Judgment:
1. These are appeals preferred by the revenue against the order of the Commissioner (Appeals) in having cancelled reassessments made under Section 147(a) of the Income-tax Act, 1961 ('the Act') in respect of the assessment years 1971-72 and 1972-73 and under Section 147(b) in respect of the assessment year 1974-75. As these appeals involve common issues, they are disposed of in a consolidated order for the sake of convenience.
2. The respondent is one Dr. John De Souza. He purchased agricultural lands bearing Survey Nos. 154, 156, 161 and 166 together with structure constructed thereon, admeasuring 17 acres 14 guntas situated at Kandlakoi Village, Medchal Taluk, Andhra Pradesh, on 20-8-1970 for a sum of Rs. 1 lakh from Shri Jainarayan Mishra who wanted money for financing air-conditioning of Sangeet Theatre. The purchase was duly registered with the registering authority. On the very same day, the assessee leased out lands to the vendor Shri Jainarayan Mishra on a monthly rent of Rs. 2,000 for a period of 5 years and the said lease deed was also registered with the registering authority. On the very same day, the assessee entered into an agreement with the vendor Shri Jainarayan Mishra to reconvey the propery to him on the condition that the latter pays to the assessee Rs. 1 lakh within 5 years from 20-8-1970, provided there was no arrear of rent to the assessee for four consecutive months by due dates at that point of time. The first two documents, viz., the conveyance deed in favour of the assessee and the lease deed in favour of Shri Jainarayan Mishra were submitted to the ITO. The third document, viz., the agreement for reconveyance was not produced before the ITO. In Part IV of the return of income, the assessee disclosed the lease rent claiming the same to be exempt as agricultural income. Assessments were duly completed on that basis for all these years.
3. However, for the assessment year 1974-75, the special audit party observed as follows : 2(a) To arrive at the gross total income the assessee offered and the ITO included the agricultural income at Rs. 22,000 relating to 11 months' lease. The assessee was entitled under an agreement to lease amount of Rs. 2,000 per mensem. What accrued in the accounting year to the assessee was Rs. 24,000 and not Rs. 22,000. The error arose on account of computation of agricultural income on 'receipt basis'. This may be rectified.
2(b) The genuineness of the assessee's ownership of the Medchal land appears to be not free from suspicion though the matter appears to have been enquired into in course of 1971-72 income-tax assessment.
The assessee claimed having leased out the land to one J.N. Mishra from whom he claimed having purchased it for Rs. 1,05,000 by drawing from his bank accounts. Reference to 1976-77 record would show that the assessee re-conveyed the land 'as per agreement' back to J.N. Mishra at cost. As agricultural income was not at all taxable in 1970 and only partially taxable for 1974-75 assessment, the circumstances of the case suggest collusion between the parties to the deed and warrant further probe as to the identity and financial background of J.N. Mishra, etc. As however the transaction amounts to a conditional sale in the nature of mortgage, the so-called agricultural lease rent of Rs. 2,000 p.m. really represents the assessee's interest receipt includible in the total income in full.
The totality of the circumstances viewed as a whole against the background of the so-called rent payable in cash monthly without reference to output, the poor quality of land and the other attendant factors support this view. Short demand (on under-asst. of Rs. 24,000) comes to Rs. 23,460.
As a result, the assessment was reopened under Section 147(b) for the assessment year 1974-75. Likewise, the assessments for the assessment years 1971-72 and 1972-73 were reopened under Section 147(a) for the reason that the agreement to re-convey the property to Shri Jainarayan Mishra was not brought to the notice of the ITO at the time of completion of the original assessments. Another reason for reopening the assessments for these two assessment years under Section 147(a) is that it came to the notice of the department that what the assessee derived was not agricultural income but amounted to only interest receipt taxable under the head 'Income from other sources', in view of the fact that lands at Kandlakoi Village were only under mortgage by conditional sale as provided for in Section 58(c) of the Transfer of Property Act, 1882. On this reasoning, it was viewed by the department that the so-called lease rent received by the assessee was nothing but interest on the amount advanced by the assessee to Shri Jainarayan Mishra. Therefore, the ITO took the lease rent under the head 'Income from other sources', whereas the claim of the assessee was that the lease rent is agricultural income.
