1. The two questions on which we are asked to express our opinion have arisen in connexion with an assessment made in the year 1933-34 on the income of the assessee derived from business in paddy and rice, and in money lending and on income derived from properties assessed under Section 9, Income-tax Act, 11 of 1922, and from ground rents and dividends. There is also an item in the assessment which is described as bustee lands. That was assessed under Section 12, Income-tax Act of 1922. The assessee is a Hindu undivided family governed by the Dayabhaga School of Hindu law; at some date long anterior to the date of the assessment that family had taken a loan from Raja Janki Nath Roy on the security of 1937 C/47 & 48 part of the house property, bustee land, and share in an agricultural estate, certain holdings in stocks and shares and the stock-in-trade of in the paddy and rice business. On a subsequent date the family had borrowed money from the Bhowanipur Banking Corporation Ltd., on the same security at a rate of interest of 9 per cent. Some time after that, certain members of the Hindu undivided family which constitutes the assessee-these members having a twelve annas interest in the family property-executed a third mortgage in favour of the Khulna Loan Company giving as security their share in five separate house properties at that time not subject to any mortgage. As the learned Commissioner of Income-tax points out it should be noted that only 12 annas interest in these properties was mortgaged and the other sharer, the four annas sharer did not come in at all as he raised his share of the amount necessary to meet their creditors from his own individual property or that of his wife's family.
2. In the year of accounting the amount paid or payable on account of the first two of the mortgages I have mentioned by way of interest was the sum of Rs. 42,917 and the amount of interest paid or payable in respect of the third mortgage was Rupees 7,236. In the assessment the amount of interest of Rs. 7,236 in respect of the third mortgage has been disallowed altogether, that is to say, the Income-tax Officer has declined to allow it to be treated as a deduction. The sum of Rs. 42,917 being the amount of interest on the first two mortgages has been allocated to the respective properties mortgaged, Rs. 7,716 being allocated to the bustee lands and this amount has not been allowed as a deduction because the income derived from the bustee lands has been assessed under the head 'other sources', that is to say under the provisions of Section 12, Income-tax Act. The Income-tax Officer took the view that section does not admit of any such allowance. Certain questions were formulated by the assessee for reference to this Court. They were in extremely general terms and, as the learned Commissioner of Income-tax himself has said, they do not appear to be happily worded and accordingly he declined to refer them to this Court in their original form. He substituted in their place two other questions which are the questions we have to answer. They are these:
(1) When the assessee is a Hindu undivided family and is being assessed in respect of income under the head 'property' under Section 9, Income-tax Act, whether the word 'mortgage' in Section 9(1)(iv) refers to a mortgage by the Hindu undivided family as such or whether it includes also a mortgage of his share only of such property by any individual member thereof for his own purposes? (2) Whether in an assessment under Section 12 for bustee lands the income is to be computed after deducting from the gross realizations, any interest on mortgage of such properties, such mortgage having been made not for any purposes of the said properties but for raising a loan for some other purposes of the assessee.
3. In order to give answers to these two questions it is desirable to refer at the outset to two of the definitions which are contained in Section 2, Income-tax Act of 1922. Sub-s. 2 of Section 2 reads thus: ''Assessee' means a person by whom income-tax is payable'; and Sub-section 9 reads thus: ''Person' includes a Hindu undivided family'. In the previous Income-tax Act (of the year 1918) those two sub-sections were all contained in Sub-section 2 of Section 2 of that Act which accordingly read thus-'' Assessee' means a person by whom Income-tax is payable and includes a firm and a Hindu undivided family'. Although in the present Act 'assessee' in one place is defined as a person by whom income-tax is payable and in another place 'person' is stated to include a Hindu undivided family the effect is the same as that of the definition in the Act of 1918. Putting the two things together for our present purpose it comes to this: that the assessee with whom we are concerned is a Hindu undivided family. So much has been admitted by Mr. Sen appearing on behalf of the assessee.
4. Mr. Sen has argued as regards the first of the two questions we have to answer that by reason of the provisions in Section 9(1)(iv) the position in the present case is that the property is subject to a mortgage-the property which is the basis of the assessment under Section 9(1)-and that therefore the assessee is entitled to claim as a deduction the amount of interest which is payable in respect of the mortgage on a part of the property even though that mortgage was effected not by the undivided joint Hindu family as such but only by some of the co-sharers who constitute that undivided family. That contention seems to me to ignore the fact that the assessee is the undivided Hindu family, not the persons who compose that family but the family taken as a unit; in other words the undivided Hindu family is a single unit for the purpose of income-tax matters. In that view of the position, to say that merely because certain part of the property had been mortgaged or because persons having a 12 annas share in the family property executed a mortgage or mortgages and therefore interest payable in respect of those mortgages is a deductible allowance is to read into Section 9(1)(iv) words which are not there and to make the section read something like this: 'Where property or any part of the property was subject to a mortgage', &c.; I am clearly of opinion that Section 9(1)(iv) of the Act applies only when the property, that is to say, the property which constitutes the taxable property of the undivided Hindu family is subject to a mortgage. That is not the position here. The result is that as regards the first question we are bound to say that when the assessee as a Hindu undivided family is being assessed in respect of his income under the provisions of Section 9, Income-tax Act the word 'mortgage' in Section 9(1)(iv)| refers to a mortgage by the Hindu undivided family as such and does not also include a mortgage by any individual member or members of his or their shares' only of such property. As regards the second question Mr. Sen has conceded that the mortgages that were made in respect of the bustee lands were not such as would fall within the purview of Section 12(2), Income-tax Act. That sub-section says 'such income, profits and gains' that is to say income, profits and gains referred to in Sub-section (1)
shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessees.
5. It is obvious that the interest payable in respect of the mortgages on the bustee lands cannot by any stretch of language be accurately described as expenditure incurred solely for the purpose of earning the income which is derived by the joint Hindu family from the bustee lands. The learned Commissioner has pointed out in the statement of the case that the contention of the assessee was
that as soon as a property is mortgaged the realisations from that property no longer wholly belong to its owner, the mortgagor. According to his contention a portion of the rents and profits legally belongs to the mortgagee on account of interest and the balance, if any, alone belongs to the mortgagor.
6. The learned Commissioner has expressed the view that as a general proposition of law this contention is wholly untenable. With that expression of opinion I entirely agree. It is manifest that rents and profits or proportionate rents and profits derivable from the bustee lands were in no sense earmarked or allocated for the purpose of paying interest due in respect of the mortgages on those bustee lands. It was open to the mortgagor to discharge his liability for interest by using either part of the rents and profits derived from the mortgaged bustee lands or by using any other resources if he was so minded. There is nothing whatever to show that the interest payable in respect of the mortgages on the bustee lands was paid out of the rents and profits received by the mortgagor from those particular lands. It follows therefore that the answer to the second question must be this: that in an assessment under Section 12 of bustee lands the income is not to be computed after deducting the interest on the mortgages on such properties from the gross realizations in cases where mortgages have not been made for any purposes of the said properties but for raising a loan for some other purposes of the assessee. The Income-tax Department will get such costs of the reference as are allowed by the rules.
7. I agree.