VEERASWAMI J. - The assessee was a money-lender. His assessment dated November 20, 1947, for the assessment year 1947-48 for which the accounting year ended on October 24, 1946, was reopened under section 34 (1) (a) of the Income-tax Act, 1922, by an order dated February 28, 1957, and certain income was added to the original income as having escaped tax. A sum of Rs. 11,475 was added as referable to the income by way of interest in the course of his money-lending business. A further sum of Rs. 1,208 was also added as income from the money-lending business carried on in the name of the assessees wife. A sum of Rs. 20,000 was found to the credit of one Mangilal Inderchand of Phaloodi in the account books of the assessee and this was found to be undisclosed income, which was brought to tax. The Appellate Assistant Commissioner, however, was of the view that the credit being dated December 15, 1945, it should be excluded from the assessment pertaining to the assessment year 1947-48. At the same time, he gave a direction to reopen the assessment for the assessment year 1946-47 so as to consider the assessment of this sum of Rs. 20,000 as income under the head 'other sources'. In other respects, the assessee failed in the departmental appeal and also before the Tribunal. In the circumstances, the following questions have been referred to us under section 66 (1) of the Act :
'1. Whether section 34 was validly applied in the case ?
2. Whether the addition of the income from the coffee estates was properly brought to tax ?
3. Whether the entire income of the assessees wife or any portion thereof from money-lending business and coffee estates was correctly added to the assessees income and
4. Whether the Appellate Assistant Commissioner could validly give a direction under section 34 (3) ?'
We shall proceed to consider and record our answer to each of them in that order.
Section 34 (1) (a) was invoked in these circumstances. The assessment from 1941-42 was made on October 23, 1942. When it was taken up in appeal, the appellate authority was the view that the income from the business carried on in the name of the assessees wife really belonging to him. This order was made by the appellate authority on May 19, 1945. It appears that, nevertheless, the assessee failed to include in his return for the assessment year 1947-48, the income from his wifes business. This was regarded as a suppression of the income from the assessees return. Mr. K. Rajah Iyer who appears for the assessee has, in view of these circumstances, not seriously contended that section 34 (1) (a) could not be properly invoked. In the year prior to the assessment year 1947-48, the assessee was in the habit of showing his wife income from her business in his returns, but for the year 1947-48, he chose not to mention it. If this source of income was taxable as the assessees income, it certainly could be regarded as having escaped tax. We consider therefore that the first question should be answered against the assessee.
The second question relates to the addition of Rs. 11,475. It is not in controversy that this sum was derived from four estates known as Lower Yeragadu, Hullical, Nuneaton and Arbury, by way of rent. These four estates were purchase by the assessee, three of them in 1945, and the Lower Yeragadu estate in 1946. The consideration for Lawer Yeragard estate was Rs. 63,000, for Hullical Rs. 14,800, for Nuneaton Rs. 10,000 and for Arbury estate a total amount of Rs. 15.000. The rents received from these estates by the assessee during the accounting period were not shown in his return for the year. The department considered that this sum of Rs. 11,475 was received by the assessee as money-lender in the course of his money-lending business and through transaction which were adopted as the mode for deriving interest on moneys lent out. It took up the stand that the assessee purchasing these estates, leasing them out either to the vendors themselves or to third parties or entering into agreements for reconveyance of one or other of the estates and thus serving income constituted a part of the modus operandi of the assessee for carrying on the money-lending business on the security of agricultural lands and, therefore, the income derived from this source in fact represented interest received as business income chargeable to tax. This view was sustained by the Appellate Assistant Commissioner and the Tribunal. The Tribunal observed in addition that the assessee never did any coffee growing himself, all of which was done by the de facto owner and the borrower.
Mr. Rajah Iyer contends that once the receipt is by way of rent derived from the estates, irrespective of other circumstances, it is agricultural income, which is totally exempt from tax under the provisions of the Act. He says that neither the character of the recipient of the income as a money-lender nor the assumption, assuming it to be correct, that the rent was received as and for interest for money lent or invested, can make any difference to the basic quality of the receipt as agricultural income. On the other hand, for the revenue it is strenuously argued that if a money-lender resorts to the device of lending money which takes the shape of purchase of agricultural lands, leasing them back or entering into agreements for reconveyance of such lands and through this process receiving income claimed by the assessee to be rent from lands, the income, notwithstanding the cloak, is but business income. We have carefully considered this question and are of the view that the contention for the assessee is well-founded.
