Full Judgment Text
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PETITIONER:
COMMISSIONER OF WEALTH-TAX, BHOPAL
Vs.
RESPONDENT:
ABDUL HUSSAIN MULLA MUHAMMAD ALI (DEAD) BY L.Rs.
DATE OF JUDGMENT09/05/1988
BENCH:
VENKATACHALLIAH, M.N. (J)
BENCH:
VENKATACHALLIAH, M.N. (J)
PATHAK, R.S. (CJ)
CITATION:
1988 AIR 1417 1988 SCR Supl. (1) 227
1988 SCC (3) 562 JT 1988 (2) 487
1988 SCALE (1)1112
ACT:
Wealth Tax Act, 1957-Sections 5 and 27-Loan-Termed by
assessee as ’Quaraza-e-hasana’ held includible as wealth of
assessee and liable to tax.
Words and Phrases: ’Quaraza-e-Hasana’-Meaning of.
HEADNOTE:
The assessee-respondent had advanced a sum of
Rs.4,00,000 to his partner Faizullabhai Mandlawala which sum
was employed as a part of Mandlawala’s capital in their
partnership firm. The assessee sought to have the value of
that loan excluded from his wealth on the claim that this
loan was what was known to Muslim Law as ’Quaraza-e-Hasana’-
a debt of good faith and goodwill carrying with it no legal
obligation on the part of the debtor to repay and
correspondingly, no right on the part of assessee to expect,
much less enforce a repayment. This claim was supported by
debtor’s declaration that the sum was received by him
’without any obligation and without any rate of interest and
without any consideration.’
The Wealth Tax Officer and the Appellate Assistant
Commissioner found it difficult to accept this claim. The
Appellate Tribunal, however, accepting the assessee’s claim
held that the loan partook of the character of ’Quaraza-e-
Hasana’ with its special incidents as known to Muslim Law;
that the transaction was one of good faith and goodwill and
lacked the concomitants of a legally enforceable claim for
repayment and that, therefore, the amount was not a debt due
to the assessee. The High Court upheld this view.
It was contended on behalf of the Revenue (1) that the
Tribunal as well as the High Court erroneously accepted the
hypothetical incidents of a supposedly peculiar institution
of the personal law of the Muslims, any rule or tenet of
Muslim Law respecting which had not having been established;
(2) that both the Tribunal and the High Court, while rightly
noticing that the special incidents of what was called
’Quaraza-e-Hasana’ had not been established, gave the
benefit of doubt as to the
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very existence of this institution of ’Quaraza-e-Hasana’ to
the assessee, and (3) that the reliance by the High Court on
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the incidents of ’Hiba-ba-shart-ul-iwaz’, a form of
Mussalman gift, was misplaced as this kind of gift expressly
stipulated contemporaneous liability for a return.
Counsel for the assessee, sought to support the
conclusions of the High Court on an alternative and
independent ground that, at all events, by entering into
this transaction the parties must be held not to have
intended to create a legal obligation between them and that,
therefore, the debt remained a debt of honour. It was
contended that an agreement would not, by itself, yield
legal obligations unless it was one which could reasonably
be regarded as having been made in contemplation of creating
legal consequences, and that in this case the parties must
be held to have excluded the contemplation of legal
consequences flowing from the transaction.
Allowing the appeal it was,
^
HELD: (1) As no authoritative text nor any principle or
precedent recognised in Muslim Law was cited before the High
Court or this Court, establishing the nature, content and
incidents of the institution of ’Quaraza-e-Hasana’, it was
not possible to say, one way or the other, whether Courts
could recognise and act upon such a rule of Muslim Law much
less afford relief to the proponent of that rule. [232G-H;
233A-B]
(2) If the concept of ’Qard Hasan’ was the same as that
of ’Quaraza-e-Hasana’, the obligation on the part of the
debtor of the loan to repay nor the right of the creditor to
repayment were excluded. The only incident appeared to be
that it was ’interest-free’. [234C]
(3) The reliance by the High Court on the concept of
mussalman gift ’Hiba-ba-shart-ul-Iwaz’ did not help the
assessee because this kind of gift stipulated liability for
return. [232E-F]
(4) The debt, though a ’passive debt’ would require to
be treated as due and payable to the assessee. It was not
the assessee’s case that the debt was bad and irrecoverable.
