Patna High Court
Pandit Lakshmi Kant Jha (Executor To The ... vs Commissioner Of Income-Tax on 20 July, 1977
Equivalent citations: [1980]124ITR470(PATNA)
JUDGMENT K.B.N. Singh, C.J.
1. This reference under Section 256(1) of the I.T. Act is by the Income-tax Appellate Tribunal, Patna Bench.
2. The late Maharajadhiraja Sir Kameshwar Singh, now represented through Pandit Lakshmi Kant Jha, executor, was the holder of an impartible estate called Darbhanga Raj. He was assessed as an individual, both in respect of his extensive zamindari properties as well as money-lending business. In the assessment year 1958-59, the corresponding accounting year ending with 31st March, 1958, a sum of Rs. 29,16,000 was claimed by Maharajadhiraja Sir Kameshwar Singh (hereinafter to be referred as " the assessee " for the sake of brevity) for allowance as bad debt in respect of money-lending business. This claim was disallowed by the ITO and the assessee's appeals on the point both before the AAC and the Income-tax Appellate Tribunal were unsuccessful. This question now falls for consideration in this reference.
3. Late Maharajadhiraja Sir Rameshwar Singh, father of the assessee, had advanced certain loans to Maharajkumar Gopal Saran Singh of Tekari in 1914 and 1915, for which the latter executed two mortgage deeds in favour of the former. Later on, two suits were filed by the Darbhanga Raj for recovery of the loans, and ultimately, a compromise decree was passed against Maharajkumar Gopal Saran Singh in mortgage Suit No. 25 of 1921 in the Court of the Subordinate Judge, Patna, on the basis of the two mortgage bonds of 1914 and 1915. A sum of Rs. 31,54,936 remained due out of the said decree.. The original creditor, Maharajadhiraja Sir Rameshwar Singh, died on 3rd July, 1929, and the present assessee, his eldest son, succeeded to his estate. In the year 1931 Raja Bahadur Harihar Prasad Singh of Amawan approached the assessee for the assignment of the mortgage decree in his favour for the consideration of the aforesaid decretal amount of Rs. 31,54,936 which offer was accepted by the assessee and a deed of assignment dated the 15th June, 1931, was executed. Out of the consideration, Rs. 1,04,936 was paid in cash and for the balance amount of Rs. 30,50,000 a zarpeshgi thika lease was executed by Raja Bahadur Harihar Prasad Singh of Amawan in respect of his Amawan properties in favour of the assessee. Some two months later, the wife of the said Raja Bahadur of Amawan, Rani Bhuwaneshwari Kuer, again approached the assessee for assignment of the said zarpeshgi thika lease to which the latter agreed and assigned the said zarpeshgi thika lease in her favour for a consideration of Rs. 30,50,000. Rani Bhuwaneshwari Kuer paid Rs. 50,000 in cash and for the balance of Rs. 30 lakhs odd she executed a zarpeshgi thika deed on the 15th August, 1931, in favour of the assessee in respect of some of the Tekari properties which she got from Maharajkumar Gopal Saran Singh of Tekari. This lease was for seventeen years and was to run up to 1355 Fasli. The said Rani again approached the assessee in 1935 to advance a further sum of Rs. 17,61,000 and in consideration thereof the assessee was to enjoy the rents and profits of the said villages of the mukarraridars for a further period of sufficient number of years to which proposal the assessee agreed on the condition that the unexpired term of the thika of the 15th August, 1931, was amalgamated with the terms of the thika lease that was going to be executed then. Accordingly, a fresh thika lease was executed on the 31st January, 1936, for an amalgamated amount of Rs. 47,61,000 for a period of twenty-eight years from 1936. The assessee remained in possession of the zarpeshgi thika properties and made collections therefrom and it is admitted that the collections made from these properties were neither offered nor subjected to income-tax. This position continued till the 8th June, 1952, on which date the properties comprised in the thika lease aforesaid vested in the State of Bihar under the