Mortgage-cum-lease treated as interest income; government securities interest taxed, and no deduction for collection expenses allowed.

A combined mortgage and lease executed on the same date was treated as one transaction, and its substance showed that the mortgagors remained in possession while paying a fixed return in the nature of interest. The receipt was therefore not agricultural income but interest arising from a simple mortgage, and exemption failed. Interest on Government securities was held taxable in the hands of the holder when receivable, regardless of private adjustments between vendor and purchaser. No deduction for collection expenses was available under the securities head because the Act did not expressly allow such expenditure.

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Issues: (i) Whether the amount received under the mortgage and lease arrangement was agricultural income exempt from tax or interest assessable to income-tax; (ii) whether the amount received on Government securities was assessable to income-tax; (iii) whether collection expenses or similar deduction could be allowed under the head of securities.

Issue (i): Whether the amount received under the mortgage and lease arrangement was agricultural income exempt from tax or interest assessable to income-tax.

Analysis: The mortgage and lease executed on the same date were read together as one transaction. On their true construction, the mortgagee was not to enjoy the usufruct of the property or receive rents and profits in lieu of interest; the mortgagors remained in possession and were bound to pay a fixed return corresponding to the interest on the loan. The documents showed that the lease was merely machinery for realizing interest and not a genuine usufructuary arrangement. The receipt was therefore not agricultural income but interest arising from a simple mortgage transaction.

Conclusion: The receipt was assessable to income-tax and the claim to exemption failed.

Issue (ii): Whether the amount received on Government securities was assessable to income-tax.

Analysis: Interest on Government securities was taxable under the head of interest on securities when receivable by the holder. The fact that the purchaser paid the vendor an amount corresponding to interest up to the date of sale did not alter the statutory character of the sum later received from Government. The taxability depended on receipt by the assessee as holder of the securities, not on private adjustments between vendor and purchaser.

Conclusion: The amount was assessable to income-tax.

Issue (iii): Whether collection expenses or similar deduction could be allowed under the head of securities.

Analysis: The Act provided no allowance for expenses in respect of interest on securities. Unlike the heads of business, professional earnings, or other sources, the head of securities carried no statutory deduction for collection charges or similar expenditure.

Conclusion: No deduction was allowable.

Final Conclusion: All material questions were answered against the assessee and the income-tax assessments were upheld.

Ratio Decidendi: Where the true substance of a combined mortgage and lease arrangement shows that the mortgagee receives only a fixed return by way of interest and not the usufruct of the land, the receipt is taxable as interest and not exempt agricultural income; further, interest on securities is taxable when receivable by the holder, and deductions are allowable only where the Act expressly provides them.

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