Full Judgment Text
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PETITIONER:
COMMISSIONER INCOME-TAX, U.P.
Vs.
RESPONDENT:
KUNWAR TRIVIKRAM NARAIN SINGH
DATE OF JUDGMENT:
09/04/1965
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION:
1965 AIR 1836 1965 SCR (3) 700
ACT:
Income Tax Act, 1922 (11 of 1922), ss. 2(1)(a)
and 4(3) (viii)-Agricultural Income--Nature of.
HEADNOTE:
The respondent was the head of a Hindu undivided
family and was the descendant of a Jagirdar.
Certain disputes between the Jagirdar and the
Zamindars in the district had been settled in 1837
by a compromise between the British Government and
the then Jagirdar, whereby, the Government granted
the Jagirdar and his heirs a pension in perpetuity
to be calculated on the basis of one fourth of the
revenue of the Jagir. By this arrangement the
collections from the Jagir became payable by the
Zamindars direct to the Government and the Jagirdar
and his successors no longer remained the
proprietors of the Jagir and became entitled only
to a pension.
The Income-tax Officer assessed the receipt of
the pension by the respondent as part of his
regular income and rejected the latter’s contention
that the amount received was agricultural income
within the meaning of s. 4(3)(viii) of the Income-
tax Act, 1922.
In appeal, the Assistant Commissioner accepted
the respondent’s contention, but the Tribunal
reversed this finding. The High Court, on a
reference, decided the issue in favour of the
respondent, on the grounds, inter alia, that the
right conferred under the compromise of 1837 was a
right to a share of one-fourth in the net land
revenue collections and furthermore, the amount
received by the successors of the Jagirdar varied
from year to year. In the appeal before the
Supreme Court, it was also contended on behalf of
the respondent that the amount received was in the
nature of a capital receipt, being a payment to the
Jagirdar and his successors of compensation for
relinquishing the title to the Jagir lands.
HELD: (i) Under the compromise and arrangement
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of 1837, the respondent had no interest in the land
or in the land revenue payable in respect thereof.
[704 A]
State of U.P.v. Kunwar Sri Trivikram Narain
Singh, [1962] 3 S.C.R 213, followed.
As the source of the income in this case was the
arrangement of 1837, the income could not be held
to be derived from land within the meaning of the
definition of agricultural income in s. 2(1)(a) of
the Act. Even if the income varied from year to
year, the source of the income was still the
arrangement and not land. [705 G]
Maharajkumar Gopal Saran Narain Singh, v.C.I.T.
Bihar and Orissa, 3 I.T.R. 237, C.I.T. Bihar and
Orissa v. Raja Bahadur Kamkhya Narayan Singh and
Ors, 16 I.T.R. 325, Mrs. Bacha F. Guzdar v.C.I.T.
Bombay 27, I.T.R. 1, MaharaJadhiraja Sir
Kameshwar Singh, v. C.I.T. Bihar and Orissa, 41
I.T.R. 169, followed.
(ii) The amount received by the respondent was
not a capital receipt but revenue income and
therefore taxable.
701
Where an owner of an estate exchanges a capital
asset for a perpetual annuity, it is ordinarily
taxable in his hands. The position would be
different if he exchanged his estate for a capital
sum payable in installments. Such installments
when received would not be taxable as income. But
in the present case there was no material to show
that the amount received was an instalment of this
nature. [706 H˜707C]
Commissioner of Inland Revenue v. Wesleyan
and General Assurance Society, 30 T.C. 11, and
Perrin v. Dickson 14 T.C. 608, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 68
of 1964.
Appeal from the judgment and decree dated July
27, 1959 of the Allahabad High Court in Income-tax
Reference No. 307 of 1957.
S.V. Gupte, Solicitor General, R. Ganapathy
Iyer and R.N. Sachthey, for the appellant.
A.V. Viswanatha Sastri and S.P. Varma, for the
respondent. The Judgment of the Court was delivered
by
Sikri, J. This appeal pursuant to a
certificate granted by the Allahabad High Court
under s. 66A(2) of the Income-tax Act (hereinafter
referred to as the Act) is directed against the
judgment of the High Court in a reference under the
Act, answering the question referred to it in the
negative. The question referred by the Appellate
Tribunal is:
"Whether on a true interpretation
of clause (viii) of subsection 3 of
section 4 of the indian Income-tax Act
the sum of Rs. 36,396/- received by the
assessee as an allowance during the
previous year of the assessment year
1949-50 is revenue income liable to tax
under the Indian Income-tax Act, 1922?"
