1. The assessee is the manager of a Hindu undivided family carrying on money-lending business in India, Burma and the Federated Malay States with borrowed capital. The findings of fact are not very clear but before us the argument has proceeded on the following basis: Owing to certain clients in Burma being unable to meet their obligations, the assessee was compelled to receive in repayment of loans made by him, agricultural lands in Burma. The money which had been lent had originally been borrowed by the assessee for the purpose of his money-lending business, that is to say, that he borrowed and in his turn lent the same money no doubt at a higher rate of interest. It was conceded by Mr. Patanjali Sastri that the assessee was carrying on one business for the year of assessment 1934-1935. It has not been contended before us that the assessee was retaining and cultivating these lands of his own inclination, but owing to the fall in agricultural lands he was involuntarily in possession and was preserving his capital in the only way open to him pending a return of agricultural economic conditions which made it possible for him to realise if not all, at least some of the capital originally lent to the borrowers, the previous owners of the lands. It was not disputed that the whole of the money borrowed, a great part of which is now in the form of land, was originally borrowed for the purpose of the money-lending business. In view of these admissions of fact, it is not necessary for us to send this matter back to the Commissioner for findings. For the assessment of the year 1934-1935 the assessee was assessed on a total income computed at Rs. 30,963. In computing the income the Income-tax Officer disallowed Rs. 17,796 under interest payments in the Kyaiklat branch and Rs. 3,114 under establishment and other charges in the Kyaiklat and Thayetmyo branches. The interest charges disallowed were claimed by the assessee under Section 10(2)(iii) of the Income-tax Act as representing the capital borrowed by him for the purpose of his business which capital was now represented by agricultural lands. The Income-tax Officer held that four-fifths of the money borrowed was so represented but he disallowed the claim on the ground that as the money was invested in agricultural lands the income from which is exempt from income-tax under Section 4(3)(viii) of the Act the assessee was not entitled to the allowance mentioned in Section 10(2)(iii). He accordingly disallowed the claim for interest as regards four-fifths of the money borrowed which he considered was the amount of the capital then represented by lands but he allowed the remaining one-fifth as being money borrowed for the purpose of .the money-lending business and utilised therein.
The assessee also claimed a sum of Rs. 3,114 made up as follows:
Establishment charges .. Rs. 2,298Loss in cattle purchase lands and bull accounts .. ' 779Conveyance charges relating to lands .. ' 37_____________Rs. 3,114_____________
2. The last item was allowed by the Commissioner. The other items were claimed as being charges under Section 10(2)(ix). The Commissioner disallowed the amount of these other items also on the ground that as it is expenditure for the purpose of earning agricultural income, it also was not deductable on the same grounds on which he had ruled that money borrowed and subsequently used in agricultural lands was not a permissible deduction. The assessee moved this Court and in compliance with the Court's direction the Commissioner has referred to us the following two questions:
(1) Where a person who is carrying on business as a money-lender, borrows money for his money-lending business, lends it out to constituents, is obliged in the course of the business to receive agricultural lands in repayment of his debts from such constituents, is he not entitled to a deduction of the interest paid by him on so much of the capital borrowed by him for business purposes as is represented by the agricultural lands got in under Section 10(2)(iii) in computing the profits and gains of the banking business for the year of account?
(2) Whether the petitioner is not entitled to a deduction in respect of the establishment and other charges for managing and cultivating the lands in Kyaiklat and Thayetmyo on the ground that they are expenses incurred for agricultural purposes and the amount spent for obtaining conveyances on the ground that it is an expense of a capital nature?
3. Section 10(1) and (2) is as follows:
(1) The tax shall be payable by an assessee under the head 'Business' in respect of the profits or gains of any business carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely:(iii) in respect of capital borrowed for the purposes of the business, where the payment of interest thereon is not in any way dependant on the earning of profits the amount of the interest paid.
