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TMI Blog1980 (2) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgagor : Provided that where the agricultural income-tax charged on such agricultural income cannot be recovered from the mortgagor, such tax shall be payable by and recoverable from the mortgagee, and the mortgagee shall lie entitled to recover from the mortgagor the amount of the tax so paid ........... " At the very outset, it is necessary to examine the contention advanced by the learned Advocate-General that agricultural income derived from lands in the possession and enjoyment of a mortgagee thereof is the agricultural income of the mortgagor thereof. The argument is that the mortgagee in possession and enjoyment of the mortgaged land appropriates the agricultural income derived therefrom in lieu of mortgage-money, principal or interest, or, principal and interest, as the case may be, depending upon the terms of the mortgage ; that, therefore, he derives or receives agricultural income therefrom and also makes the appropriation for and on behalf of the mortgagor; and, so, such agricultural income is that of the mortgagor. Section 2(a) of the Act defines the term agricultural income substantially in the same way as it is defined in s. 2(1) of the I.T. Act, 1961, and thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by him (the mortgagee) for payment of Government revenue and in lieu of interest on the mortgage-loan are really his (the mortgagor's) agricultural income and that in computing his total income under the Income-tax Act, the amounts appropriated by the possessory-mortgagee should be deducted since the appropriations were really in the discharge of his obligations. Dealing with this contention, the Patna High Court said (p. 552) : " A mortgage is a transfer of interest in an immovable property, and where the mortgagee comes into possession of the property and is entitled to appropriate the usufruct thereof, he gets the income of the land in question, subject to the payment, as the terms may be, of the Government demands in respect of the property. The payment of the Government demands, according to the terms of the mortgage bond, is in no sense the agricultural income of the mortgagor although it goes to satisfy some of the public demand for which the mortgagor may be found personally liable. Similar considerations apply to the payment of the interest out of the usufruct of the property. The mortgagee in such a case is not acting as the agent of the mortgagor. In the bond under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be also a return for the capital invested by him. To hold that he is liable to pay both Government revenue and income-tax would be imposing a double taxation which is against the policy of the Act." In CIT v. Maddi Venkatasubbayya [1951] 20 ITR 151 (Mad), where the purchaser of a standing crop of tobacco claimed that the profit he earned out of the purchase and sale of that crop after cutting and removing the same, is agricultural income and sought to press into service the principle that the income derived by a possessory-mortgagee from the mortgaged lands is his agricultural income, Viswanatha Sastri J., on behalf of the court repelling the claim, pointed out the distinction as follows (p. 156): " It is true, as pointed out by the learned advocate for the assessee, that the exemption is conferred by the Act upon a particular kind of income and it does not depend on the character of the recipient. 'Agricultural income' as defined in the Act is exempt from tax even though it can be brought under one or the other of the heads of income set out in section 6 of the Act. Agricultural income has been held not to be assessable as business profits merely because the recipient of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond the law-making power of the Legislature; and (ii) assuming the same to be a competent legislation, it is arbitrary, confiscatory, irrational and discriminatory and is, therefore, unconstitutional. According to the learned counsel for the petitioners in these cases, Mr. Rama Shenoi and Mr. P. C. Chacko, the legislative subject, "taxes on agricultural income" in entry 46 in list II in the VIIth Schedule to the Constitution is to be understood as "taxes on the agricultural income of the assessee", and that which is not his agricultural income cannot be made such by calling it his agricultural income. In short, the argument on this part of the case is that the mortgagor cannot be taxed under the Act on the agricultural income his mortgagee derives or receives from the mortgagor's lands in the possession and enjoyment of the mortgagee, and that the legislative entry does not permit making of any law in that behalf. It is contended that the Legislature itself was aware of this limitation on its legislative power, and that it is so, is evident from the employment of the fiction in s. 4(2) of the Act. The submission is that what cannot be done directly is sought to be