BANSIDHAR SEWBHAGOWAN & CO. VS COMMISSIONER OF INCOME-TAX
1998 P T D 2340
[222 I T R 16]
[Gauhati High Court (India)]
D.N Baruah and S.L. Saraf, JJ
BANSIDHAR SEWBHAGOWAN & CO.
versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.20 of 1987, decided on 19/06/1996.
(a) income-tax--
----Capital gains---Short and long-term capital gains---Difference between sale with condition to repurchase and mortgage by conditional sale-- Mortgage of land by conditional sale dated 23-8-1963---Assessee obtaining possession under Court decree dated 11-4-1970, on 20-9-1972---Parts of land sold on 25-3-1974 and 20-6-1974---Original transaction amounted to mortgage---Interest in land passed only on date of decree---Gains on sale of lands were short-term capital gains---Indian Income Tax Act, 1961, S.45.
(b) Income-tax--
----Capital of revenue expenditure---Tea company acquiring another tea estate---Expenditure on registration of sale-deed---Legal expenses---Capital expenditure ---Indian Income Tax Act, 1961, S.37.
(c) Income-tax--
----Advance tax---Return---Interest---Levy of interest under Ss. 139(8) & 217(1-A)--- Assessee need not be heard before interest is levied---Indian Income Tax Act, 1961 Ss. 139 & 217.
Before charging interest in the manner prescribed in sections 139(8) and 217(1-A) of the Income-Tax Act, 1961, it is not obligatory on the part of the Assessing Officer to give opportunity to the assessee of being heard.
There is a difference between mortgage by conditional sale and a sale with a condition of repurchase. In the case of mortgage by conditional sale, the mortgage subsists and even after the expiry of the time fixed for repayment, the mortgagor shall have the right to redeem the mortgage. But that is not so in the case of a mortgage with a condition to repurchase. The two things may resemble each other in form but they differ widely in their incidents. If the transaction is not a mortgage the right of repurchase being an option must be exercised according to the strict terms of the power and the time limited for that purpose must be precisely observed. But in the case of mortgage a failure to fulfil the strict terms of the agreement is not immediately followed by forfeiture of the property. The real point of difference between the two kinds of transactions is that in the case of a mortgage by conditional sale, the sale is only ostensible, whereas in the case of an out and out sale, it is real. The ostensible or real nature of the transaction, however, can be determined only by finding out the intention of the parties. The crucial test is the intention of the parties and this must be gathered from the language of the document itself together with the surrounding circumstances. In the case of a mortgage by conditional sale time is not the essence.
The assessee-firm carried on the business of tea plantation and sale of tea. At the material time, the assessee acquired a plot of land measuring 78-b. 2-k. 91 by a registered deed of mortgage by conditional sale dated August 23, 1963. The assessee received possession of the land on September 20, 1972, under a Court decree, dated April 11, 1970. Out of this land, a portion of land measuring 25-b. 1-k. 0-1 was sold on March 25, 1974, and June 20, 1974, which were relevant for the assessment year 1975-76. This sale resulted in a profit of Rs.4,248. The contention of the assessee before the Income-tax Officer was that the profit on sale of land was long-term capital gains as the land was acquired on August 23, 1963, the date of execution of the mortgage deed, but the Income-tax Officer rejected the claim of the assessee and treated the same as short-term capital gains on the ground that the land was acquired on April 11, 1970, the date on which the Court passed the decree. This was upheld by the Tribunal. On a reference:
Held, that by the deed of mortgage the mortgagors conveyed, assigned by way of mortgage by conditional sale all that lands described in the schedules annexed thereto, subject to the conditions mentioned therein. However, the mortgagors decided to retain possession of the properties. It was further provided that a sum of Rs.36,000 with interest thereon from the date of the agreement at 9 percent should be paid to the mortgagee on or before August 24, 1966, and in that event the properties mortgaged and assigned should be reconveyed to them. From the recitals in the deed it was clear that this was only a mortgage by conditional sale and the mortgagor had no intention to part with the property and convey right, title and interest of the property by way of transfer. Therefore, the mortgagor continued to be the owner of the property and it was only on the date of decree that the actual right, title and interest had been passed. The gains arising from the sale of lands were short-term capital gains.
