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Commissioner of Income-tax Vs. Gulab Rai Govind Pd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 240 of 1964
Judge
Reported in[1970]76ITR354(All)
ActsIncome Tax Act, 1922 - Sections 10(2); Uttar Pradesh Zamindari Abolition Act
AppellantCommissioner of Income-tax
RespondentGulab Rai Govind Pd.
Appellant AdvocateShanti Bhushan, Adv. Genral and ;R.R. Misra, Adv.
Respondent AdvocateAshok Gupta and ;B.L. Gupta, Advs.
Excerpt:
.....pay the amounts due under the two mortgages. 3. the defendant-judgment-debtor failed to execute a sale deed as required by the compromise decree. 2,49,899 as a bad debt after setting off the sum of rs. 2,49,899 under section 10(2)(xi) of the indian income-tax act, 1922. the assessee's stand was that there was an outstanding debt in favour of the assessee even after the execution of the deed dated february 24,1939. a part of the debt was satisfied by way of receipt of compensation from the state government. 2,49,899 was written as a bad debt. since there was no outstanding debt after 1939, there was no question of writing off any amount as bad debt during the previous year relevant to the assessment year 1955-56. the assessee's claim was rejected by the income-tax officer. there remained..........clause (2) of the compromise provided that the defendant must execute in favour of the plaintiff a sale deed in respect of eight villages, which would be selected by the plaintiff, and which would be sufficient to satisfy the decretal amount.3. the defendant-judgment-debtor failed to execute a sale deed as required by the compromise decree. the decree-holder, therefore, applied for execution. on february 24, 1939, the court executed a deed in favour of the assessee. the deed was described as a sale deed with respect to eight villages. the decree-holder was put in possession over the eight villages covered by the sale deed.4. the decree-holder took up the position that, in spite of the execution of the document dated february 24, 1939, the sum outstanding against the defendant in.....
Judgment:

V.G. Oak, C.J.

1. The question for consideration in this income-tax reference is whether a certain transaction amounts to a mortgage by conditional sale or a sale with a condition for repurchase. Facts leading to the transaction in question are complicated. The material facts are these:

The assessee is a Hindu undivided family, which was carrying on money-lending business for many years. On February 17, 1928, the assessee advanced a loan of Rs. 1,40,000 to Thakur Raghuraj Singh. The loan was secured on a simple mortgage of six zamindari villages for a period of five years. On October 25, 1931, the assessee advanced another loan of Rs. 1,53,000 to the same party. This loan was secured by a simple mortgage covering fifteen villages included in the first mortgage. The period of the second mortgage ended with the end of the first mortgage. The debtor failed to pay the amounts due under the two mortgages. On April 25, 1933, the assessee filed a suit against Thakur Raghuraj Singh to recover the amounts outstanding under the two loans. On July 4, 1933, there was a compromise between the parties. The suit was decreed in terms of the compromise. Under the compromise, the defendant was declared liable to pay a sum of Rs. 3,88,300 with future interest.

2. Clause (2) of the compromise provided that the defendant must execute in favour of the plaintiff a sale deed in respect of eight villages, which would be selected by the plaintiff, and which would be sufficient to satisfy the decretal amount.

3. The defendant-judgment-debtor failed to execute a sale deed as required by the compromise decree. The decree-holder, therefore, applied for execution. On February 24, 1939, the court executed a deed in favour of the assessee. The deed was described as a sale deed with respect to eight villages. The decree-holder was put in possession over the eight villages covered by the sale deed.

4. The decree-holder took up the position that, in spite of the execution of the document dated February 24, 1939, the sum outstanding against the defendant in February, 1939, continued to be an outstanding debt in favour of the assessee. Zamindari was abolished in the State under the provisions of U. P. Act No. 1 of 1951. The eight villages in question vested in the State. The State Government paid the assessee a sum of Rs. 1,30,804-10-4 as compensation. For the relevant previous year corresponding to the assessment year 1955-56, the assessee entered the sum of Rs. 2,49,899 as a bad debt after setting off the sum of Rs. 1,30,804-10-4, received by the assessee as compensation for the eight villages.

