George Vadakkel, J.
1. The petitioners in these cases question the constitutional validity of Section 4(2) of the Agrl. I.T. Act, 1950 (hereinafter, ' the Act '). They are sought to be assessed under that Act also in respect of the agricultural income derived from their lands, according to them, in the possession and enjoyment of their mortgagees under possessory mortgages. The said provision is impugned on the grounds that it is beyond the legislative competence of the. State Legislature, and is also arbitrary, confiscatory, irrational:and discriminatory.
2. Section 4(2) of the Act reads;
' 4. Total agricultural income--(1).........
(2) For the purposes of Sub-section (1), agricultural income derived from any land situated within the State, which is in the possession of the mortgagee thereof, shall, notwithstanding anything contained in Section 23, be deemed to be agricultural income received by the mortgagor :
Provided that where the agricultural income-tax charged on such agricultural income cannot be recovered from the mortgagor, such tax shall be payable by and recoverable from the mortgagee, and the mortgagee shall be entitled to recover from the mortgagor the amount of the tax so paid........'
3. At the very outset, it is necessary to examine the contention advanced by the learned Advocate-General that agricultural income derived from lands in the possession and enjoyment of a mortgagee thereof is the agricultural income of the mortgagor thereof. The argument is that the mortgagee in possession and enjoyment of the mortgaged land appropriates the agricultural income derived therefrom in lieu of mortgage-money, principal or interest, or, principal and interest, as the case may be, depending upon the terras of the mortgage; that, therefore, he derives or receives agricultural income therefrom and also makes the appropriation for and on behalf of the mortgagor; and, so, such agricultural income is that of the mortgagor.
4. Section 2(a) of the Act defines the term 'agricultural income' substantially in the same way as it is defined in Section 2(1) of the I.T. Act, 1961, and this is, as it ought to be, in view of Article 366(1) of the Constitution which ascribes to that expression the meaning assigned to it by statutes relating to Indian income-tax and the legislative subject; 'taxes on agricultural income' occurring as entry 46 in list II in the VIIth Schedule to the Constitution. Under the laws relating to income-tax, the income of a person is to be computed without taking into account his agricultural income, and, therefore, that expression should have the same meaning in laws relating to both income-tax and agricultural income-tax. Hence, it will be useful to examine the abovementioned line of argumentadvanced by the learned Advocate-General in the light of some of the decisions discussing this aspect with reference to the provision of the I.T. Act. Kanga and Palkhivala summarise the legal principles thus (Kanga and Palkhivala's The Law and Practice of Income-tax, 7th Edn., Vol. I, pp. 33-34):
' Income falling within the definition in this clause would be agricultural income, and exempt from tax as such, howsoever and by whomsoever it may be received. 'The exemption is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient'. Agricultural income does not lose its right to exemption merely because it can be brought under one or other of the heads of income set out in Section 14 of the Act. For instance, agricultural income does not lose the benefit of the statutory exemption and become assessable as business profits merely because it is received by the assessee, not as an ordinary landlord or proprietor, but as part of the profits of a money-lending or other business carried on by him. Rent for agricultural land received from the tenants by a mortgagee in possession, e.g., a usufructuary mortgagee, would be agricultural income and exempt as such, it being immaterial whether any part of the rent in any account as between mortgagor and mortgagee is or ought to be appropriated to the payment of principal or of interest or to any other purpose.'