The assessee-tea company acquired another tea estate, G, on the basis of an agreement, dated May 2, 1967, and possession of the said tea estate was taken over by the assessee on May 6, 1967, with retrospective effect from January 1, 1967, and the relevant assessment year was 1968-69. The sale-deed in respect of the said tea estate was executed on April 9, 1975 and it was registered on April 28, 1975, and the relevant assessment year was 1976-77. The assessee spent Rs.10,10,000 during the assessment year 1975-76, towards purchase of non judicial stamp paper for execution of the sale deed of the company, G. The assessee claimed that the expenditure of Rs.10,10,000 was incurred for the purpose of protecting or safeguarding the business interest and earning income therefrom, and therefore, this was a revenue expenditure. The Income-tax Officer rejected the claim of the assessee on the ground that the expenditure was of enduring benefit and, therefore, it was a capital expenditure. The Tribunal came to the conclusion that the expenditure incurred in connection with the execution of the sale deed was capital in nature and could not be allowed as a deduction, therefore, the Tribunal did not consider the question as to whether deduction was allowable in the assessment year 1975-76 or 1976-77. For the assessment year 1976-77, the assessee claimed deduction of legal expenses amounting to Rs.26,365. The Inspecting Assistant Commissioner of Income Tax (Assessment) disallowed the claim. On appeal, the Commissioner of Income-tax (Appeals) held that out of the amount claimed, a sum of Rs.8,041 was incurred for the purpose of registration of the sale-deed and the balance of Rs.18,324 was the expenses incurred for business. The Commissioner of Income-tax (Appeals) allowed a deduction of Rs.18,326 as revenue expenditure. The Tribunal, on further appeal, also disallowed deduction of Rs.8,041 as held by the Commissioner of Income-tax (Appeals). The Tribunal also disallowed the deduction of Rs.18,324 as capital expenditure. On a reference:
Held, (i) that the agreement of sale in India did not create any interest over the property except by way of charge. Therefore, the acquisition took place on the date of execution of the sale-deed though the assessee came to occupy the property on the strength of the agreement of sale, dated May 2, 1967. On May 6, 1967, the property remained with the erstwhile vendor. Therefore, the expenses spent for purchase of non judicial stamp paper for acquisition of the property were for an enduring benefit. The expenses of Rs.10,10,000 being the cost of non judicial stamp paper incurred for execution of the sale deed of the tea company, G, were capital expenditure.
(ii) That the amount of Rs.8,041 being the expenses incurred for registration of the sale deed was also a part of expenses towards acquisition of property and, therefore, this was a capital expenditure and not revenue expenditure.
(iii) That the amount of Rs.18,324 was also capital expenditure.
Alderson v. White (1958) 2 De Gex and J. 105; Balkishen Das v. W.F. Legge ILR 22 All. 149 (PC) and Govindaraju (S.) v. CIT (1982) 138 ITR 495 (Kar.) ref.
Dr. A.K. Saraf and K.K. Gupta for the Assessee.
G.K. Joshi and U. Bhuyan for the Commissioner.
JUDGMENT
D.N. BARUAH, J.---In this Income-tax reference under section 256(1) of the Income Tax Act, 1961, the following questions have been referred for opinion of this Court:
For the assessment year 1975-76:
"(1) Whether, on the facts and circumstances of the case, the Tribunal was in law justified in holding that the date of acquisition of land cannot be taken on the basis of mortgage deed, dated August 23, 1963, but has to be taken on the basis of Court decree, dated April 11, 1970?
(2) Whether, on the facts and circumstances of the case, the Tribunal was in law justified in holding that the legal expenses of Rs.10,10,000 being cost of non judicial stamp paper incurred for the execution of sale-deed of Galakey Tea Estate already acquired in the assessment year 1968-69 was capital expenditure?"
