Interest on arrears of rent is not agricultural income where it arises from tenant default and remains taxable.

Interest on arrears of rent payable by a ryot to a landholder was treated as an additional amount arising from the tenant's default, not as part of the rent itself. The Madras High Court held that it was not revenue derived from land and therefore did not fall within agricultural income under the Income-tax Act. The existence of a charge under the Madras Estates Land Act did not change the source or character of the receipt for tax purposes, and the court distinguished cases involving a fresh loan transaction. The interest was accordingly taxable.

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Issues: Whether interest on arrears of rent payable by a ryot to a landholder under the Madras Estates Land Act constituted agricultural income within the meaning of the Income-tax Act and was therefore exempt from assessment.

Analysis: The interest payable on arrears of rent was held to be an additional sum payable by reason of the tenant's default and not part of the rent itself. It was not revenue derived from land within the statutory definition of agricultural income under the Income-tax Act. The character of the receipt was determined by the definition in the taxing statute, and the fact that the Madras Estates Land Act created a charge over the rent and interest did not alter the source or nature of the interest. The Court also treated the receipt as distinct from cases where a fresh loan transaction changed the character of the liability.

Conclusion: Interest on arrears of rent payable to the landholder was not agricultural income within Section 2(1)(a) of the Income-tax Act and was taxable.

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