Courtney Terrell, C.J:— The first question for determination in this case is as to whether the income derived by the assessee by reason of a certain transaction is assessable to income-tax or whether it is agricultural income exempt from tax by reason of section 4, sub-section (3)(viii), of the Income-tax Act, 1922.
The facts which gave rise to the transaction are as follows and are set forth in paragraph 6 of the statement of the case. The assessee had on the 9th January, 1924, lent a sum of Rs. 1,06,000 to one Deonath Sahay and the parties executed two documents, one purporting to be a usufructuary mortgage of the proprietary interest of Deonath Sahay in certain villages, the other purporting to be a lease from the assessee to Deonath Sahay of the same villages. Each document recites the simultaneous execution by the parties of the other document and the two constitute a single transaction and must be so regarded and they must be construed together for the purpose of ascertaining the real nature of the transaction, as stated in the judgment of the Privy Council delivered by Lord Macnaghten in the case of Abdullah Khan v. Basharat Husain “Their Lordships agree with the High Court in thinking that the mortgage and the lease were part of one and the same transaction. But there is no inconsistency between the two instruments nor would there have been any inconsistency if the mortgage itself had contained a provision for granting a lease on the terms upon “which the lease was actually granted.” It is contended on behalf of the assessee that although the documents must be considered as a single transaction yet they amount to a usufructuary mortgage and it is contended on the] strength of two earlier decisions to be hereinafter referred to that the income of a usufructuary mortgagee as such is agricultural income and exempt from tax. Indeed the question formulated for decision by this Court is:
“whether in law the income received by a mortgagee from a usufructuary mortgagor on account of his giving the mortgaged properties in lease to the mortgagors during the pendency of the term of the usufructuary mortgage is assessable to income-tax?”
As I shall point out having regard to the facts of the case this broad question does not arise and in spite of the weight of opinion in favour of a negative answer I would reserve my own views on the subject. It is enough for the purposes of this case to consider whether the nature of the transaction here involved was when properly considered a usufructuary mortgage or whether it amounted merely to a simple mortgage in which case it cannot be denied that the interest stipulated for is assessable to income-tax.
The definition of a simple mortgage is contained in section 58(b) of the Transfer of Property Act and one of the characteristics of a simple mortgage is the fact that possession of the mortgaged property is not delivered to the mortgagee. The definition of a usufructuary mortgage is contained in paragraph (d) of the same section and the essential features are that there shall be delivery of possession of the mortgaged property to the mortgagee with an authorisation to retain such possession until the payment of the mortgage money and to receive the rents and profits accruing from the property and to appropriate them in lieu of interest or in payment of the mortgage money or partly in lieu of interest and partly in payment of the mortgage money. Now the mortgage deed recites that the co-executants are members of a joint family and sets forth the parcels mortgaged. It recites that the executants tried their best to obtain a loan from several mahajans but have been unsuccessful. Paragraph 5 recites that:
“the said mahajan” (the mortgagee) “does not agree to advance the loan unless the properties noted below” (the parcels) “are given to him in mortgage. He demands the interest of the said loan at the rate of Rs. 0-13-3 per one hundred rupees per month and no other mahajan agreed to lend money at a lower rate of interest than this.”
Paragraph 7 states that:
“For this reason we, the executants of our own respective free will and accord took a loan of Rs. 1,06,000 at an interest of Rs. 0-13-3 per hundred per money from “the mortgagee……
“We the executants have received the whole and entire loan on account of this mortgage deed from the said mahajan.”
Paragraph 8 states:
“The annual interest on the said loan amounts to Rs. 10,533-12-0. In order to fetch an annual jama equal to the said sum we give in mortgage to……………the said mahajan the proprietary interest with all zamindary rights including the surface and subsoil rights and irrigation and other rights in respect of”
and then follows a fresh repetition of the percels. Then in paragraph 9 it is said:
“The said mortgagee has and shall have the right to appropriate the enhanced jama which may be derived from the mortgaged village through his labour and diligence. We the executants neither have, nor shall have anything to do with it.”
Paragraph 10 contains a covenant by the executants to pay the Government revenue on account of the mortgaged property and in the event of failure to pay the revenue if the property is sold by auction for arrears of revenue then the mortgagee is to have the right to realise the entire amount of the loan, principal with interest, after deduction of the sum already paid to him by selling by auction the mortgaged property and also by recovering it from them personally. In paragraph 11 there is a further covenant that in the event of the executants dispossessing the mortgagee from the mortgaged properties during the term of the mortgage the mortgagee may realise the amount of the loan with interest by selling the property and also by recovering it from the executants personally. Paragraph 14 provides that the principal sum of the] loan may be paid off in instalments of not less than Rs. 1,000 at a time and paragraph 15 recites that the executants have taken a lease from the mortgagee of the mortgaged property under another deed of even date at the annual rate of Rs. 10,533-12-0 and in the event of any reduction of the principal sum due by payment of instalments as provided by clause 14 the rent payable is to be reduced in proportion.
