Mortgage by conditional sale prevails over sale form where repurchase terms and surrounding circumstances show continuing debt.

A single instrument that combines an ostensible sale with a condition for repurchase is to be treated as a mortgage by conditional sale unless the document and surrounding circumstances clearly show a contrary intention. Applying section 58(c) of the Transfer of Property Act, the court found that the deed's sale wording was outweighed by the embedded repurchase condition, its protection against transferees, the reference to additional surety, and the background of earlier mortgage dealings and an outstanding debt. The transaction was therefore characterised as a mortgage by conditional sale, and the remaining debt was held deductible as a bad debt under the Indian Income-tax Act, 1922.

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Issues: Whether the transaction evidenced by the instrument dated 24 February 1939 was a mortgage by conditional sale or a sale with a condition for repurchase, and whether the assessee was entitled to deduct the balance as a bad debt.

Analysis: The governing test under section 58(c) of the Transfer of Property Act is the real character of the transaction as gathered from the document and surrounding circumstances, with special weight given where an ostensible sale and a condition for repurchase are embodied in one instrument. The deed described the transfer as an absolute sale, but it also contained a lengthy repurchase condition, preserved the condition against transferees, referred to additional surety, and declared the remaining mortgaged property free from mortgage. The transaction followed earlier mortgage transactions and an outstanding debt, and the surrounding features outweighed the indicia of a simple sale.

Conclusion: The transaction was a mortgage by conditional sale. A debt remained outstanding after the 1939 instrument, and the assessee was entitled to treat the balance as a bad debt deductible under section 10(2)(xi) of the Indian Income-tax Act, 1922.

Ratio Decidendi: Where a single document embodies an ostensible sale and a condition for repurchase, the transaction is presumed to be a mortgage by conditional sale unless the document and surrounding circumstances clearly show a contrary intention.

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