For the assessment year 1976-77:
"(1) Whether, on the facts and circumstances of the case, the Tribunal was in law justified in holding that the legal expenses Rs.8,041 being expenses for registration of sale-deed of Galakey Tea Estate already acquired in the assessment year 1968-69 was capital expenditure?
(2) Whether, on the facts and circumstances of the case, the Tribunal was in law justified in holding that legal expenses of Rs.18,324 was capital expenditure?"
The common question suggested by the Revenue is as under:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that before charging interest under sections 139(8) and '17(1-A) of the Income Tax Act, 1961, the assessee should be given opportunity of being heard although these sections do not provide for any hearing?"
The facts for the purpose of answering these questions may be narrated as follows:
This reference relates to the assessment years 1975-76 to 1980-81. The assessee is a firm carrying on business of tea plantation and sale of tea. At the material time, the assessee acquired a plot of land measuring 78-b. 2k. 91. from Kisturmall Dulichand by a registered deed of mortgage by conditional sale, dated August 23, 1963. The assessee received the possession of land on September 20, 1972, under a Court decree, dated April 11, 1970. Out of this land, a portion of land measuring 25-b. 4k. 0l. was sold on March 25, 1974, and June 20, 1974, which were relevant for the assessment year 1975-76. This sale resulted in a profit of Rs.4,248. The contention of the assessee before the Income-tax Officer was that the profit on sale of land was long-term capital gains as the land was acquired on August 23, 1963, the date of execution of the mortgage deed, but the Income-tax Officer rejected that claim of the assessee and treated the same as short-term capital gains on the ground that the land was acquired on April 11, 1970, the date on which the Court passed the decree. Being aggrieved, the assessee filed appeal before the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) accepted the claim of the assessee and held that the profit on sale of land was long-term capital gains. Yet another appeal was filed before the Tribunal, which held that the title of the assessee in respect of the said land as per mortgage deed, dated August 23, 1963, and it was perfected only by a Court decree, dated April 11, 1970, mid hence, the date of acquisition of land must be taken as April 11, 1970. In view of that the Tribunal reversed the finding of the Commissioner of Income-tax (Appeals) and confirmed the action of the Income-tax Officer in treating the sale of land as short-term capital gains.
The assessee which was a going tea company acquired another tea estate, known as "Galakey Tea Estate" from Assam Co. Ltd. on the basis of an agreement, dated May 2, 1967, and the possession of the said tea estate taken over by the assessee on May 6, 1967, with retrospective effect from January 1, 1967, and the relevant assessment year was 1968-69. The sale deed in respect of the said tea estate was executed on April 9, 1975, and it was registered on April 28, 1975, the relevant assessment year was 1976-77. The assessee spent Rs.10,10,000 during the assessment year 1975-76, towards purchase of non judicial stamp paper for execution of the sale-deed of the said Galakey Tea Estate. The assessee claimed that the expenditure of Rs.10,10,000 was incurred for the purpose of protecting or safeguarding the business interest and earning income therefrom, therefore, this was revenue expenditure. The Income-tax Officer rejected the claim of the assessee on the ground that the expenditure was of enduring benefit and, therefore, it was a capital expenditure. He held that the expenditure did not relate to the financial year 1974, relevant for the assessment year 1975-76. The Commissioner of Income-tax (Appeals) also upheld the action of the Income tax Officer. On appeal by the assessee, the Tribunal also held that the acquisition was completed only after execution and registration of the sale deed and its was only then the assessee acquired title to the property. Therefore, to the opinion of the Tribunal, the expenditure was not incurred to protect or safeguard the business interest, but to acquire a capital asset or benefit of an enduring nature. The Tribunal came to the conclusion that the expenditure incurred in connection with the execution of the sale-deed was capital in nature and cannot be allowed as a deduction, therefore, the Tribunal did not consider the question as to whether deduction was allowable in the assessment year 1975-76 or 1976-77.
