ZAINUDDIN HUSSAIN MIRZA AND OTHERS vs COMMISSIONER OF Income Tax, BIHAR AND ORISSA.

FAZL ALI, C.J. - In this case the following two questions have been referred to us u/s 66(1) by the Income Tax Appellate Tribunal :-

"(1) Whether interest on arrear rents amount into Rs. 59,628 which was assessed to Income Tax in appellants hand constituted agricultural income within the meaning of Section 2(1) of the Income Tax Act ? (2) Assuming that interest on arrears of rent is taxable, whether a usufructuary mortgage bond executed by the debtor in favour of the assessee in the satisfaction of such interest on arrears of rent due to him is taxable ?"

The question as to whether interest accruing on rent derived from land is agricultural income provided that the land is assessed to land revenue and is subject to a local rate assessed and collected by officers of the Crown, has already been answered by us in Misc. Judicial case No. 67 of 1943, Sm. Lakshmi Daiji v. Commissioner of Income Tax, B. & O., and in dealing with the first question it would, in my opinion, be sufficient to say that the present case will also be governed by the principle laid down in that case.

The second question arises upon the following facts : The late Nawab Moinuddin Mirza was the owner of zamindari known as the Khagra estate. The Nawab died leaving a certain number of heirs consisting of his widow, several sons and daughters. The estate is now under the management of the Court of Wards through a Special Manager and the total income of all the assessees taken together for the year of assessment 1941-42 has been computed to be Rs. 90,633. It is said that a considerable part of this income has been received by way of interest upon arrears of rent, but for the purpose of this case was are concerned with the sum of Rs. 21,545 only.

It appears that Raja P. C. Lall Choudhary of Purnea holds some patni rights under the Khagra estate. The Raja could not pay the patni rent due to the estate for several years till the rent and interest thereon swelled to Rs. 86,918-7-0. This sum included the sum of Rs. 21,545 which was payable as interest upon arrears of rent. The Raja not being in a position to pay this sum in cash executed a usufructuary mortgage bond for it in favour of the assessees by which the latter were put in possession of certain agricultural property belonging to the former for the purpose of realising their dues. The bond among other things provides as follows :-

"It is further agreed that the mortgagees will realise amicably or by suit or otherwise all rent and ceases, interest and other dues due and accruing and payable to the mortgagor in respect of the properties mortgaged by this indenture including all arrear rent, ceases, and other dues in respect of the said properties in respect of all causes of action under which the mortgagor as landlords could have or may have right to sue what are assigned to the mortgagees by a separate deed."

The view taken by the Tribunal which it may be stated is in consonance with the view taken by the department is that

"this mortgage operated as a discharge of the liability of the debtor and that the appellant has received moneys worth the realisation whereof was his lookout and therefore the amount was rightly assessed to Income Tax."

In my opinion the view expressed by the Tribunal cannot be justified. If the interest which was owing to the assessees upon arrears of rent had been paid to them in cash it would not have been chargeable to Income Tax because it was agricultural income. In this case the tenure holder has not paid cash but has given security for an existing debut. To give security for a debt, as was pointed out by Lord Macmillan in Raghunandan Prasad Singh v. Commissioner of Income Tax, B & O., is not to pay it. Thus, neither in fact nor in substance the assessees have received any income but they got merely a security for their debt which still remains unrealised. The following observations made by Lord Macmillan in the case to which I have referred are in point :-

"If the assessees had received payment in kind of the amount outstanding on the original mortgage, in the shape, say, of realizable shares or bonds, the case would have been different, but they merely received further and better security for their debt. It is, in their Lordships view, quite immaterial that the assessees discharged the original mortgage and all liability under it, for that was merely and incident in the transaction whereby the new security was substituted for the old. Their Lordships accordingly hold that the assessees did not by virtue of the transaction of 1904 receive payment of the arrears of interest..... then outstanding on the mortgage of.......; that the assessees were not liable to be taxed on this sum as being income received when the new mortgage was granted; and that this sum of arrears of interest (though after 1904 secured by the new mortgage) continued to retain its character and remain due to the assessees," etc., etc.

The mortgage, therefore, cannot be regarded as moneys worth or something equivalent of cash and therefore did not constitute a taxable income. For these reasons I would answer the second question in the negative. The assessees will be entitled to their costs and to a refund to the reference fees deposited by them.

MANOHAR LALL, J. - I agree.

BEEVOR, J. - I agree.

Reference answered accordingly.