1969 (11) TMI 7 - HC - Income Tax

Debt from 1939 transaction affirmed as mortgage. Bad debt deduction allowed under tax law. Assessee wins, costs awarded.

Commissioner of Income-Tax, Uttar Pradesh Versus Gulab Rai Govind Pd.

Commissioner of Income-Tax, Uttar Pradesh Versus Gulab Rai Govind Pd. - [1970] 76 ITR 354 Issues Involved:1. Whether the transaction dated February 24, 1939, amounts to a mortgage by conditional sale or a sale with a condition for repurchase.2. Whether the assessee can deduct the bad debt of Rs. 2,49,899 under section 10(2)(xi) of the Indian Income-tax Act, 1922.Issue-Wise Detailed Analysis:1. Nature of the Transaction:The primary issue is the characterization of the transaction dated February 24, 1939-whether it is a mortgage by conditional sale or a sale with a condition for repurchase.Relevant Facts:- The assessee, a Hindu undivided family, advanced loans to Thakur Raghuraj Singh in 1928 and 1931, secured by simple mortgages on zamindari villages.- The debtor failed to repay, leading to a suit and a compromise decree in 1933, which required the debtor to execute a sale deed for eight villages.- The sale deed was executed by the court in 1939, and the assessee claimed that the debt remained outstanding, writing off Rs. 2,49,899 as a bad debt after receiving compensation from the State.Legal Provisions and Precedents:- Section 58(c) of the Transfer of Property Act defines a mortgage by conditional sale.- Various precedents were cited, including:- Mst. Fatima Bibi v. Abdul Gaffar Khan: Held no mortgage by conditional sale was created when the sale consideration was the full value of the property.- Mathura Kurmi v. Jagdeo Singh: Stated that a document in the form of an ordinary conveyance with a covenant for repurchase could be a mortgage by conditional sale.- Manmohan Dass v. Shaikh Bahab Uddin: Emphasized determining the real intention of the parties.- Chunchun Jha v. Ebadat Ali: Clarified that if a transaction is embodied in one document and its terms are covered by Section 58(c), it must be taken as a mortgage by conditional sale unless expressly stated otherwise.Analysis:- The document dated February 24, 1939, provided for repurchase within 5 to 20 years, suggesting a mortgage.- The consideration was almost equal to the price of the villages, and the provision for reconveyance was binding on subsequent possessors.- The additional surety of village Kunmau and the direction that other properties would be free from mortgage indicated a mortgage by conditional sale.- The Supreme Court's decision in Chunchun Jha v. Ebadat Ali established a presumption of a mortgage by conditional sale when an ostensible sale and a condition for repurchase are in one document.Conclusion:The transaction dated February 24, 1939, was a mortgage by conditional sale. The Tribunal's conclusion that a debt remained outstanding in favor of the assessee was upheld.2. Deduction of Bad Debt:The secondary issue is whether the assessee can deduct the bad debt of Rs. 2,49,899 under section 10(2)(xi) of the Indian Income-tax Act, 1922.Relevant Facts:- The assessee claimed the deduction of the bad debt after setting off the compensation received from the State.- The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, but the Tribunal accepted it.Legal Provisions and Precedents:- Section 10(2)(xi) of the Indian Income-tax Act, 1922, allows for the deduction of bad debts.Analysis:- Since the transaction was a mortgage by conditional sale, a debt remained outstanding.- The Tribunal correctly allowed the deduction of the bad debt as the debt was still considered outstanding despite the execution of the sale deed.Conclusion:The Tribunal's decision to allow the deduction of Rs. 2,49,899 as a bad debt under section 10(2)(xi) was correct.Final Judgment:The court answered the question in the affirmative, in favor of the assessee. The Commissioner of Income-tax, U.P., was directed to pay the assessee Rs. 200 as costs of the reference.