1. This is a reference under section 66 (1) of the Indian Income-tax Act, 1922, referred to us by the Tribunal at the instance of the assessee. The question of law referred for our determination is as follows :
'Whether, on the facts and in the circumstances of the case, the income derived by the assessee as a superior landholder from the lands, which were used by the tenants for agricultural purposes, was agricultural income within the meaning of section 2 (1) (a) and exempt from tax under section 4 (3) (viii) of the Indian Income-tax Act, 1922 ?'
2. The question relates to the assessment year 1957-58 in respect of the previous year ending on July 31, 1956. The assessee is a superior holder of Gangetha Estate in the Akkalkuva Taluka, District of West Khandesh. The Gangetha Estate was a Mehwassi Estate. The assessee had income from forest property, ground rent, etc. In compliance with the notice under section 22 (2) of the Act, the assessee had filed a return of income showing the total income of Rs. 1,29,913 as income from other sources. After making certain adjustments the assessment was completed by the Income tax Officer on a total income of Rs. 1,61,701.
3. In the appeal against the order of the Income tax Officer the assessee contended before the Appellate Assistant Commissioner that the income derived by the assessee on cash basis from the above estate was agricultural income within the meaning of section 2 (1) (a) and was exempt from tax under section 4 (3) (viii) of the Act. As this question was not agitated before the Income tax Officer a remand report was called for from him and after taking into account the remand report submitted by the Income tax Officer the Appellate assistant Commissioner took the view that the assessee's lands were liable neither to land revenue nor to local cess during the relevant accounting period and, accordingly, held that the income did not quality for exemption as agricultural income under section 4 (3) (viii) of the Act.
4. In an appeal by the assessee before the Tribunal, the order passed by the Appellate assistant Commissioner was confirmed and it is thereafter that at the instance of the assessee the above question is referred to us for our determination.
5. The argument of Mr. Rajgopal on behalf of the assessee is that the income derived by the assessee for the relevant accounting period is agricultural income within the meaning of section 2 (1) (a) of the Act and it is, therefore, exempt from payment of tax having regard to the provisions of section 4 (3) (viii). His submission was that for the relevant accounting period land revenue and local cess were in fact assessed and collected. Once it is so done, it falls within the definition of the phrase 'agricultural income' and is exempt from taxation. His submission was that any subsequent order by the Collector that the land revenue and the local cess were illegally levied, assessed and collected is of no consequence and cannot deprive the assessee of his right to claim exemption under section 4 (3) (viii). He also submitted that even if land revenue and/or local rate is illegally assessed or assessed and collected, still it will not cease to be agricultural income as admittedly the land was used for agricultural purposes. He even went a step further and submitted that even if there is a mere liability to be assessed for land revenue, that by itself is sufficient to include the income derived from such land used for agricultural purposes as agricultural income irrespective of the fact that at no time during the relevant accounting period land revenue is either assessed or local rate is assessed or collected. As we were not impressed with the submissions made on behalf of the assessee we did not consider it necessary to call upon the counsel for the revenue to reply.
6. Section 4 (3) of the Act enumerates the types of income, profits and gains which are not to be include in the total income of the person receiving them. Clause (viii) of this sub-section provides that 'agricultural income' is not to be include in the total income of the person receiving the same. The phrase 'agricultural income' is defined in section 2 (1) and we are concerned in the present case with only clause (a) thereof. It is as under :
'2. (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 the taxable territories or subject to a local rate assessed and collected by officers of the Government as such....'
7. Under this clause before revenue or rent derived from any land can be regarded as agricultural income the following conditions must be fulfilled :
(i) the land is used for agricultural purposes, and
(a) the land is assessed to land revenue in the taxable territories;
(b) the land is subject to a local rate assessed and collected by officers of the Government as such.
8. There is no controversy in the present case that for the relevant accounting period ending July 31, 1956, both land revenue as well as local cess were collected by the Government. However, it appears from the letter of the Collector of Dhulia bearing No. IIX/WS-391 dated November 13, 1961, addressed to the Income-tax Officer that such land revenue and local cess were illegally collected contravening the provisions of the relevant statutes and were ordered to be refunded. The relevant portion of the letter reads as under :
'There were in all 6 Mehwassi Estates which were formed into Akkalkuva Taluka with effect from April 1, 1950. All the laws and regulations applicable to the then Bombay State were made applicable to Akkalkuva Taluka and the Estates of Chieftains come at par with other parts of the State. The natural impression that was gathered was that the L. R. Rules and L. R. C. were made applicable to this Taluka, but there is a special provision for the recovery of land revenue that a notification under rule 19 (O) read with section 52, L. R. C., has to be made applicable by a special notification and that was not done until the year 1959-60.
It is, therefore, clear that whatever recoveries were made before that year were not land revenue and as such were subject to refund. The amounts collected were, therefore, treated as rent and rent is not subject to L. R. cess. The rent has already been ordered to be refunded and consequently local fund cess wrongly collected is liable to be refunded.'
