(The Judgment of the Court was delivered by the Honourable the Chief Justice.)
Two question have been referred to this Court by the Income-tax Appellate Tribunal, Calcutta Bench, at the request of the assessee. Mr. Srinivasa Ayyangar, on behalf of the assessee, has informed the court that his client does not wish to proved with the reference so far as it concerns the first matter. This means that the decision of the Tribunal on the question of whether the interest received by the assessee in respect of the preference shares held by him in the steel Corporation of Bengal is taxable income will stand.
The second question regards as follows :-
'Whether the interest on rent payable to other appellants as landholder under the Madras Estates Land Act can be said to be agricultural income within the meaning of section 2(1)(a) of the Act and so exempt from assessment under section 4(3)(viii) of the Income-tax Act.'
The assessee is a landholder within the meaning of the Madras Estates Land Act. Section 61 of the Act states that an arrear of rent payable by a riot to his landholder shall bear simple interest at the rate of one-half per cent. per mensem from the date on which the arrear fell due until it is liquidated. The Income-tax Officer held that the interest which the assessee received from his tenants under this section is not agricultural income within the meaning of Section 2(1) of the Indian Income-tax Act, 1922, and therefore he was liable to pay the tax on it. It is true that until the decision of the Calcutta High Court in In re Manager Radhika Mohan Roy Wards Estate the Department regarded interest paid on arrears of rent of agricultural land as being agricultural income. The former practice does not, however, preclude the Income-tax authorities from maintaining that they were wrong and that such it income is taxable. In this case the appellate Tribunal held that the assessee had been lawfully assessed in this respect.
The term 'agricultural income' is defined in Section 2(1) of the Income-tax Act. The term includes 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 the Crown as such, and any income derived from such land by agriculture.
In re Manager, Radhika Mohan Roy Wards Estate, the Calcutta High Court had to consider whether interest on arrears of rent payable under the Bengal Tenancy Act was rent or revenue derived from land. So far as this case is concerned there is no difference between the Bengal Tenancy Act and the Madras Estates Land Act. The Calcutta High Court held that interest on arrears of rent was not agricultural income. It was pointed out that rent is payable to the landlord by the tenant by virtue of a contract of tenancy of land and the cause of action in respect of rent arises out of contract. Interest on arrears of rent is payable by reason of a statutory provision of law which 'imposes a penalty upon the tenant for non-payment of his rent.' The Patna High Court followed this decision in Maharaja Bahadur Ram Ran Vijay Prasad Singh v. The Province of Bihar although in an earlier case, Sri Ramchandra Dev v. The Commissioner of Income-tax, Bihar and Orrisa, it expressed a contrary opinion. The earlier case was a reference under the Income-tax Act and the later case a reference under the Bihar Agricultural Income-tax Act, 1938, but we can see no reason for a distinction.
In our judgment interest on arrears of rent payable by a ryot to the landholder under the Madras Estates Land Act is not agricultural income within the meaning of the Income-tax Act. Such interest is not rent. It is an additional sum payable to landholder as compensation of the delay in the payment of the rent. Nor can it be classified as revenue 'derived' from the land. Its source is the tenants default in the performance of his contract. It is true that under the Madras Estates Land Act the landholder may district for arrears of rent and interest thereon, but that does not make the errors rent. Section 3(11) of that Act defines 'rent as meaning :
'Whatever is lawfully payable in money or in kind or in both to a landholder by a ryot for the use or occupation of land for the purpose of agriculture and includes whatever is lawfully payable on account of water supplied by the landholder or taken without his permission for cultivation of land where the charge for water has not been consolidated with the charge for the use or occupation of the land.'
Section 5 of the Madras Estates Land Act makes the rent and the interest of a first charge on the land but again we do not consider that this alters the character of the interest. In deciding whether interest is or is not agricultural income within the meaning of the Income-tax Act, the Court can only have regard to the definition contained in the Act.
Our attention has been drawn to the judgment of the special Bench of this Court which decided Commissioner of Income-tax, Madras v. Zamindar of Kirlampudi. It was there held that interest due to a zamindar under a promissory note taken by him from his riots for the amount of rent due by them with interest was not agricultural income within the meaning of the Income-tax Act. The basis of the decision was that there was a fresh contract between the zamindar and the riots whereby the character of the liability was changed. It was no longer rent but a loan. Apparently it was contended in that case that interest on arrears of rent must one regarded as agricultural income by reason of section 61 of the Act, but the Bench did not hold that interest on arrears of rent was agricultural income. It has been suggested that there is indication in the judgment that Bench was of this opinion. It is certainly open to doubt whether the judgment is indicative of this, but even if it were the judgment is not binding on us because the question did not arise in that case.
The present case was rightly decided by the Income-tax Tribunal and our answer to the second question referred is that interest on rent payable to the appellant is not agricultural income within the meaning of section 2(1)(a) of the Income-tax Act.
The assessee has not lost on the question argued and he must pay the costs, Rs. 250/-.
Reference answered accordingly.