4. It is, as we have emphasised, conceded that this capital was borrowed for the purpose of the business and on the facts we hold that it has also been used for the purpose of the business because it is an unquestioned fact that the assessee received these lands in repayment of the loans made by him not of his own volition but of necessity there being no other method of getting payment, and that therefore these lands came into his possession directly in the course of his money-lending business and represented the capital originally borrowed. Prima facie therefore the assessee is entitled to the benefit of Section 10 of the Act, but the Commissioner's earned Counsel argues that nothing which cannot help to earn taxable income is the subject of exemption and agricultural income is not taxable and by implication in Section 10(1) and (2) before the words 'profits and gains' must be read the word 'taxable'. He contends that the object of Section 10 is to reduce the amount of taxable income and that it cannot therefore possibly apply to any income which is not the subject of taxation. No case exactly in point has been cited. But the Commissioner has relied especially on two Indian decisions, one of this High Court and the other of the Bombay High Court. In Somasundaram Chettiar v. Commissioner of Income-tax (1927) 54 M.L.J. 436 : 2 I.T.C. 505 the question arose whether interest on capital borrowed in India to be used abroad (in that case the Federated Malay States) was a permissible deduction under Section (10)(2)(iii) of the Income-tax Act. It must be emphasised that no complication with regard to the use of the capital in a foreign country arises here Burma and Madras being subject to the same Act. This High Court took the view that 'business' in Section 10(2)(iii) means the business whose profits are being assessed in the year under consideration. In Provident Investment Co., Ltd. v. The Commissioner of Income-tax, Bombay I.L.R. (1931) 56 Bom. 92 : 33 L.R. 1587 : 6 I.T.C. 21, the Bombay High Court held that where an Indian finance company borrowed money in British India and invested it abroad keeping both the income and capital abroad, the interest on the money so borrowed was not deducted under Section 10(2)(iii) of the Income-tax Act by reason of the fact that the income was not the subject of taxation in British India. The decision of the Court there again rested on the fact that the whole of the interest derived from the borrowed capital was outside the jurisdiction and was not the subject of taxation in India. At page 25 Beaumont, C.J., expressed himself as follows:
Now looking at the section again in the light of the context, tax is to be payable by an assessee under the head of 'Business' in respect of the profits or gains of any business carried on by him. Clearly that must mean in respect of the taxable profits or gains of any business carried on by him and the business must be one which earns taxable profits or gains. Then we come to Sub-section (2)(iii) an allowance is to be made in respect of interest on capital borrowed for the purposes of the business. Now, I think that again must be for the purposes of the business which earns or is capable of earning taxable profits. Whether in fact taxable profits are earned or not is not necessarily the criterion, because the borrowed money may earn no profit, but I think the 'business' referred to in that section is a business which is so carried on that taxable profits may be earned, and unless it is a business of that character a deduction for interest on capital money borrowed for the purposes of that business is not allowable under the Act.
5. It will be noticed in both these cases the income-tax derived from borrowed capital was not the subject of any taxation in British India. In this connection it should be observed that Section 4 of the Income-tax Act makes the Act applicable to all income, profits, or gains, accruing or arising or received in British India, or deemed to be received therein. But the Act does not apply to agricultural income in British India. Under Section 4(3)(viii) it is provided that 'this Act shall not apply to...agricultural income'. 'Agricultural income' is defined in Section 2(1) as meaning:
(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land revenue in British India or subject to a local rate assessed and collected by officers of Government as such;
(b) any income derived from such land by (1) agriculture.
6. The rest of the definition is not relevant. It should be observed that the agricultural income must be derived from 'such land', i.e., land assessed to land revenue in British India or subject to a local rate assessed and collected by the officers of Government as such. There is no foundation therefore for the argument which we have heard that agricultural income is exempt from all taxation and it is therefore prima facie inequitable that money borrowed and represented by an income which does not pay tax should be subjected to any of the benefits of the Act. On the contrary, under the Act such income is expressly excluded from the burden of income-tax because it has already paid tax to Government in another form. That such circumstances as we now have to consider were in the contemplation of the legislature when passing this Act we take leave to doubt but they have arisen and must be dealt with not on general principles but in accordance with the principles relating to the construction of a fiscal statute, vis., that it should be strictly construed.
