Tax treatment of mortgage receipts turns on the capacity of receipt and final closure of the transaction, not on agricultural origin.

Amounts realised from rent collections during a mortgage transaction were taxable in the mortgagee's hands because they were received not as owner or usufructuary mortgagee, but in reduction of the secured debt; the Rs. 42,000 therefore lost any agricultural income character and was not exempt. The Court also held that the profit from the mortgage transaction, apart from the earlier receipt of Rs. 84,700, accrued only when the transaction was finally closed and title litigation ended, so it was assessable in the year of account. Both issues were decided against the assessee and the assessment was upheld.

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Issues: (i) Whether Rs. 42,000 received from court deposit representing rent collections from the mortgaged estate was agricultural income and therefore exempt; (ii) Whether the profits from the mortgage transaction, excluding Rs. 84,700 received earlier, accrued, arose or were received in the year of account.

Issue (i): Whether Rs. 42,000 received from court deposit representing rent collections from the mortgaged estate was agricultural income and therefore exempt.

Analysis: The amount was collected by a receiver while the assessee was only a simple mortgagee and before title to the estate vested in his family. It was paid into court and later received by him in reduction of the mortgage debt under the compromise decree. Since the money was not received in the character of owner or usufructuary mortgagee, and was part of the amount realised towards the debt secured by the mortgage, it could not retain the character of agricultural income in the assessee's hands.

Conclusion: The amount of Rs. 42,000 was not agricultural income and was rightly brought to tax.

Issue (ii): Whether the profits from the mortgage transaction, excluding Rs. 84,700 received earlier, accrued, arose or were received in the year of account.

Analysis: The transaction was treated by the assessee himself as remaining open until the litigation finally determined title in 1936, and the departmental assessment was postponed on that basis from year to year. The Court held that the profit could properly be ascertained only when the transaction was finally closed, and that the assessee could not avoid assessment in the year of account by relying on earlier receipts. The Rs. 42,000 also formed part of the overall profit and was not deductible as a separate reduction from the compromise amount.

Conclusion: The entire profit, excluding the earlier sum of Rs. 84,700, was assessable in the year of account.

Final Conclusion: Both questions were answered against the assessee, and the departmental assessment on the profit from the mortgage transaction was upheld.

Ratio Decidendi: Amounts realised during the course of a mortgage transaction are taxable when the transaction is finally closed and their character for tax purposes depends on the capacity in which they are received, not on their origin in agricultural rents.

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