P. vs G. RAJU, RAJAH OF VIZIANAGARAM v. COMMISSIONER OF Income Tax, A. P.

(14-6-1966) (14-6-1966)

KUMARAYYA J. - The Income Tax Appellate Tribunal, Hyderabad Bench, u/s 66(1) of the Indian Income Tax Act of 1922 referred for the decision of this court the following two questions arising out of the consolidate order in I. T. As. Nos. 550 and 551 of 1960-61 :

"1. Whether the income from the market properties is assessable in the hands of the assessee u/s 10 of the Income Tax Act ?

Whether the income from the building called fort is agricultural income within the meaning of section 2(1) (c) of the Income Tax Act and accordingly exempt ?"

This court by its order dated March 13, 1964, answered the first question in the negative. As regards the second it called for a further and fuller statement based on evidence as to the situation of the assessees lands and other particulars having a bearing on the proviso to section 2(1) (c) of the Income Tax Act so that the said question may be satisfactorily answered. The Appellate Tribunal accordingly sent the statement after calling for other report from the Appellate Assistant Commissioner.

The facts have been set out in the order dated March 13, 1964, of the court. The assessment the Rajah of Vizianagaram, owns, amongst others, a market and a fort. The controversy leading to the present reference relates to income in relation to these two items for the assessment years, 1957-58 and 1958-59. We are now concerned with the latter item. i.e., the fort. The question is whether the income from the said building is agricultural income within the meaning of section 2(1) (c) and is therefore exempt. It is common ground that the income therefrom prior to this was always exempt from assessment, that being treated as agricultural income within the meaning of the said provision. As would appear from the report of the Appellate Assistant Commissioner that as long back as in the year 1947-48 when the Income Tax Officer for the first time sought to assess the income from the assessees palace and other buildings situated in the fort area to Income Tax, the Appellate Assistant Commissioner by his order in appeal held that the annual letting value of the fort was exempt from Income Tax, as it fell within the meaning of section 2(1) (c) of the Income Tax Act. From that time onwards, no kind of doubt was entertained with regard to the fact that the letting value of this building constituted agricultural income. Even in the assessment years 1957-58 and 1958-59, the Income Tax Officer did not entertain doubt as to the nature of the income. But, on account of the changed circumstances, namely, of the abolition of the zamindaris and diminution of the extent of the agricultural land in the possession of the assessee, he held that only 50% of there income may be treated as agricultural income and granted exemption accordingly. It is obvious that, unless the building satisfies the condition set out in the prison to section 2(1) (c), the income therefrom, notwithstanding the fulfillment of the condition in the substantive clause (c) of section 2(1), cannot be exempt. Further, in case that condition is satisfied, the exemption must be complete and not partial. This position in law is not disputed before us. The Income Tax Officer could not, therefore, legitimately bring to tax 50% of the letting value of the building when the building satisfied all the conditions of section 2(1) (c) including that of situation and purpose contemplated by the proviso.

The Appellate Tribunal, as against the finding reached by the Income Tax Officer, came to the conclusion that the letting value of the building is not agricultural income. The reason given for this is that the building being situate in the middle of Vizianagaram Municipality far away from the center of agricultural operations and being utilized for residential purposes, section 2(1) (c) is not attracted. This conclusion is said to have been reached on the statement of the assessee and not on evidence brought on record. The statement filed by the assessee shows that there are in fact agricultural lands adjoining the fort.

As the conclusion was reached without reference to the evidence and as against the finding of the Income Tax Officer who had direct knowledge of all the circumstances of the case, this court thought it necessary to call for a further statement. The further statement that has been submitted shows that the fort in question is situated only within a distance of about a furlong from the lands of the assessee known as "Big Tank Farm Lands". The other lands of the assessee also are not very far from the "fort" building. It is further shown that two of the rooms of the building are used for storing up the produce from the lands and some rooms are used for office purposes. Further, the office establishment is common for collection of rent from the market properties owned by the assessee as well as for attending to agricultural estate. Some other rooms in the building are intended for residential purposes. In view of these circumstances, it is obvious that by reason of the situation of the fort and the purpose for which it is occupied, the case falls directly within the ambit of section 2(1) (c) and, therefore, the income derived from the fort is agricultural income and is exempt from tax. But it is contended that the further or supplementary statement submitted cannot be taken into account as it was based on material or evidence which was not already on record when the reference u/s 66 (1) was made. It is urged that it was not competent for the Appellate Tribunal to collect additional material and make it a part of the supplementary statement. It is no doubt true that the supplementary statement call for u/s 66(4) of the Indian Income Tax Act must be limited only to such material and evidence as may already be on record but was not included in the statement of the case made initially u/s 66(1). This position in law is no longer in doubt. Having regard to the authority on this point including the compelling authority of the Supreme Court consisting of 7 judges in the case of Keshav Mills Co. Ltd. v. Commissioner of Income Tax, it must be held that the High Court could require the Tribunal to include only such material evidence as might already be on record but which was not included in the statement of the case made initially u/s 66(1). So then we have to consider whether, even excluding the additional material that was subsequently brought on record, can it be said that the Appellate Tribunal on the material already on record came to the conclusion that it is an agricultural income. Two things must be kept in mind while pronouncing on this aspect. One is the order of the Income Tax Officer who being in full knowledge of all the circumstances of the case came to the conclusion that the letting value of the building, having regard to the situation and purpose for which was being used, is an agricultural. There is a reference to this in the annexure to the further statement. There is also reference to the fact that in 1947-48, when the appeal was preferred against the owner of the Income Tax Officer, the Appellate Assistant Commissioner decided that income from the fort fell within the definition of the section 2(1) (c) and was exempt. That is indeed a common ground. In fact, the income from the fort was being exempt from tax even since. In 1957-58, it was only circumstances was abolition of zamindaris and the diminution of the size of the landed property for which the building was occupied that weight with the Income Tax Officer. That circumstances should not, however, affect the nature of the income which directly came within section 2(1) (c). In fact, the Income Tax Officer did not say that the income on that account is out of the scope of agricultural income. The Tribunal in its further statement has endorse the report of the Appellate Assistant Commissioner where in it was stated that even the Income Tax Officer had accepted the position that the building in question satisfied the condition laid down in section 2(1) (c) in regard to both the situation and the purpose. Of course, this further statement refers also to material subsequently added which has a bearing on the situation purpose referred to in proviso to section 2(1) (c). It consist in the plan and the local inspection report of the inspector showing the exact state of affairs. Even if this material be ignore on technical grounds, the Income Tax Officers order and also the order for the year 1947-48 formed sufficient material for the Tribunal to come to that conclusion. In fact the Tribunal has endorsed the report of the Appellate Assistant Commissioner.

So then, in the circumstances of the case, we are inclined to hold that the Tribunal, even without the additional material being brought on record in its further statement its prepare to hold that the income from the fort is agricultural income. That being the case, the answer to question No. 2 is in the affirmative. As the first question has been answered in favour of the department and the second in favour of the assessee, there will be no order as to costs.