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TMI Blog1929 (11) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of ascertaining the real nature of the transaction as stated in the judgment of the Privy Council delivered by Lord Macnaughten in the case of Abdulla Khan v. Basharat Hussain 17 Ind. Cas. 737 : 35 A. 48 : 40 I.A 31 : 17 C.W.N. 233 : 13 M.L.T. 182 : (1913) M.W.N. 131 : 17 C.L.J. 312 : 15 Bom.L.R. 432 : 25 M.L.J. 91 (P.C.) at page 56 Pages of 35 A.-[Ed.]: Their Lordships agree with the High Court in thinking that the mortgage and the lease were parts of one and the same transaction. But there is no inconsistency between the two instruments nor would there have been any inconsistency if the mortgage itself had contained a provision for granting a lease on the terms upon which the lease was actually granted. 3. It is contended on behalf of the assessee that although the documents must be considered as a single transaction yet they amount to usufructuary mortgage and it is contended on the strength of two earlier decisions to be hereinafter referred to that the income of a usufructuary mortgagee as such is agricultural income and exempt from tax. Indeed the question formulated for decision by this Court is: Whether in law the income received by a mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The annual interest on the said loan amounts to ₹ 10,533-12-0. In order to fetch an annual jama, equal to the said sum we give in mortgage to....the said mahajan the proprietary interest with all zemindari rights including the surface and sub-soil rights and irrigation and other rights in respect of and then follows a fresh repetition of the parcels. Then in para. 9 it is said: The said mortgagee has and shall have the right to appropriate the enhanced jama which may be derived from the mortgaged village through his labour and diligence. We the executants neither have nor shall have anything to do with it. 8. Paragraph 10 contains a covenant by the executants to pay the Government revenue on account of the mortgaged property and in the event of failure to pay the revenue if the property is sold by auction for arrears of revenue then the mortgagee is to have the right to realize the entire amount of the loan, principal with interest, after deduction of the sum already paid to him by selling by auction the mortgaged property and also by recovering it from them personally. In para. 11 there is a further covenant that in the event of the executants dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgaged property; nor is he to enjoy the usufruct of the property or to receive the rents from the property or to appropriate them in lieu of interest or in payment of the mortgage-money. It is equally clear that the mortgagor is to remain in possession of the mortgaged property and it is the mortgagor who is to pay the Government revenue. The mortgagee is to receive nothing but the specified rate of interest upon the loan. The nature of the transaction must be discovered from the documents and the documents alone. It has been suggested to us that the usufruct of the mortgaged property must have been valued at the provided rate of interest, that is to say, ₹ 10,533-12-0 but there is no evidence of this and, moreover, even if it were true it would not be material. The nature of the transaction is not that of a usufructuary mortgage but that of a simple mortgage and the two deeds constitute one single transaction. The whole of the transaction might have been expressed in a single mortgage-deed and the real and obvious reason for splitting it up into two documents is to enable the mahajan who is the assessee to put forward a specious claim to escape income-tax. Needless to sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o doubt the mortgage deed and the lease were executed at one and the same date and the cross references in the two documents indicate that the whole transaction was settled at one time. Nevertheless there are certain distinguishing features which make the position of the present usufructuary mortgagee quite distinct from what it would have been if he had taken a purely simple mortgage. He has under the lease the right to recover rent through the Revenue Court which very often is a speedy remedy. He has also the security of the fixed amounts being paid to him regularly year after year with the option of entering into possession on the default of such payment. If he enters into possession after the ejectment of the mortgagor he is entitled to cultivate lands himself or to let the lands to tenants and receive profits from them. Under these circumstances it seems impossible to hold that the position of the assessee is that of a purely simple mortgagee who is liable to pay income-tax. 14. It will be seen that the basis of the decision was that in the particular case in question the transaction did not amount to a purely simple mortgage. Ashworth, J. said at page 501 Page of 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of each block purchased, from the last date on which interest was paid to the vendor up to the date on which, he (the assessee) purchased these securities, and he claimed that this interest should be allowed as an admissible deduction from the interest drawn by him subsequently on these securities. It was argued before us on behalf of the assesses that in purchasing the securities he had paid a price which represented not only the capital represented by the securities but the dividends which would next fall due and, therefore, that that portion of the purchase price which represented the dividends went into the hands of the vendor and should be considered as the vendor's income. Now