provisions of the Bihar Land Reforms Act, 1950. The assessee thereafter brought a suit against the Rani of Amawan for recovery of Rs. 50,00,000 and obtained an ex parte decree in it for Rs. 47,61,000 which was later set aside. The assessee then filed a claim case under Section 14 of the Bihar Land Reforms Act before the Sub-Judge, Claim officer, Gaya, who held that Rs. 14,47,768 had been realised or was realisable by the assessee since after the vesting of the properties in the State and filing of the claim before the court, and that Rs. 32,58,231 was the balance payable--vide order dated 10th June, 1957. The assessee made enquiries from the Additional Collector, Gaya, as to the amount of compensation payable to the assessee in respect of the vested zarpeshgi properties. The assessee was informed by the Additional Collector, Gaya, by his letter dated August 18, 1959, that the compensation payable to the assessee in respect of the properties involved in the zarpeshgi thika deed was Rs. 3,42,996. The assessee on that basis claimed that the balance amount of Rs. 29,16,000 was an irrecoverable loan and a bad debt against income from money-lending business during the accounting period 1957-58 and so admissible under Section 10(2)(xv) of the Indian I.T. Act, 1922. This was disallowed by the ITO, the AAC and the Appellate Tribunal as already mentioned. At the instance of the assessee, however, the Tribunal by order dated the 20th June, 1970, referred five questions for the opinion of this court. It is not necessary to set out those questions as, in the course of the hearing of the case, with the con-
sent of the learned counsel for the parties, those questions were reduced to the following single question :
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not allowing the sum of Rs. 29,16,000 as revenue loss or admissible bad debts ? "
4. The findings recorded by the Tribunal have been summarised in the statement of the case, submitted to this court, which may be usefully reproduced here :
(1) The debt was originally a money-lending debt.
(2) The character of the debt as also of the debtor changed and, at the relevant time, it was merely an agricultural asset.
(3) The earlier history and the judicial proceeding showed that the income from the impounded property was agricultural income.
(4) The legal and logical conclusion therefrom would be that the asset was an agricultural asset.
(5) The loss was a loss of agricultural asset and was outside the pale of the Income-tax Act, and therefore, not admissible.
5. Dr. Debi Pal, learned counsel appearing on behalf of the assessee, has submitted that, relying on a decision of the Supreme Court in the case of this very assessee reported in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar [1959] 37 ITR 388 the Tribunal has committed a serious error in holding that the income from zarpeshgi thika lease was agricultural income and the property involved was agricultural property. Learned counsel has submitted that the decisions that income from zarpeshgi lease deed was agricultural income and the property concerned was agricultural property have been rendered on the basis of only two documents, namely, the two zarpeshgi thika deeds of the years 1931 and 1936, without taking into consideration the attending circumstances. The above reported decision is also sought to be distinguished on the ground that the question involved there was with regard to the liability of the assessee to pay agricultural income-tax and the income-tax department was not a party to that litigation. He has also submitted that decisions in matters of assessment are not res judicata in a proceeding for assessment in subsequent years. On the basis of five letters, preceding the execution of the zarpeshgi deed of 1936, and statement of loans advanced to the debtors from 1931 to 1951, which I shall discuss presently, learned counsel has urged that the property in question was really given as security against the loan advanced by the assessee and was income from money-lending business.