The debtor’s declaration itself established its existence.
[235B]
(5) Where, as in the instant case, the tax implications
of large financial obligations were sought to be put an end
to, the burden as heavy on the assessee to establish that
what would otherwise be the usual incidents of the
transaction were excluded from contemplation by
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the parties. Here, one partner had lent a large sum to the
other to be utilized as capital in the partnership venture.
The transaction was in the context of a commercial venture.
The presumption therefore, was that legal obligations were
intended. The onus was on the parties asserting the absence
of legal obligations. The test was not subjective to the
parties, but an objective one. [236E-F]
(6) The non-enforceability of debt was pleaded not as a
part of what was permissible in law of contracts, but
specifically as some inexorable incident of a particular
tenet peculiar to and characteristic of the personal law of
the Muslims. That not having been established, no appeal
could be made to the principle of permissibility of
exclusion of legal obligations in the law of contracts. In
the instant case, the admitted existence of a debt implied
an obligation to repay. No legal bar of the remedy was
pleaded. What was set up, and was unsubstantiated, was the
non-existence of the remedy itself. The loan would therefore
become includible in the wealth of the assessee. [238C-E]
Rose and Franc Co. v. J.R. Crompton and Bros. Ltd.,
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[1923] 2 K.B. 261; Edwards v. Skyways, [1964] 1 W.L.R. 340;
Bahamas Oil Refining Co. v. Kristiansands Tankraderie A/s
and others and Shell International Marine Ltd., [1978]
Lloyds Law Reports 211, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 740 to
743 of 1975.
From the Judgment and Order dated 30.8.1974 of the High
Court of Madhya Pradesh in Miscellaneous Civil Case No. 352
of 1971.
B.B. Ahuja, Ms. A. Subhashini and K.C. Dua for the
Appellant.
T.A. Ramachandran, Vinek Gambhir, Sanjay Sareen and
S.K. Gambhir for the Respondents.
The Judgment of the Court was delivered by
VENKATACHALIAH, J. These appeals, by special leave, by
the Commissioner of Wealth-tax, Bhopal, arise out of the
opinion rendered by the High Court of Madhya Pradesh,
Bhopal, in fourconsolidated wealth-tax references under
Section 27(1) of the Wealth-tax Act, 1957. They raise a
short but interesting question touching the
230
incidents of what is described as the ’Quaraza-e-Hasana’
said to be a transaction known in and peculiar to the
personal law of the muslims.
2. The matters arise out of the proceedings concerning
the assessment to wealth-tax of the respondent, Abdul
Hussain Mulla Mohammad Ali (’the assessee’) for the four
assessment-years 1957-58 to 1960-61.
In the original-returns for the assessment year 1957-58
relevant to the valuation date 31.3.1957, the assessee filed
a return of net wealth of Rs.8,57,910 which included a sum
of Rs.4,00,000 representing the principal value of the loan
advanced by the assessee to a certain Faizullabhai
Mandlawala, Sidhpur. Both the assessee and the said
Faizullabhai Mandlawala were partners of a firm carrying on
business under the name and style ’Rising Sun Flour & Oil
Mills’ at Ujjain. The borrower had employed this sum as part
of his capital in the firm. In the revised return, filed by
him, the assessee, however, sought to have the value of that
loan excluded from his wealth, on the claim that this loan
was what was known to Muslim Law as ’Quaraza-e-Hasana’-a
debt of good faith and goodwill carrying with it no legal
obligation on the part of the debtor to repay and
correspondingly, no right on the part of the assessee to
expect, much less enforce a repayment. The claim for the
non-inclusion of this asset in the wealth of the assessee
was sought to be supported by the declaration dated
26.3.1965 furnished by the debtor that the sum was received
by him ’without any obligation and without any rate of
interest and without any consideration’. Reliance was also
placed on some extracts of the Quran said to relate to this
transaction.
