Bacha F. Guzdar v. C.I.T., Bombay AIR 1955 SC 74

BACHA F. GUZDAR V. C.I.T., BOMBAY AIR 1955 SC 74

FACTS

• Mrs. Bacha F. Guzdar, the assessee, received dividends totaling Rs 2750 in the accounting year 1949-50 from two tea companies. Those companies were engaged in the business of growing and manufacturing tea.
• According to Rule 24 of the Indian Income Tax Rules, 1922, income derived from the sale of tea grown and manufactured by the seller is treated as business income, with 40% of such income liable to tax.
• Parties agree that 40% of tea companies' income is taxed as business income, while 60% is exempt as agricultural income. Mrs. Guzdar argues that her dividends should be treated as 60% agricultural income and exempt from tax. Revenue disagrees, stating that dividend income cannot be considered agricultural and must be fully taxed.
• The Income Tax Officer, the Appellate Assistant Commissioner, and the Income Tax Appellate Tribunal all ruled in favour of the Revenue, stating that dividend income cannot be considered agricultural income.
• The High Court upheld the Tribunal's decision but granted leave to appeal to the Supreme Court.

ISSUE

• Whether 60% of the dividend amounting to Rs 2750 received by the assessee from the two Tea companies is agricultural income and as such exempt under Section 4(3)(viii) of the Act.

RULE

• Dividends are not directly associated with land, so they do not qualify as agricultural income. 
• Under Section 2(1) agricultural income means: 

(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land- revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such;

HELD

• The court held that only revenue directly derived from agricultural land can be considered as agricultural income. Dividends are not directly associated with land, so they do not qualify as agricultural income. Expanding the definition of "revenue derived from land" beyond direct association would be unjustifiable. The Income Tax Act policy exempts agricultural income but not revenue received indirectly from land.
• In CIT v. Raja Bahadur Kamakshya Narayan Singh [AIR 1949 PC 1] the court held that the interest on arrears of rent is not agricultural income as it is derived from rent, not directly from land.
• In the case of Premier Construction Co. Ltd. v. CIT [AIR 1949 PC 20], the nature of the commission received by a managing agent of a company was discussed. The company had a portion of its income from agriculture. The court held that the remuneration paid to the managing agent was for the services he provided under a contract, which were payable by the company that earned agricultural income.
• In Maharajkumar Gopal Saran Narain Singh v. CIT [AIR 1935 PC 143], it was held that the annual payment received from a transfer of land is not considered agricultural income as it arises from a personal contract and not directly from the land.
• The obvious implication of the words used by Lord Macmillan was that whosoever receives profit from the land directly is entitled to the exemption.
• From the decision abovementioned, the appeal is dismissed.

COMMENTARIES RATIO/NOTE-

• The principles that emerge from the decisions, viz., CIT v. Kamakhaya Narayan Singh, (1948) 16 ITR 325 (PC) ; Pratap Singh v. Province of Bihar, (1949) 17 ITR 202 (Pat) ; Pydah Suryanarayana Murty v. CIT, (1961) 42 ITR 83 (AP) ; CIT v. K.S. Imam Saheb, (1969) 71 ITR 742 [LNIND 1968 MAD 130] (Mad) ; CIT v. Kunwar Trivikram Narain Singh, (1965) 57 ITR 29 [LNIND 1965 SC 126] (SC), are broadly, as under:—

1. rent or revenue which is directly derived from any land which is used for agricultural purposes will be agricultural income;
2. revenue which is derived must also be directly, and not indirectly, associated with the land which is used for agricultural purposes before it can be said to be agricultural income;
3. the effective source of the receipt being from agricultural land is the decisive factor.