Agricultural income and lease premium treatment clarified: arrears interest exempt, building lease salami treated as capital receipt.

Interest on arrears of rent from agricultural land was held to be agricultural income because it was sufficiently connected with and derived from the land through the agricultural tenancy, so it remained exempt from tax. Salami or premium received for granting building leases was treated as a capital receipt on the facts found, since it was consideration for leasehold rights and not rent in advance or business income, so it was not assessable to income-tax. Both questions were answered in favour of the assessee.

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Issues: (i) Whether interest on arrears of rent of agricultural land constitutes agricultural income and is exempt from tax; (ii) whether salami or premium received on granting building leases is a capital receipt or income assessable to tax.

Issue (i): Whether interest on arrears of rent of agricultural land constitutes agricultural income and is exempt from tax.

Analysis: The expression "agricultural income" in Section 2(1)(a) of the Indian Income-tax Act includes rent or revenue derived from land. Interest on arrears of rent, though payable as recompense for default, springs from the agricultural tenancy and from rent arising out of land. The word "derived" was treated as broad enough to cover receipts traceable to that source. The interest was therefore regarded as having its origin in the land and the tenancy, and not as a disconnected commercial receipt.

Conclusion: The interest on arrears of rent of agricultural land was agricultural income and was exempt from tax, in favour of the assessee.

Issue (ii): Whether salami or premium received on granting building leases is a capital receipt or income assessable to tax.

Analysis: The character of salami or nazrana depends on the facts and the terms of the transaction. On the findings recorded, the payments were not rent in advance and did not arise from a business activity; they were part of the consideration for granting leasehold rights and thus bore the character of a capital payment rather than revenue receipt. The issue was treated as one of fact on the Tribunal's findings.

Conclusion: The salami or premium received on the building leases was a capital receipt and not assessable to income-tax, in favour of the assessee.

Final Conclusion: Both referred questions were answered in favour of the assessee, with costs awarded to the assessee.

Ratio Decidendi: A receipt is agricultural income if it is sufficiently connected with and derived from land through the agricultural tenancy, and a premium paid for acquisition of leasehold rights is capital when, on the facts found, it is not rent or business income but consideration for transfer of an interest in property.

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