Both the Wealth-tax Officer and the Appellate Assistant
Commissioner in the appeal found it difficult to accept this
claim and, accordingly, brought this sum of Rs.4,00,000 to
tax on the respective valuation dates.
However, the Income-tax Appellate Tribunal, Indore
Bench, accepting the assessee’s appeals held that the loan
partook of the character of ’Quaraza-e-Hasana’ with its
special incidents as known to Muslim Law; that the
transaction was one of good faith and goodwill and lacked
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the concomitants of a legally enforceable claim for
repayment and that, therefore, the amount was not a debt due
to the assessee.
3. The High Court before which the Tribunal, at the
instance of
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the Revenue, stated a case and referred two questions of law
for opinion upheld the view that had commended itself to the
Tribunal and answered the questions against the Revenue. The
two questions so referred were:
(1) "Whether on the facts and in the
circumstances of the case, the Tribunal was
justified in holding that the amount of Rs.4
lakhs cannot be included in the total assets
of the assessee?"
(2) "Whether on the facts and in the
circumstances of the case the Tribunal was
justified in accepting that the amount of
Rs.4 lakhs was in the nature of ’Quaraza-e-
Hasana’ particularly when Rs.1,21,500 out of
Rs.4 lakhs has been repaid?"
4. Shri B.B. Ahuja, learned counsel for the Revenue,
contended that the Tribunal as well as the High Court fell
into a serious error in their acceptance of the hypothetical
incidents of a supposedly peculiar institution of the
personal law of the muslims, respecting which nothing
tangible by way of evidence as to the existence of such rule
or tenet of muslim law was forthcoming. Learned counsel
invited our particular attention to the following
observations of the Tribunal:
"The learned counsel for the assessee, Mr.
Chitale, has also stated before us that he has not
come across any judicial decision defining or
describing the exact characteristics of the
expression ’Quaraza-e-Hasana’ nor has become
across any discussion on this matter in any of the
treaties on Mohammedan Law. We are, therefore,
satisfied that on the facts and circumstances of
this case, the amount of Rs.4 lakhs cannot be
treated as a debt due to the assessee and the same
cannot be included in the total asset of the
assessee."
Learned counsel submitted that the inference drawn does not
only not flow from the premise but would clearly be
antithetical. If the concept of ’Quaraza-e-Hasana’ and the
peculiar incidents attributed to it are not established, the
plea that there is a debt but yet there is no obligation to
repay becomes mutually contradictory. In regard to the
subsidiary or supporting reasons for the acceptance by the
Tribunal to hold that there was no debt which could be said
to be due and owing to the assessee, the learned counsel
invited our attention to the following reasoning of the
Tribunal:
232
".......Faizullabhai in a declaration dated
26.3.1965 has stated that this amount was received
by him without any obligation and without any rate
of interest and without any consideration.
Therefore, the question that arises for
consideration is whether under this peculiar
circumstance it can be said that this sum of Rs.4
lakhs which was given by the assessee to
Faizullabhai prior to 1950 for which there is no
document and for which there is no obligation to
repay can be treated as a debt due to the
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assessee........
Learned counsel submitted that neither the circumstance
that the loan was advanced prior to 1950 nor the self-
serving declaration by the borrower; nor even that no
repayment had been made during the accounting years or
earlier would, by themselves, detract from the existence and
incidents of a debt which was, otherwise, admitted. Learned
counsel pointed out that, admittedly, on 24.7.1961, a sum of
Rs.1,21,821 had been repaid by the borrower to the assessee.