5. When the Income-tax Officer took up assessment for the year 1955-56, the assessee claimed deduction of this sum of Rs. 2,49,899 under Section 10(2)(xi) of the Indian Income-tax Act, 1922. The assessee's stand was that there was an outstanding debt in favour of the assessee even after the execution of the deed dated February 24,1939. A part of the debt was satisfied by way of receipt of compensation from the State Government. The balance of Rs. 2,49,899 was written as a bad debt. This position was disputed on behalf of the department. It was urged for the department that thetransaction of February 24, 1939, was a sale in terms of the compromise decree. After execution of the sale in favour of the decree-holder there was no debt outstanding in favour of the assessee. Since there was no outstanding debt after 1939, there was no question of writing off any amount as bad debt during the previous year relevant to the assessment year 1955-56. The assessee's claim was rejected by the Income-tax Officer. The view taken by the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner. But the assessee succeeded before the Appellate Tribunal. The Tribunal accepted the assessee's case that the transaction dated February 24, 1939, was a mortgage by conditional sale. There remained a debt in favour of the assessee even after 1939. The assessee was entitled to set off the debt in due course as a bad debt. The Tribunal, therefore, agreed to make in the assessee's favour an allowance for the sum of Rs. 2,49,899 under Section 10(2)(xi) of the Act,

6. At the instance of the, Commissioner of Income-tax, U.P., the Tribunal has referred the following question of law to this court:

'' Whether, on the true interpretation of Section 58(c) of the Transfer of Property Act the transaction envisaged by the decree dated February 24, 1939, can be regarded as a mortgage by conditional sale so as to enable the assessee to deduct the bad debt of Rs. 2,49,899 under Section 10(2)(xi) of the Act?'

7. In this question the expression 'decree dated February 24, 1939' appears to have been used for the expression 'instrument dated February 24, 1939'.

8. Section 58, Transfer of Property Act, enumerates mortgages of different types. A mortgage by conditional sale has been described in Clause (c) of Section 58, Transfer of Property Act. Section 58(c), Transfer of Property Act, states:

'Where the mortgagor ostensibly sells the mortgaged property--..

on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee, a mortgagee by conditional sale:

Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.'

9. The proviso to Clause (c) of Section 58, Transfer of Property Act, was inserted by Act XX of 1929. Learned counsel for the parties cited cases decided before 1929 and after 1929 on the interpretation of Clause (c) of Section 58, Transfer of Property Act.

10. In Mst. Fatima Bibi v. Abdul Gaffar Khan, A.I.R. 1924 All. 743.the sale consideration was full value of the property conveyed. There was an agreement to reconveyin favour of one of the vendors. It was held that no mortgage by conditional sale was created.

11. In Mathura Kurmi v. Jagdeo Singh : AIR1927All321 Sulaiman J, observed on page 326 :

'It seems to me that if a document is in the form of an ordinary conveyance usually found in India and executed by the transferor only, and it contains a covenant for repurchase on payment of the consideration, the transaction would come exactly within the definition of a mortgage by conditional sale. In such cases, I would have the utmost difficulty in trying to take it out of the scope of Section 58.'

12. In Manmohan Dass v. Shaikh Bahab Uddin : AIR1957All740 it was held that whether a transaction evidenced by a document is an absolute sale with a condition for repurchase or is a mortgage by conditional sale, the court has to determine the real intention of the parties. Mere form in which the document-is couched is immaterial. Intention of the parties has to be gathered from the terms of the document itself.

13. In Mst. Qayumunnisa v. Rashidul Malik : AIR1952All200 , it was held that the intention of parties has to be gathered from the deed and surrounding circumstances.