For the assessment year 1976-77, the assessee claimed deduction of legal expenses amounting to Rs.26,365. The Inspecting Assistant Commissioner of Income-tax (Assessment) disallowed the claim. On appeal before the Commissioner of Income-tax (Appeals), he held that out of the amount claimed, a sum of Rs.8,041 was incurred for the purpose of registration of sale deed and the balance of Rs.18,324 was the expenses incurred for business. The Commissioner of Income-tax (Appeals) allowed a deduction of Rs.18,326 as revenue expenditure. The Tribunal, on further appeal, also disallowed deduction of Rs.8,041 as held by the Commissioner of Income-tax (Appeals). The Tribunal also disallowed the deduction of Rs.18,324 as capital expenditure, which was allowed by the Commissioner of Income-tax (Appeals), holding that it was connected with registration of the deed. The assessee objected to the charging of interest under sections 139(8) and 217(1-A) before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) upheld the action of the Income-tax Officer in charging the interest. On appeal before the Income taxAppellate Tribunal, the Tribunal sent back the matter to the Commissioner of Income-tax (Appeals) for giving fresh decision following the decision in S. Govindaraj v. CIT (1982) 138 ITR 495 (Kar.).
We heard Dr. A.K. Saraf, learned counsel on behalf of the assessee, and Mr. G. K. Joshi, learned standing counsel on behalf of the Revenue.
The contention of the Revenue so far as question No. l is concerned was that the clauses of the deed of mortgage by conditional sale would show that there was no intention of transferring the ownership of the land in favour of the mortgagee. Even the possession of the land was not parted with by the mortgagor. It remained with the mortgagor. Possession was acquired by the mortgagee on the basis of the Court decree, dated April 11, 1970, therefore, the date of acquisition of land cannot be said to be taken on the basis of the mortgage deed, dated August 23, 1963. On the other hand, the assessee submitted that the date of mortgage should be taken as the date of acquisition of the property.
In answering question No. 1, it is to be seen from which date the right, title and interest stood transferred to the transferee. Before we proceed further, it is necessary for us to look into the document, i.e., the deed of mortgage by conditional sale. This deed of mortgage has not been incorporated in the paper book, however, counsel for the parties submitted a copy of the said deed and both sides confirm that this was a copy of the original deed of mortgage, dated August 23, 1963, executed by and between Banshidhar Shewbhagowan & Co.; the assessee-firm, and Sri Dulichand Kejriwal, karta of the Hindu Mitakshara Joint family. In the said deed, it has been recited as such:
"The mortgagors hereto hereby convey, assign by way of mortgage by conditional sale all that lands described in the Schedules 1, 2, 3, 4, 5, 6, 7, 8 and 9 annexed herewith with all houses, buildings, structures, trees, bushes, tanks, etc., standing thereon to hold unto and to the use of the said mortgagee from the date of these presents subject to the conditions, however, that the mortgagors shall retain possession of the properties hereby mortgaged provided always and it is hereby declared that if the said sum of Rs.36,000 (rupees thirty-six thousand) only with interest thereon from the date hereof at the rate of nine percent per annum shall be paid to the mortgagees on or before the 24th day of August, of the year one thousand nine hundred sixty-six, the properties hereby mortgaged and assigned, shall be at the request and cost of the mortgagors, their heirs, assigns, administrators and executors and the coparceners of the Hindu joint family of Kisturmall Dullichand shall be reconveyed to them: And the said mortgagor No.1---Shri Dulichand Kejriwal as karta of the said joint Hindu family of Kistumall Dulchand for himself and all other coparceners---thereof and mortgagor No.2-- Shri Makhanlal Kejriwal as coparcener of the said family further covenants with the mortgagee to pay to the mortgagee on the 24th day of August, 1966, the sum of Rs.36,000 (rupees thirty-six thousand) only with the interest accruing thereon at the stipulated rate of nine percent. per annum from the date hereof and if and so long as the principal sum of Rs.36,000 (rupees thirty-six thousand) or any part thereof shall remain unpaid to pay interest thereon or so much thereof as shall for the time be owing at the rate aforesaid."