The lease which was executed on the same day sets forth the parcels of the leased property and shews (and it is not denied) that they are precisely the parcels covered by the mortgage deed. It recites the mortgage and states “It is desirable that we the katkenadars (lessees) aforesaid in coming into and remaining in possession and occupation shall enjoy the usufruct thereof and pay to the sudbharnadar (mortgagee) aforesaid the rent fixed as above according to the kistbandi given below.” If the rent is not paid according to the kist the lessees have to pay interest on the defaulted kist which the mortgagee-lessor shall have the right to realise from the lessees. If within the term of the lease the lessees pay off the recited mortgage debt then the mortgage bond is to be delivered back to them and the lease is to be cancelled and there is a further provision that if the lessees do not pay the rent according to the kist then the mortgagee-lessor is to have the right to oust the lessees from the leased property in the case of two kists remaining unpaid and shall realise the rent direct or may settle the property with another lessee. There is a further provision like that in the mortgage deed for the reduction of the rent if instalments are paid in discharge of the principal of the mortgage debt The lessees also bind themselves to comply with the requests made by the mortgagee to submit to him the jamabandi account papers in the names of the tenants of the mortgaged villages when they shall be demanded by the mortgagee.
Now it is very obvious that the intention of the parties is that the mortgagee is not to enter into possession of the mortgaged property; nor is he to enjoy the usufruct of the property or to receive the rents from the property or to appropriate them in lieu of interest or in payment of the mortgage money. It is equally clear that the mortgagor is to remain in possession of the mortgaged property and it is the mortgagor who is to pay the Government revenue. The mortgagee is to receive nothing but the specified rate in interest upon the loan. The nature of the transaction must be discovered from the documents and the documents alone. It has been suggested to us that the usufruct of the mortgaged property must have been valued at the provided rate of interest, that is to say Rs. 10,533-12-0 but there is no evidence of this and moreover even if it were true it would not be material. The nature of the transaction is not that of a usufructuary mortgage but that of a simple mortgage and the two deeds constitute one single transaction. The whole of the transaction might have been expressed in a single mortgage deed and the real and obvious reason for splitting it up into two documents is to enable the mahajan who is the assessee to put forward a specious claim to escape income-tax. Needless to say the mere fact that the transaction is a device to escape income-tax ought not to prejudice the assessee. Any subject of the State is entitled to escape paying taxes if he can devise a lawful method of doing so but by dividing what is in fact a single transaction between two documents he does not achieve the device which he seeks; nor does he change the nature of the transaction.
Two cases have been relied upon by the assessee which require some comment. The first is that of Ibrahimsa Rowther v. Commissioner of Income-tax, Madras where a somewhat similar device had been successfully used for the same purpose but one feature distinguished the facts of that case from the facts of that now under consideration, namely, that in the usufructuary mortgage no mention whatever was made of any rate of interest and in that respect the mortgage deed and the lease were inconsistent and could not be regarded as a single transaction. The documents are not set forth in the report but the fact I have stated, is emphasised and at p. 460 Srinivasa Ayyangar, J. says, “We must take it that the usufructuary mortgage referred to in the question is a simple or pure usufructuary mortgage and that there is no stipulation as to any interest and that the income accruing from the properties mortgaged is to be taken and enjoyed by the mortgagee with possession.”
