COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA Vs. KAMESHWAR SINGH

JUDGEMENT

(1.) The present appeal arises from an assessment to income-tax made upon the respondent for the year 1929-30 and the only question before their Lordships relates to an item of Rs.91,283 included in the assessment. The appellant maintains that this item, the receipt of which is admitted, forms part of the taxable profits or gains of the business of money-lending carried on by the respondent; the respondent maintains, and the High Court has held, that it is "agricultural income" within the meaning of the Indian Income-tax Act and consequently exempt from income tax. In order to determine which of these contentions is right, it is necessary to describe briefly the transaction out of which this item of receipt arose. It appears that in 1929 the respondent's father, who carried on an extensive money-lending business, made a loan of 18? lacs of rupees, with the sanction of the High Court at Patna, to Thakurain Kusum Kumari, widow and administratrix of the late proprietor of the estate of Lachmipur. The transaction was embodied in two indentures both dated 3 February 1929. The respondent's father died on 3 July 1929 and the respondent has succeeded him as his eldest son and heir and as his successor in business.

(2.) The first of the indentures is described as a "zarpeshgi lease with usufructuary mortgage" and is granted by Thakurain Kusum Kumari as "lessor mortgagor" in favour of the respondent's father as "lessee mortgagee" in consideration of the loan of 18? lacs. The lessor mortgagor thereby grants, demises and conveys in zarpeshgi lease and by way of usufructuary mortgage certain lands in the district of Bhagalpur, forming part of the Lachmipur zemindary, to the lessee mortgagee, to have and to hold the same for fifteen years. After stating that the lessor mortgagor has put the lessee mortgagee in possession, the indenture proceeds to state that the parties have agreed that the lessee mortgagee shall advance the sum of 18? lacs and that, for repayment of the loan, the lessor mortgagor has given, and the lessee mortgagee has taken, the zarpeshgi lease and usufructuary mortgage. The rent reserved to the mortgagor lessor, and described as the 'thika rent" is fixed at Rs.31,000 arrived at by taking the gross average rental of the properties at Rs. 1,59.813 and then deducting management and other expenses amounting to Rs.37,530 and "thika profits" Rs.91,283, leaving Rs. 31,000. This sum of Rs.91,283, designated "thika profits," is the sum now sought to be assessed. The indenture further provided that the thika rent should form part of the yearly payments which the lessor mortgagor thereby undertook to make in reduction of the loan and should be increased as the amount of the loan diminished by 6 per cent on the sums repaid with a corresponding reduction in the "thika profits." Other articles of the indenture provided that the lessee mortgagee should maintain the irrigation works, look after boundaries, and collect all rents and income of every kind from the properties thereby leased and mortgaged and should peacefully hold and enjoy the same. The leased properties were mortgaged and hypothecated as security for payment of the zarpeshgi loan and the lessee mortgagee was given the right to hold over and retain possession of the properties until satisfaction of the entire debt.

(3.) The second indenture dealt with certain properties in the Sonthal Parganas also forming part of the Lachmipur estate, which could not legally be mortgaged. It is described as an indenture of lease and demised these properties to the respondent's father by way of lease for 15 years at a thika rent of Rs.30,000, the lessee being bound also to pay the Government revenue charges in respect of the properties comprised in both indentures. Part of the rent was appropriated to certain payments and the balance was to be credited by the lessee toward the liquidation of the zarpeshgi loan and the usufructuary mortgage in respect of the properties in the district of Bhagalpur in possession of the lessee under the other indenture. The lessee was entitled peacefully to hold and enjoy the leased properties and to collect all rents, profits and income of every kind therefrom. The legal position occupied by the respondent's father and now by the respondent in relation to the Lachmipur properties, as the result of the transaction embodied in the two indentures, is thus stated by the learned Chief Justice (Courtney-Terrell):