From the aforesaid recital in the deed it is to be seen as to what is the nature of the mortgage. As per the deed the possession would remain with the mortgagor. The essential characteristics of a simple mortgage are-- (1) personal obligation, expressed or implied, to pay the mortgage money; (2) power, expressed or implied, to cause the property to be sold through the intervention of the Court in the event of non-payment. In case of simple mortgage, the property shall remain with the mortgagor. In mortgage by conditional sale, the mortgagor ostensibly sells the mortgaged property on condition: (a) that the sale shall become absolute on default of payment of the mortgage money on a certain date; or (b) that the sale shall become void on such payment being made; or (c) that the buyer shall transfer the property to the seller on such payment being made. Thus, the essential characteristics of a mortgage by conditional sale and a sale with a condition of repurchase. In the case of a mortgage by conditional sale, the mortgage subsists and even after the expiry of the time fixed for repayment, the mortgagor shall have the right to redeem the mortgage. But that is not so in the case of a mortgage with a condition to repurchase. The two things may resemble each other ill form but they differ widely in theory incidents. If the transaction is not a mortgage the right of repurchase being an option must be exercised according to the strict terms of the power and the time limited for that purpose must be precisely observed. But in the case of a mortgage a failure to fulfil the strict terms of the agreement is not immediately followed by forfeiture of the property. Where under an agreement an option to a vendor is reserved for repurchasing the property sold by him the option is in the nature of a concession or privilege and may be exercised on strict fulfilment of the conditions on the fulfilment of which it is made exercisable. If the vendor fails to act strictly according to the terms of the contracts, the Court has no power to afford relief against the forfeiture arising as a result of breach of such terms. The real point of difference between the two kinds of transactions is that in the case of a mortgage by conditional sale, the sale is only ostensible, whereas in the case of an out and out sale, it is real. The ostensible or real nature of the transaction, whoever, can be only determined by finding out the intention of the parties. The crucial test is the intention of the parties and this must be gathered from the, language of the documentitself together with the surrounding circumstances. The Privy Council held in Balkishen Das v. W.F. Legge (1899) ILR 22 All. 149 (PC) that it was open to Court to allow any 0extraneous evidence in order to find out the intention of the parties. In practice, however, those transactions gave rise to a great deal of litigations and Court were compelled to enumerate and consider all the various criteria which had been laid down for the purpose of determining whether a transaction was a mortgage or an out and out sale. The proviso to section 58(c) lays down a statutory test by which the intention is to be gathered. The effect of the addition of this proviso is that no transaction should be deemed to be a mortgage by conditional sale unless the condition is embodied in the document which operates or purports to effect a sale. In Alderson v. White (1858) 2 De Gex and J. 105, Lord Chancellor Cranworth said that prima facie an absolute conveyance containing nothing to show that the relation of debtor and creditor was to exist between the parties did not cease to be an absolute conveyance and became a mortgage merely because the vendor stipulated that he should have a right of repurchase. In a mortgage by conditional sale, there is a sale with a condition of repurchase.
It is to be seen from the intention of the parties incorporated in the deed itself if from reading of the deed it appears that the relationship of creditor and debtor still subsists, it shall be a mortgage by conditional sale and the right, title and interest over the property shall remain with the mortgagor. Only a limited interest of mortgagee shall stand transferred. But if the deed indicates that it is out and out a sale with a condition to repurchase then in that case it will be a case of sale with an option to repurchase. In case of a mortgage by conditional sale the time is not the essence. Even in default in making payment at the stipulated time the mortgagor shall have the right to redeem the mortgage after the expiry of the stipulated time. In the case of sale with a condition to repurchase that may not be possible. Looking to deed it appears that it is only a mortgage.