6. The first letter, referred to by learned counsel, is dated the 3rd September, 1935, written by Shri G. M. Mishra, manager, Darbhanga Raj, to Aditya Babu, manager of the estate of Rani Bhuwaneshwari Kuer. This letter relates to a proposal from Rani Bhuwaneshwari Kuer to have a further loan to be advanced to her. It is stated therein that if this proposal is accepted, the said loan is to be added to the portion of the zarpeshgi loan which yet remains unpaid by the Rani, with the result that the zarpeshgi bond will have to be recast and consolidated into a new bond for the entire loan. It is stated in that letter that for that purpose it is necessary to have an accurate accounting of the dues of the Rani which remained unpaid. It is further stated therein that in case the proposal is entertained, it would have to be examined whether it would be more advisable to have a sudbharna transaction in place of a sadhaua pataua bond, and the assessee would have to release a portion of the property and retain such part of it as would yield an income sufficient to liquidate the amount of interest. Dr. Pal has laid emphasis on the use of the expressions like " loan ", " dues ", " interest " in this letter as forming the background of the transaction resulting in the execution of the document executed in 1936. The next letter dated the 14th September, 1935, is from Rani Bhuwaneshwari Kuer to the assessee, making a request for a fresh loan of rupees 15 lakhs. It was also suggested therein that whatever amount remained unpaid after liquidation of the transaction under the zarpeshgi lease of the 15th August, 1931, the same might be added to the new loan requested to be advanced and for the two amalgamated loans a fresh document might be obtained from the Rani as security for the mukarrari properties in possession of the assessee. It was further stated that the nature of the fresh transaction might be either a sadhaua pataua one on the lines going on from before or a sudbharna transaction. It was further suggested that if the lease was to be a sudbharna one, the principal sum would remain intact, but the interest would be realised out of the rents and profits from such mukarrari properties as the assessee might choose. A request was also made therein for reducing the rate of interest from six per cent. to five per cent. The next letter dated the 16th October, 1935, from the manager of the Rani to the chief manager of the Darbhanga Raj is in continuation of the proposal made by the Rani by the letter dated the 14th September, 1935. The next letter is dated the 16th January, 1936, written by Raja Bahadur Harihar Prasad Singh, purporting to be on behalf of his wife, Rani Bhuwaneshwari Kuer, addressed to the assessee, asking for a fresh loan of Rs. 17,00,000 odd. It was stated therein that the new amalgamated transaction would be for a sum of Rs. 43,00,000, out of which a sum of Rs. 25,00,000 would carry interest at the rate of 6 per cent. and the rest being the fresh loan sought by Rani Bhuwaneshwari Kuer for a sum of Rs. 17,61,000, the rate of interest would be 5 per cent. till the repayment of Rs. 25 lakhs. A further request was made therein that the rate of income-tax might be allowed to stand at half as in the previous agreement. In consideration of this loan, the assessee was to enjoy the rents and profits out of the villages in possession of the mukarraridars for a further period of sufficient number of years. It was agreed that the unexpired term of the Tekari lease dated the 15th August, 1931, be amalgamated with the terms of this Tekari lease to be executed. The fresh lease was executed on the 31st January, 1936, for the amalgamated amount of loan to the tune of Rs. 47,61,000 for a period of 28 years, i.e., up to 1964, in place of the 1931 lease which was for a period of 17 years, i.e., up to 1948.
7. It is on the basis of these letters that Dr. Pal has submitted that the transactions evidenced by the two zarpeshgi deeds of lease were really security for the loans advanced by the assessee and that these letters are, therefore, relevant for culling out the true import of the two zarpeshgi deeds of 1931 and 1936. According to learned counsel, therefore, the decision of the Supreme Court, mentioned above, which was made without reference to these letters, cannot be held to be final adjudication as to the real import of the documents, specially when the question whether the income from the leasehold property being from land would fall within the definition of " agricultural income " was not seriously contested by the parties before the Supreme Court.
