1965 (4) TMI 9 - SC - Income Tax

Whether on a true interpretation of clause (viii) of sub-section (3) of section 4 of the Indian Income-tax Act the sum of ₹ 36,396 received by the assessee as an allowance during the previous year of the assessment year 1949-50 is revenue income liable to tax under the Indian Income-tax Act, 1922 ? Held that - The allowance is revenue income and not exempt from taxation as agricultural income. Therefore, we accept the appeal and answer the question referred in the affirmative

Summary

Issues Involved:
1. Whether the sum of Rs. 36,396 received by the assessee as an allowance during the previous year of the assessment year 1949-50 is revenue income liable to tax under the Indian Income-tax Act, 1922.
2. Whether the allowance qualifies as agricultural income under section 4(3)(viii) of the Indian Income-tax Act.
3. Whether the allowance is a capital receipt and hence not taxable.

Issue-wise Detailed Analysis:

1. Revenue Income Liability:
The primary issue was whether the sum of Rs. 36,396 received by the assessee as an allowance is revenue income liable to tax under the Indian Income-tax Act, 1922. The Income-tax Officer initially held that it was regular annual income and not agricultural income, as it arose from a statutory obligation of the Government to pay it. The Appellate Assistant Commissioner disagreed, stating that it fell within the definition of agricultural income. The Tribunal upheld the Income-tax Officer's view, stating that the source of the pension was a liability undertaken by the Government, not land or rent collections from land. The Supreme Court concurred, ruling that the allowance is revenue income and not exempt from taxation as agricultural income.

2. Agricultural Income Qualification:
The Supreme Court examined whether the allowance qualified as agricultural income under section 4(3)(viii) of the Indian Income-tax Act. Agricultural income is defined in section 2(1) of the Act as any rent or revenue derived from land used for agricultural purposes. The Court referred to previous judgments, including *Maharajkumar Gopal Sayan Narain Singh v. Commissioner of Income-tax* and *Commissioner of Income-tax v. Raja Bahadur Kamakhaya Narayan Singh*, which emphasized that the source of income must be directly associated with land used for agricultural purposes. The Court concluded that the source of the allowance was the arrangement made in 1837, not land or rent collections from land. Therefore, the allowance did not qualify as agricultural income.

3. Capital Receipt Argument:
The respondent argued that the allowance was a capital receipt, not taxable as income. He contended that if the assessee's predecessor had received compensation for relinquishing his title to the lands, it would have been a capital receipt. The Supreme Court considered the nature of the payment, referencing *Commissioners of Inland Revenue v. Wesleyan and General Assurance Society*, which emphasized examining the real character of the payment. The Court noted that an annuity exchanged for a capital asset is ordinarily taxable income, unless it is a capital sum payable in installments. In this case, no material was produced to show that the allowance was a payment in installments of the value of the disputed title. Hence, the allowance was deemed taxable income.

Conclusion:
The Supreme Court held that the allowance of Rs. 36,396 received by the assessee was revenue income liable to tax under the Indian Income-tax Act, 1922, and did not qualify as agricultural income. The argument that the allowance was a capital receipt was also rejected. The appeal was allowed, and the question referred was answered in the affirmative, with costs awarded to the appellant.