1. Income returned but held exempt — Revision of assessment under Section 26, Bihar Agricultural Income-tax Act — Characterization of leasehold receipts as agricultural income or capital receipt. (Para 1 , 2 , 3 , 4 , 5 , 6 )
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1959 Supreme(SC) 122
SUPREME COURT OF INDIA
15th May, 1959.
S.R. DAS, C.J.I., N.H. BHAGWATI AND M. HIDAYATULLAH, JJ.
Maharajadhiraj Sir Kameshwar Singh, Appellant
Versus
The State of Bihar, Respondent.
Civil Appeal No. 254 of 1954.
Advocate Appeared
Mr. B. Sen, Senior Advocate (M/s. S. K. Majumdar and I. N. Shroff, Advocates with him), for Appellant; Mr. M. C. Setalvad, Attorney General for India (M/s. B. K. Saran and R. C. Prasad, Advocates, with him), for Respondent.
Advocates:
B.K.SARAN, B.SEN, I.M.SHROFF, M.C.SETALVAD, R.C.Prasad, S.K.MAJUMDAR
B.K.SARAN, B.SEN, I.M.SHROFF, M.C.SETALVAD, R.C.Prasad, S.K.MAJUMDAR
Income returned but held exempt still "escapes assessment" if it is later found to be taxable, allowing for re-assessment. Additionally, leasehold income where the initial payment is a premium, rather than a loan, is taxable agricultural income.
Headnote:(A) Bihar Agricultural Income-tax Act, 1938 - Section 26 - Escaped Assessment - Whether income which was returned but held to be exempt from tax could be said to have "escaped assessment" so as to allow the taxing authority to exercise powers of re-assessment - The phrase "escaped assessment" is not confined to cases of inadvertent omission or where no return was submitted - If an item of income is returned but erroneously fails to be taxed, it is a case where the income has escaped assessment (Paras 8, 9, 14, 16, 21).
(B) Bihar Agricultural Income-tax Act, 1938 - Agricultural Income - Zarpeshgi Lease - Determination of whether receipts from a leasehold property are capital receipts or taxable agricultural income - Where the indenture of lease provides for possession of property for a fixed term in consideration of a payment without express terms of loan, interest, or right of redemption, the payment is a premium and not a loan - Income derived from such leasehold land is agricultural income and assessable under the Act (Paras 22, 23, 27).
Facts of the case:
The assessee returned agricultural income and claimed a deduction for payments made under a lease, which the assessing officer initially accepted as capital receipts and exempted. Subsequently, the officer issued a notice claiming the income had escaped assessment and taxed it. The assessee challenged the jurisdiction to revise the order and the character of the income as taxable agricultural income rather than a capital receipt.
Findings of Court:
The assessing officer had the jurisdiction to revise the order under the Act as the income had escaped assessment. Furthermore, the payments made were premiums for a lease and not loan repayments, making the resulting income taxable agricultural income.
Issues: (1) Whether income returned but held exempt constitutes "escaped assessment" under Section 26 of the Act; (2) Whether income from a zarpeshgi lease is taxable agricultural income or a non-taxable capital receipt.
Ratio Decidendi: The court held that "escaped assessment" includes cases where income is returned but deliberately or erroneously not taxed. The wide phrase "for any reason" in the statute supports this interpretation. Regarding the lease, the absence of loan characteristics, such as interest or a right of redemption, confirms the transaction as a lease with a premium, rendering the usufruct agricultural income.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether returned exempt income constitutes escaped assessment under Section 26 — Whether leasehold receipts represent agricultural income or capital repayment of a loan. (Para 10 , 11 , 15 , 22 , 24 )
3. Interpretation of escaped assessment under Section 26 — Analysis of lease indentures to distinguish premium payments from loan transactions — Evaluation of agricultural income definitions. (Para 8 , 9 , 12 , 13 , 14 , 16 , 17 , 18 , 19 , 20 , 23 , 25 , 26 )
4. Income returned but erroneously held exempt constitutes escaped assessment under Section 26 — Leasehold profits derived from land are agricultural income if the consideration is a premium. (Para 14 , 16 , 21 , 27 )
5. Appeal dismissed — High Court's findings on jurisdiction to revise assessment and taxability of leasehold income affirmed. (Para 21 , 28 )
6. Does income that was returned but held exempt by the taxing authority constitute income that has escaped assessment?
Yes. Even if a return is submitted and the officer deliberately holds an item exempt, if the income is actually assessable, it is regarded as having escaped assessment. The phrase is not limited to cases of inadvertence or oversight. (Para 9 , 14 , 16 , 21 )
7. Is the requirement of fresh information from an external source necessary to invoke Section 26 of the Bihar Agricultural Income-tax Act?