5. An argument similar to the one advanced on behalf of the respondents was put forward on behalf of a mortgagor-assessee under the I.T. Act in Province of Bihar v. Raja Prithvi Chand Lal Chowdhury : [1951]19ITR550(Patna) . He claimed that the amounts derived and received by the possessory-mortgagee from the mortgaged lands and appropriated by him (the mortgagee) for payment of Government revenue and in lieu of interest on the mortgage-loan are really his (the mortgagor's) agricultural income and that in computing his total income under the Income-tax Act, the amounts appropriated by the possessory-mortgagee should be deducted since the appropriations were really in the discharge of his obligations. Dealing with this contention, the Patna High Court said (p. 552) :
' A mortgage is a transfer of interest in an immovable property, and where the mortgagee comes into possession of the property and is entitled to appropriate the usufruct thereof, he gets the income of the land in question, subject to the payment, as the terms may be, of the Government demands in respect of the property. The payment of the Government demands, according to the terms of the mortgage bond, is in no sense the agricultural income of the mortgagor although it goes to satisfy some of the public demand for which the mortgagor may be found personally liable. Similar considerations apply to the payment of the interest out of the usufruct of the property. The mortgagee in such a case is not acting asthe agent of the mortgagor. In the bond under consideration there is no rate of interest fixed, and on the terms of the bond, there is nothing to show that any particular portion of the usufruct is to be specifically appropriated towards the interest of the loan. But even if there were such a term, as I have already pointed out, that would not make any difference so long as the whole usufruct of the property is appropriated and realised by the mortgagee under the terms of the document, and no part of the income of the property goes to the mortgagor. The position would have been different if it had been a case of a simple mortgage where, of course, the income derived from the property goes to the hands of the mortgagor ; or where for instance, the usufructuary mortgagee had given a lease back to the mortgagor on certain terms and conditions ensuring the payment of a certain amount towards the satisfaction of the principal or interest in respect of the mortgage dues (Vide In the matter of Makund Sarup ILR [1928] 50 All 495 : AIR 1928 All 81 [FB] and Ibrahimsa Ravuttar v. Commissioner of Income-tax ILR [1928] 51 Mad 455 : AIR 1928 Mad 543 As it has been rightly found that no part of the income derived from the mortgaged property under the terms of the bond did go to the hands of the mortgagor, the claim of the mortgagor in respect of the deductions in question is quite unfounded.'
6. Considering this point, Sulaiman J. said in the matter of Makund Sarup, AIR 1928 All 81 [FB] as follows (p. 82) :
' I am, therefore, clearly of opinion that in the case of a pure usufructuary mortgagee there is no liability to pay income-tax. The position of such a mortgagee is very much analogous to that of a proprietor who is entitled to have his name recorded in the revenue papers and is for the purposes of revenue courts treated as a co-sharer. He is also entitled to sue for arrears of rent, eject tenants and to enter into possession and cultivate the land himself as the proprietor himself could have done. He is further liable to pay Government revenue which a simple mortgagee is not. His position is analogous to that of a lessee who takes a lease of agricultural lands, say, for a fixed period on payment of some nazrana. The latter class of transferees cannot be liable to the payment of income-tax. It is thus clear that the income received by a usufructuary mortgagee is really agricultural income, though it just happens to be also a return for the capital invested by him. To hold that he is liable to pay both Government revenue and income-tax would be imposing a double taxation which is against the policy of the Act.'
7. In CIT v. Maddi Venkatasubbayya : [1951]20ITR151(Mad) , where the purchaser of a standing crop of tobacco claimed that the profit he earned out of the purchase and sale of that crop after cutting and removing the same, is agricultural income and sought to press into service the principlethat the income derived by a possessory-mortgagee from the mortgaged lands is his agricultural income, Viswanatha Sastri J., on behalf of the court repelling the claim, pointed out the distinction as follows (p. 156):
' It is true, as pointed out by the learned advocate for the assessee, that the exemption is conferred by the Act upon a particular kind of income and it does not depend on the character of the recipient. ' Agricultural income ' as denned in the Act is exempt from tax even though it can be brought under one or the other of the heads of income set out in Section 6 of the Act. Agricultural income has been held not to be assessable as business profits merely because the recipient of the income is a moneylender who has lent monies on a mortgage with possession and is receiving the rents and profits of agricultural land in lieu of interest on the loan. This is settled by the decision of the Judicial Committee in Commissioner of Income-tax v. Sir Kameshwar Singh [1935] 3 ITR 305 and Raja Mustafa Ali Khan v. Commissioner of Income-tax [1948] 16 ITR 330. But it has to be observed that the rent of agricultural income received by a usufructuary mortgagee is agricultural income not because he is a usufructuary mortgagee but because being a usufructuary mortgagee he has gone into possession of the land and received rent as such. The mortgagee who receives rent receives it in the character of a person who has interest in the land and who is entitled to possession thereof. Therefore, the income he receives in lieu of the interest on the loan is considered to be agricultural income.'
