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Judgment
WORT, A.C.J. - This is a case stated by the commissioner of Income Tax in the following terms : "Where the petitioner is part consideration for the assignment of a mortgage decree gives a Zarpeshgi thika lease of agricultural lands for a period of 17 years, whether he is entitled to set off against the interest realisable on the decree any amount by way of interest in respect of the Zarpeshgi thika lease? The limitation of this question is to be noted. I make reference to that fact by reason of the suggestion, which was put forward towards the end of the argument, that there was at any rate a possibility that the assessee was entitled to deduct not merely the interest as stated in the question, but a portion of the actual income realised by the vendor of this decree from the mortgaged properties. That point does not arise on the form of the question stated by the Commissioner.
It is necessary to state briefly the facts. The Income Tax Officer assessed the assessee (the applicant before this court) for a sum of Rs. 1,08,037. This amount was increased by the Assistant Commissioner by a sum of Rs. 1,59,042, making a total assessable income of Rs. 2,67,079. the ground for that increase arose by reason of the following facts.
The Maharajadhiraja of Darbhanga had obtained a decree for a sum of upwards of Rs. 33,00,000. This decree was assigned to the assessee for consideration of Rs. 31,54,936. The payment of the consideration was by way of a hand-note executed by the assessee for Rs. 1,04,936, the balance of Rs. 30,50,000 being liquidated by the execution of a thika or zarpeshgi lease by the assessee in favour of the Maharaja for a period of seventeen years. At the time of entering into the transaction the parties agreed upon an account. The account took the form of a statement of the principal, a calculation of interest (quarterly), an addition of this interest to the principal and the deduction therefrom of the quarterly realisations of rents and profits from the zarpeshgi property. Each quarter the net arrears so called were entered and that amount under the form of accounting adopted necessarily diminished as time went on until completely wiped out at the end of the third list of the seventeenth year. It is this quarterly interest which the assessee claims to have deducted from his income for the purpose of calculating his assessable income under the Income Tax Act. It is to be noticed that the only certain figure, although the account is agreed, is the first statement of principal and the first statement of interest as the realisations are merely an estimate and must necessarily be so in the circumstances.
The commissioner in the case has stated that the interest so called was not interest at all as it was not interest in the hands of the Maharajadhiraja as he did receive the amount but the item was a mere calculation for the purpose of ascertaining the period of occupation. The argument put forward by Sir Sultan Ahmed is certainly an attractive one, but in my judgment is one which can not be supported.
His first and substantial contention is that the fact that the transaction was a zarpeshgi lease involved his liability for interest and that liability for interest was the cost to him of the income which he was to derive from the decree which he has purchased. In the first instance there seems to be a fallacy underlying this statement. It is true that in preparing his accounts, as the assessee does on the mercantile system, he is chargeable to Income Tax on the six per cent. which he supposed to derive from this decree so long as he does not put it into execution, but it is obvious that so soon as the decree is executed the income as represented by six per cent per annum disappears. The fallacy lies in the statement that the zarpeshgi lease was for the purchase of this income. In point of fact the purchase was not for the income of the decree but the purchase of the decree itself.
Now, the question to be answered depends entirely upon, what is the nature of this interest which the assessee claims to be deducted ? The Commissioner, as I have already stated points out that, it is not income in the hands of the Maharaja, and appears also to be of the opinion that is not an expenditure on the part of the assessee. The substance of the transaction was that, for the purchase of the decree, or, to put it in the form of the argument which has been addressed to us, for the purchase of this taxable income represented by the six per cent which the assessee is deriving from the decree at the present moment, the assessee relinquished non-taxable income, being of course the rents and profits and subject-matter of the zarpeshgi lease. Now, it might have been argued - but it is an argument which as I have said is irrelevant for the purposes of this case having regard to the form of the question - that the expenditure within the meaning of either sub-section (ix) of section 10(2) or sub-section (2) of section 12 was the income from the rents and profits or the income from the zarpeshgi property which, by handing over to the Maharaja, the assessee had lost. But neither was that argument put forward seriously, nor as I have said could it be put forward seriously in this case.