The case of In re Makund Sarup is also a decision upon the facts of that particular case. The mortgage and the lease are not set forth in detail. It is true that the headnote would seem to indicate that it is a decision that in the case of a lease back to the mortgagor with a stipulation for fixed annual payments amounting to a definite percentage of the sum advanced the annual payments should be excluded from assessment but at page 498 Sulaiman, A.C.J delivering the judgment with which the two other Judges concurred said “It seems to me that to hold that such a person is liable to pay income-tax would amount to holding that the transaction is not that of a usufructuary mortgage but almost a simple mortgage. It is impossible to hold in this case that the transaction was not that of a usufructuary mortgage. No doubt the mortgage-deed, and the lease were executed on one and the same date and the cross-references in the two documents indicate that the whole transaction was settled at one time. Nevertheless there are certain distinguishing features which make the position of the present usufructuary mortgagee quite distinct from what it would have been if he had taken a purely simple mortgage. He has under the lease the right to recover rent through the revenue court, which very often, is a speedy remedy. He has also the security of the fixed amounts being paid to him regularly year after year, with the option of entering into possession on the default of such payment. If he enters into possession after the ejectment of the mortgagor he is entitled to cultivate lands himself or to let the lands to tenants and receive profits from them. Under these circumstances it seems impossible to hold that the position of the assessee is that of a purely simple mortgagee who is liable to pay income-tax.” It will be seen that the basis of the decision was that in the particular case in question the transaction did not amount to a purely simple mortgage. Ashworth, J. said, at page 501, “Does it make any difference when by means of a lease, forming a single transaction along with the mortgage, the mortgagee restores possession to the mortgagor, and himself, in the form of rent, receives a sum equal to the land revenue plus interest at a definite rate? The answer to this depends on whether the result of the two deeds could have been effected in to by a simple mortgage-deed. My learned brother has shown that this was not the case. The result of the execution of the two deeds is fraught with consequences that would not attach to the execution of a simple mortgage-deed. One transaction differs from, the other not merely in form, but in substance.” This decision is therefore not in point. I am constrained to say that even if the effect of the two deeds were as stated in the judgments of the learned Judges I should be inclined to differ from their conclusion that there were two separate transactions and that the ultimate result was not that of a simple mortgage but it is probable that the learned Judges found other circumstances in the transaction which justified them in their conclusion of fact and it is perfectly clear from the passages I have quoted that if they had decided that in fact the transaction was a single one and in the nature of a simple mortgage that they would have held that the interest whether described as such or as rent would have been assessable to income-tax. I would answer the question propounded to a limited extent by stating that in the opinion of the Court the interest reserved by the documents in this case and paid to the assessee during such period as he is not in possession of the leased property is assessable to income-tax, leaving it open for future discussion as to whether the income of a usufructuary mortgagee is so assessable, and whether, if the mortgagee lessor enters into possession, the usufruct will be assessable.
The next question propounded by the Commissioner of Income-tax is concerned with the dividends drawn by the assessee upon certain securities purchased by him. It appears that the assesee had purchased Government securities of the face value of one lakh on various dates all falling within the period 27th August, 1925, and the 27th October, 1925. In his books of account he shewed separately what he called the cost of these securities and the interest due in the case of each block purchased from the last date on which interest was paid to the vendor up to the date on which he (the assessee) purchased these securities and he claimed that this interest should be allowed as an admissible deduction from the interest drawn by him subsequently on these securities. It was argued before us on behalf of the assessee that in purchasing the securities he had paid a price which represented not only the capital represented by the securities but the dividends which would next fall due and therefore that portion of the purchase price which represented the dividends went into the hands of the vendor and should be considered as the vendor's income. Now it has been held in England by Kowlatt, J. in the case of Wigmore (H.M Inspecto of Taxes v. Thomas Summerson and Sons, Ltd. that dividends do not accrue as interest from day to day but are receivable only on the day on which the holder of the security is entitled to draw them. Section 6(ii) of the Indian Income-tax Act taxes “Interest on Securities”. Section 8 states:
“The tax shall be payable by an assessee under the head ‘Interest on Securities’ in respect of the interest receivable by him on any security of the Government of India……………”
The dividend is clearly receivable only by the holder of the security and it is not receivable until the date specified. In this case it was received by the assessee after he had become the owner and in these circumstances the section clearly provides that tax is to be levied in respect of the sum so received. The section has no concern with the profit or loss made by the assessee as a result of the investment of his money; nor is the section concerned with the rate of interest which the dividend provides for the capital invested by the assessee. The question as formulated runs as follows:
“Whether a sum paid by the vendee of Government securities to the vendor equivalent to the amount of interest due to the latter from Government on account of interest between the last date of accrual of interest and the actual date of the sale of securities at his own convenience and to facilitate the withdrawal of interest and quite apart from the sale price fixed for the securities is assessable to income-tax and supertax.”
I would answer this question in the affirmative.
It was, however, objected on behalf of the revenue authorities that the Court had no jurisdiction to entertain this question and that the Commissioner had been directed to state the case with an express reservation that he should be at liberty to take the preliminary objection on this point. It is contended that as the addition to the assessment had been made by the Commissioner in virtue of his powers of revision under section 33 there is no power in the High Court to direct him to state a case with reference to such a revisional order. There appears to be much authority in support of this contention though I would prefer to reserve, my own view upon the matter for the situation is certainly very anomalous. In view, however, of my opinion that the revisional order was in law perfectly correct it is unnecessary to discuss the point of jurisdiction.