8. Therefore, in law the agricultural income derived or received by a possessory-mortgagee from the mortgaged lands is his and not that of the mortgagor. In fact, Section 4(2) itself proceeds on that basis, for that provision only bids to deem that the agricultural income derived from land in the possession of a mortgagee thereof is such income received by the mortgagor. The proviso to Section 4(2) makes the position further clear, for, thereunder tax on such agricultural income is recoverable from the mortgagee when the same is not realisable from the mortgagor (how, unless it be the mortgagee's agricultural income?) though the mortgagee shall be entitled to recover from the mortgagor the amount of tax so paid--a provision of doubtful validity (I am not deciding this question herein) in view of the fact that the mortgagor and the mortgagee can contract otherwise, and in the absence of a contract between them, the mortgagee in possession must pay to the Government revenue and all other charges of public nature (see Sections 65(c) and 76(c) of the Transfer of Property Act, 1882).
9. In view of the conclusion arrived at in the preceding paragraph that the agricultural income derived or received by a possessory mortgagee from the mortgaged lands is his agricultural income, it is necessary toexamine the larger questions raised in this case and indicated in the beginning of this judgment. Petitioners challenge Section 4(2) of the Act, broadly speaking, on two grounds: (i) that provision is beyond the law-making-power of the Legislature ; and (ii) assuming the same to be a competent legislation, it is arbitrary, confiscatory, irrational and discriminatory and is, therefore, unconstitutional.
10. According to the learned counsel for the petitioners in these cases. Mr. Rama Shenoi and Mr. P.C. Chacko, the legislative subject, ' taxes on agricultural income' in entry 46 in list II in the VIIth Schedule to the Constitution is to be understood as ' taxes on the agricultural income of the assesses ', and that which is not his agricultural income cannot be made such by calling it his agricultural income. In short, the argument on this part of the case is that the mortgagor cannot be taxed under the Act on the agricultural income his mortgagee derives or receives from the mortgagor's lands in the possession and enjoyment of the mortgagee, and that the legislative entry does not permit making of any law in that behalf. It is contended that the Legislature itself was aware of this limitation on its legislative power, and that it is so, is evident from the employment of the fiction in Section 4(2) of the Act. The submission is that what cannot be done directly is sought to be achieved indirectly by enlarging by a fiction the range of the mortgagor's total agricultural income.
11. As already pointed out Article 366(1) says that in the Constitution, the expression ' agricultural income ' means agricultural income as defined for the purposes of enactments relating to Indian income-tax. So the expression agricultural income in entry 46 in list II has to be understood as defined in the I.T. Act, 1961. Section 2(1) of that Act defines that term, as already stated, substantially in the same way as it is defined in Section 2(a) of the Act. It may, therefore, be taken that the expression ' agricultural income ' in entry 46, list II, bears the meaning given to it by the Act as per Section 2(a) thereof. Entry 46 in list II understood with reference to s, 2(a) of the Act, does not on the face of it say that one can be taxed only on his income. ' It is well settled that the entries in the lists are not powers but are only fields of legislation, and that the widest import and significance must be given to the language used by Parliament in the various entries.' [Balaji v. ITO : [1961]43ITR393(SC) . The same principle was applied by the Supreme Court in Baldev Singh v. CIT : [1960]40ITR605(SC) and the court construed entry 54 in the Federal Legislative List in the Government of India Act, 1935, which is the same as entry 82--' Taxes on income other than agricultural income '--in List I in Schedule VII to the Constitution as follows (p. 615):
' In spite of all this it seems to us that the legislation was not incompetent. Under entry 54 a law could, of course, be [passed imposing a taxon a person on his own income. It is not disputed that under that entry a law could also be passed to prevent a person from evading the tax payable on his own income. As is well known the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary matters. So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made.'
12. In Balaji v. ITO : [1961]43ITR393(SC) , the Supreme Court following its earlier decision mentioned above again held that entry 54 of the Federal Legislative List of the Government of India Act, 1935 'can sustain a law made to prevent the evasion of tax '.
13. Section 4 of the Act as obtained now was substituted by the Agrl. I.T. (Amendment) Act, 1974 (9 of 1974). The preamble to this Act says only that 'it is expedient further to amend the Agricultural Income-tax Act, 1950, for the purposes hereinafter appearing'. There is no suggestion anywhere in the Amending Act or in the Statement of Objects and Reasons read out at the bar by the learned Advocate-General or in the counter-affidavits filed in these cases that Section 4(2) of the Act was enacted as a measure to prevent evasion of agricultural income-tax by resort to the device of mortgaging agricultural lands, or that any such practice is widely prevalent in the State. Nor was any argument advanced before me on that basis. The theme of the contentions advanced on behalf of the respondents was that the agricultural income derived or received by the possessory mortgagee from the mortgaged lands is not his but his mortgagor's (this I have already found against) and that the Legislature has plenary powers of legislation on the subject of 'taxes on agricultural income' mentioned in entry 46 in List II. In view of that, the decisions of the Supreme Court referred to above and the principles laid down therein are of no assistance to sustain the impugned provision.