4. The assessee carried the matter in appeal to the Commissioner (Appeals) who was of the view that no material was suppressed or withheld from the department by the assessee. Therefore, the reopenment made under Section 147(a) for the assessment years 1971-72 and 1972-73 was held invalid. For the assessment year 1974-75, the Commissioner (Appeals) applied the ratio of the decision of the Supreme Court in Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996, and held that the objections of the audit party on a point of law could not amount to 'information', enabling the ITO to initiate reassessment proceedings under Section 147(b).
5. Shri N. Santhanam, the learned departmental representative, submitted that the assessee had not brought to the notice of the ITO the fact that there was an agreement to re-convey the property to Shri Jainarayan Mishra and, therefore, action under Section 147(a) in respect of the assessment years 1971-72 and 1972-73 was justified. For the assessment year 1974-75, the reopenment was under Section 147(b).
It is not as if the audit party had directed the ITO to reopen the assessment; on the other hand, like any other person, the audit party merely informed the ITO about the making of certain enquiries regarding the genuineness of the assessee's ownership of lands in the said village. Therefore, it cannot be said that the ITO acted on the direction of the audit party on a point of law. He submitted that the entire transaction beginning with purchase of land from the vendor, leasing back the same to the vendor and ending with executing an agreement to reconvey the said property to the vendor at a future date was made on the same day which would really suggest that the assessee had really financed to Shri Jainarayan Mishra a sum of Rs. 1 lakh at 20 per cent interest per annum and all these documents are make-believe ones or a cloak to cover up the real transaction. In reality the transaction is a mortgage by conditional sale and Section 58(c) is attracted and the alleged lease rent is certainly in the nature of interest and, therefore, taxable under the head 'Income from other sources'. In this context, he relied upon the decision of the Supreme Court in Bhaskar Waman Joshi v. Shrinarayan Rambilas Agarwal AIR 1960 SC 301 and Bhoju Mandal v. Debnath Bhagat AIR 1963 SC 1906. Therefore, he submitted that the order of the Commissioner (Appeals) should be set aside.
6. None appeared for the assessee though notices were served. The case is decided on merits. After taking into consideration the submissions of the learned departmental representative and the materials on record, we have no hesitation in upholding the order of the Commissioner (Appeals). The assessee had brought to the notice of the ITO the fact of purchase of agricultural lands and also the fact of leasing back the same to the vendor. In Part IV of the return of income, he disclosed the lease rent. No doubt, the agreement to reconvey the property to the vendor after a period of 5 years on certain terms and conditions was not within the knowledge of the ITO who completed the original assessments. It is the department's contention that the omission to bring this document to the notice of the ITO is a serious omission of primary fact having a material bearing on the assessment giving rise to cause of action under Section 147(a). In our opinion, the agreement to reconvey the property does not constitute primary fact having a material bearing on the assessment. It is not each and every omission of certain facts primary or secondary, which is fatal. It is only those primary facts which have a bearing on the assessment that have to be disclosed to the ITO, the nondisclosure of which would empower the taxing authority to initiate reassessment proceedings under Section 147(a). On a cursory examination of the agreement to reconvey the property entered into by the assessee and the vendor-cum-lessee Shri Jainarayan Mishra, it would be clear that what is envisaged in the agreement is not an outright resale to the other party on the payment of a sum of Rs. 1 lakh at the expiry of a certain period, viz., five years. There are further conditions in it. Clause 4 of the agreement of reconveyance is as follows : Notwithstanding the provision in Clause 1 above, in the event of default by the second party in tendering and paying the amount of Rs. 1,00,000 (Rs. one lakh only) to the first party by the due date, or in default of the second party paying the monthly rent of the said property under lease deed for any four consecutive months by the due dates, or be in default of his paying the taxes or rates therefor to the Government, Corporation or other bodies, then in any of the said events, this agreement shall be inoperative and of no effect and shall be void and unenforceable by the second party, and the first party shall not be liable or bound to convey the said property.