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The relevant facts stated in the Statement of
the case are as follows: The assessee is a Hindu
undivided family headed by one Sri Trivikram Narain
Singh who is a descendant of one Sri Babu Ausan
Singh who was the original founder and owner of
what is known as Ausanganj State in the district of
Benaras. The district of Benaras was formerly a
part of Oudh territory. By a Treaty between the
East India Company Nawab Asfuddaula in or about the
year 1775, the province of Benaras was ceded to the
British Government. The British Government granted
a sanad of Raj to Raja Chet Singh who in turn gave
the Jagir of Parganas Seyedpore and Bhittery in
perpetuity to Babu Ausan Singh. It appears that in
1796 there were some disputes between Babu Ausan
Singh and the Zamindars in the district and the
matter was referred by the Collector of Benaras to
the Board of Revenue in Calcutta. The disputes
between the Jagirdars and Zamindars ultimately
ended in 1837 by a compromise between the
British Government and the then Jagirdar Hat Narain
Singh whereby the British Government
702
granted a pension of Rs. 36,322/8/- to Babu Hat
Narain Singh anal his heirs in perpetuity. The
quantum of this pension was calculated on the basis
of 1/4th of the revenue of the Jagir. By this
arrangement the revenue or land collections of
Jagir became payable by the Zamindars direct to the
Government and by the grant of the pension, Babu
Hat Narain Singh and his successors no longer
remained the proprietors of the Parganas or the
Jagir and became entitled to merely a pension. The
letter by which the amount of pension was
determined at Rs. 36,322/8/- is dated 7th of July,
1837 and was from H. Elliot Esqr., the Secretary
Sadar Board of Revenue N.W.P. Allahabad, to J.
Thompson Esqr., Offg. Secretary to Lt. Government,
N.W.P.".
The pension was paid regularly from year to
year by the Government to Babu Har Narain Singh and
his heirs. During the previous year of the
assessment year 1949-50, the assessee received a
sum of Rs. 36,396/- on account of the aforesaid
pension. The Income-tax Officer, in spite of the
objection of the assessee, held that it was a
regular annual income of the assessee and did not
fall within the category of agricultural income-
tax. He observed that "in fact this income arose
from a statutory obligation of the Government to
pay it, and although the Government recouped this
from the person with whom the land was settled,
land in the genealogical tree of Malikana appears
in the second degree, its immediate and effective
source is the Government’s statutory obligation to
pay it, and this obligation is not land within the
meaning of Income-tax Act, vide C.I.T.v. Raja
Bahadur Karnakhaya Harain Singh(1)".
The assessee appealed to the Appellate
Assistant Commissioner who held that "the alleged
cash grant of varying and unspecified amount
received by the appellant, in relation to land
revenue of Seyedpur now Tehsil of District
Ghazipur, clearly fell within the definition of
agricultural income under Section 2(1) of the
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Incometax Act."
The Income-tax Officer appealed to the Income-
tax Appellate Tribunal. The Tribunal held that the
sum of Rs. 36,396/- was chargeable to tax under the
Act as the income was not agricultural income for
"although the pension was determined with respect
to the quantum of the rent collection the rent
collections or the land could not be said to be the
immediate source of the pension. The source of the
pension was a liability undertaken by the
Government for extinguishing the proprietary rights
of the Jagirdar and when the immediate source of
the income was not land or rent collections from
land, it is difficult to hold that the receipt of
the assessee was agricultural income within the
meaning of Section 4(3)(viii) of the Income-tax
Act."
The High Court held that from the language of
the letter of July 7, 1837, it was manifest that
the right which was conferred
(1948) 16 I.T.R. 325.
703
was a right to a share of one-fourth in the net
land revenue collections after deducting costs of
Tahsil establishment. It relied on the fact that
the amount which had been received by the
successors of Babu Harnarain Singh varied from year
to year. It observed that "the language of the
letter and this conduct of the parties can only
lead to the inference that, by this settlement
contained in the letter of 7th July, 1837, Babu Har
Narain Singh and his successors were granted in
perpetuity a right to one-fourth of the land
revenue collections themselves and not merely a
right to receive u sum of money calculated on that
basis." The High Court accordingly answered the
question in the negative.