Learned counsel said that both the Tribunal and the
High Court, while rightly noticing that the special
incidents of what was called ’Quaraza-e-Hasana’ had not been
established, however, by excluding the sum from the wealth,
gave the benefit of this doubt as to the very existence of
this institution of ’Quaraza-e-Hasana’ to the assessee.
5. Referring to the reliance by the High Court on the
incidents ’Hiba-ba-shart-ul-evaz’ learned counsel submitted
that the reasoning of the High Court based on this form of a
mussalman gift was destructive of the assessee’s case
inasmuch as the kind of gift envisaged by ’Hiba-ba-Shart-Ul
Evaz’ expressly stipulated contemporaneous liability for a
return.
Shri Ramachandran, learned counsel for the assessee,
sought to support the conlusion of the High Court also
another independent ground that, at all events, by entering
into this transaction the parties did not intend to create a
legal obligations between them and that, therefore, the debt
remained a debt of honour. We will presently refer to the
possibilities of this contention in the facts of this case.
6. No authoritative texts nor any principle or
precedent recognised in Muslim Law was cited before the High
Court to show that a transaction of this nature and
incidents is known to and recognised by the personal law of
the Muslims. As no material was placed before the High
Court, or before us, to establish the content and incidents
of this
233
idea of what is referred to ’Quaraza-e-Husana’ it is not
possible to say, one way or the other, whether Courts can
recognise and act upon such a rule of Muslim Law much less
afford relief to the proponent of that rule.
Indeed literature on the Principles of Islamic Banking
"Unlawful gain and legitimate profit in Islamic Law" (Nibil
A. Saleh, Cambridge University Press, 1986) does not appear
though we do not want to be understood to have pronounced on
the subject finally to support the particular incidents of
the non-existence of the element of repayability attributed
to this kind of loans. Learned author says that Sharia
distinguishes between two types of loans: one the ’Ariya’
the ’loan for use’ which transfers the usufruct of the
property temporarily and gratuitously while ownership of the
loaned-object remains with the lender; and the second, the
’qard’. In regard to this second type of loan, the ’qard’
the author says (at pages 35 and 36):
"The second type of loan recognished by Sharia is
the qard, which ’involves the loan of fungible
commodities; that is, goods which may be estimated
and replaced according to weight, measure or
number. In this case, the borrower undertakes to
return the equivalent or likes of that he has
received but without any premium on the property,
which would, of course, be construed as interest.
The most likely object of a qard loan would be
currency or other standard means of exchage."
(emphasis supplied)
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On the question whether the lender of ’Qard’ is entitled to
derive any advantage from it, the learned author refers to
the views of the different schools namely, Hanafia,
Hanbalis, Malikis, Shafi and Ibadis. (See pages 41 to 43).
Again, the learned author refers to ’Qard-Hasan’ as interest
free loan. Explaining its incidents the author says:
"Qard Hasan means an interest-free loan, which is
the only loan permitted by Sharia principles. We
have seen previously that not only can interest
not be charged on the lent capital, but no
advantage whatsoever should be derived by the
lender from the loan. Of course, each school of
law has its own interpretation of what constitutes
’advantage’ and that we have already seen in
detail ........
One may wonder how lending could be a
business
234
proposition once interest is abolished
........."
(emphasis supplied)
(see page 89)
The learned author also proceeds to enumerate the
circumstances in which the Islamic Financial Institutions
are advised to make use of ’Qard Hasan’.
7. From what is gatherable from the author’s
observations-of course, if the concept of ’Qard Hasan’ is
the same as that ’Quaraza-e-Hasana’-the obligation on the
part of the debtor of the loan to repay nor the right of the
creditor to repayment are excluded. The only incident
appears to be that it is ’interest-free’.
However, we do not want to be understood to have
pronounced on this question finally as neither side has
produced nor relied upon any literature of Islamic Law on
the point. The extracts of the Quran relied upon merely
calls some loan a beatific loan which blesses the giver. The
incidents of the transactions are not found in the passages.