it has been held in England by Rowlatt, J., in the case of Wigmore v. Summerson Sons (1925) 9 Tax. Cas. 577 : 94 L.J.K.B. 836 : 69 S.J. 745 : 41 T.L.R. 568, that dividends do not accrue as interest from day to day but are receivable only on the day on which the holder of the security is entitled to draw them. Section 6(ii), Income Tax Act, taxes interest on securities. Section 8 states: The tax shall be payable by an assesses: under the head ' Interest on securities' in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank for this service should be allowed as an expense. There is, however, no provision in the Act for the deduction of such expenses and Section 10 provides for the deduction of expenses in respect of carrying on a business and Sections 11 and 12 deal with allowable deductions in the case of professional earnings and other sources. The matter is, moreover, concluded by the judgment of this Court in the case of Mahadeo Ashram Prasad v. Commissioner of Income Tax 100 Ind. Cas. 897 : 6 Pat. 29 : A.I.R. 1927 Pat 133 : 8 P.L.T.359. In my opinion the deduction under the head securities is not allowable. 21. The assessee has been unsuccessful on all the points raised by him and he must pay the costs of this reference. Hearing-fee ₹ 100. Das, J. 22. This is a case stated by the Commissioner of Income Tax. Bihar and Orissa, under Section 66 (3), Income Tax Act. The facts upon which the question of law arises are these : On 9th January, 1924, certain persons, who may be referred to as the Sahays, executed a usufructuary mortgage bond in favour of Balmiki Prasad Singh, the father of the assessees, to secure an advance of ₹ 1,06,000 and interest there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (in) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in Sub-clause (ii). 25. There is little doubt, therefore, that to claim exemption in this case the assessees must establish that the sum of ₹ 10,533-12- 0 received by them is agricultural income within the meaning of that term as defined in the Income Tax Act. It is impossible, therefore, for us to accept the broad contention which was advanced by Mr. Jayaswal to the effect that if the source from which the income arises is agricultural land, it is exempt from taxation. I have no doubt whatever that we have nothing to do with the determination of the question as to the source from which the income arises, except perhaps for determining whether the income is agricultural income or not. 26. It was then contended by Mr. Jayaswal. that the income in this case is agricultural income since it arises as the result of a usufructuary mortgage which entitled the assessees to retain possession of lands which were undoubtedly assessed to land revenue in British India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider the terms of the usufructuary mortgage-bond. I may mention that the bond appears to be in common form. It recites that ₹ 1,06,000 was being advanced by Balmiki Prasad Singh to the Sahays at an interest of 13 annas 3 pies per cent. per month. It stated that ₹ 10,533-12-0 would be the annual interest payable by the Sahays to Balmiki Prasad Singh and it provides that: In order to fetch an annual jama equal to the said sum, viz., ₹ 10,538-12-0....the proprietary interest with all zemindari rights, was being given in sudbharna to Balmiki Prasad Singh. It then provides that the mortgagee should appropriate: the income derived from nakdi and bhaoli holding, kamat land, khudkasht and bakasht lands....in lieu of interest. and it makes the position perfectly clear that the: right to appropriate the enhanced jama that may be derived from the sudbharna village should belong to the mortgagee. I have no doubt that, if there was nothing else in the transaction, it would be construed as an ordinary usufructuary mortgage under which the mortgagee has to enter upon possession, and appropriate the profits in satisfaction of the interest; and it might then be urged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes it perfectly clear that after paying the rent fixed as above whatever profit shall accrue from the katkena properties is and shall be the right of these katkenadars and their heirs and representatives up to the continuance of this katkena. 30. In other words (and this is a very material point) whereas if the usufructuary mortgage-bond stood alone the mortgagees would have been entitled to receive the whole of the profits from the mortgaged properties even if those profits exceeded the interest payable by the mortgagors; under the lease the mortgagees are entitled to the fixed payment of ₹ 10,533-12 per year which is the interest calculated on the sum advanced at ₹ 0-13 3 per cent per month, the excess profits going to the mortgagors. 31. Now this is the transaction, and the question is, is the transaction taken as a whole one of usufructuary mortgage? What is the position? Under the two documents which I have just described, the mortgagee does not enter upon possession of the mortgaged properties and is, therefore, not entitled to receive anything more than the yearly interest provided in the mortgage-bond. It is true that if there be default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the judgment with which I confess I am unable to agree. The leading judgment proceeds on the assumption that double taxation is against the policy of the Income Tax Act. What his Lordship had in view was the fact that the mortgagee under the terms of the mortgage-bond was liable to Government revenue and his Lordship thought that to hold that he is liable to both Government revenue and income-tax would be imposing a double taxation which is against the policy of the Act. 