Agricultural income exemption upheld for usufructuary mortgage receipts despite a contemporaneous lease back arrangement.

Income derived from agricultural land under a usufructuary mortgage retains its character as agricultural income and remains exempt from assessment under the Income-tax Act, 1922, even where the mortgagee also receives periodic payments that may reflect a return on money lent. A contemporaneous lease back to the mortgagor does not change the legal nature of the arrangement if it is in substance still a usufructuary mortgage. The Court also rejected treating the same land-based receipts as taxable business profit, noting that such a construction would amount to double taxation. The annual payments were therefore excluded from assessment, and the reference was answered in favour of the assessee.

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Issues: Whether annual payments received under a usufructuary mortgage with a contemporaneous lease back to the mortgagor constituted agricultural income exempt from assessment under the Income-tax Act, 1922.

Analysis: The Court held that income derived from land used for agricultural purposes, whether received as rent or as agricultural produce, falls within the statutory definition of agricultural income and is exempt from tax. A pure usufructuary mortgagee receives income that is in substance rent or agricultural income, even if the receipt also represents a return on capital advanced in the course of money-lending business. The contemporaneous lease back did not alter the legal character of the transaction, which remained a usufructuary mortgage and not a simple mortgage. The Court also emphasised that the taxing provisions did not justify treating the same land-based income as both revenue-bearing and taxable business profit, as that would amount to double taxation.

Conclusion: The annual payments were agricultural income and were excluded from assessment; the answer to the reference was in the affirmative and in favour of the assessee.

Ratio Decidendi: Income derived from agricultural land under a usufructuary mortgage retains its character as agricultural income and is exempt from tax, notwithstanding that it may also represent a return on money lent or be accompanied by a lease back, if the legal effect of the transaction remains that of a usufructuary mortgage.

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