- (1.) THIS order will dispose of Income-tax References Nos. 16 and 18 of 1971. The assessee in one is Arjart Singh, an individual, and in the other Gandhara Singh, again an individual.
(2.) THE assessments relate to the year 1960-61. The Income-tax Officer included a sum of Rs. 21,000 in the total income of each of the assessees on the ground that the income was not agricultural income. The assessees had taken 332 acres of land on lease jointly from the Military Estate Officer, Ferozepore, and the land admittedly was used for agricultural purposes. The working of the lease resulted in a net profit of Rs. 42,000 and hence the profit of each of the assessees came to Rs. 21,000. Each of the assessees claimed before the Income-tax Officer that the amount of Rs. 21,000 was exempt from tax under Section 4 (3) (viii) of the 1922 Act equal to Section 10 (1), read with Section 2 (1) (a) of the Income-tax Act, 1961. This contention was negatived by the Income-tax Officer on the short ground that the land was not assessed to laad revenue or a local rate as required by Section 2 (1) (a ). Appeals against this decision to the Appellate Assistant Commissioner by the assessees also failed. The assessees then preferred further appeals to the Income-tax Appellate Tribunal (hereinafter referred to as " the Tribunal " ). The Tribunal accepted the contention of the assessees and ordered the deletion of the amount of Rs. 21,000 from each of the assessees' total income. The department being dissatisfied moved an application under Section 256 (1) of the Income-tax Act, 1961, to the Tribunal and the Tribunal has stated the following question of law for our opinion in the case of both the assessees: " Whether, on the facts and in the circumstances of the case, the income of Rs. 21,000 was liable to be exempt as agricultural income under Section 4 (3) (viii) of the Indian Income-tax Act, 1922, equal to Section 10 (1) read with Section 2 (1) (a) of the Income-tax Act, 1961 ? " The contention of the learned counsel for the department is that the Tribunal has completely gone wrong in holding that the income from the land in dispute is agricultural income. The contention is that the requirements of Section 2 (1) (a), which is in the following terms, are not satisfied : " 2. In this Act, unless the context otherwise requires,-- (1) ' agricultural income''means (a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such. " One matter is beyond the pale of controversy, namely, that two conditions must co-exist before an income can be held to be agricultural income: (1) that the income must be derived from land which is used for agricultural purposes, and (2) that the land is either assessed to land revenue or is subject to a local rate assessed and collected by officers of the Government as such. See in this connection Commissioner of Income-tax v. Raja Benoy Kumar Sahas Roy, [1957] 32 I. T. R. 466, [1958] S. C. R. 101 (S. C.) and Srish Chandra Sen v. Commissioner of Income-tax, [1961] 41 I. T. R. 340 (S. C. ). The Tribunal also proceeded on this basis but on a curious reasoning that the rent paid to the Central Government is tantamount to land revenue has held that the income in dispute is agricultural income. It will be proper at this stage to set down the reasoning of the Tribunal in their own words : ". . . . . . So the army authorities who leased out the agricultural land represent the Central Government. He has paid the rent to the army authorities who represented the Central Government and it was credited to the land revenue account by the said authorities. As far as the assessee is concerned, the department accepts that the income from the cultivation of the land is agricultural income. But, they deny him the benefit of exemption because the land is not assessed to land revenue in the limited sense as the departmental representative wants us to take it. The assessee has parted with money to enjoy the fruits of the land. The army authorities have treated it as land revenue. Where lies the fault of the assessee? The army authorities wanted the assessee to pay the rent which they knew in their minds to be land revenue and the assessees have paid the same. You may call the rent, the amount which the assessees have paid, by any name, but the amount paid by the assessees is relatable to the land and only to the land and remains to be so. The land is agricultural. Agricultural land produces agricultural products and, therefore, can it be presumed that the amount which the assessee paid to the army authorities to enjoy the benefit of the use and the limited possession of the land by growing agricultural product was anything else but an amount paid in relation to the land on a definite pre-determined basis ? It may not be land revenue paid in the normal sense as is commonly understood but it is a payment on a determined basis which is relatable to and related to the agricultural land. Coming to the other argument of the learned departmental representative that the land exempted from the payment of land revenue is not the land assessed to land revenue