1928 (2) TMI 14 - HC - Income Tax

Summary

Issues:
1. Whether rent received from a mortgagor by an Assessee who has taken a usufructuary mortgage and leased the property back is assessable to income tax.

Analysis:

Issue 1: Rent Assessable to Income Tax
The High Court was tasked to determine if the rent received by an Assessee from a mortgagor, in a scenario involving a usufructuary mortgage and subsequent leaseback of the property, is subject to income tax. The Court acknowledged the need for reconsideration as the previous decision lacked thorough discussion. The Court examined the Income Tax Act XI of 1922, emphasizing that income from business is taxable unless specifically exempted, such as agricultural income. The definition of "agricultural income" includes rent derived from land used for agricultural purposes. The Court rejected the argument that agricultural income should only refer to income not designated as business income. It clarified that the rent in question, derived from agricultural land, qualifies as agricultural income exempt from assessment. The Court highlighted that the arrangement, motives, or circumvention of tax laws by the Assessee are irrelevant, focusing solely on the nature of the income. The Court concluded that the rent from the mortgagee is legally considered rent, exempting it from income tax, providing a negative answer to the reference question.

Issue 2: Interpretation of Transaction for Income Tax
Justice Jackson provided a dissenting opinion, analyzing the transaction between a money-lender and a mortgagor involving a mortgage and leaseback. He questioned the division of the transaction into two parts, emphasizing that the mortgage and lease should be viewed as one transaction, as ruled by the Judicial Committee in a previous case. Justice Jackson argued that the transaction primarily aimed at obtaining interest on the money advanced, rather than agricultural income. He contended that the rent received was based on the money-lender's interest rate, categorizing it as business profits, not agricultural income. Referring to a prior decision by a Full Bench, Justice Jackson maintained that the rent should be subject to income tax, opposing the majority's view.

In conclusion, the High Court held that the rent received by the Assessee from a mortgagor in a usufructuary mortgage and leaseback arrangement is not assessable to income tax as it qualifies as agricultural income. Justice Jackson dissented, arguing that the transaction aimed at obtaining interest on the money advanced, categorizing the rent as business profits subject to taxation.