The court held that taxing a mortgagor for agricultural income received by a mortgagee violates constitutional equality rights.

1The petitioners in these cases question the Constitutional validity of S.4(2) of the Agricultural Income Tax Act, 1950 (hereinafter, the Act). They are sought to be assessed under that Act in respect of also the agricultural income derived from their lands, according to them, in the possession and enjoyment of their mortgagees under possessory mortgages. The said provision is impugned on the grounds that it is beyond the legislative competence of the State Legislature, and is also arbitrary, confiscatory, irrational and discriminatory

2S.4(2) of the Act reads:
"4. Total Agricultural Income
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(2) For the purposes of sub-s.(1), agricultural income derived from any land situated within the State, which is in the possession of the mortgagee thereof, shall, notwithstanding anything contained in S.23, be deemed to be agricultural income received by the 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 be entitled to recover from the mortgagor the amount of the tax so paid.
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3At 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 maybe, 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.

4S.2(a) of the Act defines the same 'agricultural income' substantially the same way as it is defined in S.2(1) of the Income Tax Act, 1961, and this is, as it ought to be, in view of Art.366(1) of the Constitution which ascribes to that expression the meaning assigned to it by Statutes relating to Indian Income Tax and the legislative subject: 'taxes on agricultural income' occurring as entry 46 in List II in the VIIth Schedule to the Constitution. Under laws relating to Income Tax, income of a person is to be computed without taking into account his agricultural income, and therefore, that expression should have the same meaning in laws relating to both Income Tax and Agricultural Income Tax. Hence, it will be useful to examine the above mentioned line of argument advanced by the learned Advocate General in the light of some of the decisions discussing this aspect with reference to the provision of the Income Tax Act.

5Kanga and Palkhivala summarise the legal principles thus:-
"Income falling within the definition in this clause would be agricultural income, and exempt from tax as such, howsoever and by whomsoever it may be received. CIT. v. Kameshwar Singh 3 ITR 305, 308-9 (PC); Mustafa Ali Khan v. CIT., 16 ITR 330, 340 (PC). "The exemption is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient" Ibid. Agricultural income does not lose its right to exemption merely because it can be brought under one or other of the heads of income set out in S.14 of the Act CIIT v. Mathias 7 ITR 48, 53 (PC); Syed Mohammed Isa v. CIT, 10 ITR 267, 282; Re Habibulla, 9 ITR 292, 305, affirmed II ITR 295 (PC); CIT v. Maddi Venkatasubbayya, 20 ITR 151, 156; Choudhary Mohammed v. State of Bihar, 31 ITR 385. For instance, agricultural income does not lose the benefit of the statutory exemption and become assessable as business profits merely because it is received by the assessee, not as an ordinary landlord or proprietor, but