8. The controversy in the case before the Supreme Court was whether the holder of the zarpeshgi property was liable to pay agricultural income-tax or not. The contention of the present assessee before the Supreme Court was that it may be agricultural income, but in the hands of the assessee it was capital received in payment of the loan of Rs. 17 lakhs advanced to Rani Bhuwaneshwari Kuer. The State of Bihar, on the other hand, denied that there was any loan or mortgage at all. The State's contention was that the assessee was placed in possession of properties for a number of years on a rental of Rs. 1,000 a year and the amount paid was premium and not a loan. While considering these rival contentions the Supreme Court observed as follows (See [1959] 37 ITR 388, 396, 397) :
" The documents in question are two. They are plainly indentures of lease between the Rani and the assessee. From these documents it is clear that in consideration of a payment of Rs. 17,16,000 the lessee was placed in possession of the leasehold property for 28 years. There is no express term which makes the sum a loan returnable either by repayment or by the enjoyment of the usufruct. There is no interest fixed or right of redemption granted. There is no provision for any personal liability in case any amount remained outstanding at the end of the term of 28 years. These are the tests to apply to find out whether the transaction was one of zarpeshgi lease or a lease with a mortgage--See Mulla's Transfer of Property Act, 4th Edn., 352.
The learned counsel for the assessee in his careful argument took us through the two documents and endeavoured to prove that the relation of debtor and creditor subsisted between the parties. He referred us to Clause 4, which embodies a provision entitling the lessee to deduct 121/2 per cent. of the gross aggregate amount payable by the mukarraridars as expenses of collection and other charges incidental thereto, after payment of rent reserved to the ' lessor ' and to appropriate to himself the remainder. He submitted that the payment to the lessor was not a premium but a loan and the intention was that the lessee or creditor would be thus repaid.
The clause by itself may admit of diverse constructions, and possibly one such construction may be the one suggested, but that is not the true purport of the clause read in the context of the rest of the instrument. To interpret this clause the instrument must be read as a whole, and when so viewed, it is found that it provides for an exemption of the lessor from the liability for collection charges. It places beyond doubt that the collection charges were not to be debited to the lessor but were to be borne by the lessee. Unless such a provision was included in the instrument, it might have been a matter of some dispute as to who was to be responsible for this expenditure.
The learned counsel for the assessee next drew our attention to the last clause of the instrument of January 31, 1936. That, however, was a special covenant and the provision therein was in relation to matters not covered by the instrument.
That the income from this leasehold property which was land would fall within the definition of ' agricultural income ' was not seriously contested before us. The case of the assessee rests upon the claim that this was a money-lending transaction and the receipts represented a capital return. If, however, the payment to the lessor was premium and not a loan, the income, being agricultural from the leasehold properties was assessable under the Act. We are of the opinion that it was so, and that the Agricultural Income-tax Officer was right when he assessed it to agricultural income-tax. The income was not the income of money-lending, and this does not depend upon the character of the recipient. The thika profits were clearly agricultural income being actually derived from land. The answer to the question by the High Court was thus correct. "
9. It is thus apparent that the Supreme Court carefully considered the different clauses of the two documents and came to the conclusion that payment to the lessor was premium and not a loan and that the income derived from the leasehold property was not income from money-lending business but agricultural income. In the face of that it is very difficult for this court to hold that the interpretation put by the Supreme Court on the two documents was not the correct one. It is true that in the judgment of the Supreme Court there is, however, no mention of the letters referred to by Dr. Pal, but from that it does not necessarily follow that these letters were not on the record of the case before the Supreme Court. Nothing was shown to us in support of the contention that these letters were not on the record before their Lordships of the Supreme Court. In the order of the Tribunal, from which this reference arises, there is no mention, much less any discussion, about these letters. The contention on behalf of the department that these letters on which reliance is being placed in this court, were not on record before the Tribunal or at any rate were not relied upon before the Tribunal in appeal, is not without substance. Faced with this difficulty, Dr. Pal has submitted that although there is no mention of these letters in the order of the Tribunal, there are intrinsic pieces of evidence to show that these letters were filed or produced before the ITO and the Tribunal. He has laid emphasis on certain observations in the order of the ITO while dealing with the history of the zarpeshgi deeds to the following effect :
" No doubt, before such transaction was agreed upon, a calculation was made in regard to the net income expected to be realised from the property from year to year and the number of years that would be necessary for recouping the outstanding dues together with interest at a reasonable rate."