33. With great respect I am unable to agree with this view. I quite agree that there may be a presumption that the same tax should not be assessed twice on the same person; for instance in Carr v. Fowle (1893) 1 Q.B. 251 : 62 L.J.Q.B. 177 : 5 R. 163 : 68 L.T. 123 : 41 W.R. 365 : 57 J.P. 136 it was observed that the statute presumably did not intend that a vicar should in effect pay the same tax (land tax) twice on the same hereditament. As Rankin, J., (as he then was) points out in Probhat Chandra Barua v. Emperor 84 Ind. Cas. 31 : 51 C. 504 : A.I.R. 1924 Cal. 668 (at page 509 of 51 Cal.): This is plain enough. Thus the income-tax is one tax and income assessed under one schedule cannot be assessed al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly the amount of interest payable under the mortgage-bond and there is a specific provision that in the event of part payment of the principal amount the rent would be automatically reduced. In my judgment there is a clear distinction between rent and interest. Kent is the return from land for the use of one's land and signifies the sum payable in respect of the use of land. Interest is the return from money for the use of one's money and signifies the sum payable in respect of the use of money. Rent issues out of the land demised; whereas interest is revenue derived from the money lent. The problem for our consideration is whether the sum of ₹ 10,533-12 received by the assessees in the previous year was received by them by way of rent or by way of interest. Viewing the transaction as a whole, I have no doubt whatever that it was received by way of interest; and, in my judgment, the question propounded in the case must be answered in the affirmative. 37. There are two other questions, not as important as the one which I have just discussed but which nevertheless require our consideration. It appears that the assessees purchased certain Government securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on any security of the Government of India, or of a Local Government, or on debentures or other securities for money issued by or on behalf of a local authority or Company, and then follow certain provisos which need not be considered in this case. Now the interest, was undoubtedly receivable by the assessees; it has in fact been received by them. On what ground then can it be suggested that the income tax authority acted improperly in assessing tax on this sum of money? If I have understood Mr. Jayaswal correctly, he contends that the interest on these Government securities up to the date of the sales thereof was properly payable to the vendors of these securities and not to the assessees; and that to suit the convenience of all the parties the assessees paid the whole of the interest due to the vendors up to the dates of the sales as indeed he was bound to do, and subsequently recovered them from the proper authority. In my opinion the argument rests on a fundamental misconception as to the true position. The interest on Government securities does not accrue from day to day but accrues on certain specified dates. It did not, therefore, accrue to the vendors of these securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view clearly taken by the Legislature in this matter the simplest of reasons may be advanced, namely, that ordinarily no expense is incurred by a person in drawing his interest on securities. In my opinion the question must be answered in favour of the Income tax department. 41. As the assessees have failed on every point, they must pay the cost of this reference, hearing fee ₹ 100. Kulwant Sahay, J. 42. Three questions have been referred to us in this case under Section 66(3), Income Tax Act (1922). 43. The first question relates to the income derived by the assessee on account of the transaction of 9th January, 1924. It is contended on behalf of the assessee that the document of 9th January, 1924, executed by Deonath Sahay and others in favour of the assessee was a usufructuary mortgage and that the income derived by the assessee was agricultural income within the meaning of Section 2 (1), Income Tax Act, and, therefore, exempt from taxation under Section 4 (3) (viii). The real question for consideration, therefore, is whether the transaction amounted to a usufructuary mortgage and the income derived by the assessee was agricultural inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mortgaged property only after the mortgagee takes possession of the mortgaged property. I am of opinion that the income derived by the assessee in the year under consideration was interest and not agricultural income and was, therefore, liable to assessment. I would answer the first question referred to us to this limited extent. What the nature of the income would be if the mortgagee takes possession of the mortgaged property is a question which need not be considered at present and must be left open for consideration in future. The question whether the income derived by a usufructuary mortgagee is agricultural income and exempt from taxation or whether it is merely interest and liable to assessment is a question upon which I express no opinion. 44. The second question relate? to the interest drawn by the assessee upon certain Government securities purchased by him. I agree with my Lord, the Chief Justice, in the answer he proposes to give to this question. I desire, however, to point out that income-tax upon the securities in question was deducted at the time of the payment of interest under Section 18 of the Act. The assessee does not contend that he is entitled to a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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