Summary of Legal Opinion

Factual and Procedural Background

This is a reference under Section 66(1) of the Income-tax Act, 1922 by the Appellate Tribunal, Calcutta Bench, asking the opinion of this Court on whether the proportionate amount of the government revenue (jama) paid from the estate to which the coal lands appertain, or a reasonable portion of it, ought to have been allowed as a deduction under Section 12(2).

The assessee, the Raja of Panchkote, is owner of a zemindary assessed to pay an annual jama of Rs. 54,527. In the previous year 1940–1941 (assessment year 1941–1942) the assessee derived income from royalties from coal fields leased to lessees and claimed a deduction of the jama. The Income-tax Officer disallowed the deduction on the ground that Section 12 did not permit it and that the jama had been fixed long ago (at the Permanent Settlement) and thus was not attributable to the coal income. The Appellate Assistant Commissioner reached substantially the same conclusion.

The Appellate Tribunal took the contrary view, directing that the proportionate amount of the revenue paid may be deducted in computing income from the non-agricultural sources and that an enquiry should be made as to the sum deductible. The Commissioner of Income-tax, Bihar and Orissa, referred the question to this Court for opinion.

Legal Issues Presented

1. “Whether the proportionate amount of the revenue paid from the estate, to which appertain the coal lands from which the royalties arose, or a reasonable portion of it, ought to have been allowed as a deduction under S. 12(2)?”

Arguments of the Parties

Assessee's Position

• The assessee claimed deduction of the jama (land revenue) against the royalty income derived from coal fields within his zemindary.

Income-tax Department's Arguments

• The Income-tax Officer contended that Section 12(2) did not permit the deduction because the jama was fixed long ago (at the Permanent Settlement) and the development of the coal fields was not a factor when the jama was fixed; therefore the jama could not be treated as attributable to the coal income.
• The Officer also stated that the expense was not incurred solely for the purpose of making or earning the coal income and so was not deductible under Section 12(2).
• The learned standing counsel drew attention to Section 9(1)(v) (which allows a deduction for land revenue where an assessee is taxed under the heading 'property') and argued that no similar reference is found in Sections 10 or 12, implying that no deduction should be allowed under those sections.

Appellate Tribunal's Reasoning (as presented)

• The Tribunal observed that most of the income assessed arose out of the revenue-paying estate and that the revenue payable was Rs. 54,527.
• It held that if the whole jama could not be deducted an enquiry should be held to apportion the amount deductible and relied on the principle (cited as "58 Cal. 4301 at pp. 443-444") that the tax is not on gross income and that non-agricultural income of an estate is income after deducting the revenue.
• Accordingly the Tribunal directed that the proportionate amount of the revenue paid may be deducted in computing income from non-agricultural sources.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
57 I.A 228	That income derived from a zemindary should be computed after making proper allowance in respect of the jama assessed and paid; i.e., the assessment should not be on gross receipts but after deducting land revenue.	The Court described this pronouncement (Lord Russell of Killowen's judgment) as conclusive and binding and relied on it to hold that the assessee is entitled to claim a deduction for the jama attributable to the coal lands producing the royalties.
58 Cal. 4301 at pp. 443-444	The principle that the tax is not on gross income and that the non-agricultural income of an estate is income after deducting the revenue.	The Appellate Tribunal invoked this principle to justify apportionment and deduction of the proportionate revenue; the Court accepted the Tribunal's direction consistent with this principle.

Court's Reasoning and Analysis

The Court agreed with the Appellate Tribunal. It relied principally on the authoritative decision in 57 I.A. 228 (Lord Russell of Killowen), which the Court treated as conclusive and binding. The Court extracted and applied the principle from that authority that, where income is derived from a zemindary, the income for taxation should be computed after making proper allowance in respect of the jama assessed and paid; otherwise the tax would be on gross receipts rather than on "income, profits and gains."

Applying that principle to the facts, because the royalties were derived from coal fields situated within the assessee's zemindary, the assessee is entitled to a deduction for the portion of the jama that can be attributed to those coal lands. The Court acknowledged the Income-tax Department's practical point that it may be difficult to ascertain the exact jama attributable to the coal lands but stated that it was not the Court's function at this reference stage to advise the parties on the specific evidence to be led to determine that apportionment.

The Court rejected the standing counsel's argument based on Section 9(1)(v) and the absence of a similar provision in Sections 10 or 12 as being inadmissible in the face of the Judicial Committee's decision in 57 I.A. 228.

Holding and Implications

Holding: The reference is answered in favour of the assessee. The Court held that the assessee is entitled to claim a deduction on account of the jama paid which can be attributed to the coal lands from which the royalties included in the assessable income arose in the previous year.

Implications: The direct effect is that the proportionate amount of the jama attributable to the coal lands must be allowed as a deduction when computing the assessee's non-agricultural income from royalties for the year in question. The Court did not set out any new rules for apportionment of the jama or specify the evidence required; it left the practical determination of the attributable amount to the appropriate fact-finding process. The Court also awarded costs to the assessee (hearing fee Rupees 250). The opinion relied on existing authority and did not purport to create a novel precedent beyond applying those authorities to the facts.

Reference answered.