NACHIAPPA CHETTIAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) K . M. N. S. P. N. Nachiappa Chettiar was the karta of an undivided Hindu family. In that capacity he was carrying on extensive money -lending business in Ceylon. In the course of his money -lending business moneys had been lent to one O. L. M. Abdul Majith totaling nearly two lakhs of rupees up to the beginning of March, 1930, and on the 3rd of March, 1930, the debtor executed a deed purporting to convey absolutely to the creditor by way of sale certain houses and lands for a price of Rs. 2, 03, 300. The deed recited that the "said vendor doth hereby sell, assign, transfer, set over and assure unto the said vendee, his heirs, executors, administrators and assigns the aforesaid several lands" and that the purchaser should hold the said several lands and premises conveyed to him with the appurtenances thereof absolutely. The consideration for the sale was made up of the principal amount of Rs. 1, 88, 950 due on twenty -three pronotes bearing dates between the 2nd of April, 1925, and 31st of January, 1930, a sum of Rs. 6, 081 -6 -6 being the balance of interest due on these pronotes, a sum of Rs. 5, 200 appropriated to the principal and interest due on three other pronotes, Rs. 1, 430 retained with the vendee to pay up the arrears of assessment due to the municipality in regard to the properties conveyed, Rs. 1, 515 for the discharge of a debt owed by the vendor to a third person who was named, and lastly, Rs. 4, 334 paid in cash to the vendor to make up the round figure of Rs. 2, 03, 300. Nachiappa, the vendee, entered into possession of the properties and enjoyed them as his own. Some of the items purchased were sold very soon after their acquisition. The total sum realised by these sales amounted to about Rs. 99, 000 and deducting these and adopting the value put upon them under the deed of March, 1930, property having a book value of Rs. 1, 04, 384 thereafter remained in Nachiappa's possession and enjoyment. It might be mentioned that Nachiappa was realising the rents and profits from the properties which remained with him during the years 1930 to 1944. The significance of this latter date will be apparent in a little while.Nachiappa died in 1938, leaving will appointing his wife Valliammai Achi as his executrix, and she obtained probate of the will in the Courts of Ceylon, and the properties which remained unsold continued in her possession as executrix. At this stage Abdul Majith filed a suit in the District Court of Colombo on 4th January, 1940, alleging that the transaction embodied in the deed dated 3rd March, 1930, though purporting to be an absolute sale, was in reality a conveyance subject to purporting to be an absolute sale, was in reality a conveyance subject to an oral trust under which the creditor undertook to retain the properties for the purpose of discharging his indebtedness to him and with an obligation to retransfer such of the properties as remained after the debts were satisfied. The plaint further averred that out of the rents and profits realised from the properties as well as from the Rs. 99, 000 realised by reason of the sales effected the indebtedness of the plaintiff to Nachiappa had long ago been discharged and on this basis the plaintiff required Valliammai Achi to reconvey to him the balance of the properties which still remained unsold, as well as to have an account taken of all the moneys realised by the creditor and after adjusting them towards the debts payable by the plaintiff to pay over the balance due to him. The suit was defended and contentions raised both of fact as well as of law. The District Judge of Colombo, who tried the suit, however repelled the technical objections raised to the reception of such evidence which contradicted the express terms contained in the deed of sale, upheld the case of and oral trust put forward by the plaintiff an practically decreed the plaintiff's suit as prayed for. The following were the findings on the material issues :

(2.) THIS judgment was rendered on the 25th of September, 1942. Valliammai Achi preferred an appeal to the Supreme Court of Ceylon and the learned Judge upheld the admissibility of the evidence of oral trust and confirmed the finding of fact as that trust. The appeal was accordingly dismissed on 31st March, 1944. Apparently the execution of the decree of the District Court was stayed pending an appeal to the Supreme Court, but when this appeal was dismissed, the stay got vacated. Valliammai Achi preferred a further appeal to the Privy Council where also she met with a similar fate, her appeal being dismissed by the Board on 24th April, 1947.

(3.) WE do not consider it necessary or profitable to discuss the grounds or the reasoning upon which the Tribunal rested their decision against the assessee but shall confine ourselves to the arguments addressed before us by counsel on either side. We shall first deal with the contentions raised with regard to the question propounded in Referred Case No. 81 of 1953. The argument of the learned Advocate -General who appeared for the assessee was on these lines : The assessee was a money -lender and his stock -in -trade originally consisted of money and the debts represented by the promissory notes. During the course of this money -lending business and in realisation of the amounts due to him the assessee had obtained a conveyance of the properties belonging to the debtor in full satisfaction of his debt. This was the basis upon which the assessee's accounts were made up. When land or other immovable property is taken by a money -lender in discharge of a debt the property acquired assumes the character of the money -lender's stock -in trade. For this proposition reliance was placed on Commissioner of Income -tax, Burma v. P. L. S. M. Concern, Minhla, where Page, C.J., in delivering the judgment of the full bench stated, "......... the assessees contended that each transaction in which land is received in satisfaction of an outstanding debt must be considered on its own merits. It is urged on their behalf that the land which is received in repayment of a loan is the equivalent of cash, and should be treated as money's worth and as such not fixed capital, but working assets, and part of the stock -in -trade of their business as money -lenders" and later in the judgment, the learned Chief Justice affirmed the correctness of this position. Our attention was also invited to the following passage in the judgment of Dunkerley, J., in Commissioner of Income -tax, Burma v. A. K. A. R. Family, where the learned Judge observed :