It would be evident from the above that if the contingencies envisaged in the aforesaid clause do not arise in the future, the assessee is bound to reconvey the property ; otherwise he is not. Besides, in view of the specific provisions of Section 58(c), we hold that this document does not partake of the nature of primary facts to be disclosed to the ITO.7. We also notice that in the letter dated 27-12-1982 the assessee's advocate Shri Venkatasubramanian had drawn the attention of the ITO to the sale deed dated 20-8-1970 by virtue of which the assessee purchased the lands from Shri Jainarayan Mishra and also the lease deed by virtue of which the very same lands were leased back to the vendor. He had also enclosed copies of these two documents. He had contended that what the assessee received from the lessee on monthly basis was an agricultural income which is not taxable. He had also cited in support of his contention the case of K. Simrathmull v. CIT [1967] 64 ITR 166 (Mad.). On the basis of these facts, the original assessments were completed by the ITO for the assessment years 1971-72, 1972-73 and 1974-75. In fact, these two documents, viz., the purchase of agricultural land by the assessee and leasing back the same to the vendor, definitely constitute primary facts which should have been disclosed to the ITO and as a matter of fact these have been disclosed.
For the contention of the assessee that the lease income was only in the nature of agricultural income, he had relied on the decision of the Madras High Court cited supra. Having completed the assessments on this basis, we do not find any justification for the ITO to revise his opinion on the alleged failure of the assessee to inform the taxing authority about the existence of an agreement to reconvey the said property to the vendor Shri Jainarayan Mishra. In our opinion, this agreement to reconvey the property to the vendor upon fulfilment of certain terms and conditions as adumbrated in the said agreement dated 20-8-1970 does not constitute primary fact the non-disclosure of which is fatal to the assessee.
8. In fact, the department was informed by the audit party on a point of law in the course of audit for the assessment year 1974-75. The Commissioner (Appeals) had extracted that part of the audit objection in paragraph 10 of his order [paragraph 2 (6) already extracted in this order] and has held the reasons for reopening of the assessment as per the order-sheet entry exactly tallied with the language of the audit objection mentioned above. Therefore, he held that the reassessment under Section 147(b) for the assessment year 1974-75 was launched exclusively on the basis of the above audit objection. Applying the ratio of the decision of the Supreme Court in Indian & Eastern Newspaper Society's case (supra) he held the opinion of an audit party on a point of law could not be regarded as information enabling the ITO to initiate reassessment proceedings under Section 147(b). Thus, he cancelled the reassessment proceedings for the assessment year 1974-75.
We are in complete agreement with him on this. We uphold his order.
9. For the earlier assessment years, viz., 1971-72 and 1972-73, proposals for reassessment proceedings were sent on 13-7-1978 and this was after the receipt of audit objections, the date of audit being 15-10-1977. Therefore, taking into account the sequence of dates, we conclude that the reassessments for 1971-72 and 1972-73 were triggered off by the audit objections, though these audit objections relate to the assessment year 1974-75. It was because there was no power for the ITO to reopen the assessment under Section 147(b) in respect of the years 1971-72 and 1972-73, proceedings under Section 147(b) were resorted to while for the assessment year 1974-75, there was ample time for the ITO to take proceedings under Section 147(b). Therefore, the conclusion is inescapable that the audit objections formed the basis for these reassessment proceedings. By the very nature of audit objections, it will be evident that the audit party has given its views on a question of law and that cannot be the basis for reopenment in the ratio of the decision of the Supreme Court cited supra.
10. It is necessary for us to examine whether all these documents, viz., the sale deed by virtue of which the assessee purchased the lands, the lease deed by virtue of which the lands were leased back to the vendor on a monthly rent of Rs. 2,000 and the agreement to reconvey the property at a future date upon fulfilment of certain conditions would all constitute a single transaction of mortgage by conditional sale. We have to examine this aspect of the matter in order to find out whether the failure to produce any one of these documents before the taxing authority would amount to suppression of primary facts. Section 58(c) is as follows : on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee is a mortgagee by conditional sale : Provided that no such transaction shall be deemed to be a mortgage unless the condition is embodied in the document which effects or purports to effect the sale.
