1946 (4) TMI 17 - HC - Income Tax

Interest on arrears of rent from agricultural land qualifies as agricultural income exempt from tax. Salami or nazrana from leases is a capital receipt.

MST. SARJU BAI Versus COMMISSIONER OF INCOME-TAX

The court held that interest on arrears of rent from agricultural land constitutes 'agricultural income' under the Indian Income-tax Act, exempt from tax. ... - Issues Involved:1. Whether the interest on arrears of rent of agricultural land constitutes 'agricultural income' under Section 2(1) of the Indian Income-tax Act and is exempt from tax under Section 4(3)(viii).2. Whether the amount received as salami or nazrana from the granting of leases is a capital receipt or income assessable to income-tax.Detailed Analysis:Issue 1: Interest on Arrears of Rent as Agricultural IncomeThe primary question was whether the interest on arrears of rent due from agricultural tenants constituted 'agricultural income' under Section 2(1) of the Indian Income-tax Act, thereby exempting it from tax under Section 4(3)(viii). The Income-tax Officer included Rs. 365 in the assessment for 1939-40, which was upheld by the Assistant Income-tax Commissioner. However, the Income-tax Tribunal held it as 'agricultural income.'The court analyzed the statutory nature of interest on arrears of rent under the United Provinces Tenancy Act, where Section 146 mandates that arrears of rent carry interest. The argument against considering it as agricultural income was that such interest is merely commercial compensation for the default of the debtor and not related to the agricultural relationship of landlord and tenant. Conversely, it was argued that this interest is inherently part of the tenancy relationship and thus qualifies as 'revenue derived from land.'The court referenced several cases, including Sri Ramchandra Dev v. Commissioner of Income-tax and Srimati Lakshmi Daiji v. Commissioner of Income-tax, which supported the view that interest on arrears of rent could be classified as agricultural income. The court agreed with the broader interpretation that the interest could be traced back to the agricultural tenancy and thus be considered 'revenue derived from land.'The court also noted conflicting views from the Calcutta High Court and the Full Bench of the Bihar High Court, which did not consider such interest as agricultural income. However, the court found these views less persuasive, particularly because they did not fully address the broader term 'revenue.'The court concluded that the interest on arrears of rent was 'agricultural income' within the meaning of Section 2(1) of the Income-tax Act and exempt from tax under Section 4(3)(viii).Issue 2: Salami or Nazrana as Capital Receipt or IncomeThe second issue was whether the amount of Rs. 10,000 received as salami or nazrana from the granting of leases was a capital receipt or income assessable to income-tax. The Income-tax Officer treated this sum as income, which was confirmed by the Appellate Assistant Commissioner. The Income-tax Tribunal treated this question as one of fact, determining whether the receipts were capital or revenue.The court emphasized that the nature of such receipts depends on the intention of the parties and the specific terms of the agreements, making it a question of fact. The Tribunal found that the assessee was effectively selling property rights rather than anticipating rent, indicating that the receipts were capital in nature.The court referenced the Privy Council case of Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax, which distinguished salami as a capital receipt for acquiring the right to enjoy benefits under a lease. The court agreed with this characterization, concluding that the payments in question were capital receipts and not assessable to income-tax.Conclusion:1. The sum realized by the assessee on account of interest on arrears of rent of agricultural land was 'agricultural income' and exempt from tax under Section 4(3)(viii) of the Indian Income-tax Act.2. The amount received as salami or nazrana was a capital receipt and not assessable to income-tax.The court answered the references accordingly and awarded costs to the assessee.