Civil Appeal No1396 of 1974 From the Judgment and order dated 2821973 of the Kerala High Court in IT Reference No 84 of 1971
TS Krishnamurthy Iyer VJ Francis and NM Popli for the Appellant
SBalakrishnan for the Respondent
The Judgment of the Court was delivered by PATHAK J
This appeal by special leave is directed against the judgment of the High Court of Kerala disposing of an Agricultural 163 Income tax Reference and answering the following question in favour of the assessee and against the Revenue Whether on the facts and circumstances of the case the Tribunal was justified in holding that the amount of Rs3374709 is not agricultural income for the assessment year 1964 65 The assessees Kerala Estate Mooriad Chalapuram is a broad description of seven persons possessing the status of tenants in common under the Kerala Agricultural Income tax Act 1950
They owned an estate from which they derived agricultural income liable to be assessed in the year 1963 64
The assessees followed the mercantile system of accounting
In assessment proceedings for the year 1963 64 the assessees claimed a deduction of Rs3374709 from their agricultural income on the ground that it was payable towards interest on a loan of Rs400000 taken by them from Ms Associated Planters Ltd Calicut
The deduction was allowed
During the accounting period relating to the assessment year 1964 65 Ms Associated Planters Ltdwaived payment of the interest of Rs3374709 and accordingly the amount was credited to the revenue accounts of the assessees
The assessing authority brought the amount to tax
The case was ultimately carried in second appeal to the Tribunal on the question whether the sum of Rs3374709 credited in the relevant previous year could be assessed to tax for the year 1964 65
The Tribunal by majority held that it was not agricultural income
As the instance of the Commissioner of Agricultural Income tax Kerala a reference was made to the High Court of Kerala under sub section
2 of section 60 of the Kerala Agricultural Income tax Act on the question of law set forth earlier and the High Court has answered the question in the affirmative
The High Court has taken the view that it was immaterial that the assessees followed the mercantile system of accounting because the case was not one of an actual or constructive receipt or any receipt at all but only one of remission
According to the High Court a remission could not give rise to a credit item in the accounts of the assessees and that what had been given up by the creditor in favour of the assessees or returned to them could not constitute the income of the assessees
The High Court observed that what was returned to the assessees had nothing to do with the activities of the assessees and that it did not arise from the agricultural operations carried on by the assessees
The Kerala Agricultural Income tax Act 1950 provides for the 164 levy of tax on agricultural income in the State of Kerala
Section 3 of the Act provides that agricultural income shall be charged for each financial year on the total agricultural income of the previous year of every person at the rates specified in the Schedule
Section 4 defines what total agricultural income  is and s5 details the deductions to be made in computing the agricultural income
Clauses e g h and i of section 5 refer to interest paid by an assessee in different kinds of cases
The interest in all these cases has to be deducted from the agricultural income of a person before the levy is imposed
It is not disputed that the interest allowed to be deducted in the assessment of the present assessees falls under one of those clauses and was therefore rightly deducted in computing their agricultural income
The question is whether the interest waived by Ms Associated Planters Ltd and credited to the revenue accounts of the assessees can be regarded as their agricultural income
There has been serious controversy through the years on the question whether an amount refunded or remitted constitutes the income of an assessee
In Commissioner of Income tax Mysore vs Lakshmama the Mysore High Court took the view that a refund received by the assessee in respect of excise fees payable by him amounted to a revenue receipt liable to tax
In that case however the High Court specifically made a distinction between cases of refund and cases of remission and it appears to have taken the position that an amount received as remission of duty could not be treated as a revenue receipt while an amount received by way of refund could be
In the judgment under appeal the High Court of Kerala noticed that decision and after exhaustively surveying several decisions came to the conclusion that the remission in the present case could not amount to agricultural income
We think that the view taken by the High Court in the case before us is right
The remission cannot in our opinion be considered as amounting to the receipt of agricultural income
What was allowed to be deducted from the total agricultural income of the assessees was interest pursuant to s5 of the Act
It was a deduction made permissible by the Act
To be regarded as taxable in the hands of the assessees the amount which was the subject of remission must be capable of being described as agricultural income
As the High Court has observed in the present case what was returned to the assessee has nothing to do with the activities of the assessee it does not arise from business nor does it arise from agricultural operations when the assessee is an agriculturist
 165 In order to eliminate such a controversy in cases falling under the Indian Income tax Act 1922 sub section
2A was added in section 10 of that Act whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business profession or vocation
Sub section 2A was inserted in s10 in 1955
Before that Chagla CJ speaking for the Court in Mohsin Rehan Penkar vs Commissioner of Income tax Bombay City had observed It is impossible to see how a mere remission which leads to the discharge of the liability of the debtor can ever become income for the purposes of taxation
This observation was noted by the Mysore High Court in CIT vs Lakshmamma supra and appears from what was said by them to have received that tacit approval of the learned Judges
It was made the basis of distinguishing the case before them from that decided by the Bombay High Court
We may point out in regard to sub section
2A of section 10 of the Indian Income Tax Act 1922 that it has been replaced by an even wider provision as sub section
1 of section 41 of the Income Tax Act 1961
No provision of that nature finds place in the Kerala Agricultural Income Tax Act
The appeal fails and is dismissed with costs
MLA Appeal dismissed


Summary:
The Kerala Agricultural Income Tax Act 1950 provides for the levy of tax on agricultural income in the State of Kerala
Section 5 details the deductions to be made in computing the agricultural income
Clauses e g h and i refer to interest paid by the assessee in different kinds of cases
The interest in all these cases has to be deducted from the agricultural income of a person before the levy is imposed
The respondents assessees claimed a deduction of Rs3374709 from their agricultural income under section 5 of the Kerala Agricultural Income Tax Act 1950 towards interest on a loan of Rs4 lakhs taken from a creditor
The deduction was allowed
However in the next accounting period relating to the assessment year 1964 65 the said creditor waived payment of the interest of Rs3374709 and accordingly the amount was credited to the revenue accounts of the respondents assessees
The Assessing Authority brought the amount to tax
But the Tribunal as well as the High Court took the view that the case was not one of an actual or constructive receipt or any receipt at all but only one of remission and a remission could not give rise to a credit item in the accounts of the assessees and that what had been given by the creditor in favour of the assessees or returned to them could not constitute the income of the assessees
Dismissing the appeal of the Revenue  HELD 1 The view taken by the High Court is right
The remis 162 sion cannot be considered as amounting to the receipt of agricultural income
What was allowed to be deducted from the total agricultural income of the assesses was interest pursuant to section 5 of the Act
It was a deduction made permissible by the Act
To be regarded as taxable in the hands of the assessee the amount which was the subject of remission must be capable of being described as agricultural income
164F G In the instant case what was returned to the assessees has nothing to do with the activities of the assessees it does not arise from business nor does it arise from agricultural operations when the assessee is an agriculturist
164G H Commissioner of Income tax Mysore vs Lakshmamma1964  approved
Mohsin Rehman Penkar vs Commissioner of Income tax Bombay City1948  referred to
2 In order to eliminate such a controversy in cases falling under the Indian Income tax Act 1922 sub s2A was added in section 10 of that Act whereby a receipt such as this was expressly made liable to tax by legal fiction as profits and gains of business profession or vocation
Subs2A of s10 of the Indian Income Tax Act 1922 has been replaced by an even wider provision as sub section
1 of section 41 of the Income Tax Act 1961
No provision of that nature finds place in the Kerala Agricultural Income Tax Act
165A BD