Mst. Sarju Bai Vs. Commissioner of Income-tax. - Court Judgment

BRAUND, J. - We have before us three references by the Income-tax Appellate Tribunal under Section 66 of the Indian Income-tax Act. The three references raise between them two questions and we need not for this purpose distinguish between the three references. It is sufficient to say that the references relate to a lady called Mst. Sarju Bai, who apparently lived at Jhansi and there owned a very considerable area of land situated in the civil station. It is out of her transactions in respect of this property that these questions have arisen in relation to the assessment year 1939-40 and 1940-41. I propose to deal with the two questions quite separately.

The first one is a very simple question indeed. In the assessment of the year 1939-40 the Income-tax Officer included as against the assessee a sum of Rs. 365 in respect of interest on arrears of rent due by the assessees agricultural tenants. It is common ground that such interest was charged and was received and the only question is whether it constituted 'agricultural income' within the meaning of the definition contained in Section 2 (1) (a) of the Indian Income-tax Act. Of that definition there are only six material words, as far as we are concerned, and those are the words 'rent or revenue derived from land,' within which in this case the interest in question would have to come if it is to stand any chance of being classified as agricultural income and, therefore, being held to be exempt from income-tax. The Income-tax Officer assessed her to tax on this sum and the Assistant Income-tax Commissioner up held the assessment. In due course she appealed to the Income-tax Tribunal which held that the sum of Rs. 365 in question was 'agricultural income.' Finally a question was framed and submitted to us in this form :-

'Whether the sum realized by the assessee on account of interest on arrears of rent of agricultural land is agricultural income within the meaning of Section 2 (1) of the Income-tax Act and as such exempt from tax under Section 4 (3) (vii) of the said Act.'

It has to be observed that under the United Provinces Tenancy Act by Section 146 it is made a statutory attribute of arrears of rent that they shall carry interest. It can, therefore, be said, for what it may be worth, that if is statutorily inherent in the character of rent under the United Provinces Tenancy Act is that it shall carry interest when in arrear. That is a material consideration since it and similar provisions of other relevant Acts have formed the basic of discussion in a good many of the cases to which we have been referred. The argument on the one hand is that interest payable (whether by statute or not) on arrears of rent which have already become a debt due is not referable in any way to the agricultural relationship as landlord and tenant, but is attributable solely to their character as creditor and debtor. It is said that interest is in its nature merely that commercial compensation which either the accepted practice of business or in some cases the legislature has adopted to see that a creditor does not suffer from the default of his debtor. That, it is said, has nothing whatever to do with the relationship of landlord and tenant and, therefore, is not in any way derived from the agricultural land which is the subject-matter of the tenancy. That is one way of putting it. The other way of putting it is that interest on arrears of rent is something which in this case has been introduced by the United Provinces tenancy Act as a condition of the relationship between landlord and tenant. Arguing from that, it is said that, whether or not such interest can be strictly classified as rent, it certainly can be classified as coming within the larger expression 'revenue' which forms part of the definition of agricultural income. It will be remembered that the definition speaks of 'any rent or revenue derived from land.' Those who put it in this way say that such interest, when received, has its origin in the tenancy, because, if there had been no tenancy, there would have been no arrears of rent and if there had been no arrears of rent, there would have been no statutory interest. Following this sequence of causes, they say that it is obvious that interest in circumstances such as these must be classified as 'revenue derived from land.'

The case is almost one of first impression, although a number of Courts have exercised their minds in this matter. There are at least two decisions of the High Court at Patna which take a view favourable to the assessee and hold that interest on arrears of rent can be classified as agricultural income. The first of these case is that of Sri Ramchandra Dev v. Commissioner of Income-tax, Bihar and Orissa. This was decided in 1942 and the learned Chief Justice and Mr. Justice Manohar Lall of the Patna High Court, considering the question in relation to the same section of the Indian Income-tax Act as I am now dealing with, took the view that interest on arrears of mustajiri rent received in default of punctual payment, formed part of the agricultural income of the assessee. The second of the two cases is the still more recent one of Srimati Lakshmi Daiji v. Commissioner of Income-tax in which again the same question was considered and decided in the same way. In this case, however, the learned Judges took the rather wider view, which with great respect I am inclined to think is the right view, that interest in a case like this falls to be considered not as rent but as revenue derived from the land on the ground that it has its source in the agricultural tenancy itself inasmuch as but for that no question could ever have arisen of it being paid.

I see no reason to put a limited meaning on the word 'derived' appearing in Section 2 (1) (a) of the Income-tax Act. It is not a term of art and, as was said by Lord Davey in the privy Council in the case of Commissioners of Taxation v. Kirk :-

'.....Their Lordships attach no special meaning to the word derived, which they treat as synonymous with arising or accruing ....'