10. It is difficult to hold, on such stray observations, that the letters in question were produced before the ITO and relied upon before the Tribunal and the Tribunal committed an error in not referring to them at all, particularly when the Tribunal dealt with the matter in great detail. It will also be relevant to mention in this regard that although the grounds of appeal before the AAC and before the Income-tax Appellate Tribunal as also the reference application under Section 256(1) of the Act filed by the assessee are exhaustive, no grievance was made in any of them regarding the non-consideration of the five letters. This also shows that the letters in question were not filed before the authorities concerned.
11. Dr. Pal has also submitted that from the order of the AAC at paragraph 10, as also from the order of the claims officer at para. 5, it is apparent that the intention of the parties was that the loan was to bear interest till the satisfaction of the principal amount. He has also made a reference to one of the clauses in the zarpeshgi deed mentioning the necessity for the loan, where it is mentioned that the lessor was in need of a sum of Rs. 17,61,000 for meeting the pressing demands of the creditors, who are charging a heavy rate of interest, to show that the intention of the lessor was to take a loan bearing interest for which the zarpeshgi bond was executed. These submissions of Dr. Pal in this regard have been considered by the Tribunal while deciding the appeal. The Tribunal relied, in support of its finding, against the assessee on the question, on the decision of the Supreme Court already referred to, and its finding cannot be said to be erroneous. There is also substance in the contention of learned stand-
ing counsel for the department that the assessee cannot be allowed to take up new grounds based on fresh materials not urged before the Tribunal in the appeal--vide Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC).
12. Dr. Pal has submitted that under Section 66 of the Indian I.T. Act, 1922, an application for reference to the High Court has to be made in the prescribed form, and under Section 2(10) of the Act, "prescribed" means prescribed by the Indian I.T. Rules, 1922, made under this Act. Clause 6 of the relevant prescribed Form No. (R) T on which reliance has been placed by Dr. Pal, runs as follows :
" That the documents or copies thereof, as specified below (the translation in English of the documents, where necessary, is annexed) be forwarded to the High Court with the statement of the case. "
13. Dr. Pal has submitted that the letters and the statement of account in question having been duly forwarded to this court by the Tribunal, as has been mentioned in the application for reference, those documents must be deemed to have been properly placed before this court for consideration for the purpose of answering the question. It is settled law that this court is to give opinion on a question of law arising from the appellate order of the Tribunal. Mere forwarding of certain documents which the party concerned may choose to be forwarded to the High Court, but which were not relied upon before the Tribunal, will not change the legal position in this regard. The position would be different where the Tribunal committed an error of record in not referring to certain documents which were on the record and were relied upon by the party concerned. From the mere forwarding of these letters along with other documents (which were relied upon by the assessee) it does not necessarily follow that either these letters were before the Tribunal at the appellate stage or any argument on the basis of those documents was advanced before the Tribunal.
14. From the aforesaid discussion, it follows that the Tribunal cannot be said to have come to an erroneous conclusion that the income derived from the thika lease was agricultural income and not income from money-lending business and that the property in question was agricultural property.
