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PETITIONER: COMMISSIONER OF AGRICULTURAL INCOME-TAX, TRIVANDRUM

       Vs.

RESPONDENT: KERALA ESTATE MOORIAD CHALAPURAM

DATE OF JUDGMENT15/07/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1750            1986 SCR  (3) 161  1986 SCC  (3) 584        JT 1986   316  1986 SCALE  (2)10

ACT:      Kerala Agricultural  Income Tax Act, 1950, ss. 4 and 5- Agricultural Income  -Deductions allowed  under s. 5-Whether subsequent   remission   thereof   could   be   treated   as "agricultural   income"-Remission   and   Refund-Distinction between.

HEADNOTE:      The Kerala  Agricultural Income  Tax Act, 1950 provides for the  levy of  tax on agricultural income in the State of Kerala. Section  5 details  the deductions  to  be  made  in computing the agricultural income. Clauses (e), (g), (h) and (i) refer  to interest  paid by  the assessee  in  different kinds of  cases. The  interest in all these cases, has to be deducted from the agricultural income of a person before the levy is imposed.      The  respondents-assessees   claimed  a   deduction  of Rs.33,747.09 from  their agricultural  income under  s. 5 of the Kerala Agricultural Income Tax Act 1950 towards interest on a loan of Rs.4 lakhs taken from a creditor. The deduction was allowed. However, in the next accounting period relating to the  assessment year  1964-65, the  said creditor  waived payment of  the interest of Rs.33,747,09 and accordingly the amount  was   credited  to   the  revenue  accounts  of  the respondents-assessees. The  Assessing Authority  brought the amount to  tax. But,  the Tribunal as well as the High Court took the  view that  the case  was not  one of  an actual or constructive receipt  or any  receipt at all but only one of remission and  a remission  could not  give rise to a credit item in the accounts of the assessees and that what had been given by the creditor in favour of the assessees or returned to them could not constitute the income of the assessees.      Dismissing the appeal of the Revenue, ^      HELD: (1)  The view  taken by  the High Court is right. The remis 162 sion cannot  be considered  as amounting  to the  receipt of agricultural income.  What was  allowed to  be deducted from the total  agricultural income  of the assesses was interest pursuant to  s. 5  of the  Act.  It  was  a  deduction  made

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permissible by  the Act.  To be  regarded as  taxable in the hands of  the assessee,  the amount which was the subject of remission must be capable of being described as agricultural income. [164F-G]      In the instant case, what was returned to the assessees has nothing  to do  with the activities of the assessees; it does  not  arise  from  business  nor  does  it  arise  from agricultural   operations    when   the   assessee   is   an agriculturist. [164G-H]      Commissioner of Income-tax, Mysore v. Lakshmamma,[1964] 52 ITR 789, approved.      Mohsin Rehman  Penkar v.  Commissioner  of  Income-tax, Bombay City,[1948] 16 ITR 183, referred to.      (2) In  order to  eliminate such a controversy in cases falling under  the Indian  Income-tax Act,  1922, sub-s.(2A) was added  in s.  10 of  that Act, whereby a receipt such as this was  expressly made  liable to  tax by legal fiction as profits and  gains  of  business,  profession  or  vocation. Sub.s.(2A) of  s.10 of  the Indian  Income Tax Act, 1922 has been replaced by an even wider provision as sub-s. (1) of s. 41 of  the Income Tax Act, 1961. No provision of that nature finds place  in the  Kerala  Agricultural  Income  Tax  Act. [165A-B;D]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No.1396 of 1974      From the  Judgment and  order dated  28.2.1973  of  the Kerala High Court in I.T. Reference No. 84 of 1971.      T.S. Krishnamurthy  Iyer, V.J.  Francis and  N.M. Popli for the Appellant.      S.Balakrishnan for the Respondent.      The Judgment of the Court was delivered by      PATHAK J.  This appeal  by special  leave  is  directed against the  judgment of  the High Court of Kerala disposing of an Agricultural 163 Income-tax Reference and answering the following question in favour of the assessee and against the Revenue:           "Whether on  the facts  and circumstances  of  the           case the  Tribunal was  justified in  holding that           the amount  of Rs.33,747.09  is  not  agricultural           income for the assessment year 1964-65."      The assessees  Kerala Estate  Mooriad Chalapuram,  is a broad description  of seven persons possessing the status of tenants-in-common under  the Kerala  Agricultural Income-tax Act, 1950.  They owned  an estate  from which  they  derived agricultural income  liable to be assessed in the year 1963- 64.  The   assessees  followed   the  mercantile  system  of accounting. In  assessment proceedings for the year 1963-64, the assessees claimed a deduction of Rs.33,747.09 from their agricultural income  on  the  ground  that  it  was  payable towards interest on a loan of Rs.4,00,000 taken by them from M/s. Associated  Planters Ltd.,  Calicut. The  deduction was allowed.  During  the  accounting  period  relating  to  the assessment year  1964-65 M/s. Associated Planters Ltd.waived payment of the interest of Rs.33,747.09, and accordingly the amount  was   credited  to   the  revenue  accounts  of  the assessees. The  assessing authority  brought the  amount  to tax. The case was ultimately carried in second appeal to the Tribunal on  the question  whether the  sum of  Rs.33,747.09 credited in  the relevant previous year could be assessed to tax for  the year  1964-65. The  Tribunal, by majority, held