The learned Additional Solicitor-General, on
behalf of the appellant, contends that according to
the true interpretation of the letter dated July 7,
1837, no right in the land revenue was granted to
the assessee. He relies on the decision of this
Court in State of Uttar Pradesh v. Kunwar Sri
Trivikram Narain Singh(1). That case arose out of
the writ petition filed by the present respondent
in the High Court of Judicature at Allahabad for a
writ in the nature of mandamus calling upon the
State of Uttar Pradesh to forbear from interfering
with his right to regular payment of the "pension,
allowance or Malikana" payable in lieu of the
hereditary estate of Harnarain Singh in respect of
parganas "Syudpore Bhettree" and for an order for
payment of the "pension, allowance or malikana" as
it fell due. This Court interpreted the same
letter, dated July 7, 1837, and came to the
conclusion that the respondent did not acquire any
interest in land or any land revenue. Shah, J.,
speaking for the Court, observed:
"Because the annual allowance is
equal to a fourth share of the net
revenue of the mahals, the right of the
respondent does not acquire the
character of an interest in land or in
land revenue. Under the arrangement,
the entire land revenue was to be
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collected by the Government and in the
collection Harnarain Singh and his
descendants had no interest or
obligation. As a consideration for
relinquishing the right to the land and
the revenue thereof, the respondent and
his ancestors were given an allowance
of Rs. 30,612-13-0. The allowance was
in a sense related to the land revenue
assessed on the land, i.e. it was fixed
as a percentage of the land revenue;
but the percentage was merely a
measure, and indicated the source of
the right in lieu of which the
allowance was given."
The learned counsel for the respondent, Mr. A.
Viswanatha Sastri urges that on its true
interpretation the letter dated July 7, 1837,
showed an arrangement for sharing collections. We
are unable to agree with his contention. We
respectfully adopt the reasoning and conclusion of
this Court in the case of State of
[1962] 3 S.C.R. 213.
704
Uttar Pradesh v. Kunwar Sri Trivikram Narain
Singh(1) and hold that the respondent, under the
arrangement, had no interest in land or in the land
revenue payable in respect thereof.
If this is the true interpretation of the
arrangement arrived at, the question arises whether
the pension or allowance is agricultural income.
’Agricultural income’ is defined in s. 2 of the Act
as follows:
"(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 British India or subject to
a local rate assessed and collected by
officers of the Crown as
such: ...... "
In Maharajkumar Gopal Saran Narain Singh v.
Commissioner of Income-tax, Bihar and Orissa(2),
the facts were that the assessee had conveyed the
greater portion of his estate. The consideration
for the transfer was, inter alia, an annual payment
of Rs. 2,40,000/to the assessee for life. The
Privy Council held that this "annual payment was
not agricultural income as it was not rent or
revenue derived from land but money payable under a
contract imposing a personal liability on the
covenantor the discharge of which was secured by a
charge on land."
The Privy Council, in Commissioner of Income-tax
Bihar and
v. Raja Bahadur Kamakhaya Narayan Singh and
construed the word ’derived’ as :follows:
"The word "derived" is not a term of
art. Its use in the definition indeed
demands an enquiry into the genealogy
of the product. But the enquiry should
stop as soon as the effective source
is discovered. In the genealogical
tree of the interest land indeed
appears in the second degree, but the
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immediate and effective source is rent,
which has suffered the accident of
nonpayment. And rent is not land
within the meaning of the definition."
This Court observed in Mrs. Bacha
F. Guzdar, Bombay Commissioner of
Income-tax, Bombay(4) as follow:
"Agricultural income as defined in
the Act is intended to refer to the
revenue received by direct association
with the land which is used for
agricultural purposes and not by
indirectly extending it to cases where
that revenue or part thereof changes
hands either by way of distribution of
dividends or otherwise."
(1) [1962] 3 S.C.R. 213.
(2) 3 LT.R. 237.
(3) 16 I.T.R.325
(4) 27 LT.R. 1.
