TMI Blog1954 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 4(3) (viii) of the said Act and if so, what part of such dividend income is so exempt ? It was pointed out by Mr. Mazumdar on behalf of the assessee that there is a mistake in the form in which the first question has been framed. On the request of the parties I reframe the first question in the following manner :- whether any portion of the ground rent received from the assessees tenants in respect of certain lands on which shops had been erected is agricultural income within the meaning of Section 2(1) (a) of the Indian Income Tax Act, 1922, and is exempt from tax under Section 4(3) (viii) of the said Act ? Question No. 1. - This question relates to the assessment years 1946-47, 1947-48 and 1948-49. It appears that the assessee received ground rent from various tenants in respect of certain lands on which shops had been erected. The assessee split up the ground rent received from the tenants into two portions (1) for the floor area of the shops and (2) for the remaining area. Having split up the rent, the assessee included in his return only that portion of the ground rent which was received in respect of the floor area on which shops had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The proper test to apply whether the income has the quality of agricultural income is to find out whether the land from which rent is derived is used for agricultural purposes or not. This view is supported by the decision in Maharajadhiraj Sir Bijoy Chand Mahtab Bahadur of Burdwan, In re. It was held in that case that the question whether a certain income was agricultural income or not was a question of fact and had to be determined not with reference to the nature of the lease by which the lands were let out but by reference to the use to which the land had been put. Counsel for the assessee alternatively contended that there was evidence in this case to show that the land was used for agricultural purpose. It was stated by the learned counsel that the assessee produced documents before the Income Tax authorities to show that the land was used for keeping bundle of grain and bundle of any stacks. I am unable to accept this argument as correct. It is well settled that the question whether a certain item of income is of agricultural nature or not is a question of fact and the burden of proving the exemption is upon the assessee. In the present case the assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n British Indian shall be computed as if it were income derived from business, and 40 per cent of such income shall be deemed to be income liable to be taxed. It was argued on behalf of the assessee on the basis of this rule that only 40 per cent of the amount of the dividends of the tea companies was liable to be taxed and the rest of the amount should be taken to be agricultural income. The argument was rejected by the Appellate Tribunal on the ground that the dividends of the tea companies cannot be identified with any particular class of income. Mr. Mazumdar presented the argument that dividend merely represented the share of the profit of a shareholder in the company's income and the source of the dividend was the same as the source of the profits made by the company. Counsel made the submission that there was no reason in principle why 60 per cent of the amount of the dividend should not be treated as agricultural income and exempted from being taxed. In my opinion the argument of the learned counsel cannot be accepted as correct. The reason is that in the eye of law income from dividend is not identical in quality with the profits made by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the agricultural operation of the company in the ultimate sense but in testing whether the income is agricultural within the meaning of Section 2(1) of the Act we must look not to the ultimate or remote source of the income but to the immediate and effective source. This view is borne out by the decision of the Judicial Committee in Commissioner of Income Tax v. Kamakshya Narayan Singh. The question at issue in that case was whether interest on arrears of rent in respect of agricultural land was agricultural income within the meaning of the Income Tax Act and was therefore exempt from tax. It was held by the Judicial Committee that interest on arrears of rent was not agricultural income and the argument of the assessee to the contrary effect was rejected as unsound. At page 328 Lord Uthwatt states : Equally clearly the interest on rent is revenue, but in their Lordships opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent - and rent is obviously derived from land -there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court that the immediate source of the assessees income was not land but was the declaration of the dividend and so the assessee was not entitled to claim exemption from being taxed on the dividends of the tea companies. Mr. Mazumdar challenged the correctness of the Bombay decision and in support of his argument referred to three authorities : Commissioner of Income Tax v. Sir Kameshwar Singh, Governor-General in Council v. Raleigh Investment Co. Ltd. and Commissioner of Income Tax v. Hungerford Investment Trust Ltd. In my opinion the principle laid down in these cases has no bearing on the question which is being investigated in the present case. In Commissioner of Income Tax v. Kameshwar Singh the assessees father who carried on a money lending business made a loan under an indenture described as a zarpeshgi lease with usufructuary mortgage . A certain portion of the rent was reserved to the mortgagor as thika rent and the mortgagee was allowed to take the balance of the profits after deducting the expenses as thika profits in consideration of the loan. It was held by the Judicial Committee that thika profits received by the assessee as mortgagee lessee were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contemplation of law and liable to assessment as a subject chargeable with tax is not for all purposes to be regarded as entirely separate and distinct from the corporators. The underlying principle of the clause as the Commissioner in stating the present case has recognised is that the dividend represents merely the shareholders share in the income of the company. This passage must however be read subject to the qualifying effect of the context of subjecta materies. The question at issue in that case was as to the proper construction of Section 14 (2) (a) of the Income Tax Act and in the passage to which counsel had made reference Sir George Rankin was attempting to explain the principle underlying that section. In any case it is clear that if there is no distinction between the dividend income of the shareholder and the income of the company, there would have been no need on the part of the Legislature to enact Section 14(2). The very fact that the section was enacted clearly indicates that but for the enactment of the section the shareholders would have been liable to pay tax on the dividend, though the company had already been assessed to tax. The dictum of Sir George Ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a dividend paid without British Indian shall be deemed to be income accruing and arising in British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to Income Tax in British India . The question was whether Section 4 (1) (c) read with Explanation 3 had extra-territorial operation. It was while considering this question that the Chief Justice observed that the source of income (not necessarily the immediate and effective source) was the profits made in British India and this circumstance was a sufficient territorial nexus between the taxpayer and the taxing authorities and therefore the legislative provisions cannot be declared to be invalid on the ground of extra-territorial effect. It is obvious that the passage from the judgment of the Chief Justice of India must be read subject to the qualifying effect of its context. For the purpose of testing the extra-territorial character of a taxing provision, the source of dividends may be the same as the source of the company's profits. But that is not equivalent to saying that the same test must be applied in examining whether the quality of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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