The third question is very simple. The assessee claims to deduct as part of his expenses a sum which he says represents the cost of collecting the interest on the securities. It is argued that the assessee is a minor and must in any case employ a bank or some other agency for collecting his dividends and the charges made by the bank for this service should be allowed as an expense. There is however no provision in the Act for the deduction of such expenses and section 10 provides for the deduction of expenses in respect of carrying on a business and sections 11 and 12 deal with allowable deductions in the case of professional earnings and other sources. The matter is moreover concluded by the judgment of this Court in the case of Maharaja Guru Mahadeo Ashram Prasad, Sahi Bahadur v. Commissioner of Income-tax, Bihar and Orissa. In my opinion the deduction under the head “Securities” is not allowable.
The assessee has been unsuccessful on all the points raised by him and he must pay the costs of this reference.
Das, J.:— This is a case stated by the Commissioner of Income-tax, Bihar and Orissa, under section 63(3) of the Income-tax Act. The facts upon which the question of law arises are these: On the 9th January, 1924, certain persons, who may be referred to as the Sahays, executed a usufructuary mortgage bond in favour of Balmiki Prosad Singh, the father of the assesees, to secure an advance of Rs. 1,06,000 and interest thereon at the rate of 13 as. 3 pie per cent, per month amounting to Rs. 10,533-12-0 per year; and Balmiki Prosad Singh on the same day gave a lease of the properties covered by the usufructuary mortgage bond to the Sahays at a rent of Rs. 10,533-12-0 per year. The Income-tax Officer took the view that it was open to him to assess income-tax on the sum of Rs. 10,533-12-0 admittedly received by the assessees from the Sahays during “the previous year”; and the question of law which arises on these facts has been formulated as follows by the assessees:
“Whether in law the income received by a mortgagee from a usufructuary mortgagor on account of his giving the mortgaged properties in lease to the mortgagors during the pendency of the term of the usufructuary mortgage is assessable to income-tax.”
It is no longer open to doubt that under section 6 of the Income-tax Act, income, profits and gains from whatever source derived is chargeable to income-tax “save as otherwise provided by this Act.”. This is clear from the precise language employed in section 6 in which the different heads of income, profits and gains are specified. One of the heads is “other sources” and section 12 specifically declares that the tax.
“shall be payable by an assessee under the head ‘other sources’ in respect of income, profits and gains of every kind and from every source to which this Act applies (if not included under any of the preceding heads)”.
The income in this case clearly comes within the sweeping words of section 12 unless indeed it is made out that it falls within the exceptions specified in the Act. Section 4(3) provides that the Act shall not apply to certain classes of income and one of the classes of income excepted out of the Income-tax Act is agricultural income. ‘Agricultural income’ has been defined in section 2 as
“(a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in British India or subject to a local rate assessed and calculated by officers of Government as such; and
(b) any income derived from such land by—
(i) agriculture, or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken, to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process, has been performed other than a process of the nature described in sub-clause (ii)”.
There is little doubt therefore that to claim, exemption in this case the assessees must establish that the sum of Rs. 10,533-12-0 received by them is ‘agricultural income’ within the meaning of that term as defined in the Income-tax Act. It is impossible therefore for us to accept the broad contention which was advanced by Mr. Jayaswal to the effect that if the source from which the income arises is agricultural land, it is exempt from taxation. I have no doubt whatever that we have nothing to do with the determination of the question as to the source from which the income arises except perhaps for determining whether the income is agricultural income or not.
It was then contended by Mr. Jayaswal that the income in this case is agricultural income since it arises as the result of a usufructuary mortgage which entitled the assessees to retain possession of lands which were undoubtedly assessed to land revenue in British India and to recover the rents and profits issuing out of those lands as the proprietor of the property for the time being. Whether the income derivable by a usufructuary mortgagee is or is not agricultural income within the meaning of that term as used in the Income-tax Act is a difficult question which I do not propose to determine in these proceedings. It may be urged that the common, form of usufructuary mortgages is that in which the borrower says to the creditor, “You lend the money and I the land; if either of us want that which he has lent he shall restore that which was lent to him”; and that the income derivable from a transaction so described is agricultural income, assuming that the land, which is the subject matter of the transaction is used for agricultural purposes and is either assessed to land-revenue in British India or is subject to a local rate assessed and collected by officers of Government as such. On the other hand it may be urged with equal force that a mortgage does not cease to be a mortgage because possession is delivered to the mortgagee and that the essence of a mortgage, simple or usufructuary, is that a loan is advanced and a security given for the due repayment of that loan; and that the income derivable by the mortgagee, whether in possession or not, is interest upon the money advanced and is the return from that money, not rents, issues and profits from the lands mortgaged and therefore not a return from the land. As I have said, the question is a difficult one upon which much may be said on either side. I will assume in this case that the profits from a usufructuary mortgage are outside the ambit of the Income-tax Act, though I must make it clear that I do not decide the question in the present proceedings and reserve to myself the fullest liberty to determine the point if, and when, it arises.