In the instant case by the deed of mortgage the mortgagors conveyed, assigned by way of mortgage by conditional sale all that lands described in the schedules annexed thereto, subject to the conditions mentioned therein, however, the mortgagors decided xo retain possession of the properties. It was further provided that if a sum of Rs.36,000 with interest thereon from the date of the agreement at nine percent should be paid to the mortgagee on or before August 24, 1966, the properties mortgaged and assigned should be reconveyed to them. From the recital of the deed, in our opinion, this was only a mortgage by conditional sale and the mortgagor had no intention to part with the property and convey right, title and interest of the property by way of transfer. Therefore, the mortgagor continued to be the owner of the property and it was only on the date of decree the actual right, title and interest had been passed.
Question No.2 relates to the assessment years 1975-76 and 1976-77 for purchase of non-judicial stamp papers for execution of the sale-deed of Galakey Tea Estate. The assessee claimed Rs.10,10,000 and Rs.26,365 towards legal expenses, etc. According to the assessee, the Galakey Tea Estate was acquired from Assam Company. Ltd. in accordance with an agreement, dated May 2, 1967, and the possession of the estate was taken an May 6, 1967, with retrospective effect from January 1, 1967, relevant for the assessment year 1968-69. However, the said sale-deed was executed on April 9, 1975, and was registered on April 28, 1975, during the assessment year 1976-77. Before the Assessing Officer, the assessee claimed expenditure of Rs.1,12,152 as revenue expenditure. The Assessing Officer, however, was of the opinion that the expenses for sale-deed were part of the expenses for acquisition of capital assets, the expenditure is of an enduring benefit and was, therefore, a capital; expenditure. The Assessing Officer further opined that the expenses for the sale-deed was part of the expenses for acquisition of capital assets, therefore, it was a capital expenditure. The sale-deed was executed on April 9, 1975. Though the agreement was executed on May 2, 1967, the possession of the tea estate was given on May 6, 1967. The right title and interest was acquired actually on the date of the execution of the sale. It is a well-settled principle of law that an agreement of sale in India does not create any interest over the property except by way of charge. Therefore, the acquisition took place on the date of the execution of the sale deed though the assessee came to occupy the property on the strength of agreement of sale, dated May 2, 1967. On May 6, 1967, the property remained with the erstwhile vendor, therefore, the expenses spent for the purchase of non-judicial stamp paper definitely for acquisition of the property was an enduring benefit. In our opinion, it will be a capital expenditure and not revenue expenditure
For the assessment year 1976-77:
Question No. 1 relates to disallowance of Rs.8,041 claimed by the assessee in respect of registration expenses of the sale-deed. The sale-deed was executed on April 9, 1975. In our opinion, the amount of Rs.8,041 being the expenses incurred for registration of the sale-deed is also a part of expenses towards acquisition of property and, therefore, this is a capital expenditure and not revenue expenditure.
In view of our answering question No. 1, question No. 2 is also answered accordingly and we hold that the amount of Rs.18,324 is a capital expenditure.
As regards the common question suggested by the Revenue whether opportunity should be given to the assessee before charging interest under; sections 139(8) and 217(1-A) of the Act, we have gone through the relevant sections. Under subsection (8) of section 139 where the return under subsections (1), (2) and (4) for an assessment year is furnished after the specified date, or is not furnished, the assessee shall be liable to pay :simple interest at the rate of 15 percent per annum from the day immediately following the specified date to the date of the furnishing of the return, or, where no return has been furnished, the date of completion of the assessment under section 144. Similarly, .under section 217(1-A) also the Assessing Officer has the right to charge interest in the manner prescribed therein. Before charging interest in the manner prescribed in the said sections, in our opinion, it is not obligatory on the part of the Assessing Officer to give opportunity to the assessee.
For the foregoing reasons, we answer all the questions referred to above in the affirmative, i.e., in favour of the Revenue and against assessee.
A copy of this judgment under the signature of the Registrar and the seal of this High Court shall be transmitted to the Income-tax Appellate Tribunal. In the facts and circumstances of the case, we make no order as to costs.
S.L. SARAF, J.---I agree.
M.B.A./1506/FCReference answered.