Interest on arrears of mustajiri rent treated as agricultural income where underlying lease payment was rent.

Interest on arrears of mustajiri rent was treated as agricultural income because the annual payment under the lease was characterised as rent arising from an interest in land. The court reasoned that default interest merely followed the character of the underlying rent, and the contractual auction form of the arrangement did not change that result. No distinction was accepted between interest on arrears of mustajiri rent and interest on arrears of rent payable by a cultivating tenant. The impugned interest was therefore not assessable to income tax and retained the exemption attached to agricultural income.

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Issues: Whether interest on arrears payable under a mustajiri lease constituted agricultural income and was, therefore, not assessable to income tax.

Analysis: The annual payment reserved under the mustajiri lease was treated as rent because the arrangement created an interest in land and entitled the mustajir to collect the landlord's share of produce rent. Interest charged on default in payment of that rent was therefore interest on arrears of rent. The circumstance that the payment arose under a contractual auction arrangement did not alter its character as rent, and no distinction was accepted between such interest and interest on arrears of rent payable by a cultivating tenant, which had long been treated as part of agricultural income.

Conclusion: The interest on arrears of mustajiri rent formed part of the assessee's agricultural income and was not taxable; the answer to the reference was in the affirmative and in favour of the assessee.

Final Conclusion: The reference was answered by holding that the impugned interest retained the character of agricultural income, with costs and refund awarded to the assessee.

Ratio Decidendi: Interest on arrears of rent retains the character of agricultural income when the underlying annual payment under a lease is itself rent arising from an interest in land.

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