14. In Debi Singh v. Jagdish Saran Singh : AIR1952All716 a Full Bench of this court had occasion to consider the effect of the proviso to Section 58(c), Transfer of Property Act. It was held by the Full Bench by a majority that if a deed effecting or purporting to effect a sale, after the amendment in Clause (c) of Section 58 of the Transfer of Property Act came into force, contains any one of the three conditions mentioned in that clause, it is in every case a deed of mortgage by conditional sale. Nasirullah Beg J. took a different view. He was of the view that where the transaction is embodied in one document, the transaction does not necessarily become a mortgage by conditional sale irrespective of the intention of the parties. In view of subsequent decisions of the Supreme Court, the proposition laid down by the majority in Debi Singh's case cannot be accepted as an accurate statement of law.

15. In Chunchun Jha v. Ebadat Ali : [1955]1SCR174 .it was observed on page 346 :

'If the words are express and clear, effect must be given to them and any extraneous enquiry into what was thought or intended is ruled out. The real question in such a case is not what the parties intended or meant but what is the legal effect of the words which they used. If, however, there is ambiguity in the language employed, then it is permissible to look to the surrounding circumstances to determine what was intended.'

16. It was further observed on page 348.:

'Now, as we have already said, once a transaction is embodied in one document and not two, and once its terms are covered by Section 58(c), then it must be taken to be a mortgage by conditional sale unless there are express words to indicate the contrary, or, in a case of ambiguity, the attendant circumstances necessarily lead to the opposite conclusion.'

17. In Bhaskar Waman Joshi v. Shrinarayan Rambilas Agarwal : [1960]2SCR117 their Lordships of the Supreme Court observed on page 304 :

'The question whether by the incorporation of such a condition a transaction ostensibly of sale may be regarded as a mortgage is one of intention of the parties to be gathered from the language of the deed interpreted in the light of the surrounding circumstances......What distinguishes the two transactions is the relationship of debtor and creditor and the transfer being a security for the debt. The form in which the deed is clothed is not decisive...The question in each case is one of determination of the real character of the transaction to be ascertained from the provisions of the deed viewed in the light of the surrounding circumstances. If the words are plain and unambiguous, they must, in the light of the evidence of surrounding circumstances, be given their true legal effect.'

18. The material provisions of the instrument dated February 24, 1939, may now be examined. The consideration mentioned in the deed was Rs. 4,03,976-4-11. The property conveyed consisted of eight villages. The price was noted against each village separately. The total price of the eight villages as noted in the deed was Rs, 4,03,949-2-0. The consideration mentioned in the deed was almost equal to the price of the eight villages noted in the document. The price of the eight villages appears to have been calculated in terms of Clause (6) of the compromise between the parties. Clause (6) of the compromise provided that the net income of Rs. 4-8-0 was to be deemed to be equivalent to the capital value of Rs, 100.

19. Clause (2) of the document dated February 24, 1939, is important. Clause (2) ran thus;

'That the sale deed is absolute in favour of the purchaser according to the above-mentioned decree but myself and my heirs and successors or any person to whom they may direct will be entitled to get the property back in the month of Jeth after 5 years or before another 15 years after payment of the fixed prices in the list attached with this document either in full or according to serials......Any person in whose possession theproperty will be found will be responsible for the above conditions and this condition is an important condition of the sale deed.'

20. Courts have laid down various tests for deciding whether a certain transaction amounts to a sale or a mortgage. One of the tests is existence of a debt. Another test is the period fixed for repayment. A short periodindicates a sale, whereas a long period suggests a mortgage. A price below the true value indicates a mortgage. A price equal to the market value suggests a sale. In the present case, the document dated February 24, 1939, provided for repurchase at any time between five years and 20 years.

21. The learned Advocate-General appearing for the department pointed out that the document dated February 24, 1939, was executed by the court in execution of a decree. It was urged for the department that, having taken so much trouble to recover the two loans advanced in 1928 and 1931, the plaintiff was not likely to be content with a mere mortgage of eight villages. It was pointed out that under the agreement dated October 25, 1931, as many as 15 villages had been mortgaged. It was, therefore, urged for the department that the decree-holder was not likely to accept a mortgage for 8 villages only. In this connection it may be pointed out that the agreement dated October 25, 1931, was for a simple mortgage covering fifteen villages. Under the transaction dated February 24, 1939, the transferee obtained actual possession over eight villages. It cannot, therefore, be said that on the footing that this was a mere mortgage, the transaction was necessarily unfavourable to the plaintiff-decree-holder.

