'Mortgage'

A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.

Mortgages are also known as "liens against property" or "claims on property.

In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.

Mortgage Section 58(a)

Mortgage has been defined in Section 58(a) of Transfer of Property Act as "the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability" It works on the simple idea of lien over another's property and is effected as an instrument between the lender and borrower. The borrower seeks a loan against the security of his property. This is done by transferring an interest of the immovable property to the lender and it entails pecuniary/financial liability as well. The person who advances loan against security is referred to as the 'mortgagor' and the one who seeks loan is the "mortgagee".
A M O R T G A G O R B M O R T G A G E E

Transfer of Interest

Loan

Redemption

Reconveyance

As per the Registration Act, 1908, when the money involved in the mortgage transaction is more than hundred rupees, a mortgage needs to be brought into effect by a registered instrument, duly signed by the mortgagor and two witnesses. If the money involved is less than hundred rupees, it can also be legitimized by delivery of property. Mortgages can be on any freehold or leasehold immovable property. Definitions: 1. Debt / Mortgage Money: The principal borrowed from the lender. The borrower in addition to the principal has to pay the interest levied on it. 2. Redemption: It means that the interest transferred to the mortgagee during the transaction at the time of the execution of mortgage would be vested back in the mortgagor at the time of recovery. 3. Mortgage Deed: It is a legal instrument in accordance with the mortgage law in India and duly stamped under Indian Stamp Act, 1889. It is legally binding on both parties in the mortgage deal. It contains details of the property owner, location of the property, size of property, amount of mortgage, interest payable and time duration. It also contains conditions upon which loan is agreed against property. Procedure of effecting a Mortgage 1. The mortgage deed is marked with the rights and obligations of both parties. 2. The borrower with receives money from the lender. 3. The mortgage money is to be paid back at a later date, mostly in accepted installments until a pledged programmed date.

4. Money is to be reimbursed as a rule with interest and on contracted terms linking both the parties. 5. It is expected that the borrower returns money within the time lines. 6. Interest is intended on debt. 7. The borrower guarantees to take back his property and to pay interest 8. If the borrower fails to pay, the lender is capable of accruing money by selling the property or he may even carry out a legal act to make sure the money (interest and principal) is paid.

The mortgage deed is marked with the rights and obligations of both parties.

Interest is intended on debt.

The borrower guarantees to take back his property and to pay interest

The borrower with receives money from the lender.

It is expected that the borrower returns money within the time lines.

The mortgage money is to be paid back at a later date, mostly in accepted installments until a pledged programmed date.

If the borrower fails to pay, the lender is capable of accruing money by selling the property or he may even carry out a legal act to make sure the money (interest and principal) is paid.

Money is to be reimbursed as a rule with interest and on contracted terms linking both the parties.

RIGHTS AND LIABILITIES OF MORTGAGOR ( Sec 60) Right of mortgagor to redeem At any time after the principal money has become due, the mortgagor has a right, on payment or tender, at a proper time and place, of the mortgage-money, to require the mortgagee (a) to deliver to the mortgagor the mortgage-deed and all documents relating to the mortgaged property which are in the possession or power of the mortgagee, (b) where the mortgagee is in possession of the mortgaged property, to deliver possession thereof to the mortgagor. (c) at the cost of the mortgagor either to re-transfer the mortgaged property to him or to such third person as he may direct, or to execute and (where the mortgage has been effected by a registered instrument) to have registered an acknowledgement in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished: PROVIDED that the right conferred by this section has not been extinguished by the act of the parties or by decree of a court. The right conferred by this section is called a right to redeem and a suit to enforce it is called a suit for redemption. Nothing in this section shall be deemed to render invalid any provision to the effect that, if the time fixed for payment of the principal money has been allowed to pass or no such time has been fixed, the mortgagee shall be entitled to reasonable notice before payment or tender of such money.

