1969 (11) TMI 7 - HC - Income Tax

Whether a certain transaction amounts to a mortgage by conditional sale or a sale with a condition for repurchase - on the true interpretation of s. 58(c) of the Transfer of Property Act the transaction envisaged by the decree can be regarded as a mortgage by conditional sale so as to enable the assessee to deduct the bad debt u/s 10(2)(xi)

Summary

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.