8. Nor does the reliance by the High Court on the well
recognised institution in Muslim Law, of Hiba-ba-Shart-ul-
Iwaz’ advance the case of the assessee any further. In
Principles of Mohammadan Law (Mulla, 16th Edition page 165)
this kind of gift is explained:
"Where a gift is made with a stipulation (shart)
for a return, it is called hibaba-shart-ul-iwaz
.......... The main distinction between Hiba-bil-
Iwaz as defined by older jurists and Hiba-ba-
shart-ul-Iwaz is that in the former iwaz proceeds
voluntarily from the donee of the gift while in
the latter it is expressly stipulated for between
the parties."
Referring to what distinguishes Hiba-bil-Iwaz from
Hiba-ba-shart-ul-Iwaz, the learned author, Syed Ameer Ali,
in ’Mahommadan Law’ (4th Edition), Vol. I, p. 158 excerpting
from Fatawai Alamgiri, says:
Iwaz or consideration was of two kinds: one which
was subsequent to the contract (of gift), the
other which was conditioned in it."
"In the other kind, the consideration was
expressly stipu-
235
lated in the contract, and when once it was
received the transaction acquired the legal
character of a sale. The modern hiba-ba-shart-ul-
iwaz has unquestionably sprung from the above."
Then, in the last analysis what follows as a logical
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consequence is that the debt, though a ’passive debt’ would
require to be treated as due and payable to the assessee. It
was not the assessee’s case that the debt was a bad and
irrecoverable debt. The declaration of the debtor itself
establishes its existence.
9. But, then, Shri Ramachandran, anticipating the
inherent infirmity of the claim based on ’Quaraza-e-Hasana’
sought to treat us to a resourceful argument that the
conclusion of the High Court is, at all events, supportable
on an independent ground that an agreement will not, by
itself, yield legal obligations unless it is one which can
reasonably be regarded as having been made between the
parties in contemplation of legal consequences and that in
the present case the parties had excluded the contemplation
of legal consequence flowing from the transactions. This
proposition is stated in ’Chitty on Contracts’ (25th Edn.
Volume I para 123) thus:
"An agreement, even though it is supported by
consideration, is not binding as a contract if it
was made without any intention of creating legal
relations. Of course, in the case of ordinary
commercial transactions it is not normally
necessary to prove that the parties in fact
intended to create legal relations."
(emphasis supplied)
Learned counsel cited certain cases to illustrate the point.
In Rose and Frank Co. v. J.R. Crompton and Bros. Ltd.,
[1923] 2 K.B. 261 Sccutton, LJ, said:
"..... Now it is quite possible for parties to
come to an agreement by accepting a proposal with
the result that the agreement concluded does not
give rise to legal relations. The reason of this
is that the parties do not intend that their
agreement shall give rise to legal relations. This
intention may be implied from the subject matter
of the agreement, but it may also be expressed by
the parties. In social and family relations such
an intention is readily implied, while
236
in business matters the opposite result would
ordinarily follow ...."
At page 293, Atkin, LJ, said:
"..... To create a contract there must be a common
intention of the parties to enter into legal
obligations, mutually communicated expressly or
impliedly."
The novelty of the clause in the contract relied upon in
that case did not miss the learned Judge’s notice. He
observed:
"...... I have never seen such a clause before,
but I see nothing necessarily absurd in business
men seeking to regulate their business relations
by mutual promises which fall short of legal
obligations, and rest on obligations of either
honour or self-interest, or perhaps both ...."
This contention of Shri Ramachandran was not, in this form,
urged before the High Court. It was not the case of the
parties that, apart altogether from the Rule of Muslim Law
relied upon, they had agreed otherwise also that no legal
obligation should arise.