Redemption of portion of mortgaged property Nothing in this section shall entitle a person interested in a share only of the mortgaged property to redeem his own share only, on payment of a proportionate part of the amount remaining due on the mortgage, except only where a mortgagee, or, if there are more mortgagees than one, all such mortgagees, has or have acquired, in whole or in part, the share of a mortgagor. RIGHTS AND LIABILITIES OF MORTGAGEE (Sec 67) Right to foreclosure or sale In the absence of a contract to the contrary, the mortgagee has, at any time after the mortgage- money has become due to him, and before a decree has been made for the redemption of the mortgaged property, or the mortgage-money has been paid or deposited as hereinafter provided, a right to obtain from the court a decree that the mortgagor shall be absolutely debarred of his right to redeem the property, or a decree that the property be sold. A suit to obtain a decree that a mortgagor shall be absolutely debarred of his right to redeem the mortgaged property is called a suit for foreclosure. Nothing in this section shall be deemed(a) to authorise any mortgagee other than a mortgagee by conditional sale or a mortgagee under an anomalous mortgage by the terms of which he is entitled to foreclose, to institute a suit for foreclosure, or a usufructuary mortgagee as such or a mortgagee by conditional sale as such to institute a suit for sale; or (b) to authorise a mortgagor who holds the mortgagee's rights as his trustee or legal representative, and who may sue for a sale of the property, to institute a suit for foreclosure; or
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(c) to authorise the mortgagee of a railway, canal, or other work in the maintenance of which the public are interested, to institute a suit for foreclosure or sale; or (d) to authorise a person interested in part only of the mortgage-money to institute a suit relating only to a corresponding part of the mortgaged property, unless the mortgagees have, with the consent of the mortgagor, severed their interests under the mortgage.

RIGHTS AND LIABILITIES OF MORTGAGOR

RIGHTS AND LIABILITIES OF MORTGAGEE

(a) to deliver to the mortgagor the mortgage-deed and all documents relating to the mortgaged property which are in the possession or power of the mortgagee. (b)where the mortgagee is in possession of the mortgaged property, to deliver possession thereof to the mortgagor. (c) at the cost of the mortgagor either to re-transfear the mortgaged property to him or to such third person as he may direct, or to execute and (where the mortgage has been effected by a registered instrument) to have registered an acknowledgement in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished:

(a) to authorise any mortgagee other than a mortgagee by conditional sale or a mortgagee under an anomalous mortgage by the terms of which he is entitled to foreclose, to institute a suit for foreclosure, or a usufructuary mortgagee as such or a mortgagee by conditional sale as such to institute a suit for sale; or (b) to authorise a mortgagor who holds the mortgagee's rights as his trustee or legal representative, and who may sue for a sale of the property, to institute a suit for foreclosure; or (c) to authorise the mortgagee of a railway, canal, or other work in the maintenance of which the public are interested, to institute a suit for foreclosure or sale; or

Types of Mortgage 1. Simple Mortgage 2. Mortgage by Conditional Sale 3. Usufructuary Mortgage 4. English Mortgage 5. Mortgage by deposit of title Deed 6. Anomalous mortgage

Simple Mortgage Mortgage by Conditional Sale Types of Mortgage Mortgage by deposit of title Deed English Mortgage Usufructua ry Mortgage

Anomalous mortgage

1. Simple Mortgage A simple mortgage does not involve giving the possession of the mortgagor's property to the mortgagee. It is under mutual agreement that in case of nonpayment by the mortgagee to the mortgagor within the specified time, the

mortgagee can cause the mortgaged property to be sold in accordance with law and have the sale proceeds adjusted towards the payment of the mortgage money. 2. Mortgage by Conditional Sale This type of mortgage entails the apparent sale of property by the mortgagor to the mortgagee on a conditional basis, that on default by mortgagor, the sale shall become absolute and complete. If the mortgagor repays his loan, the sale shall become null and void. 3. Usufructuary Mortgage This type of mortgage, by an express or implied term gives possession to the lender and gives him rights to accrue the rents or income coming from that property as repayment for interest and mortgage money till the time repayment is complete. There is no time limit for payment of the mortgage money. 4. English Mortgage The mortgagor transfers the mortgaged property to the mortgagee in entirety. However there is a condition that on complete repayment of the repayment money, he will re-transfer the property back to himself. 5. Reverse Mortgage Reverse mortgage involves lending money to senior citizens against mortgage of their property (house) and there is no need of repaying the same. The loan is awarded as a lump sum amount or as monthly installments. In the event of death of the mortgagor, the property goes into the possession of the mortgagee.

6. Anomalous Mortgage A mortgage that does not fall under the purview of any of the mortgage types is called an anomalous mortgage. Conditions attached with mortgage 1. While mortgaging property, only legal rights are transferred to the mortgagee but not the possession. 2. An instrument of mortgage deed is mandatory. 3. On sale of a mortgaged property, the mortgage flows along with the property.

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Mortgage by Conditional Sale

Section 58(c) of the Transfer of the Property Act defines the "Mortgage by Conditional Sale. It may be defined as an ostensible sale on condition that upon repayment, the buyer shall transfer the property to the seller.During the Muslim rule,this kind of mortgage came in to vogue,as traking of interest is forbidden under the Mohammedan law.

Mortgage by conditional sale-Where, the mortgagor ostensibly sells the mortgaged property 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 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.

