K SIMRATHMULL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee was a money-lender. His assessment dated November 20, 1947, for the assessment year 1947-48 for which the accounting year ended on October 24, 1946, was reopened under section 34(1)(a) of the Income-tax Act, 1922, by an order dated February 28, 1957, and certain income was added to the original income as having escaped tax. A sum of Rs. 11, 475 was added as referable to the income by way of interest in the course of his money-lending business. A further sum of Rs. 1, 208 was also added as income from the money-lending business carried on in the name of the assessee's wife. A sum of Rs. 20, 000 was found to the credit of one Mangilal Inderchand of Phaloodi in the account books of the assessee and this was found to be undisclosed income, which was brought to tax. THE Appellate Assistant Commissioner, however, was of the view that the credit being dated December 15, 1945, it should be excluded from the assessment pertaining to the assessment year 1947-48. At the same time, he gave a direction to reopen the assessment for the assessment year 1946-47 so as to consider the assessment of this sum of Rs. 20, 000 as income under the head "other sources". In other respects, the assessee failed in the departmental appeal and also before the Tribunal. In the circumstances, the following questions have been referred to us under section 66(1) of the Act "1. Whether section 34 was validly applied in the case ?.2. Whether the addition of the income from the coffee estates was properly brought to tax ?.3. Whether the entire income of the assessee's wife or any portion thereof from money-lending business and coffee estates was correctly added to the assessee's income ? and4. Whether the Appellate Assistant Commissioner could validly give a direction under section 34(3) ?"

(2.) WE shall proceed to consider and record our answer to each of them in that orderSection 34(1)(a) was invoked in these circumstances. The assessment for 1941-42 was made on October 23, 1942. When it was taken up in appeal, the appellate authority was of the view that the income from the business carried on in the name of the assessee's wife really belonged to him. This order was made by the appellate authority on May 19, 1945. It appears that, nevertheless, the assessee failed to include in his return for the assessment year 1947-48, the income from his wife's business. This was regarded as a suppression of the income from the assessee's return. Mr. K. Rajah Iyer who appears for the assessee has, in view of these circumstances, not seriously contended that section 34(1)(a) could not be properly invoked. In the years prior to the assessment year 1947-48, the assessee was in the habit of showing his wife's income from her business in his returns, but for the year 1947-48, he chose not to mention it. If this source of income was taxable as the assessee's income, it certainly could be regarded as having escaped tax. WE consider therefore that the first question should be answered against the assesseeThe second question relates to the addition of Rs. 11, 475. It is not in controversy that this sum was derived from four estates known as Lower Yeragadu, Hullical, Nuneaton and Arbury, by way of rent. These four estates were purchased by the assessee, three of them in 1945, and the Lower Yeragadu estate in 1946.

(3.) THE business is only incidental and is not the source in such a case. THE same consideration will apply with equal force to a money lender making an advance on the security of immovable property and getting possession as part of the security. This court in Commissioner of Income-tax v. Khoyee Sahib, took a similar view. In that case also the assessee was a money-lender and in the course of his business advanced a large amount to a certain landholder who was to pay interest at a certain percentage at the end of the year and compound interest on default. THE money-lender got possession of ten villages as security for the loan and was directed to take possession of certain other villages after paying off a creditor in whose possession they were. THE assessee was to take a certain percentage of the gross receipts from the properties and to credit what remained after meeting public charges and others towards interest due to him. Any surplus left was to be credited towards principal. During the year of account, there the assessee received from the properties a certain sum for which he claimed exemption under section 4(3)(viii) on the ground that it was agricultural income. This court held that the assessee was right and was entitled to the exemption claimed by him on the ground that the income was agricultural income, though he had credited the receipt towards interest. Learned counsel for the revenue relied on a single sentence from the judgment in that case, namely, "But where under the guise of a lease what is taken is really interest which is different from the rent on the land, one may argue that in such a case the lease is merely a mask and the mortgagee merely gets interest" *, and contends that this observation will be applicable to the facts of this case. We cannot agree. As mentioned by us earlier, nowhere in the earlier stages was it the case of the revenue that any of the transactions entered into by the assessee was a cloak or a make-believe. Where a lease is put forward, which is in reality non-existent, it is obvious that the pretended lessee cannot claim the income in such a case to be agricultural income. But we are not concerned with that kind of case here. In the matter of Mukund Sarup was again a case of a money-lender assessee who took usufructuary mortgage of agricultural lands and immediately leased the same back to the mortgagor. It was held that the rent received by the mortgagee-assessee from his lessee was not liable to tax on the view that this was agricultural income. We have already extracted a quotation by the Privy Council from the judgment of Ashworth J. in this case. But we would like to quote also the further observation of this learned judge with whom we find ourselves in respectful agreement "Nor again can the taxing authorities avoid an implication arising from the form of a transaction on the ground that, except for a desire to escape income-tax, the transaction would have taken a different form, which is what is meant, in that reference by 'looking at the substance of the transaction'. It is not unlawful to avoid, by any means not forbidden by law, rendering oneself liable to the payment of income-tax, though it is an offence by false return or by concealment to evade payment of income-tax." *In our view, it is quite open to a money-lender who is assessed to income-tax to have recourse to the process of doing money-lending business in such a way that the income derived in the course of such business is not made liable to tax within the legitimate limits of the law. But on the facts of this case we are not even satisfied that there was any such attempt on the part of the assessee by resorting to sales, executing leases and agreement for reconveyance and deriving income from agricultural land by that process. Sri Ramchandra Dev v. Commissioner of Income-tax brings out the distinction between rent derived from agricultural lands which is not liable to tax and interest received on arrears of such rent, which is of course chargeable. In Raja Mustafa Ali Khan v. Commissioner of Income-tax, there was a usufructuary mortgage and a lease-back under a liquidation scheme.