705
The same test was adopted by this
Court in Maharajadhiraja Sir Kameshwar
Singh v. Commissioner of Income-tax,
Bihar and Orissa(1) and the Court again
looked to the source of the right in
order to determine whether income was
agricultural income or not. Shah, J.,
observed:
"The appellant has no beneficial
interest in the lands which are the
subject-matter of the trust: nor is he
given under the trust a right to
receive and appropriate to himself the
income of the properties or a part
thereof in lieu of any beneficial
interest in that income. The source of
the right in which a fraction of the
net income of the trust is to be
appropriated by the appellant as his
remuneration is not in the right to
receive rent or revenue of agricultural
lands, but rests in the covenant in the
deed to receive remuneration for
management of the trust. The income of
the trust appropriated by the appellant
as remuneration is not received by him
as rent or revenue of land; the
character of the income appropriated as
remuneration due is again not the same
as the character in which it was
received by the appellant as trustee.
Both the source and character of the
income are, therefore, altered when a
part of the income of the trust is
appropriated by the appellant as his
remuneration, and that is so,
notwithstanding that computation of
remuneration is made as a percentage of
the income, a substantial part whereof
is derived from lands used for
agricultural purposes. The
remuneration not being received as rent
or revenue of agricultural lands under
a title, legal or beneficial in the
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property from which the income is
received, it is not income exempt under
section 4(3)(viii)."
It follows from the decisions of the Privy
Council and the judgments of this Court cited above
that if it is held in this case that the source of
the allowance or pension is the arrangement arrived
at in 1837. then the income cannot be held to be
derived from land within the meaning of the
definition in s. 2(1)(a) of the Act. It seems to
us that in this case the source of income is
clearly the arrangement arrived at in 1837 and,
therefore, it is not agricultural income as defined
in the Act.
Mr. Sastri sought to distinguish those cases on
the ground that the allowance here varied from year
to year. Assuming that the allowance varied from
year to year, the source of the income still
remains the arrangement and not land.
The next point that arises in this case is
whether the allowance is taxable income at all.
Mr. Sastri contends that it is capital receipt. He
says that if the assessee’s predecessor had
received
) 41 I.T.R. 169.
706
compensation for relinquishing his title to the
lands in dispute, that would have been a capital
receipt and not taxable. He further says that the
allowance was in fact a payment of the compensation
for relinquishing the title to those lands. He
says that we must consider the quality of the
income and not its periodicity. He refers to the
following passage from the speech of Viscount Simon
in Commissioner of Inland Revenue v. Wesleyan and
General Assurance Society(1):
"It may be well to repeat two propositions
which are well established in the application of
the law relating to Income-tax. First, the name
given to a transaction by the parties concerned
does not necessarily decide the nature of the
transaction. To call a payment a loan if it is
really an annuity does not assist the taxpayer, any
more than to call an item a capital payment would
prevent it from being regarded as an income payment
if that is its true nature. The question always is
what is the real character of the payment, not what
the parties call it."
He, therefore, asked us to disregard the word
’pension’ in the letter dated July 7, 1837, and
determine the real character of the payment.
Another passage from the speech of Viscount Simon
is also relevant. Lord Simon observed:
"Secondly, a transaction which, on its true
construction, is of a kind that would escape tax,
is not taxable on the ground that the same result
could be brought about by a transaction in another
form which would attract tax. As the Master of the
Rolls said in the present case: ’In dealing with
Income-tax questions it frequently happens that
there are two methods at least of achieving a
particular financial result. If one of those
methods is adopted tax will be payable. If the
other method is adopted, tax will not be
payable ....
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The net result from the financial point of view is
precisely the same in each case, but one method of
achieving it attracts tax and the other method does
not. There have been cases in the past where what
has been called the substance of the transaction
has been thought to enable the Court to construe a
document in such a way as to attract tax. That
particular doctrine of substance as distinct from
form was, I hope, finally exploded by the decision
of the House of Lords in the case of Duke of
Westminster v. Commissioner of Inland Revenue(2)".
It seems to us that where an owner of an estate
exchanges a capital asset for a perpetual annuity,
it is ordinarily taxable income in his hands.
The position will be different if he exchanges
(1) 30 T.C. II. (2) 19 T.C. 490.
707
his estate for a capital sum payable in installments. The
installments when received would not be taxable income.
Mr. Sastri, relying on Perrin v. Dickson(1) contends
that an annuity is not always taxable as income. This is
true, but in this case no material has been produced to show
that the allowance was in fact a payment in instalments of
the value of the disputed title of the assessee’s
predecessor in 1837.
In the result, we hold that the allowance is revenue
income and not exempt from taxation as agricultural income.
Therefore, we accept the appeal and answer the question
referred in the affirmative. The appellant will have his
costs here and in the High court.
Appeal allowed.
(1) 14 T.C. 603