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Essentials : The essentials features of mortgage by conditional sale. 1. If the mortgagor fails to repay the mortgage on a certain date,the sale becomes absolute. 2. If the mortgagor pays the mortgage debt on a certain date,the sale becomes void and the mortgagor becomes the owner. 3. if the mortgagor pays the mortgage debt,the buyer must retransfer the property to the seller.This transaction is mortgage by conditional sale. 4. The transaction resembles that of sale,though it is only a mortgage. 5. The ostensible sale becomes absolute sale,if the mortgagor fails to make payment on the specified date.This can be enforced by taking proceedings for forclose of the mortgage.The order of foreclosure by the court converts the mortgage by Conditional Sale into an absolute sale.

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The Essentials features of mortgage by conditional sale.

If the Mortgagor fails to repay the mortgage on a certain date,the sale becomes absolute.

If the mortgagor pays the mortgage debt on a certain date,the sale becomes void and the mortgagor becomes the owner.

If the mortgagor pays the mortgage debt,the buyer must retransfer the property to the seller.This transaction is mortgage by conditional sale.

The transaction resembles that of sale,though it is only a mortgage

The ostensible sale becomes absolute sale,if the mortgagor fails to make payment on the specified date.

Amendment of Sec.58(c) : If the condition of retransfer is embodied in the document effecting the Ostensible sale,then such transaction is not regarded as a mortgage by Conditional Sale.

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How mortgage by conditional sale works In case of a simple mortgage, without delivering possession of the mortgaged property, a mortgagor binds himself personally to pay the mortgage money.

He agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgagee will have a right to sell the mortgaged property and the proceeds of sale go towards the mortgage money. This transaction is called a simple mortgage.

A mortgage by conditional sale is different. In case of a mortgage by conditional sale, a mortgagor ostensibly sells the mortgaged property on the condition that on default of repayment of the mortgage money by a certain date the sale will become absolute. On the payment being made, the sale will become void. And on the payment being made the buyer will have to transfer the property back to the seller.

Section 58(C) of the Transfer of the Property Act defines a mortgage by conditional sale. It is defined as an ostensible sale on the condition that on repayment, the buyer will transfer the property back to the seller.

The mortgagor states in the deed that he sells the property for the mortgage money as a consideration subject to conditions. So, a mortgage by conditional sale is where the mortgagor sells the property to the mortgagee on the condition that in case of default of repayment of the mortgage money, the sale will become absolute, and on repayment of the money the sale will become void and the mortgagee will transfer the property back to the mortgagor.
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Benefits of Mortgage by conditional sale There are many advantages with this type of mortgage. In a simple mortgage, if there is a default in the repayment of the money, the property has to be brought to sale for recovery of the debt and there is no question of the mortgagee becoming the absolute owner of the property. The mortgagee has to resort to lengthy legal steps. However, in the case of mortgage by conditional sale, the mortgagor becomes a legal owner absolutely when a default in payment occurs on the specified due date. Ostensible sale in case of mortgage by conditional sale is in reality a mortgage, subject to the conditions set out in the document. A mortgagee cannot claim a right of ownership on the date of execution of the mortgage by conditional sale. It is only if and when the conditions embodied in the document are not complied with by the mortgagor that the mortgagee can lay claim to the ownership of the property ostensibly sold under that document. Till then, the property continues to remain the property of the mortgagor. The right of redemption of the mortgage vests with the mortgagor and the mortgagee remains under an obligation to discharge the mortgage on the conditions embodied in the document regarding repayment within the stipulated time being fulfilled. Mortgage by conditional sale is a mortgage and not a sale. It is liable to be cancelled at the option of the mortgagor at a subsequent date. A mortgage once created remains a mortgage unless it is foreclosed or redeemed.

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Judiciary
Case Law
[2002] 121 TAXMAN 251 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax v.s

Chandulal Kamdar R. JAYASIMHA BABU AND K. GNANAPRAKASAM, JJ. TAX CASE NO. 895 OF 1984 REFERENCE NO. 791 OF 1984 NOVEMBER 22, 2000 Section 2(47) of the Income-tax Act, 1961 - Capital gains - Transfer Assessment year 1976-77 - Whether ostensible sale in case of mortgage by conditional sale is in reality a mortgage subject to conditions set out in mortgage deed - Held, yes - Whether in such cases, transfer under section 2(47) on sale can take place only in year of foreclosure of mortgage and not in year in which mortgage is created - Held, yes The assessee executed a deed describing it as mortgage by FACTS conditional sale, giving thereunder a right to the mortgagee to foreclose mortgage in the event of the mortgagor failing to repay. The assessee failed to repay the amount within specified period which expired in the subsequent year. The Tribunal held that since there was no foreclosure of the
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mortgage during the assessment year, it remained a mortgage during that year and it could not be said that any transfer and thereby any sale took place during the assessment year and the sale proceeds were not taxable The assessee executed a deed describing it as mortgage by conditional sale, giving thereunder a right to the mortgagee to foreclose mortgage in the event of the mortgagor failing to repay. The assessee failed to repay the amount within specified period which expired in the subsequent year. The Tribunal held that since there was no foreclosure of the mortgage during the assessment year, it remained a mortgage during that year and it could not be said that any transfer and thereby any sale took place during the assessment year and the sale proceeds were not taxable.