But in this case there was not only a usufructuary mortgage executed by the Sahays in favour of Balmiki Prosad Singh but there was also “a lease back”, as it has been described, by Balmiki Prosad Singh, to the Sahays; and the simple question for our determination is whether the two transactions taken together amount to an usufructuary mortgage. The answer to this question must depend on the solution of the problem as to what in fact was the transaction between Balmiki Prosad Singh and the Sahays.
I will first consider the terms of the usufructuary mortgage bond. I may mention that the bond appears to be in common form. It recites that Rs. 1,06,000 was being advanced by Balmiki Prosad Singh to the Sahays at an interest of 13 as. 3 pie per cent, per month. It states that Rs. 10,533-12-0 would be the annual interest payable by the Sahays to Balmiki Prosad Singh and it provides that:
“In order to fetch an annual ja ma equal to the said sum, viz., Rs. 10,533-12-0………………the proprietary interest with all zamindary rights”
was being given in sudhbharna to Balmiki Prosad Singh. It then provides that the mortgagee should appropriate
the income derived from nakdi and bhaoli holding, kamat land, khudkasht and bakasht land…………………in lieu of interest”;
and it makes the position perfectly clear that the
“right to appropriate the enhanced jama that may be derived from the sudbharna village”
should belong to the mortgagee. I have no doubt that if there was nothing else in the transaction, it would be construed as an ordinary usufructuary mortgage under which the mortgagee has to enter upon possession and appropriate the profits in satisfaction of the interest; and it might then be urged that as the transaction contemplated that the entire profits of the land should go to the mortgagee in his right as a zamindar, the income derivable by him was agricultural income. But the usufructuary mortgage bond does not stand alone. There is a further document which, in my opinion, qualifies the meaning which might otherwise be attached to the usufructuary mortgage. It is necessary for me to deal with the terms of the other document which is a kabuliat executed by the Sahays in favour of Balmiki Prosad Singh on the same day, that is to say, on the 9th January, 1924. Now before dealing with this document, I may mention that the execution of the kabuliat is already recited in the usufructuary mortgage bond. In paragraph 15 of the usufructuary mortgage bond, the mortgagors say as follows:
“We the executants have taken from the said mahajan katkena lease of the said sudbharna property under another deed of this date at an annual jama of Rs. 10,533-12-0 with effect from the 12 annas kist of 1331 Fs. and 16 annas kist of 1332 to 1333 Fs. In case a sum of Rs. 1,000 or more is paid within the term of this sudbharna deed then interest thereof at the rate of 0-13-3 per hundred rupees per month shall be deducted year by year from the katkena rent of the property at the time of rendering an account, and the said mahajan shall be entitled to get such amount of the jama in respect of the katkena property as will remain due after the deduction of the interest on the amount paid at the rate of 0-13-3 per hundred rupees per month.”
It will be noticed that the rent payable under the lease is the same as the interest due to the mortgagees under the usufructuary mortgage bond; and there is a clear provision that:
“the interest thereof at the rate of 0-13-3 per hundred rupees per month”
shall be deducted from the rent in the event of the mortgagors making part payment to the mortgagees to the extent of Rs. 1,000 or more at a time. Now the lease merely carries out the intention which has already been clearly expressed in the usufructuary mortgage bond. It provides that the rent of the properties demised should be Rs. 10,533-12-0 per year and it also provides that if there should be any default on the part of the lessees in paying the rent the lessor would have the power to enter upon possession and satisfy himself out of the rents and profits. It makes it perfectly clear that
“after paying the rent fixed as above whatever profit shall accrue from the katkena properties is and shall be the right of these katkenadars and their, heirs and representatives up to the continuance of this katkena.”
In other words (and this is a very material point) whereas if the usufructuary mortgage bond stood alone the mortgagees would have been entitled to receive the whole of the profits from the mortgaged properties even if those profits exceeded the interest payable by the mortgagors, under the lease the mortgagees are entitled to the fixed payment of Rs. 10,533-12-0 per year which is the interest calculated on the sum advanced at 0-13-3 per cent, per month, the excess profits going to the mortgagors.