The question therefore arise, as I have already stated, what is this interest chargeable in the account? In fact the interest is nothing more than an arithmetical calculation entered into by the parties for the purpose of ascertaining the period of occupation of the vendor the Maharaja at the end of which he would reimburse the amount of the consideration being the purchase price of this decree. Although the account may disclose items of interest, it is impossible in the circumstances to say that it is a liability of the assessee. It is not a payment which he is to make, nor is it a sum for which he could be sued : I have stated that the interest is nothing more than a method of calculation of the period for which the Maharaja held the property. It is not contended that, had the property been handed over to the Maharaja absolutely, any deduction whatsoever could be made. It would indeed be nothing more than a capital expenditure within the meaning of sub-section (2) of Section 12. The question arises whether the fact that the property was placed in the hands of the Maharaja for a limited period would make any substantial difference to the proposition which I have stated. In my judgment it would not. In substance this is nothing more than a capital expenditure over a period of seventeen years. I have already pointed out and repeat, for fear that there might be any misunderstanding of my statement, that we are not actually concerned with any question of deduction of the income to be derived from this property as an expenditure within the meaning of the section. It being impossible under any circumstances to contend that that sum could be deducted, it seems tome necessary to follow that a sum by way of interest or, to put in the other words, an item in the account which is described as interest merely for the purposes of ascertaining the period over which the property should be held, could not be deducted either.
In my judgment the opinion of the Commissioner in this case that this is not interest chargeable to the assessee and therefore not an expenditure within the meaning of Section 10 or Section 12 is correct. I would therefore answer the question submitted to the court in the negative.
The Crown is entitled to cost; hearing fee ten gold mohurs.
DHAVLE, J. - The assessee claims to be entitled to set off against the interest realizable on the decree the amounts that were shown as interest in the accounts that were made up between the assessee and the Maharajadhiraja as a preliminary to the execution of the zarpeshgi thika lease; and the makes this claim on the footing that latter is expenditure incurred by him solely for the purpose of earning the former. But the accounts that were agreed to between the parties on that occasion were merely pro forma accounts. As the commissioner of Income Tax has observed : "No doubt the interest factor enters into the computation of the period for which the lease should run." Those accounts only show how the period of seventeen years for the zarpeshgi thika lease was arrived at, but it is impossible to contend that they impose any separate liability upon the assessee for payment of any interest of the Maharajadhiraja. There is no dispute that interest as a matter of fact is not actually mentioned in the Zarpeshgi thika lease.
Sir Sultan Ahmed has strenuously contended that the matter should be governed even more by the form than by the substance, but this contention had reference to the fact that the arrangements between the assessee and the Maharajadhiraja took the form of a zarpeshgi thika lease. It is urged that interest is of the absence of such a lease and is therefore necessarily implied in it. But payment of interest may be contemplated and yet there may no interest actually paid or received in the case of such arrangements. The period is fixed on the basis of a certain assumed income from the property mortgaged, but the zarpeshgidar takes the rise of the seasons and apart from the lease itself, there is no liability imposed on the mortgagor for the payment of any interest. Nor is it altogether correct to say that by means of this zarpeshgi thika lease the assessee purchased the interest on which the Income Tax department endeavoured to assess him.
The consideration that flowed from The Maharajadhiraja to the assessee in return for this zarpeshgi thika lease is the decree for Rs. 33,00,000 and old. This decree, it is true, carried interest at 6 per cent; but is is indisputable that the assessee would not be entitled to any interest at all under the assignment from the Maharajadhiraja the moment he succeeds in realising in full the decree assigned to him. The pro forma accounts agreed between the parties as a preliminary to the zarpeshgi assumed interest as payable by the mortgagor and assignee of the decree for a period of 17 years; but it cannot be said that they assumed interest on the decretal amount for that or any other fixed period. What the assignee paid for was the decree and there was no question of his paying for the incalculable amount of the interest that may fall due on the decretal amount. It cannot therefore be said within the meaning of clause (ix) of Section 10(2) or sub-section (2) of Section 12 that there was any interest in the zarpeshgi thika lease which could be regarded as expenditure incurred solely for the purpose of earning any interest on the decree assigned to the assessee by the Maharajadhiraja.
Question answered in the negative.