14. It is contended that the Legislature has full power to legislate on the subject: taxes on agricultural income and this includes the power to enact a legislation whereunder A can be taxed on the income of B. Relying on Amina Umma v. ITO : [1954]26ITR137(Mad) , Janab Jameelamma v. ITO : [1956]29ITR246(Mad) and C. W. Spencer v. ITO : [1957]31ITR107(Mad) , a similar contention was raised before the Supreme Court in Baldev Singh v. CIT : [1960]40ITR605(SC) , but that court was not inclined to decide that question in that case. In the next case, Balaji's case : [1961]43ITR393(SC) , also that question was not answeredthough the court observed that: ' a final decision by this court on such an important question at the earliest point of time is highly desirable '. It appears that there is no decision rendered by that court on this point. The very same decisions relied on in Baldev Singh's case : [1960]40ITR605(SC) have been cited before me by the learned Advocate-General in support of the contention that the entry does not limit the Legislature's power to make laws authorising to tax A on B's income. I will for the present without deciding so, assume it to be so, and examine the case of the petitioners that even so, the legislation in question is unconstitutional as arbitrary, confiscatory, irrational and discriminatory, and, thereafter, if necessary, revert to the above-mentioned larger question.
15. Despite the fact that the State has a wider discretion in classifying persons for the purpose of taxation, and though it can pick and choose objects and subjects of tax, it is by now well settled that such legislation is also controlled by Part III of the Constitution.
' Article 265 imposes a limitation on the taxing power of the State in so far as it provides that the State shall not levy or collect a tax, except by authority of law, that is to say, a tax cannot be levied or collected by a mere executive fiat. It has to be done by authority of law, which must mean valid law. In order that the law may be valid, the tax proposed to be levied must be within the legislative competence of the Legislature imposing a tax and authorising the collection thereof and, secondly, the tax must be subject to the conditions laid down in Article 13 of the Constitution .' (K.T. Moopil Nair v. State of Kerala : [1961]3SCR77 .
16. Article 13(2) provides that the State shall not make any law which takes away or abridges the fundamental rights conferred by Part III of the Constitution, and that any law made in contravention of Article 13(2) shall, to the extent of the contravention, be void.
17. The scheme of the Act with Section 4(2) therein and in relation to that subsection is that it classifies persons as those who have possessorily mortgaged their lands and those who have not done so. Those who are not such mortgagors are assessable to tax under the Act in respect of only the agricultural income derived or received by them. However, so far as those who have possessorily mortgaged their lands are concerned, they are assessable to tax under the Act not only in respect of the agricultural income derived or received by them, but also by another, though that another is the mortgagee in possession of such assessee's lands.
18. Considering the question as to whether agricultural produce itself is income and becomes charged to tax under the Madras Agrl. I.T. Act, 1955, the Supreme Court in Rajalinga Raja v. State of Madras : [1967]63ITR617(SC) said :
' The expression ' income ' in its normal connotation does not mean mere production or receipt of a commodity which may be converted into money. Income arises when the commodity is disposed of by sale, consumption or use in the manufacture or other processes carried on by the assessee qua that commodity. There is no reason to think that the expression 'income' in the Act has any other connotation. A tax on income whether agricultural or non-agricultural is, unless the Act provides otherwise, a tax on monetary return--actual or notional.'
19. This decision was followed by this court in Velayuthan Nair v. Commr. of Agrl. I.T. : [1972]83ITR127(Ker) . In this case the assessee obtained during the previous year relevant to the assessment year certain quantity of pepper but it had not been sold, consumed or used by him. It was held that he had not derived any agricultural income so far as his produce was concerned.
20. The agricultural produce derived or received by a mortgagee in possession from the mortgaged lands, therefore, becomes chargeable to tax under the Act only in the event of the mortgagee, who admittedly obtains the same, sells, consumes or uses it. Over none of these acts the mortgagor has any control. He may not even know of the quantum of produce obtained by the mortgagee so that he cannot include it in his return with any amount of certainty. For the sin of being compelled to borrow money by furnishing possessory-landed-security, he is visited with the punishment of being taxed unlike others, on the agricultural income derived or received by another; an income, as regards the derivation or receipt of which he has no control and as regards the quantum whereof he is not in a position to ascertain. The provision is not analogous to a provision intended to prevent evasion of tax ; for example, an enactment whereunder a person who possessorily mortgages lands to his wife or children or other near relations is sought to be taxed under the Act in respect of the agricultural income derived or received from such lands ; such is not the case on hand.
