Nature of lumpsum receipt in satisfaction of Debt

January 02,2016
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Anish Thacker (Partner, Ernst & Young LLP)


As we bring the year 2015 to a close, let us look at a very interesting proposition, if a person receives a lump sum from a debtor without the debtor expressly stating as to whether it is towards principal or interest, what is the recipient of the sum to be taxed on? We are all aware that where tax and interest are due from a taxpayer and the taxpayer makes a lump sum payment, the department is specifically permitted to adjust the sum first towards interest and only the amount remaining if any, towards principal i.e. the tax amount. But does the same principle apply to a sum received by a creditor from a debtor?

The issue has been examined by a there judge bench of J.C. Shah, C.J, K.S. Hedge And A.N. Grover ,JJ, in CIT v T.S.P.L.R. Chidambaram Cheitas [1971] 80ITR 467. This case pertained to Assessment Year (A.Y.) 1944-45 so finality even in the good old days took years. Indeed, in this case the question was about taxability of an amount received by the taxpayers’ father but by the time the judgment was delivered by the Hon. Supreme Court, even the taxpayer (he Son) was no more.

 Relevant Facts

The taxpayer’s father, Palaniappa Chettiar, was a money lender. He made various advances to one N.S. Manandiar, who was a Pattayagar, a prominent landlord in the Coimbatore district.

The total principal advanced by Palaniappa to the Pattayagar was Rs 138,535 upto 6th July 1932. Interest on the same came to Rs. 1,34,965. On 6th July 1932, a further Rs 2,500 was advanced to the Pattayagar. For the amounts due from him the Pattayagar executed a mortgage of some of his property in favour of Palaniappa for a sum of Rs 2,76,000.


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