TMI Blog1927 (12) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in the following words: If a person carrying on money-lending business lends money in the course of such business on the security of lands of which he takes a usufructuary mortgage, and if he immediately leases those lands back to the mortgagor with a stipulation for fixed annual payments, which amount to a definite percentage (8 in the case cited above) on the sum advanced, should those annual payments be excluded from the assessment of the profits and gains of his business as being agricultural income within the meaning of Section 2(1)(a), Indian Income Tax Act, 1922? 2. The main question underlying this reference appears to be whether if the case is not that of a pure usufructuary mortgage, but one where there is a simultaneous grant of a lease of the mortgaged property to the mortgagor so that the net result is that the mortgagee obtains regular cash payments representing interest on his capital, the latter is exempted from liability to pay Income Tax. 3. Section 3 of the Act in the first place makes all income, profits and gains liable to Income Tax, but Section 4 contains an exemption clause which among other matters provides that the Act shall not apply to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to have his name recorded in the revenue papers and is for the purposes of revenue Courts treated as a cosharer. 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. 6. Coming to the next question whether even if a usufructuary mortgagee is not liable to pay Income Tax, a mortgagee who at the same time leases back the mortgaged land to the mortgagor with a stipulation that there would be a fixed annual payment calculated on the basis of rate of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of opinion that the answer to the question should be in the affirmative, and the annual payments should be excluded from assessment. Banerji, J. 9. I agree. I am of opinion that upon the facts of the present case the income which is derived by the assessee is income which comes within the definition of agricultural income in Section 2(1), Income Tax Act. The mere fact that the usufructuary mortgagee has granted a lease to the mortgagor, in my opinion, does not alter what in law is the effect of the document executed by the mortgagor an favour of the mortgagee. It still remains a usufructuary mortgage and in the case of a usufructuary mortgage, although it would come within the definition of business, it is exempted from the operation of the Act by reason of the definition of agricultural income in Section 4 which says that any income derived from any rent from land which is used for agricultural purposes is exempted from taxation. In my opinion in no case can the profit which the usufructuary mortgagee receives be called anything but rent derived from land used for agricultural purposes. E.H. Ashworth, J. 10. I concur. The owner of agricultural land who leases land is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his reference to this Court that the transaction of a usufructuary mortgage and a lease was fraudulent, or colourable, or that the legal consequence of the execution of both deeds can be avoided on this ground; but he has referred to a decision of the Madras High Court in which this point is raised. There can be no doubt that the decision by the Madras High Court was reasonably invoked by the Income Tax Commissioner. It appears, therefore, desirable to examine that decision both to see how far it is on all fours with the present case, and, if so, on what grounds dissent from it should be expressed. The main distinction to my mind between the reference to the Madras High Court and this reference is that there was undoubtedly forwarded to the Madras High Court an expression of opinion, treated by the Madras High Court as a finding of fact, which is wanting in the reference to this Court. In that reference the Income Tax Commissioner had stated: The income received or receivable by the capitalist is not income derived from land, but income derived from the business of money-lending. It appears to me that taxing authorities and Courts in such a case as this must look to the subst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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