22. Clause (2) of the document provides that the conditions of the transfer would be binding on every person in whose possession the property would be found. That means that the provision for reconveyance would be binding on a transferee from the assessee. It may be difficult to enforce such a condition on the footing that the transaction dated February 24, 1939, was a sale. There would be no difficulty in enforcing that provision, if the transaction constituted a mortgage. For, liability to redemption runs with the land.

23. Clause (3) of the document ran thus :

'I will be responsible for alt the conditions of the sale deed and as surety my whole village of Kunmau with all its hamlets situated in tehsil Sidhauli, Dist. Sitapur, will be under obligation and attachment.'

24. Village Kunmau was in addition to the eight villages specifically transferred by the instrument. The fact that village Kunmau was described as surety suggests that the other eight villages were also transferred by way of surety.

25. Clause (4) of the instrument ran thus :

'After the execution of this sale deed all my other property under the decree No. 27 of 1933 will be free from mortgage,'

26. We have seen that initially fifteen villages were under mortgage. By the instrument dated February 24, 1939, only eight villages were transferred. The direction in the document that the remaining property will be free from mortgage suggests that the eight villages in question were treated as under mortgage.

27. Clause (2) of the deed provided that the vendor might repurchase in full or according to serials. That meant piecemeal reconveyance. There is no difficulty in piecemeal reconveyance on the footing that the transfer dated February 24, 1939, stated a sale. Ordinarily, piecemeal redemption of mortgaged property is not permissible. But parties may agree to piecemeal redemption of mortgaged property. So, the fact that the document provided for piecemeal reconveyance does not throw much light on the question whether the instrument was a sale or mortgage by conditional sale.

28. The factors supporting the department's case that this was a sale are these : Firstly, the transaction was described as a sale deed. It was mentioned in Clause (2) that the sale deed was absolutely in favour of the purchaser. Secondly, the consideration mentioned in the deed was .almost equal to the price of the eight villages, as noted in the document. Thirdly, the instrument was executed under a compromise decree. That decree was passed in a suit brought by the assessee to recover two loans previously advanced by it.

29. The factors supporting the theory of mortgage by conditional sale are these ; Firstly, the term permitting reconveyance was fairly long (20 years). Secondly, there was a judgment-debt outstanding in favour of the assessee on the date the instrument was executed- Thirdly, there were two prior mortgages of the years 1928 and 1931. Fourthly, it was emphasised in the document that the provision for reconveyance would be binding on every person in whose possession the property could be found. Fifthly, village Kunmau was offered as additional surety. Sixthly, the ostensible sale and the condition for repurchase were contained in the same document.

30. According to the decision of the Supreme Court in Chunchun, Jha v. Ebadat Ali, whenever an ostensible sale and a condition for repurchase are contained in one document, there is a presumption that the transaction constitutes a mortgage by conditional sale. The department has not been able to rebut the presumption. On the contrary, the factors suggesting a mortagage by conditional sale outweigh the factors suggesting a sale with a condition for repurchase. There are no express words in the instrument to the effect that this was not a ;mortgage by conditional sale. The language of the document is not ambiguous. Under the circumstances, it must be held that the transaction amounted to a mortgage by conditional sale.

31. The Tribunal was right in holding that in spite of the transaction dated February 24, 1939, a debt remained outstanding in favour of the assessee. It was possible to write off the balance of the debt as a bad and doubtful debt. The question referred by the Tribunal has to be answered in the affirmative.

32. Our answer to the question referred to the court is in the affirmative, and in favour of the assessee. The Commissioner of Income-tax, U.P., shall pay the assessee Rs. 200 as costs of the reference.


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