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Assessment of income under Indian Income Tax Act - Claim for exemption under Section 4(3)(viii) - Distinction between agricultural income and interest income in the case of a usufructuary mortgage. Analysis: 1. The case involved a reference by the Commissioner of Income Tax regarding the assessment of income derived from a money-lending business. The assessee had advanced a sum to a Zamindar and obtained a mortgage-deed, which included provisions for interest, repayment, possession of villages, and other rights. The Commissioner sought to assess the income as non-agricultural, while the assessee claimed exemption under Section 4(3)(viii) of the Act. 2. The Court referred to the precedent set by a Full Bench decision in Ibrahimsa Rowther v. Commissioner of Income Tax, Madras, which held that income derived from land under a usufructuary mortgage was exempt from tax as agricultural income. The Court analyzed the distinction between agricultural income and interest income in the context of a usufructuary mortgage. 3. The judgment discussed the principles underlying the classification of income as agricultural, emphasizing that direct collection of rent from tenants by the mortgagee in a usufructuary mortgage qualifies as agricultural income. The Court rejected arguments based on provisions for deductions and inspection rights, maintaining that the key factor is the direct collection of income from tenants by the mortgagee. 4. The Court found no grounds to distinguish the present case from previous decisions, noting that the mortgagee effectively functions as the landholder, undertaking responsibilities and obligations associated with land ownership. The Court upheld the application of the precedent in Ibrahimsa Rowther and concluded that the income in question should be considered agricultural income. 5. The judgment highlighted a specific point from another case, In the matter of Makund Sarup, regarding lease arrangements and the treatment of rent as interest. However, this point was deemed irrelevant to the present case, as there was no lease-back provision involved. The Court reiterated that direct collection by the mortgagee from tenants supports the classification of income as agricultural. 6. Ultimately, the Court decided to follow the precedent in Ibrahimsa Rowther and upheld the assessee's claim for exemption under Section 4(3)(viii) of the Act. The Commissioner was given the option to appeal to the Privy Council. The judgment concluded by ordering costs to the assessee and a refund of the deposit. Judgment: The High Court of Madras, in a reference under Section 66(2) of the Indian Income Tax Act, ruled in favor of the assessee, holding that income derived from a usufructuary mortgage should be treated as agricultural income and exempt from tax. The Court emphasized the direct collection of rent from tenants by the mortgagee as the key factor in determining the nature of the income. The decision aligned with previous precedents and rejected arguments based on deductions and inspection rights, affirming the classification of the income in question as agricultural.
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