7. It seems to us that the governing section in order to decide this matter must be Section 10(2)(iii) was the capital borrowed for the purpose of the assessee's business? No difficulty arises about that for it is conceded that it was so borrowed. It was also unquestionably used for the purpose of the business because it is again conceded that it was lent to the borrowers. Does it continue to be so used? It is in that respect that it is important again to emphasise that this case has been argued before us on the basis that these lands came into and were retained in the possession of the assessee in payment of a money-lending debt and ex necessitater. In this Presidency there is a current of authority to the effect that immovable property received by a money-lender in repayment of loans is an asset of his money-lending business and that any profits derived from the sale of such lands and also any income from the land such as rents, etc., must be regarded as the profits of such business and taxable as such see Chettiappa Chettiar and Ors. v. The Commissioner of Income-tax, Madras : AIR1930Mad119 . In that case as here the assessee was a money-lender who had secured his advances on rubber estates which he had finally to take over in repayment of his debts and to hold until a favourable opportunity occurred for re-sale and it was held that any profits from such re-sale were profits of his money-lending business. See also Lakshmanan Chettiar v. The Commissioner of Income-tax, Madras (1929) 58 M.L.J. 68 : 4 I.T.C. 200. In Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga (1935) 69 M.L.J. 474 : L.R. 62 IndAp 215 : I.L.R. 14 Pat. 623 (P.C.) the Judicial Committee had before them for consideration the question as to whether income received from an estate taken over by a lender as security for an amount advanced under an usufructuary mortgage was agricultural income. At page 631, Lord Macmillan in delivering the advice of the Board after setting out the facts and emphasising that prima facie the income of the land was agricultural income, states as follows:
In answer to this prima facie conclusive ground for excluding the sum in question from the respondent's assessment the appellant concedes that if the respondent were not a money-lender and if the transaction in virtue of which he receives the rents had not been a transaction entered into in the course of his money-lending business, he would have been entitled to invoke the statutory exemption of agricultural income; but the appellant submits that the fact that the respondent carried on a money-lending business and receives the rents as the result of a transaction entered into in the course of that business makes all the difference.
8. It would appear therefore that the Board recognised the position that rents from agricultural lands could be received in virtue of a money-lending transaction. Their Lordships then proceed to hold that agricultural income does not lose its character by reason of the nature of its receipt and state. 'The exemption is conferred and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient....' In view of the above we consider that all the provisions of Section (10)(2)(iii) are complied with in that the money concerned was borrowed and at all material times was used and continued to be used 'for the purpose of the business.
9. Certain cases were referred to in which for the purpose of assessment the business of the assessee had been split into two categories, for instance, Maxse's case (1919) 1 K.B. 647 in which the business of a journalist and the business of an editor were divided and Ransom's case (1918) 2 K.B. 709 in which the business of a chemist and the business of husbandry were split. In the Ipoh case, Somasundaram Chettiar v. Commissioner of Income-tax, Madras (1927) 54 M.L.J. 436 : 2 I.T.C. 505, the Madras and Ipoh businesses were treated as distinct. That aspect does not arise before us because Mr. Patanjali Sastri argued the case on the basis as is unquestionably the fact that only one business was carried on by the assessee. In both the English cases cited above it must be observed that the separate enterprises were of design carried on by the assessee. For instance in Ransom's case* no doubt the firm's directors could have bought their herbs in the market but they preferred to grow them themselves. Nor was there any obligation on Mr. Maxse to be a journalist as well as an editor. But in the case before us where is the money-lender's choice? Here is the only method by which he can be repaid if further losses in the money-lending business are to be avoided. And how can agricultural land be preserved except by cultivation. The cultivation was merely a necessary incident of his involuntary possession which came to him because as a money-lender he had lent money to a borrower who could not re-pay in money. It appears therefore that only by straining the Act against the assessee can he be excluded from the benefits of Section 10(2)(iii). Apart from the fact that that is not the method of construing a taxing statute it appears there is nothing unreasonable in the result at which we arrive. The legislature has thought fit to exclude agricultural income from the incidence of income-tax because it has already paid the tax in another form. The position is peculiar to India and not to England and in this case we are told--and it appears to be the fact-that the assessee would be better off if he had not taken this land from the debtor and was therefore unable to realise anything in cash as he would then be able to get the benefit of Section 10(2)(iii), The argument of the Commissioner's earned Counsel appears to be entirely based on the fact that agricultural income is not the subject of income-tax in British India for he conceded that had the re-payment of the loan to the money-lender been received in the form of a number of motor cars which could be let out on hire until a favourable opportunity to sell them arose (such profits would of course be taxable), the assessee would have been entitled to the benefits of Section 10(2)(iii). The Commissioner has relied on Sachindra Mohan Ghosh v. The Commissioner of Income-tax, Bihar and Orissa I.L.R. (1936) Pat. 47 : 5 I.T.C. 397. In that case a receiver was appointed by the Court for the management of an estate which derived taxable and non-taxable income and the question arose what proportion of the salary of the receiver was allowable expenditure. That decision is of no assistance in this matter because it deals with income from 'other sources', and Section 12(2) which governs that decision permits a deduction of expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains. In the present case we are dealing with business and interest on capital borrowed for the business.
