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1937 (1) TMI 14

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..... essee was retaining and cultivating these lands of his own inclination, but owing to the fall in agricultural lands he was involuntarily in possession and was preserving his capital in the only way open to him pending a return of agricultural economic conditions which made it possible for him to realise, if not all, at least some of the capital originally lent to the borrowers, the previous owners of the lands. It was not disputed that the whole of the money borrowed, a great part of which is now in the from of land, was originally borrowed for the purpose of the money-lending business. In view of these admissions of fact, it is not necessary for us to send this matter back to the Commissioner for findings. For the assessment of the year 1934-1935 the assessee was assessed on total income computed at ₹ 30,963. In computing the income the Income Tax Officer disallowed ₹ 17,796 under interest payments in the Kyaiklat branch and ₹ 3,114 under establishment and other charges in the Kyaiklat and Thayetmyo branches. The interest charges disallowed were claimed by the assessee under Section 10(2)(iii) of the Income Tax Act as representing the capital borrowed by him for .....

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..... nd that they are expenses incurred for agricultural purposes and the amount spent for obtaining conveyances on the ground that it is an expense of a capital nature? Section 10 (1) and (2) is as follows: (1) The tax shall be payable by an assessee under the head Business in respect of the profits or gains of any business carried on by him. (2) Such profits or gains shall be computed after making the following allowances namely: (iii) in respect of capital borrowed for the purposes of the business, where the payment of interest thereon is not in any way dependent on the earning of profits, the amount of the interest paid. It is, as we have emphasised, conceded that this capital was borrowed for the purpose of the business and on the facts we hold that it has also been used for the purpose of the business because it is an unquestioned fact that the assessee received these lands in repayment of the loans made by him not of his own volition but of necessity, there being no other method of getting payment, and that therefore these lands came into his possession directly in the course of his money-lending business and represented the capital originally borrowed. P .....

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..... tion (2)(iii) an allowance is to be made in respect of interest on capital borrowed for the purposes of the business. Now, I think that again must be for the purposes of the business which earns or is capable of earning taxable profits. Whether or not in fact taxable profits are earned is not necessarily the criterion, because the borrowed money may earn no profit, but I think that business referred to in that section is a business which is so carried on that taxable profits may be earned, and unless it is a business of that character a deduction for interest on capital money borrowed for the purposes of that business is not allowable under the Act. It will be noticed in both these cases the income derived from borrowed capital was not the subject of any taxation in British India. In this connection it should be observed that Section 4 of the Income Tax Act makes the Act applicable to all income, profits, or gains, accruing or arising or received in British India, or deemed to be received therein. But the Act does not apply to agricultural income in British India. Under Section 4 (3)(viii) it is provided that This Act shall not apply to;-Agricultural income. Agricultural .....

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..... business and taxable as such (See Chettiappa Chettiar and Others v. The Commissioner of Income tax AIR 1930 Mad. 119. In that case as here the assessee was a moneylender who had secured his advances on rubber estates which he had finally to take over in repayment of his debts and to hold until a favourable opportunity occurred for resale and it was held that any profits from such resale were profits of his money-lending business. (See also Lakshmanan. Chettiar v. Commissioner of Income-tax AIR 1930 Mad. 121). In Commissioner of Income-tax v. Maharajadiraj of Darbhanga 14 Pat. 623 the Judicial Committee had before them for consideration the question as to whether income received from an estate taken over by a lender as security for an amount advanced .under an usufructuary mortgage, was agricultural income. At page 631 Lord Macmillan in delivering the advice of the Board, after setting out the facts and emphasising that prima facie the income of the land was agricultural income, states as follows:- In answer to this prima facie conclusive ground for excluding the sum in question from the respondent's assessment the appellant concedes that if the respondent were not a money .....

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..... ultural land be preserved except by cultivation? The cultivation was merely a necessary incident of his involuntary possession which came to him because as a money-lender he had lent money to a borrower who could not repay his money. It appears therefore that only by straining the Act against the assessee can he be excluded from the benefits of Section 10 (2) (iii). Apart from the fact that that is not the method of construing a taxing statute it appears there is nothing unreasonable in the result at which we arrive. The legislature has thought fit to exclude agricultural income from the incidence of income tax because it has already paid the tax in another form. The position is peculiar to India and not to England and in this case we are told-and it appears to be the fact-that the assessee would be better off if he had not taken this land from the debtor and was therefore unable to realise anything in cash as he would then be able to get the benefit of Section 10(2)(iii). The argument of the Commissioner's learned counsel appears to be entirely based on the fact that agricultural income is not the subject of income-tax in British India for he conceded that had the repayment of .....

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..... page 997 as follows: It is contended on behalf of the Crown that, if the bank get the benefit of that exemption, it should be deprived of the advantage of deducting this sum of 41,262 being the expenses attributable to the earning of the income which has been held to be immune from taxation. In other words, it is said if the corpus -that is to say, the income-is to be excluded, the accessory that is to say-the expense of earning it-ought also to be excluded. The exclusion on the one side ought to be balanced by the exclusion of the other, otherwise the taxpayer is getting a double advantage, he is getting his exemption in respect of the interest, and he is also having the additional benefit of deducting the expenses of earning that interest, just as if the interest had been included as taxable. I confess that there seems to be great force in that argument, and if I had been able to find a warrant for giving effect to that argument in the language of the Act I should certainly have done so, because it seems to me to be both a reasonable and a proper conclusion. With regard to this last observation of Lord Wright, as we have already pointed out, in India a special provision is mad .....

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