Ramchandra Dev, Zamindar of Bodokhemidi vs Commissioner of Income Tax

Harries, C.J.—This is a reference u/s 66(3), Income Tax Act, made by the Commissioner of Income Tax, Bihar and Orissa.

The assessee in the case is Sri Bamohandra Dev, the Zamindar of Bodokhemidi, which is an impartible estate. The assessee has income from a number of sources, and one of the main sources is agriculture. This agricultural income is, of course, exempt from Income Tax by reason of the provisions of the Income Tax Act. In the accounting year in question, which ended on 31st March 1938, the assessee was assessed to Income Tax on a sum of Rs. 4034 which represented interest on arrears due from various mastajars. The assessee claimed that this interest formed part of his agricultural income and was not assessable to Income Tax. The taxing authorities, however, came to the conclusion that this interest on arrears was in no sense rent and could not be regarded as agricultural income. The Income Tax Officer, therefore, assessed this sum to tax, and his decision was affirmed by the Assistant Commissioner. The Commissioner in review proceedings took the same view and declined to refer the question to this Court u/s 66(2), Income Tax Act. Application, however, was made to this Court, and the Commissioner was directed u/s 66(3), Income Tax Act, to state a case on the following question:

Whether the sum of Rs. 4034 represents interest on rent and is agricultural income and, therefore, not assessable under the Income Tax Act?

The learned Commissioner has forwarded the statement of the case to this Court and has expressed his opinion that the question should be answered in the negative.

It appears that in the Zamindari of Bodokhemidi a large number of tenants pay produce rent. The zamindar appears to collect cash rents direct from tenants but in the case of land let on produce rent he does not himself collect the rent. This is done by mustajars. The granting of rights to mustajars is done by auction and by subsequent execution of certain documents. The right to collect produce rent from various tenants of villages is put up to auction, and the right is given to the highest bidder. Documents are then executed by which the person granted the right agrees to pay a certain sum in instalments and further agrees to pay interest on such sums if they are not paid on due date. By these documents the mustajars are given the right to collect the landlord''s share of the produce rent and, of course, to retain the same for their own use. In short, the mustajar is a farmer of rents and very much in the position of a thikadar. He is given an interest in land for which he pays the zamindar an annual sum. The interest, which he is given in the land, entitles him to demand and to recover the produce rents from the tenants. The view I take of this lease is fully supported by the definitions given in Wilson''s Glossary of the term mustajar and mustajari. Mustajar is defined as a farmer, a renter, one who holds lands under a proprietor at a stipulated rate; also a farmer of revenue appointed to make the collections on the part of a zamindar or proprietor, on condition of paying a fixed sum. Mustajari is defined as renting, farming, holding in farm, settlement in farm.

A "mustajari lease" is in my view, a lease which creates an interest in land. The proprietor gives up his right to collect the rents from the tenants and grants the same to the mustajar in return for a fixed payment. That fixed payment is, in my view, the rent which the proprietor reserves under the mustajar lease.

The Commissioner appears to have thought that as the rights were put up to auction what the zamindar received was under a contract and was not rent; the Commissioner appears to take the view that rent is only payable by the cultivator, that is the actual raiyat. It must be remembered that rent is always the subject-matter of a contract between the landlord and tenant. It is the subject-matter of a contract relating to land. The payment which the raiyat has to make is the rent provided for in the contract. The fact that the mustajar and the zamindar in this case entered into a contract does not prevent what is payable on that contract being regarded as rent. Thikas are often granted by zamidars, and there can be no doubt that what the thikadar pays under the thika lease to the proprietor is rent. Similarly, it appears to me that what the mustajar agrees to pay to the zamindar by the terms of the mustajar lease is rent for the interest granted to him. The payment is an annual payment for an interest in land granted by the document, and that being so, it must be regarded as rent.

The mustajar lease provides that if this payment, which I hold is rent, is not paid punctually, interest at the rate of 12 per cent, will be charged on the arrears. This interest is, therefore, interest on arrears of rent.

The Commissioner was of opinion that interest on arrears of rent was not rent and, therefore, could not be regarded as agricultural income. He relied upon a recent Calcutta case Sheik Yusuf Vs. Jitendra Nath Roy, . in which it was held that interest payable on rent either under a contract or under the law is not rent as defined in the Bengal Tenancy Act and a separate suit for interest only is not maintainable as a rent suit under the Bengal Tenancy Act. The Bench which decided that case appears to have been of opinion that a difference existed between cases in which interest is claimed with rent and oases where interest on rent alone is claimed. If the interest was claimed with the rent, then the suit was maintainable as a rent suit under the Bengal Tenancy Act, but it was not maintainable if interest alone was sued for. Even assuming that interest on arrears of rent cannot be regarded as rent under the Bengal Tenancy Act, yet that does not decide the question whether it is agricultural income as that term is defined in the Income Tax Act.

The Income Tax authorities have always conceded that interest on arrears of rent payable by a raiyat is agricultural income and not taxable, and there is authority of a Special Bench of the Madras High Court for the view that such arrears are not taxable. In the case in The Commissioner of Income Tax Vs. Rajah Inugenti Rajagopala Venkata Narasimha Rayanim Bahadur Varu, . the question arose as to whether certain interest accruing on promissory notes could be regarded as agricultural income. The zamindar had obtained from defaulting tenants promissory notes in respect of the rent and interest thereon due at the date of the notes, and the question arose whether the interest which accrued due on these notes could be regarded as agricultural income. The Special Bench held that such interest could not be regarded as agricultural income because it was interest accruing due on a loan. By the execution of the promissory notes the arrears of rent had been converted into loans to the tenants; but it is clear from the decision that the Special Bench were of opinion that had no promissory notes been executed the interest on the arrears of rent would have been agricultural income which would not be taxable.

I can see no reason why interest on mustajari rent should be regarded differently from interest on rent payable by a raiyat. If the latter interest has always been regarded as part of a zamindar''s agricultural income it appears to me that interest payable on arrears of mustajari rent must also be so regarded. Once it is held that the annual payment fixed by the mustajari lease is rent, then the same rules must govern interest running on arrears of such rent as apply to interest on arrears of rent paid by a cultivating tenant direct to the landlord. No distinction can be drawn between the two, and that being so, I would hold that interest on arrears of mustajari rent forms part of the zamindar''s agricultural income and is, therefore, not taxable.

For these reasons I would answer the question formulated in the affirmative. As the assessee has succeeded in this case, he is entitled to costs, which I would assess at five gold mohurs. He is also entitled to the refund of Rs. 100 deposited by him.

Manohar Lall, J.

I agree.