Full Judgment Text
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PETITIONER:
COMMISSIONER OF AGRICULTURAL INCOME-TAX, TRIVANDRUM
Vs.
RESPONDENT:
KERALA ESTATE MOORIAD CHALAPURAM
DATE OF JUDGMENT15/07/1986
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION:
1986 AIR 1750 1986 SCR (3) 161
1986 SCC (3) 584 JT 1986 316
1986 SCALE (2)10
ACT:
Kerala Agricultural Income Tax Act, 1950, ss. 4 and 5-
Agricultural Income -Deductions allowed under s. 5-Whether
subsequent remission thereof could be treated as
"agricultural income"-Remission and Refund-Distinction
between.
HEADNOTE:
The Kerala Agricultural Income Tax Act, 1950 provides
for the levy of tax on agricultural income in the State of
Kerala. Section 5 details the deductions to be made in
computing the agricultural income. Clauses (e), (g), (h) and
(i) refer to interest paid by the assessee in different
kinds of cases. The interest in all these cases, has to be
deducted from the agricultural income of a person before the
levy is imposed.
The respondents-assessees claimed a deduction of
Rs.33,747.09 from their agricultural income under s. 5 of
the Kerala Agricultural Income Tax Act 1950 towards interest
on a loan of Rs.4 lakhs taken from a creditor. The deduction
was allowed. However, in the next accounting period relating
to the assessment year 1964-65, the said creditor waived
payment of the interest of Rs.33,747,09 and accordingly the
amount was credited to the revenue accounts of the
respondents-assessees. The Assessing Authority brought the
amount to tax. But, the Tribunal as well as the High Court
took the view that the case was not one of an actual or
constructive receipt or any receipt at all but only one of
remission and a remission could not give rise to a credit
item in the accounts of the assessees and that what had been
given by the creditor in favour of the assessees or returned
to them could not constitute the income of the assessees.
Dismissing the appeal of the Revenue,
^
HELD: (1) The view taken by the High Court is right.
The remis
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sion cannot be considered as amounting to the receipt of
agricultural income. What was allowed to be deducted from
the total agricultural income of the assesses was interest
pursuant to s. 5 of the Act. It was a deduction made
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permissible by the Act. To be regarded as taxable in the
hands of the assessee, the amount which was the subject of
remission must be capable of being described as agricultural
income. [164F-G]
In the instant case, what was returned to the assessees
has nothing to do with the activities of the assessees; it
does not arise from business nor does it arise from
agricultural operations when the assessee is an
agriculturist. [164G-H]
Commissioner of Income-tax, Mysore v. Lakshmamma,[1964]
52 ITR 789, approved.
Mohsin Rehman Penkar v. Commissioner of Income-tax,
Bombay City,[1948] 16 ITR 183, referred to.
(2) In order to eliminate such a controversy in cases
falling under the Indian Income-tax Act, 1922, sub-s.(2A)
was added in s. 10 of that Act, whereby a receipt such as
this was expressly made liable to tax by legal fiction as
profits and gains of business, profession or vocation.
Sub.s.(2A) of s.10 of the Indian Income Tax Act, 1922 has
been replaced by an even wider provision as sub-s. (1) of s.
41 of the Income Tax Act, 1961. No provision of that nature
finds place in the Kerala Agricultural Income Tax Act.
[165A-B;D]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No.1396 of
1974
From the Judgment and order dated 28.2.1973 of the
Kerala High Court in I.T. Reference No. 84 of 1971.
T.S. Krishnamurthy Iyer, V.J. Francis and N.M. Popli
for the Appellant.
S.Balakrishnan for the Respondent.
The Judgment of the Court was delivered by
PATHAK J. This appeal by special leave is directed
against the judgment of the High Court of Kerala disposing
of an Agricultural
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Income-tax Reference and answering the following question in
favour of the assessee and against the Revenue:
"Whether on the facts and circumstances of the
case the Tribunal was justified in holding that
the amount of Rs.33,747.09 is not agricultural
income for the assessment year 1964-65."
The assessees Kerala Estate Mooriad Chalapuram, is a
broad description of seven persons possessing the status of
tenants-in-common under the Kerala Agricultural Income-tax
Act, 1950. They owned an estate from which they derived
agricultural income liable to be assessed in the year 1963-
64. The assessees followed the mercantile system of
accounting. In assessment proceedings for the year 1963-64,
the assessees claimed a deduction of Rs.33,747.09 from their
agricultural income on the ground that it was payable
towards interest on a loan of Rs.4,00,000 taken by them from
M/s. Associated Planters Ltd., Calicut. The deduction was
allowed. During the accounting period relating to the
assessment year 1964-65 M/s. Associated Planters Ltd.waived
payment of the interest of Rs.33,747.09, and accordingly the
amount was credited to the revenue accounts of the
assessees. The assessing authority brought the amount to
tax. The case was ultimately carried in second appeal to the
Tribunal on the question whether the sum of Rs.33,747.09
credited in the relevant previous year could be assessed to
tax for the year 1964-65. The Tribunal, by majority, held
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that it was not agricultural income. As the instance of the
Commissioner of Agricultural Income-tax, Kerala, a reference
was made to the High Court of Kerala under sub-s. (2) of s.