Lord Davey then went on in a very well known judgment to trace how out of the various processes of manufacture between the time of the extraction of the ore from the ground to the receipt of the money derived from its ultimate sale many of theses can be properly described as being derived from the original source. I see no reason, therefore, why the word 'derived' in the definition in the Indian Income-tax Act should not properly be used to cover something which can be traced back to a beginning from which it can reasonably be said to spring and without which it never would have existed at all. It seems to me quite logical to say on this line of reasoning that the interest which a defaulter pays on his arrears of rent can be traced back to the lease itself which gave rise to the rent of which the default was made on which the interest has by statute been imposed. It seems to me that that interest can properly be said to have been 'derived' from the rent, which rent itself issued out of the agricultural land.

It is noticeable that, although there are cases in the High Court at Calcutta in which the same view has been taken, there are others in which a completely opposite view has prevailed. In the case of In re Manager, Radhika Mohan Roy Wards Estate, Sir Harold Derbyshire and Mr. Justice Mukherjee have held in 1940 that interest on arrears of rent realized under Section 67 of the Bengal Tenancy Act of 1885 is not agricultural income within the meaning of Section 2 (1) (a) of the Indian Income-tax Act. And they have gone somewhat out of their way to way that it is neither rent nor revenue. They have traced the origin of the Interest exclusively to that 'statutory recompense which is allowed to the landlord for being deprived of the use of the money which is payable as rent by the tenant.' With great respect, it is my view that, while no doubt, it does serve the purpose of being that statutory recompense which they say it is, it may none the less be derived from the land in the sense that I have endeavoured to explain above. I do not feel that its purpose as statutory recompense is inconsistent with its being derived from the land for the reason that the occasion for the recompense itself arises out of the land.

The only other case on which I desire to say one word is the Full Bench Bihar case of Maharaja Bahadur Ram Ran Vijay Prasad Singh v. The province of Bihar, in which three of the learned Judges of that Court expressed an uncompromising dissent to the view I have ventured to express above. I do not desire to say more than that having read that case with some care, I do not think it really constitutes an authority to the detriment of the view that interest on arrears of rent may constitute agricultural income for the purposes of the definition of that term in the Indian Income-tax Act. What was being dealt with in this Full Bench case was the Bihar Agricultural Income-tax Act; and, as I understand it (though the Act has not been produced) the only word there to be construed was the word 'rent'. With great respect I should concede that it would be difficult to hold that interest on arrears of rent was itself rent. There was, I am told, no such word as 'revenue' as is found in the definition in the Indian Income-tax Act and there is a passage in the judgment itself which would appear to afford some indication that had the learned Judges been considering the word 'revenue', they might not have expressed so strong a view. They say :-

'A similar view was taken by a Bench of the Calcutta High Court in a very recent decision in In re Manager, Radhika Mohan Roy Wards Estate in which it was held that interest on arrears of rent realized under Section 67, Bengal Tenancy Act, was not agricultural income within the meaning of the Section 2 (1) (a), Indian Income-tax Act. It is neither rent for revenue derived from land. In Bihar it has been held that interest on rent may be revenue derived from land; but in my view there is no doubt whatsoever as to the correctness of this decision that interest on arrears of rent is not rent.'

It is noticeable that the learned Chief Justice there confines himself to an expression of opinion that interest on arrears of rent is not 'rent'. But he says nothing about whether it may not possibly be 'revenue'.

For these reasons I have come to conclusions that on this part of the case the Income-tax Tribunal was right and in my judgment the first of the two questions before us should be answered by saying that the sum realised by the assessee on account of interest on arrears of rent of agricultural land was 'agricultural income' within the meaning of Section 2 (1) of the Income-tax Act and as such exempt from tax under Section 4 (3) (viii) of the said Act.

I now come to second of the two questions involved in these references. It seems that the assessee in the year in question had granted some twelve leases of parts of her property which were in the nature of the letting of plots on building leases. It is common ground that in respect of these twelve lettings she fixed a small rent in the nature of a ground rent and charged on each occasion what is alternatively called a nazrana or salami, which in English legal parlance would be called a fine. The Income-tax Officer, being unable to ascertain the exact amount from the assessees books, fixed an amount of ten thousand rupees as the assessees proceeds from this source for the year in question. And by his assessment of the 30th January, 1941, he treated this sum as income on the ground that the 'lease money fixed is quit disproportionate to the premium charged and area involved.'