9. It is contended on behalf of the assessee that in fact in spite of this order, though land revenue is refunded, the local fund cess has not in fact been refunded.
10. Having regard to the definition of the phrase 'agricultural Income' in section 2 (1) (a), before any rent or revenue derived from land used for agricultural purposes is treated as agricultural income, one of the conditions to be fulfilled is, (a) that the land is either assessed to land revenue in the taxable territories, or (b) is subject to a local rate assessed and collected by officers of the Government as such. Taking the words used in their natural meaning there can be no doubt that the phrase 'assessed to land revenue' and the phrase 'local rate assessed and collected' can only mean 'legally assessed to land revenue' and 'local rate legally assessed and collected'. Any act done either for assessment of land revenue or for assessment and collection of local rate in flagrant violation of the provisions of the Land Revenue Code (hereinafter referred to as 'the Code') and the rules made thereunder, cannot in the eye of law be regarded as a valid assessment of land revenue or a valid assessment or collection of local rate.
11. By the West Khandesh Mehwassi Estates Regulation, 1949 (Bombay Regulation No. 1 of 1949), inter alia, all Acts passed by the Provincial Legislature before April 1, 1937, were extended to the territory of the Mehwassi Estates. This Act received the assent of the Governor on January 31, 1950, and the Act came into force at once. Section 3 of this Regulation provides that the Bombay Land Revenue Code, 1879, shall subject to the modifications specified in Schedule II come into force in the territory of the Mehwassi Estates. The modifications provided in Schedule II of this Regulation are not relevant for determining the question which is involved in this reference.
12. The first question that has to be considered in this reference is whether it can be said that for the accounting period ending July 31, 1956, the land of the assessee was assessed to land revenue. It is not possible to accept the contention of Mr. Rajgopal that merely because there is a liability to pay land revenue upon compliance with the provisions of the Code or merely because land revenue is illegally assessed and collected, the condition laid down in the definition of the phrase 'agricultural income' is satisfied or complied with. Section 45 of the Code provides that :
'All land, whether applied to agricultural or other purposes, and wherever situate, is liable to the payment of land revenue to the Government according to the rules hereinafter enacted except such as may be wholly exempted under the provisions of any special contract with the Government or any law of the time being in force.'
13. On the language of this section the contention on behalf of the assessee is that the moment the Code is extended to a piece of land the liability to pay land revenue arises. Such a contention clearly overlooks the phrase that 'the liability to pay land revenue is according to the rules hereinafter enacted'. The existence of the words 'according to the rules hereinafter enacted' indicates that no liability will ever accrue or arise unless the rules are complied with. Section 52 of the Code provides by whom the assessment of any land is to be fixed. Under the relevant part of sub-section (1) thereof, on all lands which are not wholly exempt from the payment of land revenue and on which the assessment has not been fixed under the provisions of Chapter VIII-A, the assessment of the amount to be paid as land revenue shall, subject to rules made in this behalf under section 214, be fixed at the discretion of the Collector, for such period not exceeding ninety-nine years as he may be authorised to prescribe, and the amounts due according to such assessment shall be levied on all such lands. A mere reading of this sub-section clearly shows that even land revenue cannot be fixed until the procedure prescribed by the rules has been gone into and until it is fixed, there can be no possibility of the levy of the assessment. Until the land revenue is fixed as contemplated by the rules, even liability to pay the land revenue will never arise. Section 139 which is contained in Chapter XI, inter alia, provides that the land revenue shall be leviable on or at any time after the first day of the revenue year for which it is due. Thus, it is not possible to levy land revenue before it becomes due for any particular revenue year.
14. The procedure for fixing the amount of land revenue is prescribed in rule 19 (O) of the Bombay Land Revenue Rules. There has been some amendment in these rules from time to time and looking at the rule that was existing as applicable to the relevant accounting period, it is clear that the assessment of the amount to be paid as land revenue under section 52 on all agricultural lands which are not wholly exempt from land revenue and on which the assessment has not been fixed under the provisions of Chapter VIII-A of the Code shall be fixed in terms of cash in accordance with the provisions of sub-rules (2) to (4). A plain reading of these sub-rules makes it clear that the question of levy or liability to pay land revenue will never arise before it is fixed. That this is so is aptly clear if regard be had to the factors which are to be taken into account under sub-rules (2) to (4) of these Rules. One of the factors to be taken into account is the average of the price of each class of agricultural product per acre of the particular piece of land for a period of five years or such period not less than three years for which relevant statistical data may be available. This requirement clearly shows that there is nothing in the provisions of these sub-rules to indicate that land revenue can be fixed so as to five retrospective effect to levy of such revenue after it is fixed. On reading the relevant provisions of the Code and especially section 52 read with rule 19 (O) it is quite apparent that land revenue is not assessed in respect of any land used for agricultural purposes until it is fixed in the manner provided therein. Admittedly, for the accounting period ending July 31, 1956, for the land in question belonging to the assessee it was not fixed. If land revenue is not fixed as contemplated and in the manner provided by these provisions, then the land cannot be regarded as assessed to land revenue.
