1983 (6) TMI 67 - AT - Income Tax

Summary

Issues Involved:
1. Nature of income received by guarantors.
2. Whether the income received by guarantors is agricultural income and exempt from tax.

Detailed Analysis:

1. Nature of Income Received by Guarantors:

The primary issue in this case is determining the nature of the income received by the guarantors under the guarantee agreements. The Income Tax Officer (ITO) argued that the income received by the guarantors was not agricultural income but was instead income from other sources. The ITO's reasoning was based on the fact that the guarantors did not contribute any land and received the income as per the guarantee agreements. The ITO referenced the Supreme Court decision in CIT v. Raja Benoy Kumar Sahas Roy, emphasizing that the income must be derived from basic agricultural operations on the land.

The Appellate Assistant Commissioner (AAC), however, found that the guarantors were actively involved in agricultural operations and that the income they received was directly related to the agricultural activities on the land. The AAC considered the joint efforts of the guarantors and managing partners in pooling resources and carrying out agricultural operations, concluding that the income received by the guarantors was agricultural income.

2. Whether the Income Received by Guarantors is Agricultural Income and Exempt from Tax:

The AAC's decision was challenged by the department, which argued that the income in the hands of the guarantors arose from the guarantee agreements and not directly from agricultural activities. The department contended that the immediate source of the income was the guarantee agreement and not the land or agricultural operations.

The learned counsel for the assessee argued that the entire farming operations were rationalized and coordinated, with the guarantors actively participating in agricultural operations. The counsel emphasized that the income was derived from the land through agricultural activities, and the guarantee agreements merely modified the partnership deeds to include the guarantors as sharers of the agricultural income.

The Tribunal had differing opinions among its members. The Accountant Member agreed with the AAC, stating that the income received by the guarantors was agricultural income as it was directly related to the agricultural operations on the land. The Judicial Member, however, disagreed, arguing that the income was derived from the guarantee agreements and not directly from agricultural activities.

The Third Member, Vice President P.V.B. Rao, ultimately agreed with the Accountant Member, emphasizing that the income's character as agricultural income remained unchanged in the hands of the guarantors. The Third Member highlighted the joint agricultural operations and the guarantors' active involvement in these operations, concluding that the income was derived from the land through agricultural activities.

Conclusion:

The majority view held that the income received by the guarantors was agricultural income and thus exempt from tax. The Tribunal's final decision was to uphold the AAC's order, dismissing the departmental appeal. The income received by the guarantors was deemed to have a direct relationship with the land and the agricultural operations performed on it, maintaining its character as agricultural income.