10. The contention has, no doubt, its possibilities.
But where, as here, the tax implications of large financial
obligations are sought to be put an end to, the burden is
heavy on the assessee to establish that what would otherwise
be the incidents of the transaction were excluded from
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contemplation by the parties. Here, one partner has lent a
large sum to the other to be utilised as capital in the
partnership venture. The transaction is in the context of a
commercial venture. The presumption is that legal
obligations are intended. The onus is on the parties
asserting the absence of legal obligations and the test is
not subjective to the parties; but is an objective one.
Chitty says (para 123, supra):
"..... The onus of proving that there was no such
intention ’is on the party who asserts that no
legal effect is intended, and the onus is a heavy
one. Where such evidence is adduced, the Courts
normally apply an objective test."
(emphasis supplied)
The observations of Atkin, LJ in the case cited by counsel
are also worth recalling:
237
"....... Such an intention ordinarily will be
inferred when parties enter into an agreement
which in other respects conforms to the rules of
law as to the formation of contracts. It may be
negatived impliedly by the nature of the agreed
promise or promises, as in the case of offer and
acceptance of hospitality, or of some agreements
made in the course of family life between members
of a family as in Balfour v. Balfour, [1919] 2 KB
571 ....."
In Edwards v. Skyways, [1964] 1 WLR 340 at 355 Megaw J said:
"In the present case, the subject matter of the
agreement is business relations, not social or
domestic matters. There was a meeting of minds-an
intention to agree. There was, admittedly,
consideration for the company’s promise. I accept
the propositions of counsel for the plaintiff that
in a case of this nature the onus is on the party
who asserts that no legal effect was intended, and
the onus is a heavy one."
Again, in Bahamas Oil Refining Co. v. Kristiansands
Tankrederie A/S and Others and Shell International Marine
Ltd., [1978] Lloyds Law Reports 211 it was said:
"...... In deciding whether or not there was any
animus contrabendi in relation to a certain
transaction, or whether or not sufficient notice
of a certain term was given, the law applies an
objective and not a subjective test ......"
"...... In the absence of such evidence, how can
the Court assume, even if it might be relevant in
law, that the master did not intend to enter into
a contract ......"
11. The arguments of learned counsel proceeds on the
general proposition that in addition to the existence of an
agreement and the presence of consideration there is also a
third contractual element in the form of intention of the
parties to create legal relations. This proposition, though
accepted in English Law, has not passed unchallenged. In
Cheshire and Fifoot’s Law of Contract, 10th Edn., it is
said:
"......the criticism of it made by Professor
Williston demands attention, not only as emanating
from a distinguished American jurist, but as
illuminating the whole subject now under
discussion. In his opinion, the separate
238
element of intention is foreign to the common law,
imported from the Continent by academic influences
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in the nineteenth century and useful only in
systems which lack the test of consideration to
enable them to determine the boundaries of
contract ......"
(at page 97)
Be that as it may, the point, however, to note and emphasise
is that this intention not to create legal obligation is not
inferable from the application of any objective text. The
non-enforceability of debt was pleaded not as a part of what
is permissible in law of contracts, but specifically as some
inexorable incident of a particular tenet peculiar to and
characteristic of the personal law of the Muslims. That not
having been established, no appeal, in our opinion, could be
made to the principle of permissibility of exclusion of
legal obligations in the law of contracts. We are afraid
both the Tribunal and the High Court accepted, somewhat
liberally perhaps, what was at best an argument of
hypothetical probabilities. The admitted existence of a debt
implies an obligation to repay. No legal bar of the remedy
is pleaded. What was set up, and unsubstantiated, was the
non-existence of the remedy itself.
12. Accordingly, the appeals are allowed and, in
reversal of the view taken by the High Court, the questions
referred for opinion, are answered in the negative and in
favour of the Revenue, with the attendant implication that
the loan would become includible in the wealth of the
assessee for the relevant assessment years. In the
circumstances of the case, we make no order as to costs.
R.S.S. Appeals allowed.
239