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Issues Involved:
1. Whether the income derived by the assessee from a certain transaction is assessable to income-tax or exempt as agricultural income. 2. Whether the sum paid by the vendee of Government securities to the vendor equivalent to the amount of interest due is assessable to income-tax and super-tax. 3. Whether the cost of collecting interest on securities is deductible as an expense. Issue 1: Assessability of Income from Transaction The primary question is whether the income derived by the assessee from a certain transaction is assessable to income-tax or whether it qualifies as agricultural income exempt from tax under Section 4(3)(viii) of the Income Tax Act, 1922. The transaction in question involved a loan of Rs. 1,06,000 lent to Deonath Sahay, secured by a usufructuary mortgage and a simultaneous lease of the same property back to Deonath Sahay. The court examined whether this arrangement constituted a usufructuary mortgage or a simple mortgage. The court analyzed the definitions of simple and usufructuary mortgages under Section 58 of the Transfer of Property Act. A simple mortgage does not involve the transfer of possession, whereas a usufructuary mortgage involves the transfer of possession and the right to receive rents and profits in lieu of interest. The court found that the mortgagee did not take possession of the property and was entitled only to a specified rate of interest, not the usufruct of the property. Therefore, the transaction was deemed a simple mortgage, making the interest received assessable to income-tax. The court also discussed two precedents cited by the assessee: Commissioner of Income Tax v. Ibrahimsa Routher and In the matter of Makund Sarup. Both cases involved similar arrangements but were distinguished based on their specific facts. The court concluded that the transaction in question was a single transaction amounting to a simple mortgage, and the interest received was assessable to income-tax. Issue 2: Assessability of Interest Paid on Government Securities The second issue concerned the dividends drawn by the assessee on Government securities purchased within a specific period. The assessee claimed that the interest paid to the vendors for the period before the purchase should be deductible from the interest received subsequently. The court referred to the case of Wigmore v. Summerson & Sons, where it was held that dividends do not accrue from day to day but are receivable on specific dates. According to Section 6(ii) and Section 8 of the Income Tax Act, the tax is payable on the interest receivable by the holder of the security on the specified date. The court held that the interest received by the assessee after becoming the owner of the securities was assessable to income-tax, regardless of any prior payments made to the vendors. The question was answered in the affirmative, making the interest paid to the vendors non-deductible for income-tax purposes. Issue 3: Deductibility of Expenses for Collecting Interest on Securities The third issue involved the assessee's claim to deduct the cost of collecting interest on securities as an expense. The court noted that there is no provision in the Income Tax Act for such a deduction. Sections 10, 11, and 12 of the Act provide for allowable deductions in respect of business, professional earnings, and other sources, but not for interest on securities. The court referred to its previous judgment in Mahadeo Ashram Prasad v. Commissioner of Income Tax, which concluded that such expenses are not deductible. Therefore, the court held that the deduction claimed by the assessee under the head "securities" is not allowable. Conclusion The court answered all the questions against the assessee: 1. The interest received from the transaction is assessable to income-tax. 2. The sum paid by the vendee of Government securities to the vendor is assessable to income-tax and super-tax. 3. The cost of collecting interest on securities is not deductible as an expense. The assessee was directed to pay the costs of the reference, with a hearing fee of Rs. 100.
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