Judgement

Appeal (No. 94 of 1934) from a judgment of the High Court (December 21, 1933) on a Reference by the Commissioner of Income-tax, Bihar and Orissa.

The respondents father, who carried on a large money-lending business, lent Rs. 18 1/2 -lakhs to the administratrix of an estate known as the Lachmipur estate on terms evidenced by two deeds dated February 3, 1929. By the first deed zamindari lands in the Bhaghalpur district were conveyed by the

Law Rep. 62 Ind. App. 215 ( 1934- 1935) Commissioner of I.T. v. Maharajadhiraj of Darbhanga

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administratrix as lessor-mortgagor to him as lessee-mortgagee " in zarpeshgi lease and by way of usufructuary mortgage with all rights and profits in respect of the properties demised which belong and accrue to the proprietor of the estate as zamindar and malik and administrator " for fifteen years from September 19, 1929. The gross average rental was estimated at Rs. 1,59,813 and, under the terms of the lease the lessee-mortgagee was to be put in possession and manage the properties, collecting rents, paying Government revenue and taxes and having all rights in relation to the raiyats that the lessor-mortgagor had. From the gross rental of Rs. 1,59,813, Rs. 37,530 was to be deducted for expenses and Rs. 31,000 for “thika rent" which was to be credited towards repayment of the zarpeshgi loan. The lessee-mortgagee was to take the balance of Rs. 91,283 as "thika profits.” There was no mention of interest in the deed.

The second deed was a lease of zamindari lands in the Santhal Parganas under the terms of which, after deducting certain specified payments, the balance of the rent was to be credited towards the repayment of the zarpeshgi loan.

The respondents father died on July 3, 1929, and the respondent succeeded to his properties and money-lending business and entered into possession of the estates conveyed by the said deeds.

In 1931 the Income-tax Officer, in assessing the respondents income, included the sum of Rs. 91,283 (thika profits) derived from the properties mortgaged under the first deed on the footing of its being interest from money-lending, and, in an appeal by the respondent to the Assistant Commissioner, the decision of the Income-tax Officer was upheld. On a petition by the respondent under s. 66 of the Act, the Commissioner referred to the High Court the questions—

(a) Is the Lachmipur bond a simple mortgage or a usu fructuary mortgage ?

(b) Is the income from the Lachmipur property taxable ? The High Court answered the second question in the negative and found it unnecessary to answer the first. From this decision the Commissioner appealed.

May 31. Dunne K.C. and Sir Thomas Strangman for the appellant. The thika profits, if collected by the mortgagor, would be agricultural income. In the hands of the respondent it was a source of income from his money-lending business. It was not to go towards the discharge of the debt. [Sects. 2 and 4 read.]

[LORD MACMILLAN. Under the Indian Act is it the income that is taxed or the person in respect of his income, as in England ?

Dunne K.C. It seems to be the income.

Sect. 9 was referred to.]

In this case the assessee is a money-lender and he has been taxed as such. The profits are the profits of his money-lending business. The transaction was one in the course of the business. The profits are taxable under s. 6 (iv.) as gains from " business " or s. 6 (vi.) " other sources." The money was being collected by the respondent for the mortgagor for the purpose of paying himself the profits. The money was received in his money-lending business and entered in the accounts of the business. The learned Chief Justice in his judgment found " The source of the income must be con sidered in its proximate rather than its ultimate significance." That is not the proper test. The respondent did not collect the Rs.

Law Rep. 62 Ind. App. 215 ( 1934- 1935) Commissioner of I.T. v. Maharajadhiraj of Darbhanga

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91,000 as rent or revenue. He collected a gro