No. The use of the words any reason in Section 26 is of wide import and dispenses with the conditions requiring fresh information from an external source that may circumscribe other similar statutes. (Para 16 )
8. How is a zarpeshgi lease distinguished from a lease with a mortgage or loan for tax purposes?
A transaction is a lease with premium rather than a loan if there is no express term making the sum returnable, no fixed interest, no right of redemption, and no personal liability for outstanding amounts at the end of the term. (Para 23 )
9. Are profits derived from leasehold properties under a zarpeshgi lease taxable as agricultural income?
Yes, if the payment to the lessor is a premium and not a loan, the thika profits derived from the land are agricultural income and assessable under the Act, regardless of the character of the recipient. (Para 27 )
Judgement
M. HIDAYATULLAH J. : This appeal, with the special leave of this Court, has been filed by Maharajadhiraja Sir Kameshwar Singh of Darbhanga (hereinafter referred to as the assessee) against the judgment of the High Court of Patna dated 19-2-1952, by which the High Court answered in the affirmative the following two questions referred to it under S. 25 (1) of the Bihar Agricultural Income-tax Act, 1938:
(1) Whether in view of the circumstances of the case, and particularly the manner in which, after due consideration, the learned Agricultural Income-tax Officer in his first judgment dated 5-1-1946 had held that the assessee was not liable to be assessed for the receipt on account of the zarpeshgi lease, the learned Agricultural Income-tax Officer has jurisdiction to revise his own order under S. 26 of the Act; and
(2) Whether if he had the jurisdiction to revise his own order, under S. 26 of the Act, the income from the zarpeshgi lease of the assessee was taxable under the Act."
2. The facts of the case lie within a very narrow compass. For the assessment year 1944-45 which corresponded to the year of account 1351 Fasli, the assessee returned Rs. 37,43,520 as his agricultural income. He claimed a deduction of Rs. 9,42,137-3-10 1/2 on account of land revenue, rent etc., including a sum of Rs. 2,82,192 shown to have been paid to the Tekari Raj from which two leasehold properties were taken on zarpeshgi lease by indentures dated 15-8-1931, and 31-1-1936, respectively. The amount was sought to be deducted as a capital receipt.
3. The Agricultural Income-tax Officer of Darbhanga by his order dated 28-12-1945 accepted this contention, and exempted the amount from payment of agricultural income-tax. He observed:
" Out of Rs. 9,42,137-3-10 1/2 claimed on account of Land Revenue and rent, Rs. 2,82,192 is shown as payment to Tekari Raj and then taken towards the realisation of Zarpeshgi Loan to self. I have gone through the bond of Gaya Zarpeshgi Lease. This payment is allowed to the assessee, as it is a capital income according to the terms of the bond. At the same time, I think, this amount of Rs. 2,82,192 should be treated as income to Tekari Raj and assessed in Gaya Circle along with other income of Tekari Raj as it is credited to that Raj by the assessee and then set off against the Zarpeshgi loan advanced to Tekari Raj."
The assessment was approved by the Assistant Commissioner of Agricultural Income-tax on 4-1-1946, and on the day following, the Income-tax Officer passed his formal order and issued a demand notice.
4. The assessee paid two instalments out of three, when on 22-3-1946, the Agricultural Income-tax Officer recorded the following order:
"It appears that some agricultural income from Gaya Zarpeshgi lease which should have been taxed for the year 1944-45 (1351 Fasli) has escaped assessment. Issue notice under S. 26 fixing the 20th May 1947." After the assessee appeared, a supplementary assessment order was passed and Rs. 39,512-6-0 were assessed as tax on Rs. 2,52,879.
5. In deciding the matter the Agricultural Income-tax Officer gave the following reasons:
"According to the terms of the lease the assessee is to remain in possession and enjoy the usufruct of the lands given in lease for a fixed number of years on payment of an annual thica rent of Rs. 1,000 to the lessor and thus satisfy himself for the entire amount of consideration money of the zarpeshgi lease in question. In fact, by this zarpeshgi lease the assessee has been given the grant of lands for a fixed term on a fixed rent. Whatever income is derived from these lands during the tenure of this lease, is the income of the assessee and as such it should be taxed in the hands of the assessee and not in the hands of the lessor."
The Agricultural Income-tax Officer purported to act under S. 26 of the Bihar Agricultural Income-tax Act, 1988 (hereinafter referred to as the Act).
6. The assessee appealed. The Commissioner of Agricultural Income-tax reversed the deci
