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 dissatisfiedmoved 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,  32 I.T.R. 466,  S.C.R. 101 (S.C.) and Srish Chandra Sen v. Commissioner of Income-tax,  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 landrepresent 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 authoritieshave 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 cannotchange 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 thatland 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.
4. There is no warrant for the view that if land is exempt from land revenue, it is necessarily assessed to land revenue, at one time. Land revenue is imposed during the course of a settlement. Excepting Bengal, where there is a permanent settlement, the settlements are made every twenty years. The land may be subject to payment of land revenue in one settlement and may be exempt from its payment in the other. It is the current settlement which has to be seen to determine whether land is assessed to land revenue. So far as the lands in dispute are concerned, they are not assessed to land revenue in the current settlement. No evidence has been led to show that during the current settlement these lands were assessed to land revenue and later on exempted. Moreover, there is no presumption that a land in a cantonment was necessarily agricultural land. In one sense all lands can be used for agricultural purposes, but it is not necessary that what can be used for agricultural purposes is necessarily agricultural land within the meaning of Section 2(1)(a). For instance, sites in towns and villages within the Lal Lakit have never been considered agricultural lands though they may be used for agriculture. Such lands are not assessed to land revenue. Even lands within a cantonment could have been assessed to land revenue, but for the fact that such lands belonging to the Central Government are exempt from being so assessed. However, there could be a special order to the contrary. In that case lands within the military cantonment would be assessed to land revenue.
5. The warrant for exemption of lands in military cantonments is to be found in Clause 1 of Appendix XV in Dome's Settlement Manual (4th edition), which reads thus :
' All lands in a military cantonment and all village sites of ancient standing will be exempt from assessment in the absence of special orders and if exempt heretofore,'
Paragraph 461 of the said Manual deals with assessment of land in civil stations and cantonments and is in the following terms:
' Instructions regarding the assessment of land in civil stations and cantonments will be found in Appendix XV, in which have also been embodied instructions issued by the Government of India regarding the assessment of land in municipalities.'
It is, therefore, clear that lands in military cantonments would not be assessable to land revenue unless there is a special order therefor.
6. In our opinion, the Tribunal's decision cannot be sustained, either on principle or on authority. The mere fact that any sum due to the Central Government is recoverable as arrears of land revenue does not make that amount partake of the nature of the land revenue or a local rate. The assessment of land revenue is a matter which is purely within the jurisdiction of the State Government. Whatever rent is paid by a lessee to the Union of India cannot in any sense of the term be land revenue.
7. The matter can be approached from another standpoint. The Union of India is the owner of lands. It has leased the lands and in the capacity of a lessor it is getting the rent. Therefore, whatever rent it gets can in no way be said to be payment of tax. It is merely an income derived by an owner by lease of lands. Moreover, the basic idea of exempting agricultural income is that the land which yields income is already assessed to tax, i.e., the land revenue, and in spite of that the legislature has given the power to tax agricultural income to the State Legislature and not to the Central Legislature. This reinforces the contention of the learned counsel for the department that the rent paid on lands belonging to the Union of India can in no sense be said to be land revenue.
8. The example given by the Tribunal of a grantee of lands for war services who has leased the land is not apt. In the first instance, when such a grant is made it is either of land or of revenue. It can be both of land and revenue, but in no case the Government exempts the land from land revenue and if the Government was to exempt the land from land revenue, the land in that instance would not be assessed to land revenue and it would mean that the income from that land would not be agricultural income. However, this example does not furnish an answer to the problem which the Tribunal was called upon to determine. Effect has to be given to the plain meaning of the statute and two conditions mentioned in Section 2(1)(a) have to be satisfied before the income can be regarded as agricultural income. One of these conditions is not satisfied in the present case. That being so, the income from such land cannot be treated as agricultural income.
9. For the reasons recorded above, we answer the question referred to us in the negative, i.e., in favour of the department and against the assessee. However, we leave the parties to bear their own costs.