the Income-tax Officer the assessee produced certain accounts. The Income-tax Officer, however, reported that he was still unable to find that there was any loss. On receipt of the report the Commissioner disposed of the appeal without hearing the assessee. It is contended that he was entitled to be heard before the appeal was finally disposed of. The Commissioner says that the assessee was fully heard on his appeal and that no fresh hearing was necessary. It is no doubt an elementary principle of law that no order should be passed against any party in a judicial proceeding without an opportunity being given to that party of being heard. In the present case, how-, ever, there were no fresh materials placed before the Commissioner, and the fact that he did not hear the assessee after receipt of the report is not a circumstance which would in any way affect the correctness of the decision of the Commissioner on appeal.

52. The last point as regards the jurisdiction need not be discussed at any length. It appears that in the present assessment the Commissioner acting under Section 5(4) of the Income-tax Act, made an order in writing directing that the powers conferred upon the Income-tax Officer and the Assistant Commissioner by or under the Act should be exercisable by the Assistant Commissioner and the Commissioner respectively, and accordingly the present assessment was made by the Assistant Commissioner acting as Income-tax Officer. The Assistant Commissioner acting as Income-tax Officer made the assessment at Patna and it appears that this was done with the consent of the assessee. The question now raised is, that he was not justified under the law in making the assessment at Patna but that he was bound under S. 64 of the Act to do so at Darbhanga. Having regard to the circumstances of the case I am of opinion that the contention raised by the assessee cannot be sustained. I accordingly agree with my Lord the Chief Justice and would answer each of the questions raised in the manner proposed by his Lordship.

D.D

53. Reference answered.