10. Since the arguments in this reference were concluded, a report of a very recent decision of the Court of Appeal has been received in this country and has been brought to our notice, Hughes v. Bank of New Zealand (1936) 3 All. E.L.R. 975. In that case the bank had a branch in London and from its floating capital had purchased 5 per cent, war loan which is tax free and 3 per cent. India Government stock and other securities on which the amount of the tax had been repaid on the ground that there was no residence by the assessee in the United Kingdom. It was sought by the income-tax authorities to tax the interest on all the above securities. The authorities further denied the right of the bank to deduct the expenses incurred by the bank for the purpose of earning the income from the above securities. The Court of Appeal after holding that the immunity from taxation of the above securities was absolute dealt with the question whether the expenses of the bank incurred for the purpose of earning non-taxable income were properly deducted. 41,262 was found to be the expenses attributable to the earning of the profits derived from the above-mentioned securities and it would appear that very much the same argument was advanced by the Inspector of Taxes in that case as has been advanced here. It is summarised by Lord Wright at p. 997 as follows:
It is contended on behalf of the Crown that, if the bank get the benefit of that exemption, it should be deprived of the advantage of deducting the sum of 41,262 being the expenses attributable to the earning of the income which has been held to be immune from taxation. In other words, it is said if the corpus-that is to say, the income-is to be excluded, the accessory-that is to say, the expense of earning it-ought also to be excluded. The exclusion on the one side ought to be balanced by the exclusion on the other, otherwise the tax-payer is getting a double advantage, he is getting his exemption in respect of the interest, and he is also having the additional benefit of deducting the expenses of earning that interest, just as if the interest had been included as taxable. I confess that there seems to be great force in that argument, and if I had been able to find a warrant for giving effect to that argument in the language of the Act I should certainly have done so, because it seems to me to be both a reasonable and a proper conclusion.
11. With regard to this last observation of Lord Wright, as we have already pointed out, in India a special provision is made for taxing agricultural lands so that 'the double advantage' referred to is not applicable here. But at page 99S His Lordship says:
The expenses which are dealt with here by the Commissioners are interest on the money borrowed and used to purchase these particular securities, and it would be a suitable conclusion if that could be deducted.
12. Lord Wright rejected the contention that one part of the expenses could be eliminated and the trade as it were divided observing that there was one individual trade. In the present reference as already indicated the agricultural activities of the assessee were inextricably mixed with and incidental to the money-lending business.
13. The above decision seems to support the view which we have expressed that in the absence of any express provision in the Act, the assessee is not to be deprived of the advantages conferred by exemptions such as Section 10(2)(iii) because the capital benefiting therefrom by means of permissible deductions happens to produce a non-taxable income.
14. It follows from what has been stated above that the answer to the first question must be in the affirmative. The answer to the second question will admittedly follow from the decision on the first and the answer to it therefore is also in the affirmative. The assessee will have the costs of this petition fixed at Rs. 250. The Rs. 100 deposited by the assessee will be refunded.