The Act by section 2 (1) defines agricultural income to mean 'any rent or revenue derived from lane which is use 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'. Section 4 (3) (viii) totally exempts agricultural income from the charging provision. For the revenue it is not denied that the rent here was derived from land which was used for agricultural purposes, namely, coffee plantation. Nor is it questioned that the estates were assessed to land revenue in the taxable territories. The assessee leased out the estates during the accounting year and received the proceeds of sale of coffee directly from the Coffee Board, which is in accordance with the statutory provisions governing the sale of coffee. It is very clear that the sale proceeds of coffee received by the assessee from the Coffee Board represented rents derived from the estates. In fact, we have not heard learned counsel for the revenue to dispute this position. But what he contends, as we already indicated, is that the process of transactions we mentioned earlier was the mode adopted by the assessee to earn interest in his money-lending business and this fact made a difference to the taxability of the income. In our opinion, the argument is unsound. It is not the case of the revenue at any stage that any of the transactions of the assessee relating to the four estates was bogus or unreal or in the nature of a cloak. If the transactions of sale which conveyed the estates to the assessee were real ones as they were, though in origin - and here we are not sure of the facts - they might have been entered into in discharge of debts due to the assessee, by virtue of these transactions the assessee came by the possession of the estates. When he leased them back either to the vendors or to strangers and received rents from the lessees, clearly the receipt partook the character of agricultural income. Income is agricultural if it is derived from agricultural lands and the recipient if he is in possession of such lands and is in receipt of rent on account of such possession, the income in his hands bears the character of agricultural income. It may be that such income is derived by a money-lender even in the course of his business of money-lending. But neither the character of the recipient nor the fact that it was received in the course of money-lending business can alter the character of the receipt as agricultural income. The character of such income depends on its sure and the fact that it is derived from possession of agricultural land rather than from other circumstances. It follows that the motive with which it is derived cash hardly neutralise the character of receipt and convert what is in truth and fact agricultural income into business income or income from any other source. A person may come by of different situations, as for instance as owner, or as security for repayment of loans advanced by him, or as a lessee, or by a conveyance with an agreement to resale, or even as a trespasser. In everyone of this instances, the income derived by the person in possession will be agricultural income. Where, however, an owner or a person in possession leases out the land and receives rent, even in such a case the receipt will partake the character of agricultural income, for such a person will be deemed in law to be in possession through his lessee. If, however, a lease or any other transaction under which a person comes in possession is proved to be a cloak and is unreal, then of course different considerations may apply and it will be a question whether in such as case income derived by such a person can be character of the income will be whether the income is derived from agricultural lands assessed to land revenue and if those indicia are satisfied, normally the presence of other circumstances in which the person came by possession or derived income from the land can make no difference to the character of the income.
The view we have taken appears to be supported by ample authority. Commissioner of Income-tax v. Kameshwar Singh was a case of an assessee whose father had an extensive money-lending business and under an indenture described as 'a lease with usufructuary mortgage' the lessor-mortgagor conveyed to the lessee-mortgagee certain properties for a period of fifteen year and a certain portion of the rents was reserved to the mortgagor as thika rent. The mortgagee was allowed to take the balance of the profits after deducting the expenses as thika profits in consideration of the loan. The Patna High Court was of opinion that thika profit received by the assessee as mortgagee-lessee was exempt from tax as agricultural income. The Privy Council affirmed that decision and Lord Macmillan, speaking for the Board, observed :
'The result, in their Lordships opinion, is to exclude agricultural income altogether from the scope of the Act, howsoever or by whomsoever it may be received.'