HELD

The mortgage by conditional sale is very much a mortgage and as the description of the deed indicated, the mortgage was created by incorporating the condition in the document by which the mortgage was created, though the document itself was one by which the mortgagor ostensibly sold the property. Ostensible sale is not by itself a sale though it may become one when the condition regarding repayment is not fulfilled. Ostensible sale in case of mortgage by conditional sale is in reality a mortgage, subject to the conditions set
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out in the document. The mortgagee cannot claim right of ownership on the date of the execution of the mortgage by conditional sale. It is only if and when the condition embodied in the document is not complied with by the mortgagor that the mortgagee can lay claim to the ownership of the property ostensibly sold under that document. Till then the property continues to remain the property of the mortgagor. The right of redemption of the mortgage vests in the mortgagor and the mortgagee remains under an obligation to discharge the mortgage on the condition embodied in the document regarding repayment within the stipulated time being fulfilled. The Tribunal was right in holding that there was no sale of the property on the date on which the mortgage by way of conditional sale was created by the execution of the document in relation thereto and it could be taken as transfer only in the year of foreclosure and not in the year in which the mortgage was created.

JUDGMENT

Jayasimha Babu, J. - The Tribunal held that the mortgage by conditional sale is a mortgage and is not a sale which is liable to be cancelled at the option of the mortgagor at a subsequent date. A mortgage once created remains a mortgage unless it is foreclosed or redeemed. There was no foreclosure of the
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mortgage during the assessment year. The foreclosure was an event which occurred in the subsequent year. The Assessing Officer, therefore, could not have treated the sale as having taken place in the assessment year 1976-77. The assessee had executed a deed describing it as mortgage by conditional sale on 24-1-1976, giving thereunder a right to the mortgagee to foreclose the mortgage in the event of the mortgagor failing to repay the amount secured thereunder within four months. The assessee failed to repay the amount within that period which expired in the subsequent assessment year. 2. Section 58 of the Transfer of Property Act, 1882 which occurs in Chapter IV deals with mortgage of immovable property and charges. Mortgage by conditional sale is one of the modes by which mortgage can be created. The other types of mortgages being simple mortgage; usufructuary mortgage; English mortgage; mortgage by deposit of title deeds and anomalous mortgage. Clause (c) of section 58 deals with mortgage by conditional sale. It reads thus : (c) Mortgage by conditional sale.Where the mortgagor ostensibly sells the mortgaged property on condition that on default of payment of the mortgagemoney on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or

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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, 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. 3. The mortgage by conditional sale is, therefore, very much a mortgage and as the description of the deed indicates, the mortgage is created by incorporating the condition in the document by which the mortgage is created, though the document itself is one by which the mortgagor ostensibly sells the property. Ostensible sale is not by itself a sale though it may become one when the condition regarding repayment is not fulfilled. Ostensible sale in case of mortgage by conditional sale is in reality a mortgage, subject to the conditions set out in the document. The mortgagee cannot claim right of ownership on the date of the execution of the mortgage by conditional sale. It is only if and when the condition embodied in the document is not complied with by the mortgagor, that the mortgagee can lay claim to the ownership of the property ostensibly sold under that document. Till then the property continues to remain the property of the mortgagor. The right of redemption of the mortgage vests in the mortgagor and the mortgagee remains under an obligation to discharge the mortgage on the condition embodied in the
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document regarding repayment within the stipulated time being fulfilled. 4. The Tribunal was right in holding that there was no sale of the property on the date on which the mortgage by way of conditional sale was created by the execution of the document in relation thereto. 5. The question referred to us is as to whether in the facts and circumstances of the case, the sum of Rs. 64,000 being the amount secured under a mortgage by conditional sale can be taken to be a transfer within the meaning of section 2(47) of the Act, and whether the said sum can be taken as capital gain either in the year of mortgage or in the year of foreclosure, is answered by holding that it can be taken as transfer only in the year of foreclosure and not in the year in which the mortgage was created.

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Conclusion

Mortgage by conditional sale-Where, the mortgagor ostensibly sells the mortgaged property 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 a mortgagee by conditional sale:

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