Now this is the transaction and the question is: Is the transaction taken as a whole one of usufructuary mortgage? What is the position? Under the two documents which I have just described, the mortgagee does not enter upon possession of the mortgaged properties and is therefore not entitled to receive anything more than the yearly interest provided in the mortgage bond. It is true that if there be default in the payment of interest it will be open to the mortgagees to enter upon possession; but at the present moment the mortgagees are not in possession and they are not entitled to receive anything beyond the yearly interest provided in the mortgage bond. It is true that the parties describe the sum payable by the mortgagors to the mortgagees as rent; but I am of opinion that we have to look to the substance and not to the form of the transaction. I take it that the most important argument advanced in favour of the view that the income derivable by a mortgagee from a usufructuary mortgage constitutes his agricultural income is that income represents not only the interest payable to the mortgagee but the whole of the rents, issues and profits derivable from the land. Now that argument cannot be advanced in this case. When the two deeds are read together as forming parts of one transaction, there is little doubt that the lease is in the nature of a machinery for the purpose of realizing the interest. What the mortgagee has in view is the realization of interest not the appropriation of the rents, issues and profits from the lands mortgaged. In my view it is idle to contend that a transaction of this nature is one of usufructuary mortgage. In my opinion the transaction is one of ordinary mortgage with a power reserved to the mortgagee to enter upon possession and satisfy himself out of the rents and profits should there be a default in the payment of interest.
It is right that I should deal with two cases upon which reliance has been placed by Mr. Jayaswal. In Makund Sarup's case a Full Bench of the Allahabad High Court decided that, if a person carrying on a money lending business lends money in the course of such business on the security of lands of which he takes a usufructuary mortgage and if he immediately leases those lands back to the mortgagor with a stipulation for fixed annual payments which amount to a definite percentage on the sum advanced, these annual payments should be excluded from the assessment of the profits of the assessees as being ‘agricultural income’ within the meaning of that term as used in the Income-tax Act. The case of the Allahabad High Court may well have been decided on the facts of that particular case; but at the same time there is much in the judgment with which I confess I am unable to agree. The leading judgment proceeds on the assumption that double taxation is against the policy of the Income-tax Act. What his Lordship had in view was the fact that the mortgagee under the terms of the mortgage bond was liable to Government revenue and his Lordship thought that “to hold that he is liable to both Government revenue and income-tax would be imposing a double taxation which is against the policy of the Act.” With great respect I am unable to agree with this view. I quite agree that there may be a presumption that the same tax should not be assessed twice on the same person; for instance in Carr v. Fowle it was observed that the statute presumably did not intend that a Vicar should in effect pay the same tax (land tax) twice on the same hereditament. As Rankin, J. (as he then was) points out in Emperor v. Probhat Chandra Barua: “This is plain enough. Thus the income-tax is one tax and income assessed under one schedule cannot be assessed all over again under another.” But there is no presumption that I know of that because a person has been assessed under one statute, he is immune from taxation under another statute. The question has been discussed with great clearness and precision in the judgment of Rankin, J. in the case to which I have already referred and it is unnecessary for me to pursue the point. In dealing with the question whether if a usufructuary mortgagee is not liable to pay income-tax, a mortgagee who at the same time leases back the mortgaged land to the mortgagor with a stipulation that there should be fixed annual payment calculated on the basis of the rate of interest agreed upon between the parties, Sulaiman, J. in the Allahabad case said as follows: “It seems to me that to hold that such a person is liable to pay income-tax would amount to holding that the transaction is not that of a usufructuary mortgage but almost a simple mortgage.” It seems to me that the argument employed by his Lordship begged the whole question which was in debate before him. Once it was assumed that the two documents amounted to no more than a usufructuary mortgage pure and simple, the issue was determined and the question was solved; but, with great respect the whole question is, does it not make a difference that the person lending money, without assuming the responsibility of at usufructuary mortgagee provides for payment of interest to him and stipulates that in certain events he would be entitled to enter upon possession of the mortgaged properties. With the utmost respect, this question was not faced in the Allahabad case to which I have just referred. As I have pointed out the transaction viewed as a whole amounts to no more than this that there was a loan, there was a security for the loan, and there was further a machinery for the purpose of realising the interest.
The other case to which reference was made, the decision of a Full Bench of the Madras High Court in Ibrahimsa Rowther v. Commissioner of Income-Tax, Madras proceeds on the view that what was agreed to be paid by the mortgagor to the mortgagee was rent. As I have said, we have to look to the substance and not to the form of the transaction. In the case before us the rent agreed to be paid is exactly the amount of interest payable under the mortgage bond and there is a specific provision that in the event of part payment of the principal amount, the rent would be automatically reduced. In my judgment there is a clear distinction between rent and interest. Rent is the — return from land for the use of one's land and signifies the sum payable in respect of the use of land. Interest is the return from money for the use of one's money and signifies the sum payable in respect of the use of money. Rent issues out of the land demised; whereas interest is revenue derived from the money lent. The problem for our consideration is whether the sum of Rs. 10,533-12-0 received by the assessees in the previous year was received by them by way of rent or by way of interest. Viewing the transaction as a whole, I have no doubt whatever that it was received by way of interest; and in my judgment the question propounded in the case must be answered in the affirmative.