The proviso to Section 58(c) is very significant. According to the said proviso, unless the condition for re-transfer is embodied in the document which effects or purports to effect the sale, the said document cannot be considered as a mortgage by conditional sale. In this context, Shri Santhanam wanted us to lift the veil and look into the substance of the transaction. Certainly, in certain situations the Courts are empowered to look for the substance of transactions. In order to enable us to lift the veil, the department must by cogent evidence pro ve that the transaction is really in the nature of mortgage with all the trappings of ostensible sale and reconveyance.
Here again, one has to look into the provisions of the document. This is not a case in which the property purchased by the assessee was simply conveyed back to the vendor. This is a case in which the property initially purchased by the assessee was conveyed to some other person at the instance of the vendor. From a perusal of the deed of conveyance registered as Document No. 120 of 1976, Book 1, Vol. 533, pages 21 to 26, it is found that vendor No. 1 is Shri Jainarayan Mishra, vendor No. 2 is the assessee and the real purchaser is a third person by name Smt. Uma Arun Shah wife of Shri Arun Kumar Shah, Hyderabad. The purchase consideration was not Rs. 1 lakh as was agreed to in the agreement of re-conveyance dated 20-8-1970, but it was Rs. 2 lakhs at the time of conveyance to the said Smt. Uma Arun Shah though the assessee received only Rs. 1 lakh due to him. In a mortgage by conditional sale, normally the property is reconveyed to the mortgagor.
This has not happened in this case, nor has the department brought evidence to show that the ultimate purchaser is in any way connected with Shri Jainarayan Mishra. In the circumstance, how is it possible for us to brush aside the realities of life in our endeavour to look into the substance of the transaction Therefore, we reject the contention of Shri Santhanam in this behalf. Another reason for our rejection is that according to Section 58(c), unless the conditions of reconveyance and other related conditions are embodied in the initial sale document, it is not possible for us to hold that all the three documents referred to by the revenue would constitute a mortgage by conditional sale. In this view of the matter, we hold that there was absolutely no basis for the view entertained by the audit party that the entire transaction is one coming within the purview of Section 58(c). The reassessment induced by such audit objection must fail for want of jurisdiction.
11. We have already indicated that the reassessments for the assessment years 1971-72 and 1972-73 were in a way influenced by the audit objections for the later year 1974-75 on an erroneous view of the provisions of Section 58(c) and on that ground also, the proceedings under Section 147(a) must fall. Besides, in view of the specific provisions of Section 58(c) we hold that the agreement to reconvey the property entered into on 20-8-1970 was not a primary fact having a material bearing on the assessment. Therefore, we uphold the order of the Commissioner (Appeals) in having set aside the reassessment proceedings under Section 147(a) for the assessment years 1971-72 and 1972-73.
12. Shri Santhanam relied on the case of Bhoju Mandal (supra). This was a case concerning a transaction done on 2-2-1924 and at that point of time, the proviso to Section 58(c) was not there in the statute. In fact, the proviso was added by the Transfer of Property (Amendment) Act, 1929 and, therefore, the Supreme Court has no occasion to consider the effect of the transaction in the light of the proviso which was added subsequently. The other case relied on by him, viz., Bhaskar Waman JoshVs case (supra) is not on all fours with the case before us.
In that case, it was observed by Shah, J., as follows : The proviso to this clause [i.e., Clause (c) of Section 58 of the Transfer of Property Act] was added by Act 20 of 1929. Prior to the amendment there was a conflict of decisions on the question whether the condition contained in a separate deed could be taken into account in ascertaining whether a mortgage was intended by the principal deed. The Legislature resolved this conflict by enacting that a transaction shall not be deemed to be a mortgage unless the condition referred to in the clause is embodied in the document which effects or purports to effect the sale ....
Therefore, this case also does not come to the assistance of the revenue.
13. In the result, the appeals of the department fail and are dismissed.