21. What Section 4(2) says is that agricultural income derived from the land in the possession of the mortgagee shall be deemed to be the agricultural income received by the mortgagor. This means that even where bare agricultural lands wherefrom no agricultural income is derived have been possessorily mortgaged and the mortgagee makes improvements thereon or raises other crops on such land and thereby earns agricultural income, he need not pay agricultural income-tax in respect of such income, and the mortgagor who does not earn any such income from the lands is liable to pay such tax. Section 4(2) puts the creditor in an advantageous position by providing that his debtor shall pay the agricultural income-tax which normally and but for that provision is payable by the former. There is no rationale to support this discriminatory treatment of the debtor.
22. Again, as admitted by the learned Advocate-General, an owner of agricultural land which, is in the possession and enjoyment of a trespasser does not derive or receive any agricultural income from the trespassed-upon-land and he is not liable for tax under the Act in respect of the agricultural income derived or received by the trespasser. However, a mortgagor who parts with possession of his land by way of a security for a loan, borrowed by him and puts the mortgagee in possession thereof is liable for the tax in respect of the agricultral income derived or received by the mortgagee. Here again, there is no reasonable explanation as regards the basis and object of classification. Therefore, there is no merit in the contention that the mortgagor, being the owner, is liable for the tax under the Act in respect of the agricultural income derived or received by the mortgagee from the land in his possession under a mortgage.
23. Section 17 of the Act requires that every person who is assessable to tax under the Act with reference to his total agricultural income during the previous year shall file a return containing also the prescribed verification. This verification is to the effect that he declares to the best of his knowledge and belief that the information given in the return is correct and complete and that no agricultural income other than that shown in the return accrued or arose or was received by him during the previous year and that he had no other source of agricultural income during the said year. If this declaration is false and if he makes this declaration knowing or believing the same to be false or not believing it to be true, he commits an offence and would be liable to be prosecuted. So far as one whose lands are in the possession and enjoyment of the mortgagee, he may not know as to how much agricultural produce the mortgagee obtained from the mortgaged lands, and whether the same has become agricultural income in the mortgagee's hands. Without the mortgagee also co-operating, the mortgagor would not be in a position to file a return containing the abovemen-tioned declaration. And, if he dees not file a return he would be liable to be assessed on a best-judgment basis, whereby he is deprived of his right of appeal. Shortly, the Act or the Rules do not contain any machinery which would enable the assessee to find out as to whether the mortgagee has obtained any agricultural income, and ensure proper quantification of the agricultural income, if any, in the hands of the possessory mortgagee (he is, under the proviso, immune from the tax liability and, therefore, need have the least worry about keeping accounts relating to it). The mortgagor-assessee is thus deprived of fair play in the matter of assessment proceedings.
24. To sum up: The impugned provision, Section 4(2) of the Act, denies a mortgagor who has transferred possession of his land under a possessory mortgage to his mortgagee equality before the law relating to agriculturalincome-tax and equal protection of that law, for no apparent reason and with no particular lawful and reasonable object in view. This provision offends Article 14 and is, therefore, void for that reason.
25. In the above view, it is not necessary to embark upon an enquiry into the Legislature's competency to enact Section 4(2) of the Act, and I refrain from doing so.
26. The 1st respondent in O. P. No, 4358 of 1977 has issued ex. P-1 pre-assessment notice proposing to assess the petitioner therein taking into account also Section 4(2) of the Act. The petitioner therein has preferred ex. P-2 objection thereto. There shall be a direction that the 1st respondent therein will dispose of ex. P-2 objection in the light of this decision.
27. The 1st respondent in O. P. No. 141 of 1978 has likewise issued pre-assessment notices in respect of assessment years 1974-75 to 1976-77 proposing to assess the petitioner therein also on the basis of Section 4(2) of the Act. The said notice is not marked herein. The 1st respondent herein is directed to afford an opportunity to the petitioner therein to file objections thereto and to dispose of the same in the light of this decision.
28. The two writ petitions are allowed to the above extent. There will be no order as regards costs.