In expressing that view, the Board negatived the argument for the revenue that, while the income might be agricultural income within the definition, nevertheless, it had been received by the assessee not as an ordinary proprietor or landlord, but as part of the income, profits and gains of his money-lending business and therefore, it lost the benefit of the statutory exemption of agricultural income and became assessable as business profit. The following observation of Ashworth J. in Mukund Sarup v. Commissioner of Income-tax, was quoted with approval :
'The business of money-lending may bring in an income, which is exempt from income-tax on the ground that it is derived from agricultural land.'
The Board went on to say :
'The exemption is conferred, and conferred indelibly on a particular kind of income and does not depend on the corrector of the recipient, contrasting thus with the exemption conferred by the same sub-section on the income of the local authorities.'
The reference was to section 6. In the course of money-lending, an assessee money-lender may find that to purchase agricultural lands is the only way by which he can realise his money from the debtor. We do not understand why, because he has in such circumstances in the course of money-lending come by possession of agricultural lands, the receipt of rents derived from such lands should be regarded as anything other than agricultural income. The business is only incidental and is not the source in such a case. The same consideration will apply with equal force to a money-lender making an advance on the security of immovable property and getting possession as part of the security. This court in Commissioner of Income-tax v. Khoyee Sahib, took a similar view. In that case also the assessee was a money-lender and in the course of this business advanced a large amount to a certain landholder who was to pay interest at a certain percentage at the end of the year and compound interest on default. The money-lender got possession of ten villages as security for the loan and was directed to take possession they were. The assessee was to take a certain percentage of the gross receipts from the properties and to credit what remained after of meeting public charges and others towards interest due to him. Any surplus left was to be credited towards principal. During the year of account, there the assessee received from the properties a certain sum for which he claimed exemption under section 4 (3) (viii) on the ground that it was agricultural income. This court held that the assessee was right and was entitled to the exemption claimed by him on the ground that the income was agricultural income, though he had credited the receipt towards interest. Learned counsel for the revenue relied on a single sentence from the judgment in that case, namely, 'But where under the guise of a lease what is taken is really interest which is different from the rent on the land, one may argue that in such a case the lease is merely a mask and the mortgagee merely gets interest', and contends that this observation will be applicable to the facts of this case. We cannot agree. As mentioned by us earlier, nowhere in the earlier stages was it the case of the revenue that any of the transaction entered into by the assessee was a cloak or a make believe. Where a lease is put forward, which is in reality non-existent, it is obvious that the pretended lessee cannot claim the income in such a case to be agricultural income. But we are not concerned with that king of case here. In the matter of Mukund Sarup was again a case of a money-lender-assessee who took usufructuary mortgage of agricultural lands and immediately leased the same back to the mortgagor. It was held that the rent received by the mortgagee assessee from his lessee was not liable to tax on the view that this was agricultural income. We have already extracted a quotation by the Privy Council from the judgment of Ashworth J. in this case. But we would like to quote also the further observation of this learned judge with whom we find ourselves in respectful agreement :
'Nor again can the taxing authorities avoid an implication arising from the form of a transaction on the ground that, except for a desire to escape income-tax the transaction would have taken a different form, which is what is meant, in that reference by looking at the substance of the transaction. It is not unlawful to avoid, by any means not forbidden by law, rendering oneself liable to the payment of income-tax, though it is an offence by false return or by concealment to evade payment of income-tax.'
In our view, it is quite open to a money-lender who is assessed to income-tax to have recourse to the proves of doing money-lending business in such a way that the come derived in the course of such business is not made liable to tax within the legitimate limits of the law. But on the facts of this case we are not even satisfied that there was any such attempt on the part of the assessee by resorting to sales, executing leases and agreement for reconveyance and deriving income from agricultural land by that process. Sri Ramchandra Dev v. Commissioner of Income-tax brings out the distinction between rent derived from agricultural lands which is not liable to tax and interest received on arrears of such rent, which is of course chargeable. In Raja Mustafa Ali Khan v. Commissioner of Income-tax, there was a usufructuary mortgage and a lease-back under a liquidation scheme.
The rent received by the lessor was held by the Privy Council to be agricultural income on the same view as was expressed in the earlier case by the Board in Commissioner of Income-tax v. Kameshwar Singh. East India Housing Land Development Trust v. Commissioner of Income-tax illustrates that the motive of the assessee cannot alter the character of the income as falling under a particular head.