within the meaning of Section 2 (1) (a) of the Income-tax Act. The land may be assessed to land revenue. The land may be exempted from land revenue by the Government for considerations of the State policy. If a land is exempted from land revenue by an order of the Government, the exempted land does not pay land revenue but it was once assessed to land revenue. It has been exempted from the payment of land revenue. Does it mean that the exempted piece of agricultural land ceases to be agricultural land ? No. Can we say that it was not assessed to land revenue ? No. Exemption from payment of land revenue presupposes assessment to land revenue otherwise the exemption loses its significance. The question can be asked: exemption from what ? The answer is : exemption from payment of land revenue. This is the case with cantonments. The Government has thought it fit in its wisdom to leave the administrative control and other functions of the areas declared as cantonments to the army authorities. The reason is simple and understandable. The cantonments are the nerve centres of the army. Army must enjoy exclusive control over the areas so that their military operations and manoeuvres are not unduly hampered with by the civil administration which could adversely affect the efficiency of the army and consequently the security of the State. This is an overriding and weighty consideration in the interest of the country and State. But, can it be said that the land which is now called a cantonment and was once an agricultural land assessed to land revenue has ceased to be so because it has been granted exemption from the operation of the Land Revenue Act of the State". Exemption follows assessment. Once a land is assessed to land revenue, it is a land assessed to land revenue and the subsequent exemption cannot change its nature. Take an example : An army officer renders meritorious services during the course of a war or when the country is in a state of belligerancy. Recognising the services rendered by the Officer, the Government (may be the Central Government or the State Government) awards him a huge tract of agricultural land and further exempts the said land from the land revenue. The Officer leases it out to another person on payment of some rent, may be nominal or exorbitant, may be fixed or dependent on the yield from year to year. He so leases it out as the officer is still in active service and is, therefore, not in a position to cultivate himself. When the lessee earns an income from the cultivation of the-said land, can that agricultural income be taken as a non-agricultural income of the lessee and hence taxable under Income-tax Act because the land is exempt from the payment of land revenue and hence not assessed to land revenue. Or take another set of circumstances. Supposing the said officer leases out the land to a bona fide lessee on the condition that the said officer shall not charge any rent from the lessee but share the yield or the income from the agricultural land. Can the share from that income be assessed in the hands of the officer for the reason that even when undoubtedly, the yield is from agricultural land, but as the land is exempt from land revenue it should be taken as not assessed to land revenue. Hence, the exemption under the Act is no more available to the officer. If it were to be taken to be so, the very purpose of the reward would be defeated. That is not what the Government intended. What was not intended to be by the Government cannot be done by the Revenue Collectors of the Government. May be of the State Government or the Central Government. What the Government intends must be intended by those who collect the revenue for the Government and the Revenue Collectors cannot but intend what the Government intended. If it was to be otherwise, the two wings of the Government would be pulling in opposite directions. When you pull in opposite directions, you remain where you are. This renders the revenue machinery unworkable. That cannot be as it should not be. What cannot be because it should not be, cannot be permitted. "
(3.) IT appears to us that the Tribunal has completely gone off the mark. There is no warrant for the proposition that rent paid to army authorities for land leased out by them is land revenue. There is no basic difference bat ween the lease of land not assessed to land revenue and assessed to land revenue belonging to the Central Government and leased out by it on rent. The rent so received would not be land revenue. It is immaterial if the land belonging to the Central Government is exempt from land revenue. If the Central Government leases out such land, the rent received cannot be termed as land revenue. The Tribunal seems to have forgotten that land is a State subject and the right to recover land revenue only accrues to the State Government and not to the Central Government. The Union of India cannot levy land revenue or local rate. In this connection, reference may be made to entries Nos. 45, 46 and 49 in List II of the Seventh Schedule to the Constitution of India.;