V.G. Oak, C.J. - (1.) THE question for consideration in this income-tax reference is whether a certain transaction amounts to a mortgage by conditional sale or a sale with a condition for repurchase. Facts leading to the transaction in question are complicated. THE material facts are these: THE assessee is a Hindu undivided family, which was carrying on money-lending business for many years. On February 17, 1928, the assessee advanced a loan of Rs. 1,40,000 to Thakur Raghuraj Singh. THE loan was secured on a simple mortgage of six zamindari villages for a period of five years. On October 25, 1931, the assessee advanced another loan of Rs. 1,53,000 to the same party. This loan was secured by a simple mortgage covering fifteen villages included in the first mortgage. THE period of the second mortgage ended with the end of the first mortgage. THE debtor failed to pay the amounts due under the two mortgages. On April 25, 1933, the assessee filed a suit against Thakur Raghuraj Singh to recover the amounts outstanding under the two loans. On July 4, 1933, there was a compromise between the parties. THE suit was decreed in terms of the compromise. Under the compromise, the defendant was declared liable to pay a sum of Rs. 3,88,300 with future interest.
(2.) CLAUSE (2) of the compromise provided that the defendant must execute in favour of the plaintiff a sale deed in respect of eight villages, which would be selected by the plaintiff, and which would be sufficient to satisfy the decretal amount. The defendant-judgment-debtor failed to execute a sale deed as required by the compromise decree. The decree-holder, therefore, applied for execution. On February 24, 1939, the court executed a deed in favour of the assessee. The deed was described as a sale deed with respect to eight villages. The decree-holder was put in possession over the eight villages covered by the sale deed. The decree-holder took up the position that, in spite of the execution of the document dated February 24, 1939, the sum outstanding against the defendant in February, 1939, continued to be an outstanding debt in favour of the assessee. Zamindari was abolished in the State under the provisions of U. P. Act No. 1 of 1951. The eight villages in question vested in the State. The State Government paid the assessee a sum of Rs. 1,30,804-10-4 as compensation. For the relevant previous year corresponding to the assessment year 1955-56, the assessee entered the sum of Rs. 2,49,899 as a bad debt after setting off the sum of Rs. 1,30,804-10-4, received by the assessee as compensation for the eight villages.
(3.) WHEN the Income-tax Officer took up assessment for the year 1955-56, the assessee claimed deduction of this sum of Rs. 2,49,899 under Section 10(2)(xi) of the Indian Income-tax Act, 1922. The assessee's stand was that there was an outstanding debt in favour of the assessee even after the execution of the deed dated February 24,1939. A part of the debt was satisfied by way of receipt of compensation from the State Government. The balance of Rs. 2,49,899 was written as a bad debt. This position was disputed on behalf of the department. It was urged for the department that the transaction of February 24, 1939, was a sale in terms of the compromise decree. After execution of the sale in favour of the decree-holder there was no debt outstanding in favour of the assessee. Since there was no outstanding debt after 1939, there was no question of writing off any amount as bad debt during the previous year relevant to the assessment year 1955-56. The assessee's claim was rejected by the Income-tax Officer. The view taken by the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner. But the assessee succeeded before the Appellate Tribunal. The Tribunal accepted the assessee's case that the transaction dated February 24, 1939, was a mortgage by conditional sale. There remained a debt in favour of the assessee even after 1939. The assessee was entitled to set off the debt in due course as a bad debt. The Tribunal, therefore, agreed to make in the assessee's favour an allowance for the sum of Rs. 2,49,899 under Section 10(2)(xi) of the Act, At the instance of the, Commissioner of Income-tax, U.P., the Tribunal has referred the following question of law to this court: '' Whether, on the true interpretation of Section 58(c) of the Transfer of Property Act the transaction envisaged by the decree dated February 24, 1939, can be regarded as a mortgage by conditional sale so as to enable the assessee to deduct the bad debt of Rs. 2,49,899 under Section 10(2)(xi) of the Act?" ;