This was confirmed by the Appellate Assistant Commissioner and ultimately the question was brought before the Income-tax Appellate Tribunal. It is instructive to notice that, as I read the judgment of the 16th October, 1942, of the Tribunal, they were content to treat this question -and I think they were right in doing so - as a question of fact. The argument was whether the receipts were in the nature of capital receipts or of revenue and in speaking of the assessees objection they say that it was to the effect that 'on the facts of this case the receipts of this source are not income but constitute capital....' They say that prima facie salami or nazrana is not income and that if the Income-tax authorities wish to have it treated as income in any particular case, the burden lies on them to show 'that there do exit facts which would make it income.' I entirely agree with that statement, and indeed, when the question is analysed, it seems to me to come down to nothing but a question of fact.

There are two ways of putting it. It has been said - and this I gather was the principal bone of contention before the Tribunal - that the premium paid represented advance payments of rent. That is entirely a question of what the agreement between the parties was and what their intention was in reference to the particular lettings in issue. Those questions are essentially questions of fact. That presupposes that the proceeds of the salami or nazrana are to be treated under head (iii) of Section 6 of the Act as income from property. If, on the other hand, it is to be put the other way and treated as income from business, then it is equally a question of fact. Whether or not an assessee in any particular case, in dealing with his or her property, has done so with that amount of system or intention that would convert a merely private dealing with his or her own property into a business enterprise is, as it seems to me, again entirely a question of fact.

Turning now to the question asked, it is :-

'Whether in the circumstances of this case the amount of (Rs. 10,000 estimated as) salami received by the assessee is a capital receipt or receipt of income assessable to income-tax.'

This actually expresses, or rather puts, no particular question of law. It merely adopts the very undesirable practice which is now so frequent of asking a general question as to whether the assessee is liable to pay income-tax and calling it a question of law. In my view this question is appropriate rather to the second of the two alternatives than to the first. But, however that may be, I should for myself be content to answer this reference by saying that it is entirely a question of fact.

It can be put in another way. If we look at the findings of the Tribunal - and they are the only sources from which we are entitled to take our facts - it seems to me to have been most clearly held by the Income-tax Appellate Tribunal that on facts of this case the assessee was in effect selling her property and was not merely anticipating rent. I imagine that a person who owns property can sell it for whatever consideration and for a consideration in whatever form he or she likes. Taking the facts as found by the Tribunal in this case, there seems to be no room for contending either that the premium paid on the granting of these leases represented rent in advance or that the assessee was carrying on a business so as to convert her receipts from this source into revenue.

For these reasons I should propose to answer the second question put to us by saying that on the facts as found by the Appellate Tribunal and as stated in the case before us, the payments in question are not assessable to income-tax.

PATHAK, J. - I agree in the conclusions of my learned brother on both the points. I may, however, add a few words on the second question mentioned by my learned brother. That questions, in short, is whether the receipts which have been described as nazrana are capital or income. Prima facie, this is a question of fact. In the present case, upon the findings arrived at by the Income-tax Appellate Tribunal, there is no question that the matter is entirely one of fact. There is no mention of any salami or nazrana in the leases. The finding is that the moneys in question were received by the assessee, but not by way of rent. No hard and fast rule can be laid down in order to determine what is the character of a particular payment. Normally, the character of payment of a sum would be a question of fact, because it would depend upon, as my learned brother has put it, what the contract was. But there may be cases where the question may turn upon the construction of a document. If the sum in question is payable under a document, its character would depend upon the intention of the parties to be gathered from the terms thereof; and if the process of finding out the intention of the parties involves the question of the construction of the document, the question as to what the character of that sum is may become a question of law. But, in the present case, no such question could possibly arise. The payments in question are of the character possessed by the sums described as salami or premium by their Lordships of the Privy Council in the case of Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax, Bihar and Orissa. In that case, the dispute was as to whether payments made under certain mining leases were capital or income. At page 519, their Lordships dealt with that question and proceeded :-

'The payments which under the leases are exigible by the lessor may be classed under three categories : (i) the salami or premium; (ii) the minimum royalty; (iii) the royalties per ton. The salami has been, rightly in their Lordships opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account.'

To my mind, there is no doubt that, upon the facts found by the Income-tax Appellate Tribunal, the payment in question was a capital payment and was not income and, therefore, not assessable under the Indian Income-tax Act.

BY THE COURT :- We answer the question referred to us in the affirmative and hold that the sum realised by the assessee on account of interest on arrears of rent of agricultural land is agricultural income and is exempt from tax under the Income-tax Act. The Commissioner of Income-tax must pay the costs of the assessee, which we assess at Rs. 100. Counsel for the Department is given one months time within which to file his certificate.

Reference answered accordingly.