TMI Blog1944 (9) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that they were agricultural income which is exempt under Section 4 (3) (viii) of the Act. He appealed to the Appellate Assistant Commissioner of Income-tax. The latter while holding under the first head that income from the sale of trees was assessable, reduced the amount to ₹ 21,040 allowing actual expenses instead of 10 per cent. He dismissed the appeal in respect of malikana. As regards the annuity and interest thereon he reduced the amount assessable to ₹ 61,797. The assessee appealed to the Tribunal, raising again the question whether any of these items was assessable. He also objected to some other items with which we are not concerned. The Commissioner of Income-tax did not appeal against the reduction made under the head of annuity and interest thereon. The Tribunal agreed that the income from sale of trees and from malikana was assessable, but held that the item of ₹ 61,797 (with which alone it was concerned under the head of annuity and interest thereon) was not taxable. The assessee in his application for reference accordingly raised only the questions whether the forest income and the malikana were taxable. In his application, the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purthala v. Commissioner of Income-tax, Central United Provinces [1945] 13 ITR 74 , and it is not disputed that our decision in that case will answer the question in this case also. Counsel did not therefore address us again upon it. We hold that income from the sale of trees growing on land naturally and without the intervention of human agency, even if the land is assessed to land revenue, is not agricultural income within the meaning of Section 2(1)(a) of the Act. We now come to the second question. The finding that the malikana in question is assessable to income-tax is based on its historical origin which has been held to distinguish it from what we may call ordinary malikana, or as it is referred to in the appellate order of the Tribunal haq malikana . The latter is payable by the under-proprietors to the superior proprietors. The malikana under consideration is payable by the superior proprietors to the assessee. How the superior proprietors became liable to pay it is explained in the following extract from the revenue papers which we take from the order of the Tribunal. During the days of the Nawabs of Oudh the Raja of Utraula was recognised as the pargana lord and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment is independant of the actual profits of villages. Thus, no change was or is being made in the amount of the malikana at the time of second or third regular settlement corresponding to a change in the land revenue assessments, or to the income of the village. Even if a villlage yields no income to the proprietors in any year due to floods, draught, hailstorms, etc. , and subsequent remissions in rent or revenue, the proprietor of the village will still be liable to pay malikana to the Utraula estate in the terms of the decree. The source of the malikana is, thus, the settlement decree and not the land in which the Raja of Utraula has absolutely no right or interest. The owners of these village are the full or superior proprietors (Malike-Ala) of their villages and not the under-proprietors (Matahedar) of the Utraula estate. They engage directly with the Government for settlement of the land revenue for payment of which they are directly responsible . It is thus abundantly clear that this 'malikana' is totally different from 'Haqqa-malikana', referred to in the judgment of the Chief Court. This 'malikana' is admitted to be the money charged upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the position of the assessee in the present case is not parallel with that of the original proprietors in Nathu v. Ghansham Singh 4. For the Income-tax Commissioner it was argued that where malikana is paid by under-proprietors to superior proprietors it is actually rent derived from land while a person cannot receive rent from land if he has no proprietary interest in it. The malikana under consideration may be charged upon the villages, but this does not mean that it is derived from land. If that were so, then maintenance allowances charged on land would be exempt from income-tax, but they are not. Similarly in the case of an annuity which is charged on land. On this point the case in Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar Orissa [1935] 3 ITR 237, was cited, where it was held by their Lordships of the Judicial Committee that the annuity was not agricultural income within Section 2(1)(a), but money payable under a contract imposing a personal liability, the discharge of which was secured by a charge on land. Reference was made to this last case by a Bench of this Court in In the matter of Assessment in the case of Lal Suresh Singh of Kalakankar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anpara Estate was required to pay the Raja of Utraula an annuity for life of ₹ 1,70,292. The award was made a decree of this Court. There was again default on the part of the Raja of Nanpara and the liquidation scheme referred to was consequently drawn up to provide for the extinction of the liability in ten years. The annual amount to be paid included interest on the arrears of the annuity. Two deeds were executed on 4th September 1937, to give effect to the liquidation scheme. The Raja of Nanpara executed a usufructuary mortgage deed in favour of the Raja of Utraula, and the Raja of Utraula executed a lease in favour of the Raja of Nanpara of the mortgaged property. The mortgage was for ₹ 12,13,079-4-0, the total amount then found due from the Raja of Nanpara to the Raja of Utraula. It bore interest at the rate of 3 per cent. the rate provided in the liquidation scheme. Under the lease the Raja of Nanpara engaged to pay the Raja of Utraula the sum of ₹ 1,45,862 annually for ten years. In this way it was arranged that the mortgage liability would be extinguished in this period. The assessee received only ₹ 1,07,000 in the year 1938-39 out of the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise. The amount which it is suggested should be taken into consideration as interest, being credited to this head out of the sum of ₹ 1,07,000, was not interest upon any part of the annual rental due under the lease. To ascertain its character we have to go behind the lease and see how that rental was made up and that is just what we are precluded from doing. In the Special Bench Patna case referred to it was said that the source of the income must be considered in its proximate rather than in its ultimate significance. If we consider only the lease, and that is all we can consider, we find that the whole amount of ₹ 1,45,862 is to be paid annually as rent and that being so no part of the sum of ₹ 1,07,000 paid can be deemed interest. Something was said about evasion of income-tax by this means, but the law is well settled that no objection can be taken by the Income-tax department to any legitimate transaction, though it may have or appear to have this effect. In In the matter of Makund Sarup [1928] 107 IC 683 a Full Bench of the Allahabad High Court considered the case of a money-lender who lent money in the course of his business on the security of lands, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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