Substance over form in shop receipts: usufructuary mortgage principles prevailed over lease characterization

Receipts from shop arrangements are determined by substance, not form, when deciding whether they arise from a lease or a usufructuary mortgage. A usufructuary mortgage involves delivery of possession to the mortgagee with authority to retain it and appropriate rents and profits towards the debt, while a lease transfers a right to enjoy property for rent or premium. Reading the deeds as a whole, the shop construction, continued possession for a fixed period, and application of usufruct to liquidation of the advance indicated mortgage-like arrangements. The absence of interest or an express redemption clause did not, by itself, convert the transaction into a lease.

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Issues: Whether the receipts from the shops were taxable as revenue income or were referable to a usufructuary mortgage arrangement and therefore not assessable as rent.

Analysis: The decisive inquiry was the true nature of the instruments. A usufructuary mortgage involves delivery of possession to the mortgagee with authority to retain it until repayment and to appropriate rents and profits towards interest or the mortgage money. A lease, by contrast, is a transfer of a right to enjoy property for a term in consideration of rent or premium. On a reading of the deeds as a whole, the arrangements contemplated construction of shops, continued possession for a fixed period, and appropriation of the usufruct towards liquidation of the amount advanced. The absence of interest or an express redemption clause did not, by itself, make the transaction a lease, and the earlier authorities supported treating such arrangements as mortgages where the substance showed liquidation of the debt from the usufruct.

Conclusion: The receipts were held to arise from mortgage-like arrangements and the assessee's challenge to their assessment as taxable income failed.

Ratio Decidendi: In determining whether an instrument is a lease or a usufructuary mortgage, the Court must look to the substance of the transaction and whether possession and usufruct are given for liquidation of a debt; a fixed term and the absence of express redemption or interest clauses do not necessarily convert a mortgage into a lease.

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