15. Mr. Rajgopal, on behalf of the assessee, drew our attention to Bombay Regulation No. II of 1954. Clause 2 of this Regulation, inter alia. provides that the provisions of section 117-B of the Code shall stand modified as therein stated. Section 117-BB as applicable to Mehwassi Estates is as under :
'117BB. - The survey of lands made in the village comprised in the territory of the Mehwassi Estate as specified in Schedule F and in force as at the date of commencement of the West Khandesh Mehwassi Estates Bombay Regulations, 1949, shall be deemed to have been made in accordance with the provisions of this Chapter and shall continue to remain in force until a fresh survey of the said lands is directed by the State Government.'
16. Relying upon these provisions the argument of Mr. Rajgopal is that as survey has been made earlier, it is deemed to have been made under the provisions of the Code until a fresh survey is directed to be made by the State Government and the assessment fixed earlier is also deemed to have been continued as a result of this provision in respect of the land of the assessee. If regard be had to the heading of Chapter VIII-A of the Code it is quite clear that a clear distinction is made between survey of lands, assessment of lands and settlement of land revenue. Each is separate from the other and what is intended to be done by the Bombay Regulation No. 11 of 1954 is merely to continue the survey made earlier until a new survey has been made under the directions of the State Government. There is nothing in the provisions of this Regulation to indicate that the assessment fixed earlier shall continue to remain fixed for the purposes of the code even though such assessment has not been fixed as contemplated by the provisions of section 52 read with rule 19 (O). Thus, until land revenue is assessed as provided by the Code read with the relevant rules, land revenue cannot be regarded as assessed or legally assessed as contemplated by the definition of the phrase 'agricultural income'.
17. Under the provisions of the Bombay Local Boards Act, 1923, especially section 93 thereof, local fund cess is fixed at the rate of three annas on every rupee of every sum payable to the State Government as ordinary land revenue. So, unless the land revenue is fixed, the question of fixing the local rate or the local fund cess does not arise, because this cess is only a particular part of the land revenue payable in respect of any particular piece of land. As admittedly land revenue was not assessed in respect of the land of the assessee for the relevant accounting period ending on July 31, 1956, it cannot be said that his land was assessed to land revenue or in respect of the land local rate was assessed and collected. If this ingredient is not fulfilled, then the rent or revenue derived by the assessee from the land in question cannot be regarded as agricultural income within the meaning of the Act.
18. In our opinion, if land revenue is not legally assessed or local rate is not legally assessed or collected, the question of illegal de facto assessment or collection thereof is really irrelevant. It is undoubtedly true that for the relevant accounting period such land revenue and local rate were assessed and collected from the assessee. However, it is quite clear from the letter of the Collector of Dhulia dated November 13, 1961, that the Government realised that such assessment and collection was illegal and in fact ordered refund of both of them. It is admitted that land revenue is in fact refunded, but it was said that so far as the local fund cess is concerned, though it was ordered to be refunded, it has not in fact been refunded. If an illegal tax is collected by any Government, then the aggrieved person has always a remedy in a court of law to recover the same and more so when such illegal assessment and collection is admitted or conceded by Government. Once an order of refund is passed both in respect of land revenue and local rate, it cannot be said that the land of the assessee is assessed to land revenue or in respect thereof local rate is assessed and collected.
19. Reliance was placed by Mr. Rajgopal upon a decision of the Supreme Court in Kishinchand Chellaram v. Commissioner of Income-tax. In this case a dividend was declared and credited by the company to the shareholders but subsequently the company had passed a resolution to treat the amounts credited as loans. The question which arose for consideration was whether having regard to the provisions of section 16 (2) of the Act such subsequent resolution affected the question about the dividend to be taxed as such. We fail to see how determination of such a question can be of any assistance to us in interpreting the phrase 'agricultural income' as defined in section 2 (1) (a). Section 2 (1) (a) is merely an interpretation section and not a part of charging section and the words therein contained have to be interpreted having regard to the normal canons of construction which apply to words which are clear and unambiguous and not susceptible to any doubt. Reference was also made to the decision of the Allahabad High Court in Commissioner of Income-tax v. Kalicharan Jagannath. If regard be had to the facts of this case, in our opinion, it has not any relevance to the issue to be decided in this case and, in our opinion, this decision cannot be of any assistance to the assessee.
20. In the result, we answer the question referred to us as under :
Having regard to the facts and circumstances of the case, the income derived by the assessee as a superior holder from the lands, which were used by the tenants for agricultural purposes, was not agricultural income within the meaning of section 2 (1) (a) and was not exempt from tax under section 4 (3) (viii) of the Indian Income-tax Act, 1922.
21. The assessee shall pay the costs of this reference.