KALI PRASAD SINGH vs COMMISSIONER OF Income Tax, BIHAR AND ORISSA.

RAMASWAMI AND AHMAD, JJ. - In this case the assessment relates to the income of Sri Shiva Prasad Singh who was the holder of an impartible estate called Jharia Raj. The assessment relates to the year 1947-48 and the accounting year is 1953, Bengali Samvat which is the year ending on the 13th April, 1947. As the assessee Shiva Prasad Singh died on the 1st January, 1947, the assessment has been made on his eldest son Sri Kali Prasad Singh under the provisions of section 24B of the Indian Income Tax Act. The income of the assessee consisted mainly of royalties and surface rents from coal-bearing lands which were not of agricultural character. The assessee had made settlement of these lands with various persons and one of the important clauses in the agreements was that the lessee should pay to the assessee the entire road-cess payable under the Cess Act (Bengal Act IX of 1880). The relevant clause in the agreement is in the following terms : "That the 2nd party shall be bound to pay separately in the Sherista of the first party, road cess at the rate of 0-1-0 (one anna) per rupee on the amount the said minimum royalty or commission and the cess payable to the Mines Board Of Health or any other cess, rent or tax that may be imposed on the first party. Besides that the second party shall deposit separately in the respective offices or court, any other cess, rent or tax that are in vogue or may be imposed on the second party in future in respect of coal mines and coal business." Under the Cess Act assessee was liable to pay cess to the authorities at the rate of one anna per rupee. During the accounting year the assessee realised from his lessees a sum of Rs. 4,609 on account of road cess in addition to the rents and royalties stipulated in the various agreements. The Income Tax Officer held that the entire amount of Rs. 4,609 should be included in calculating the total income of the assessee. On appeal the Appellate Assistant Commissioner held that the assessee had not derived any advantage or benefit from the realisation of cess from the lessees in accordance with the agreements. He therefore excluded the sum of Rs. 4,609, from the total income of the assessee. The Income Tax authorities took the matter in appeal to the Income Tax Appellate Tribunal and it was contended on their behalf that the Appellate Assistant Commissioner had no warrant or justification for excluding the sum of Rs. 4,609, from the assessees total income. The Tribunal considered the provisions of the Cess Act and reached the conclusion that the tenant and the landlord were each liable to pay half the road cess levied under the Cess Act. The assessee therefore derived an advantage to the extent of half the amount of cess realised from the tenants and the Tribunal held that the assessee was liable to be taxed on this advantage which was equivalent to the amount of Rs. 2,304, that is half of the amount received by the assessee from the various lessees of the coal bearing lands.

In this state of facts the Appellate Tribunal has referred the following question of law for the opinion of the High Court : "Whether the sum of Rs. 2,304, being half of the amount received by the assessee from the lessees of his non-agricultural lands on account of road cess, was liable to inclusion in his total income as income from other sources for the assessment year 1947-48 ?"

On behalf of the assessee Mr. Dutt stressed the argument that the lessee was liable to pay cess calculated at the rate of one anna per rupee to the Government on account of the coal-bearing lands. It was contended that the payment of cess was a permissible deduction from the total income of the assessee u/s 12 of the Income Tax Act. Learned counsel relied upon section 12(2) which is in the following terms : "such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains......"

But we thing that there is difficulty in accepting this argument. It is true that section 12(2) permits the assessee to compute his total income after making allowance for any expenditure incurred solely for the purpose of making or earning such income. But this section must be read in the context of section 10 which relates to the method of calculating profits or gains of a business, profession or vocation. Section 10(2)(xv) is enacted in the same language as section 12(2). Section 10(2)(xv) also permits the assessee to deduct any expenditure laid out or expended wholly and exclusively for the purpose of the business. But there is an exception contained in section 10(4) which states that nothing in clause (xv) of sub-section (2) should be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business. If we read section 12(2) in the context of section 10(2)(xv) and section 10(4) of the Act it is clear enough that the assessee in this case is not entitled to claim any deduction of the amount of cess which he had paid to Government as a legitimate deduction under any of the provisions of the Act. In fact Mr. Dutt after reading the relevant sections conceded that his argument on this point cannot be validly pressed.

On the other hand we are satisfied that the Income Tax Appellate Tribunal has properly held that half of the amount of road cess realised from the tenants, viz., Rs. 2,304, was liable to be taxed in the hands of the assessee. Section 6 of the Cess Act provides that cess should be assessed on the annual value of lands and until provision to the contrary is made by the Central Legislature, on the annual net profits from mines and quarries, other than notified mines and from tramway. Section 80 deals with the manner in which notice of the amount of cess should be given by the Collector of the district and also date of payment. Section 81 provides that the lessee is liable to pay only half the amount of local cess which has been imposed upon the landlord. A reading of sections 80 and 81 clearly goes to show that under the statute the lessee is liable to pay half the amount of cess and the landlord is liable to pay other half of the cess. If either party pays more than half the amount of cess he is liable to recover the excess from the other party. It was pointed out by Mr. Dutt that in this case the lessee was under a contractual liability to pay the entire amount of cess to the landlord.

But that would not make any difference in the legal position. Under the Cess Act the lessee is liable to pay to the Government half the total amount of the cess and the landlord is liable to pay the other half of the amount. Since the lessor has in the present case relaised the entire amount of the cess from the tenants and not merely half the amount, it is clear that the lessor had derived an advantage or benefit equal to half the amount of road cess which he had realised from the tenants. If follows that half the amount of road cess which the lessor had realised in excess from the tenants is tantamount to income in his hands and is liable to be taxed under the provisions of the Income Tax Act.

For the reasons assigned we hold that the amount of Rs. 2,304, which is half the amount of cess received by the assessee from the lessees of the coal bearing lands is liable to inclusion in his total income for the assessment year 1947-48. The question referred to the High Court must accordingly be answered in favour of the Income Tax department and against the assessee. The assessee must pay the costs of the reference. We assess hearing fee at Rs. 250.

Reference answered accordingly.