We are, therefore, clearly of opinion that the sum of Rs. 11,475 was agricultural income inasmuch as it represented rents received by the assessee from the estates. We answer the second question in favour of the assessee.
On the third question we think that the first part which relates to the money-lending business should be answered against the assessee and the second part relating to the coffee estates involved in that question in favour of the assessee; in favour of the assessee because whether the income belongs to the wife or to the assessee, in either case, it will be agricultural income inasmuch as it was derived from the coffee estates. So far as the first part of the question relating to the money-lending business is concerned, it appears from the statement of the case as well as the supplemental statement which we called for, that the assessee accepted the finding of the revenue for the assessment year 1941-42 that the money-lending business carried on in the name of his wife belonged to the assessee. But it was contended before the Tribunal that on September 15, 1943, the wife sold some of her jewels and realised Rs. 12,196-14-0. Earlier her mother-in-law made a gift of jewels weighing 600 to as of gold. For the assessment year 1946-47, the assessees wife made a statement before the Income-tax Officer mentioning these facts. In the light of these facts Mr. Rajah Iyer for the assessee contends that the Tribunal must have investigated and found whether the money-lending business was not jointly carried on by the assessee and his wife. Learned counsel assumes that the wife should have contributed the sale proceeds of the jewellery realised in 1943, and the other funds of hers to money-lending business and that, therefore, part of the income from the money-lending business belonged to her. But this was not the case of the assessee at all either before the Tribunal or before the departmental authorities. Nor is there any material to show that the wife had made such a contribution. We do not even find any mention of such a case of contribution before the Tribunal. We are, therefore, of opinion that the first part of the third question, as stated by us, in so far as it relates to the money-lending business. should be answered against the assessee.
There remains now a consideration of the fourth question. The Tribunal disposed of this matter observing that, so far as the assessment year in question was concerned, the credit of Rs. 20,000 was directed to be deleted from the assessment and the assessee was therefore not aggrieved by the direction of the Appellate Assistant Commissioner to reopen the assessment for the assessment year 1946-47.
Mr. Rajah Iyer contends that the direction given by the Appellate Assistant Commissioner was entirely beyond has jurisdiction and that, though the credit was deleted from the chargeable income for the assessment year 1947-48, still, inasmuch as the assessee was exposed to the risk of the revenue relying on the direction of the Appellate Assistant Commissioner and reopening the assessment, this court should express its opinion. On the other hand, learned counsel for the revenue says that, in the circumstances, the fourth question is entirely academic and that the assessee would have an opportunity to canvass the propriety of the direction in the reopening of the assessment for the year 1946-47 in connection with the credit entry. In one sense the revenue is right in that argument. But we can find no harm if we express our view as to the propriety of the direction since we have heard arguments on the question.
The scope and effect of the second proviso to section 34 (3) is now well established. In Income-tax Officer v. Murlidhar Bhagwan Das the Supreme Court dealt with the matter and held that a finding for the purpose of the proviso can only mean that which is necessary for the disposal of an appeal in respect of an assessment of a particular year and the expression 'direction' in the proviso cannot be construed in vacuum but must be collated to the direction which the Appellate Assistant Commissioner can give under section 31. The Supreme Court observed.
'The Appellate Assistant Commissioner may hold, on the evidence, that the income shown by the assessee is not the income of the relevant year and thereby exclude that income from the assessment of the year under appeal. The finding in that context is that that income does not belong to the relevant year. He may incidentally find that the income belongs to another year, but that is not a finding necessary for the disposal of an appeal in respect of the year of assessment in question.'
The last observation is apposite here. The finding of the Appellate Assistant Commissioner that the credit in respect of Rs. 20,000 did not belong to the assessment year 1947-48 did not clothe him with the jurisdiction to give any direction, except for the purpose of the disposal of the appeal, to reopen the assessment so as to include that credit in the chargeable income for any other assessment. We are of the view, therefore, that the direction to reopen the assessment in regard to the credit entry was beyond the jurisdiction of the Appellate Assistant Commissioner. The fourth question is therefore answered in favour of the assessee with costs. Counsels fee Rs. 250.