15. Dr. Pal has alternatively submitted that even though the property in question was in the nature of agricultural land, its loss was admissible as a bad debt. It may be that the income from such property will be exempt from income-tax, in view of there being specific provision to that effect in the Indian I.T. Act, 1922, namely, Section 4(3)(viii), but from that it does not necessarily follow that its loss was not admissible. Learned counsel has submitted that the approach of the Tribunal on the question at issue was based on the assumption that the moment the property is found to yield agricultural income, the property from which it is derived will be agricultural property and the loss of the aforesaid property will be agricultural loss is wholly erroneous and untenable in law. The Privy Council and the Supreme Court decisions, relied upon by the Tribunal in this regard, merely emphasised that the exemption in the case of agricultural income is total. It was not held in those decisions that if the income derived is " agricultural income ", the property from which it is derived must be agricultural property. It is contended that the Privy Council and the Supreme Court did not lay down any principle to the effect that if agricultural property is given as security for loan the loss of agricultural property in the course of money-lending transactions will not be an admissible loss as bad debt. Dr. Pal is not right in his submission that the Tribunal assumed on the basis of the decisions of the Privy Council and the Supreme Court aforesaid, that the moment the income is found to be agricultural, the property will be held to be agricultural property. This is apparent from para. 17 of the order of the Tribunal, which runs as follows :
" The first question is whether the property was agricultural property. One of the arguments suggested was because the income was agricultural, therefore, the property must be held to be agricultural. Both the parties agree that there is no decided case on this aspect of the matter. It is, therefore, res integra, and, therefore, we shall examine this contention from first principles. "
16. In the decision of the Privy Council in the case of CIT v. Sir Kameshwar Singh [1935] 3 ITR 305, referred to in the order of the Tribunal, it was held by their Lordships of the Judicial Committee that agricultural income is excluded altogether from the scope of the Act howsoever or by whomsoever it is received and, even if in the course of the business of money-lending, one receives income on that account from agricultural land, the exemption conferred by the I.T. Act remains unaltered. In the words of Ashworth J. in Mukund Samp v. CIT [1928] ILR 50 All 495 ; 2 ITC 495; AIR 1928 All 81 [FB], which were quoted with approval in the aforesaid case : " The exemption is conferred, and conferred indelibly on a particular kind of income and does not depend on the character of the recipient, contrasting thus with the exemption conferred by the same subsection on ' income of local authorities '. " It may also be mentioned that Section 2(4A) of the Indian I.T. Act, 1922, excludes from the definition of " capital asset ", " any land from which the income derived is agricultural income ". It is, thus, apparent that " agricultural property " could not also be " capital asset " for the purpose, of the Indian I.T. Act, 1922. The basic difficulty in the way of Dr. Pal lies in the fact that the Tribunal has found that the property in question was acquired by the assessee on agreeing to pay rent of Rs. 1,000 per annum and was thus a leasehold property and not a security for the loan advanced. This finding of the Tribunal is supported by the decision of the Supreme Court in the case of this very assessee (Maharajadhiraj Sir Kameshwar Singh v. State of Bihar [1959] 37 ITR 388, 397), the relevant portion from which may again be quoted :
" The case of the assessee rests upon the claim that this was a money-lending transaction and the receipts represented a capital return. If, however, the payment to the lessor was premium and not a loan, the income, being agricultural, from these leasehold properties was assessable under the Act. We are of the opinion that it was so, and that the Agricultural Income-tax Officer was right when he assessed it to agricultural income-tax. The income was not income of money-lending and this does not depend upon the character of the recipient. The thika profits were clearly agricultural income being actually derived from land, " (Italics are mine)
17. Dr. Pal has emphasised that the original advance given to Maharaj-kumar Gopal Saran Singh was undoubtedly a loan given to him. That may be so. But the Tribunal has also found that the character of the original advance given to Maharajkumar Gopal Saran Singh changed after a decree was obtained against the Maharajkumar by the assessee and the two zarpeshgi deeds were cash advance lease acquired by the assessee on agreeing to pay Rs. 1,000 per annum, and, therefore, the leasehold property was not a security for the loan or debt. This will be so even if the zarpeshgi bond was executed in respect of past consideration, provided that the other considerations for making it a cash advance loan are satisfied--vide Nidha Sah v. Murli Dhar [1903] LR 30 IA 54 ; ILR 25 All 115 (PC). The finding recorded by the Tribunal, in my opinion, is correct, based as it is on the decision of the Supreme Court in the case of this very assessee.
18. Once it is held that the thika properties were not security for loan, the claim for exemption of the sum of Rs. 29,16,000 as revenue loss or admissible bad debt has to be rejected. The question as reframed has to be answered in the affirmative, in favour of the department and against the assessee. In the circumstances of the case, however, I would make no order as to costs.
B.S. Sinha, J.
19. I agree.