achieved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Federal Legislative List of the Government of India Act, 1935 "can sustain a law made to prevent the evasion of tax". Section 4 of the Act as obtained now was substituted by the Agrl. I.T. (Amendment) Act, 1974 (9 of 1974). The preamble to this Act says only that "it is expedient further to amend the Agricultural Income-tax Act, 1950, for the purposes hereinafter appearing". There is no suggestion anywhere in the Amending Act or in the Statement of Objects and Reasons read out at the bar by the learned Advocate-General or in the counter-affidavits filed in these cases that s. 4(2) of the Act was enacted as a measure to prevent evasion of agricultural income-tax by resort to the device of mortgaging agricultural lands, or that any such practice is widely prevalent in the State. Nor was any argument advanced before me on that basis. The theme of the contentions advanced on behalf of the respondents was that the agricultural income derived or received by the possessory mortgagee from the mortgaged lands is not his but his mortgagor's (this I have already found against) and that the Legislature has plenary powers of legislation on the subject of " taxes on agricultural income" men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be subject to the conditions laid down in art. 13 of the Constitution." (K. T. Moopil Nair v. State of Kerala [1961] AIR 1961 SC 552 at 557). Article 13(2) provides that the State shall not make any law which takes away or abridges the fundamental rights conferred by Part III of the Constitution, and that any law made in contravention of art. 13(2) shall, to the extent of the contravention, be void. The scheme of the Act with s. 4(2) therein and in relation to that subsection is that it classifies persons as those who have possessorily mortgaged their lands and those who have not done so. Those who are not such mortgagors are assessable to tax under the Act in respect of only the agricultural income derived or received by them. However, so far as those who have possessorily mortgaged their lands are concerned, they are assessable to tax under the Act not only in respect of the agricultural income derived or received by them, but also by another, though that another is the mortgagee in possession of such assessee's lands. Considering the question as to whether agricultural produce itself is income and becomes charged to tax under the Madras Agrl. I.T. Act, 1955, the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ural income is derived have been possessorily mortgaged and the mortgagee makes improvements thereon or raises other crops on such land and thereby earns agricultural income, he need not pay agricultural income-tax in respect of such income, and the mortgagor who does not earn any such income from the lands is liable to pay such tax. Section 4(2) puts the creditor in an advantageous position by providing that his debtor shall pay the agricultural income-tax which normally and but for that provision is payable by the former. There is no rationale to support this discriminatory treatment of the debtor. Again, as admitted by the learned Advocate-General, an owner of agricultural land which is in the possession and enjoyment of a trespasser does not derive or receive any agricultural income from the trespassed upon-land and he is not liable for tax under the Act in respect of the agricultural income derived or received by the trespasser. However, a mortgagor who parts with possession of his land by way of a security for a loan borrowed by him and puts the mortgagee in possession thereof is liable for the tax in respect of the agricultral income derived or received by the mortgagee. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax and equal protection of that law, for no apparent reason and with no particular lawful and reasonable object in view. This provision offends art. 14 and is, therefore, void for that reason. In the above view, it is not necessary to embark upon an enquiry into the Legislature's competency to enact s. 4(2) of the Act, and I refrain from doing so. The 1st respondent in O. P. No. 4358 of 1977 has issued ex. P-1 preassessment notice proposing to assess the petitioner therein taking into account also s. 4(2) of the Act. The petitioner therein has preferred ex. P-2 objection there to. There shall be a direction that the 1st respondent therein will dispose of ex. P-2 objection in the light of this decision. The 1st respondent in O. P. No. 141 of 1978 has likewise issued preassessment notices in respect of assessment years 1974-75 to 1976-77 proposing to assess the petitioner therein also on the basis of s. 4(2) of the Act. The said notice is not marked herein. The 1st respondent herein is directed to afford an opportunity, to the petitioner therein to file objections there to and to dispose of the same in the light of this decision. The two writ petitions are allowed to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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