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that it  was not agricultural income. As the instance of the Commissioner of Agricultural Income-tax, Kerala, a reference was made  to the High Court of Kerala under sub-s. (2) of s. 60 of the Kerala Agricultural Income-tax Act on the question of law  set forth  earlier, and  the High Court has answered the question  in the  affirmative. The  High Court has taken the view  that it was immaterial that the assessees followed the mercantile  system of  accounting, because  the case was not one  of an actual or constructive receipt or any receipt at all  but only  one of  remission. According  to the  High Court a  remission could  not give  rise to a credit item in the accounts  of the assessees, and that what had been given up by the creditor in favour of the assessees or returned to them could  not constitute  the income of the assessees. The High Court  observed that what was returned to the assessees had nothing  to do with the activities of the assessees, and that it  did not  arise  from  the  agricultural  operations carried on by the assessees.      The Kerala  Agricultural Income-tax  Act, 1950 provides for the 164 levy of  tax on  agricultural income in the State of Kerala. Section 3 of the Act provides that agricultural income shall be charged for each financial year on the total agricultural income of  the previous  year of  every person  at the rates specified in  the Schedule.  Section 4  defines what  ’total agricultural income’  is, and  s.5 details the deductions to be made  in computing  the agricultural income. Clauses (e), (g), (h),  and (i)  of s.  5 refer  to interest  paid by  an assessee in  different kinds  of cases.  The interest in all these cases  has to be deducted from the agricultural income of a  person before  the levy is imposed. It is not disputed that the  interest allowed  to be deducted in the assessment of the  present assessees  falls under  one of those clauses and was,  therefore, rightly  deducted  in  computing  their agricultural income.  The question  is whether  the interest waived by  M/s. Associated Planters Ltd. and credited to the revenue accounts  of the  assessees can be regarded as their agricultural income.      There has been serious controversy through the years on the  question   whether  an   amount  refunded  or  remitted constitutes the  income of  an assessee.  In Commissioner of Income-tax, Mysore  v. Lakshmama,  [1964] 52  ITR  789.  the Mysore High  Court took  the view  that a refund received by the assessee  in respect  of  excise  fees  payable  by  him amounted to  a revenue  receipt liable to tax. In that case, however, the  High Court  specifically  made  a  distinction between cases  of refund  and cases  of  remission,  and  it appears to  have taken  the position that an amount received as remission  of duty  could not  be treated  as  a  revenue receipt, while an amount received by way of refund could be. In the  judgment under  appeal, the  High  Court  of  Kerala noticed  that  decision  and  after  exhaustively  surveying several decisions  came to the conclusion that the remission in the present case could not amount to agricultural income. We think  that the  view taken by the High Court in the case before us is right. The remission cannot, in our opinion, be considered as  amounting  to  the  receipt  of  agricultural income. What  was allowed  to be  deducted  from  the  total agricultural income  of the  assessees was interest pursuant to s.5  of the  Act. It  was a deduction made permissible by the Act.  To be  regarded as  taxable in  the hands  of  the assessees the amount which was the subject of remission must be capable of being described as agricultural income. As the High Court  has observed  in  the  present  case  "what  was

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returned  to  the  assessee  has  nothing  to  do  with  the activities of  the assessee, it does not arise from business nor does  it arise  from agricultural  operations  when  the assessee is an agriculturist." 165      In order  to eliminate  such  a  controversy  in  cases falling under  the Indian  Income-tax Act,  1922 sub-s. (2A) was added  in s.  10 of  that Act, whereby a receipt such as this was  expressly made  liable to  tax by legal fiction as profits and  gains of business, profession or vocation. Sub- s. (2A)  was inserted  in s.10  in 1955. Before that Chagla, C.J., speaking  for the  Court in  Mohsin  Rehan  Penkar  v. Commissioner of  Income-tax, Bombay  City, [1948] 16 ITR 183 had observed:  "It is impossible to see how a mere remission which leads  to the discharge of the liability of the debtor can ever  become income  for the purposes of taxation". This observation was  noted by the Mysore High Court in C.I.T. v. Lakshmamma (supra),  and appears  from what was said by them to have  received that tacit approval of the learned Judges. It was made the basis of distinguishing the case before them from that decided by the Bombay High Court.      We may  point out  in regard to sub-s. (2A) of s. 10 of the Indian Income Tax Act, 1922 that it has been replaced by an even wider provision as sub-s. (1) of s. 41 of the Income Tax Act,  1961. No  provision of  that nature finds place in the Kerala Agricultural Income Tax Act.      The appeal fails and is dismissed with costs. M.L.A.                                     Appeal dismissed. 166