There are two other questions, not as important as the one which I have just discussed, but which nevertheless require our consideration. It appears that the assessees purchased certain Government securities of the face value of one lac of rupees on various dates all falling within the previous year. Now the interest on those Government securities did not accrue until after the purchases were made by the assessees; but by arrangement, between the assessees and the vendors of these Government securities the assessees paid the sum of Rs. 2,297 to the vendors as interest due to the latter upon the Government securities up to the dates of the sales thereof, and subsequently recovered those interests from the proper authority. The assessees claimed before the Income-tax Officer that the sum of Rs. 2,297 paid by them to the vendors of these Government securities, should be allowed as an admissible deduction from the interest drawn by them subsequently on those securities and the Assistant Commissioner accepted the contention of the assessees. The Commissioner of Income-tax, however, in the exercise of his power of revision, held that the view, taken by the Assistant Commissioner was not correct and he added back the sum of Rs. 2,297 under section 33. Now upon this the question formulated by the assessees runs as follows:
“Whether a sum paid by the vendee of Government securities to the vendor equivalent to the amount of interest due to the latter from Government on account of interest between the last date of accrual of interest and the actual date of the sale of securities at his own convenience and to facilitate the drawal of interest and quite apart from the sale price fixed for the securities, is assessable to income-tax and super-tax.”
The question has been inartistically drawn but there is no doubt as to what the assessees mean. The learned Counsel appearing on behalf of the Commissioner of Income-tax contends before us that this question is not open to us having regard to the fact that it is a question which arises out of the order passed by the Commissioner under section 33 and not out of the appellate order. It is not necessary for me to deal with the question raised on behalf of the Crown as, in my opinion, the question raised by the assessees must be decided against them. It seems to me that section 8 of the Income-tax Act is conclusive so far as this question is concerned. That section provides:
“The tax shall be payable by an assessee under the head ‘Interest on Securities’ in respect of the interest receivable by him on any security of the Government of India, or of a Local Government, or on debentures or other securities for money issued by or on behalf of a local authority or company;”
and then follow certain provisos which need not be considered in this case. Now the interest was undoubtedly receivable by the assessees; it has in fact been received by them. On what ground then can it be suggested that the income-tax authority acted improperly in assessing tax on this sum of money? If I have understood Mr. Jayaswal correctly, he contends that the interest on these Government securities up to the date of the sales thereof was properly payable to the vendors of these securities and not to the assessees; and that to suit the convenience of all the parties the assessees paid the whole of the interest due to the vendors up to the dates of the sales as indeed he was bound to do, and subsequently recovered them p. from the proper authority. In my opinion the argument rests on a fundamental misconception as to the true position. The interest on Government securities does not accrue from day to day but accrues on certain specified dates. It did not therefore accrue to the vendors of these securities at all, since they sold those securities to the assessees before any interest accrued on them. It may of course be that the vendors did not agree to sell the securities except on terms that the purchasers paid them, not only the market value of the securities, but also in addition a certain sum of money calculated on the basis of the interest supposed to be due to them on the dates of the sales of the securities. But that was a matter between the assessees and the vendors, and the assessees might well have protected themselves by insisting that the amount of tax which would ultimately be payable by them should be deducted from the purchase money; but we are not concerned with that question in these proceedings. The contention of the assessees must fail on the terms of section 8 of the Income-tax Act and I must accordingly answer the question in the affirmative.
The last question arises out of the refusal of the Income-tax Officer to allow any deduction or any percentage under the head “securities.” The following question has been formulated by the assessees:
“Whether in law the basis of the establishment charges for the purposes of allowing percentage of deduction should be total income of the assessee excluding the amount of interest on securities although the latter is taken into consideration for calculating the gross assessable income of the assessee.”