60 of the Kerala Agricultural Income-tax Act on the question
of law set forth earlier, and the High Court has answered
the question in the affirmative. The High Court has taken
the view that it was immaterial that the assessees followed
the mercantile system of accounting, because the case was
not one of an actual or constructive receipt or any receipt
at all but only one of remission. According to the High
Court a remission could not give rise to a credit item in
the accounts of the assessees, and that what had been given
up by the creditor in favour of the assessees or returned to
them could not constitute the income of the assessees. The
High Court observed that what was returned to the assessees
had nothing to do with the activities of the assessees, and
that it did not arise from the agricultural operations
carried on by the assessees.
The Kerala Agricultural Income-tax Act, 1950 provides
for the
164
levy of tax on agricultural income in the State of Kerala.
Section 3 of the Act provides that agricultural income shall
be charged for each financial year on the total agricultural
income of the previous year of every person at the rates
specified in the Schedule. Section 4 defines what ’total
agricultural income’ is, and s.5 details the deductions to
be made in computing the agricultural income. Clauses (e),
(g), (h), and (i) of s. 5 refer to interest paid by an
assessee in different kinds of cases. The interest in all
these cases has to be deducted from the agricultural income
of a person before the levy is imposed. It is not disputed
that the interest allowed to be deducted in the assessment
of the present assessees falls under one of those clauses
and was, therefore, rightly deducted in computing their
agricultural income. The question is whether the interest
waived by M/s. Associated Planters Ltd. and credited to the
revenue accounts of the assessees can be regarded as their
agricultural income.
There has been serious controversy through the years on
the question whether an amount refunded or remitted
constitutes the income of an assessee. In Commissioner of
Income-tax, Mysore v. Lakshmama, [1964] 52 ITR 789. the
Mysore High Court took the view that a refund received by
the assessee in respect of excise fees payable by him
amounted to a revenue receipt liable to tax. In that case,
however, the High Court specifically made a distinction
between cases of refund and cases of remission, and it
appears to have taken the position that an amount received
as remission of duty could not be treated as a revenue
receipt, while an amount received by way of refund could be.
In the judgment under appeal, the High Court of Kerala
noticed that decision and after exhaustively surveying
several decisions came to the conclusion that the remission
in the present case could not amount to agricultural income.
We think that the view taken by the High Court in the case
before us is right. The remission cannot, in our opinion, be
considered as amounting to the receipt of agricultural
income. What was allowed to be deducted from the total
agricultural income of the assessees was interest pursuant
to s.5 of the Act. It was a deduction made permissible by
the Act. To be regarded as taxable in the hands of the
assessees the amount which was the subject of remission must
be capable of being described as agricultural income. As the
High Court has observed in the present case "what was
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returned to the assessee has nothing to do with the
activities of the assessee, it does not arise from business
nor does it arise from agricultural operations when the
assessee is an agriculturist."
165
In order to eliminate such a controversy in cases
falling under the Indian Income-tax Act, 1922 sub-s. (2A)
was added in s. 10 of that Act, whereby a receipt such as
this was expressly made liable to tax by legal fiction as
profits and gains of business, profession or vocation. Sub-
s. (2A) was inserted in s.10 in 1955. Before that Chagla,
C.J., speaking for the Court in Mohsin Rehan Penkar v.
Commissioner of Income-tax, Bombay City, [1948] 16 ITR 183
had observed: "It is impossible to see how a mere remission
which leads to the discharge of the liability of the debtor
can ever become income for the purposes of taxation". This
observation was noted by the Mysore High Court in C.I.T. v.
Lakshmamma (supra), and appears from what was said by them
to have received that tacit approval of the learned Judges.
It was made the basis of distinguishing the case before them
from that decided by the Bombay High Court.
We may point out in regard to sub-s. (2A) of s. 10 of
the Indian Income Tax Act, 1922 that it has been replaced by
an even wider provision as sub-s. (1) of s. 41 of the Income
Tax Act, 1961. No provision of that nature finds place in
the Kerala Agricultural Income Tax Act.
The appeal fails and is dismissed with costs.
M.L.A. Appeal dismissed.
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