Holding

A remission of interest cannot be treated as agricultural income under the Kerala Agricultural Income Tax Act, 1950.

Summary

The assessees, Kerala Estate Mooriad Chalapuram, claimed a deduction of Rs.33,747.09 as interest on a loan under section 5 of the Kerala Agricultural Income Tax Act, 1950, which was allowed. In the subsequent year, the creditor waived the interest, and the amount was credited to the assessees' revenue accounts. The assessing authority treated this credit as taxable agricultural income, but the Tribunal and the Kerala High Court held that a remission is not a receipt of agricultural income. The Supreme Court affirmed this view, stating that for the amount to be taxable it must be describable as agricultural income, which a remission is not. The Court noted that provisions in the Indian Income Tax Act that treat such remissions as taxable by legal fiction do not apply to the Kerala Agricultural Income Tax Act. Consequently, the appeal by the Commissioner was dismissed.

Issues considered

Whether a remission of interest, credited to the assessee's accounts, constitutes agricultural income under section 5 of the Kerala Agricultural Income Tax Act, 1950.

Legislation cited

Income Tax Act, 1922s. 10(2A)
Income Tax Act, 1961s. 41(1)
Kerala Agricultural Income Tax Act, 1950s. 3, s. 4, s. 5

Subjects

agricultural income taxremissioninterest deductiontaxable incomeKerala Agricultural Income Tax Actlegal fictionrefund vs remission

Judgment

A

COMMISSIONER OF AGRICULTURAL INCOME-TAX,
TRIVANDRUM
v.
KERALA ESTATE MOORIAD CHALAPURAM B

JULY !5, 1986

l [R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.)

Kera/a Agricultural Income Tax Act, 1950, ss. 4 and 5-Agri-
cultura/ Income-Deductions allowed under s. 5-Whether subsequent c
remission thereof could be treated as "agricultural income"-Remission
and Refund-Distinction between.

The Kerala Agricultural Income Tax Act, 1950 provides for the
levy of tax on agricultural income in the State of Kerala . Section 5 D
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 de-
ducted from the agricultural income of a person before the levy is
imposed.
E
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
cr~ditor waived payment of the interest of Rs.33,747.09 and accord· F
ingly the amount was credited to the revenue accounts of the res-
pondents-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 bad been given by the G
creditor in favour of the assessees or returned to them could not consti·
tute the income of the assessees.

Dismissing the appeal of the Revenue,

HELD: (I) The view taken by the High Court is right. The remis· H
162 SUPREME COURT REPORTS 11986] 3 S.C.R.

A 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 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. I164F-G I
B
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
agricnltnrist. [164G-H] t
C Commissioner of Income-tax, Mysore v. Lakshmamma, 11964]
52 !TR 789, approved.

Mohsin Rehman Penkar v. Commissioner of Income-tax,
Bombay City, 11948] 16 !TR 183, referred to.
D
(2) In order to eliminate such a controversy in cases falling Wider the
Indian Income-tax Act, 1922, sub-s. (2A) was added ins. IO 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. IO of the Indian Income Tax Act, 1922 has been replaced by
an even wider provision as sub-s. (I) of s. 41 of the Income Tax Act,
E
1961. No provision of that nature'finds place in the Kerala Agricultural
Income Tax Act. [165A-B; D]

CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1~~~ \
F
From the Judgment and Order dated 28.2.1973 of the Kerala
High Court in l.T. Reference No. 84 of 1971. r
T.S. Krishnamurthy Iyer, V.J. Francis and N.M. Popli for the
Appellant.
G
S. Balakrishnan for the Respondent.

The Judgment of the Court was delivered by )

PA,THAK J. This appeal by special leave is directed against the
H judgment of the High Court of Kerala disposing of an Agricultural
C.l.T. (AGRL.) v. KERALA ESTATE {PATHAK,J.J 163

Income-tax Reference and answering the following question in favour A.
1 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 .B
year 1964-65."
!,

The assessees Kerala Estate Mooriad Chalapuram, is a broad

I 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 c
system of accounting. In assessment proceedings for the year 1963-64,
the assessees claimed a deduction of Rs.33,747.09 from their agri-
~ cultural 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 D
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
E
assessed to tax for the year 1964'65. The Tribunal, by majority, held
that it was not agricultural income. As the instance of the Commis-
sioner 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 f
High Court has taken the view that it was immaterial that the assessees
1. 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 G
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<:arried on by the a'5essees.

The Kerala Agricultural Income-tax Act, 1950 provides for the H
164 SUPREME COURT REPORTS 11986] 3 S.C.R.

A levy of tax on agricultural income in the State of Kerala. Section 3 of r
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, ands. 5 details the deductions to be
B 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 ·1evy 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, there-
I
fore, rightly deducted in computing their agricultural income. The
c 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
D question whether an amount refunded or remitted constitutes the in-
come of an assessee. In Commissioner of Income-tax, Mysore v.
Lakshmama, 11964] 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
E 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
F 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 agri-
cultural 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
G 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 \
/

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 ag-
ricultural operations when the assessee is an agriculturist."
H
C.l.T. (AGRL.) v.. KERALAESTATE [PATHAK,J.[ 165

In order to eliminate such a controversy in cases falling under the A
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 B
Income-tax, Bombay City, [1948] 16 ITR 183 had observed: "It is im-
possible to see how a mere remission which leads to the discharge of

l the liability of the debtor can ever become income for the purposes of
taxation''. This observation was noted by th~ 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 de- c
cided 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 D
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. E

I

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