Now it may be pointed out that the Income-tax Officer allowed a deduction of five per cent, from the gross income under the head ‘interest’; while as I have already stated, he refused to allow any deduction from any percentage under the head “securities.” Now section 6 specifically mentions the different heads of income, profits and gains chargeable to income-tax. It will be noticed that while there are clear provisions that the tax payable under the heads ‘property’, ‘business’, ‘professional earnings’ and ‘other sources’ is subject to certain allowances specifically mentioned in section 9, section 10, section 11 and section 12 of the Income-tax Act, there is no provision that the tax payable by an assessee under the head “Interest on Securities” in respect of the interest receivable by him on any security of the Government of India, or of a Local Government or on debentures or other security for money issued by or on behalf of local authority or a company should be subject to any allowance. In support of the view clearly taken by the Legislature in this matter the simplest of reasons may be advanced, namely, that ordinarily no expense is incurred by a person in drawing his interest on securities. In my opinion the question must be answered in favour of the Income-tax Department.
Kulwant Sahay, J.:— Three questions have been referred to us in this case under section 66(3) of the Indian Income-tax Act (1922).
The first question relates to the income derived by the assessee on account of the transaction of the 9th of January, 1924. It is contended on behalf of the assessee that the document of the 9th of January, 1924, executed by Deonath Sahay and others in favour of the assessee was a usufructuary mortgage and that the income derived by the assessee was agricultural income within the meaning of section 2(1) of the Indian Income-tax Act and therefore exempt from taxation under section 4(3)(viii). The real question for consideration therefore is whether the transaction amounted to a usufructuary mortgage and the income derived by the assessee was agricultural income. It is contended on behalf of the assessee that if the mortgage executed by Deonath Sahay had stood alone there could be no doubt that the transaction was of the nature of a usufructuary mortgage, and the fact that on the same date the mortgage executed a lease back to the mortgagors of the mortgaged property did not in any way alter the nature of the transaction. There can be no doubt that the two documents, viz., the mortgage by Deonath Sahay and others and the lease back by the assessee were parts of the same transaction and the two must be read together as forming one transaction. It is necessary to examine the real nature of the transaction. Reading the two documents together as one whole, there can be no doubt that the intention of the parties was that the mortgagors should pay the interest on the mortgage money at the stipulated rate and that it was only in the event of default on the part of the mortgagors to pay the stipulated amount that the mortgagee was to take possession of the mortgaged property. Having regard to the nature of the transaction it is clear that the sum agreed to be paid by the mortgagors under the lease was the interest on the mortgage money and the stipulation was that it was only on default in payment of interest that the mortgagee was to take possession of the mortgaged property. The transaction was very much similar to that of the mortgage in Partab Bahadur Singh v. Gajadhar Baksh Singh. In that case the stipulation in the mortgage debt was that until delivery of possession of the mortgaged property the mortgagor shall pay interest at the rate of 2 per cent, on the mortgage money and by a lease executed at the same time as the mortgage some of the villages forming the mortgaged property were leased to the mortgagor who thus became the tenant of the mortgagee and paid rent in lieu of interest. It was held by their Lordships of the Judicial Committee of the Privy Council that the interest referred to in the mortgage deed was only interest until possession was given of the mortgaged property and that the mortgagee after possession took the rents and profits instead of interest. It is thus clear that what the assessee receives from the mortgagors in the present case is interest on the mortgage money and that it will become the rents and profits of the mortgaged property only after the mortgagee takes possession of the mortgaged property. I am of opinion that the income derived by the assessee in the year under consideration was interest and not agricultural income and was therefore liable to assessment. I would answer the first question referred to us to this limited extent. What the nature of the income would be if the mortgagee takes possession of the mortgaged property is a question which need not be considered at present and must be left open for consideration in future. The question whether the income derived by a usufructuary mortgagee is agricultural income and exempt from taxation or whether it is merely interest and liable to assessment is a question upon which I express no opinion.
The second question relates to the interest drawn by the assessee upon certain Government securities purchased by him. I agree with my Lord the Chief Justice in the answer he proposes to give to this question. I desire however to point out that income-tax upon the securities in question was deducted at the time of the payment of interest under section 18 of the Act. The assessee does not contend that he is entitled to a refund of that tax. The question, however, arises in relation to the fixing of his income for the purposes of super-tax. Under sub-section (4) of section 18 all sums deducted in accordance with the provisions of the section shall, for the purpose of “computing the income of an assessee, be deemed to be income received. Therefore, under this” provision of the Act the tax deducted at the time of the payment of interest on the securities has to be added to the income of the assessee for the purpose of computing his income for the purposes of super-tax. The tax deducted was out of the income derived by him as interest on the securities. If the tax so deducted has to be added to his income it is clear that the interest out of which the tax deducted is added should also be added to his income in order to compute the same for the purposes of super-tax. It is clear that the assessee cannot claim any deduction on account of the payment made by him to his vendor as under section 8 no such deduction is allowable.
As regards the third question, I agree with my Lord the Chief Justice that the assessee is not liable to any deduction on account of expenses.