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In CIT v. Sir Kameshwar Singh [1935] 3 ITR 305 (PC) the assessee, who carried on an extensive money-lending business, made a loan of over Rs. 18,00,000. By a deed the borrower conveyed to the lender certain agricultural properties for a period of 15 years. The assessee realized certain rents from such land in consideration of such loan named as thika profits/rent. It was held that such thika profits received by the assessee as mortgagee-lessee was exempt from income tax, being agricultural income. Now the question arose that once such income is held to be agricultural in nature whether the same can still be taxed on the basis that the same constitute an income arising in the course of business of money lending carried out by the assessee.

LORD MACMILLAN pronounced that agricultural income is altogether excluded from the scope of the Indian Income-tax Act, howsoever or by whomsoever it may be received. Such income does not, therefore, lose the benefit of the statutory exemption and become assessable as business profits merely because it is received by the assessee, not as an ordinary landlord or proprietor but as a part of the income, profits or gains of a money-lending business carried on by him. “The exemption”, he said, “is conferred, and conferred indelibly, on a particular kind of income and does not depend on the character of the recipient.”

NA Palkhivala in his tax treatise pointed out that the exemption embodied in section 10 may be divided broadly into two categories, – exemption to which certain classes of income from their very nature are entitled, and exemption to which the character of the assessee entitles him. Clearly scholarships fall in the first category hence benefiting the actual recipient irrespective of any other premise or assumption under any other provision under the Act. An employer is therefore right is its course in not deducting any tax at source on the sum of scholarships made to the children of the employees.

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