Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, HYDERABAD
Vs.
RESPONDENT:
NAWAB MIR BARKAT ALI KHAN BAHADUR
DATE OF JUDGMENT16/10/1974
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
SARKARIA, RANJIT SINGH
GUPTA, A.C.
CITATION:
1975 AIR 838 1975 SCR (2) 453
1975 SCC (4) 360
ACT:
Indian Income-tax Act 1922-Trust created by assessee Corpus
deposited with the Government-Government agreed to pay
interest free of all taxes. Beneficiary released and
assigned all rights in the trust to the settlor-assessee-
Whether settlor assessee entitled to the same exemption from
taxation as the beneficiary.
HEADNOTE:
The assess had created a trust of thirty lacs of rupees for
the benefit of his daughter-in-law on 8th October, 1949. On
the same day an agreement was entered into between the
assessee and Government of India, the important terms of
which were that the trustees would deposit the corpus of the
trust with the Government of India; that the Government of
India would pay interest on that amount at the rate of Re.
one per cent per annum free of income-tax and other taxes,
to pay out of the corpus such sum every year together with
interest accrued thereon or on the balance sum thereof which
would in all be a sum of Rs. one lac; that the Government of
India would not assess or levy on the settlor or the
trustees or any of the beneficiaries under the deed of trust
any income-tax, super-tax or other taxes in respect of the
income or corpus of the said sum of Rs. thirty lacs or part
thereof. The beneficiary released, assigned and transferred
her rights, title and interest in the trust fund in favour
of the assessee and it was stated that the settlor would be
entitled to receive the amount which the beneficiary was
entitled to free of income-tax, super-tax and other taxes.
The Income-tax Officer held that the receipt of Rs. one lac
per annum by the assessee from the trustees constituted the
assessee’s income and so he was liable to pay tax thereon.
The order was affirmed by the Appellate Assistant
Commissioner and the Income-tax Appellate Tribunal. The
High Court held that though the amounts received by the
assessee in pursuance of the release deed were his income,
he was entitled to exemption from payment of taxes upon
those amounts because of the agreement dated October 8, 1949
that the assessee stood in the shoes of the original.
beneficiary under the trust deed and had become entitled to
all the benefits to which she was entitled.
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On appeal to this Court it was contended that (1) the
assessee who was a transferee of the rights of the
beneficiary under the trust deed, could not get the benefit
of that exemption and (2) the question of grant of exemption
to the payment of tax to the assessee could not arise
because the settlor got divested of the ownership of the
corpus.
Dismissing the appeals,
HELD : A fair reading of the agreement showed that the basic
scheme was that the payment of Rs. one lac under the
agreement would be exempted from the payment of tax. There
is nothing in the agreement that the Government wanted to
show a special favour to the beneficiary personally and that
the same would have been with held in case the person
entitled to receive Rs. one lac was not the beneficiary but
the settlor. The consideration which appears to have
weighed with the Government of India in agreeing to grant
exemption in the matter of tax was the deposit of Rs. thirty
lacs with the Government. That consideration held equally
good whether the person to whom the payment of Rs. one lac
was made by the trustees was the beneficiary or the
assessee. The exemption was of a general and comprehensive
nature and was not restricted to the beneficiary alone.
Agreement which the Government entered into with the settlor
and the trustees expressly granted exemption in the matter
of payment of tax in respect of the said sum Rs. one lac to
the settlor also. The agreement makes it clear that in no
event were the settlor and the trustees and the beneficiary
to be taxed in respect of payment of Rs. one lac. [461 B-D;
F; H]
(2) In spite of the knowledge that the settlor had
transferred the amount of the trust the Government of India
agreed to grant exemption to the settlor in respect
454
of any income from the corpus or part thereof It would
follow that the intention of the parties was that the
settlor was to be exempt in any case from payment of tax in
respect of income from that amount and that in the event of
the assessee becoming entitled to the beneficial interest
under the trust deed the exemption from payment of tax would
be available to him. [462 C-D]
(3) Under s. 58 of the Indian Trusts Act 1882 (Act 2 of
1882) the beneficiary competent to contract, may transfer
his interest. The present case is not covered by the
proviso because the beneficiary transferred her interest,
not during the subsistance of her marriage, but at the
time of the dissolution of her marriage.
[462 E-F]
(4) During the three years in question the Government has
acted upon agreement dated October 8, 1949 even though the
beneficial interest under the trust deed had been
transferred by Princess Niloufer to the assessee. Despite
that transfer the Government paid the amount of Rs. 1,00,000
under the agreement. The payment of Re. 1,00,000 under the
agreement and the exemption in the matter of tax were linked
together. It would certainly appear anomalous that the
Government should keep the corpus of the trust fund in
deposit with itself on a nominal rate of interest of Re. 1
per cent per annum and, at the same time, decline to give
the benefit of the other part of the agreement which relates
to the exemption in respect of payment of tax. It is true
that there is no equity about tax. The above dictum has are
levance when the matter relates to giving effect to the
provisions of tax law. The dictum would not, however, be
attracted when the question before the court as in the
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present case is the construction of an agreement and finding
out the intention of the parties thereto as manifested by
its terms. [462 G-H]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1184 to
1186 and 1198 to 1200 of 1970
From the Judgment & Order dated the 25th July, 1969 and 25th
September, 1969 of the Andhra Pradesh High Court in Referred
Case No. 39 of 1965 and 10 of 1966 respectively.
M. C. Manchanda, B. B. Ahuja and S. P. Nayar for the
Appellant.
S. V. Gupte, Anwarulla Pasha, J. B. Dadachanji, A. Subba
Rao and Mrs. Anjali K. Varnia, for the Respondent.
The Judgment of the Court was delivered by
KHANNA, J.-The short question which arises for determination
in these six civil appeals Nos. 1184 to 1186 and 1198 to
1200 of 1970 which have been filed on certificate by the
Commissioner of Incometax against the judgment of the Andhra
Pradesh High Court is whether, on the facts of the case, the
sum of Rs. 1,00,000/- received by the assesses from the
Trustees of Princess Niloufer Trust constituted income under
the Indian Income-tax Act, 1922 (hereinafter referred to as
the Act) and if so, whether the assesses was entitled to
exemption from tax in respect of the income under the terms
of the agreement entered into with the Government of India
on October 8, 1949. The High Court to which the above
question was referred under section 66 (1) of the Act held
that though the payment of Rs. 1,00,000/- per year was
income in the hand of the assessee, he was entitled to
exemption from tax thereon under the terms of agreement
dated October 8, 1949.
The matter relates to the assessment of the income for the
years 1952-53,1953-54 and 1954-55 of Nizam Mir Osman Ali
Khan Bahadur, ,who was the Ruler of Hyderabad State prior to
its integration with
455
the Union of India. A large number of questions arose
during the course of the assessment, but we are no longer
concerned with them. Indeed, most of the questions were
decided in the light of the decision of this Court in
respect of the assessment of this very assessee for the
previous years. The decision of this Court is reported in
59 ITR 666.
We may now set out the facts giving rise to the question
reproduced above Prince Muazzam Jah Bahadur is the second
son of the assessee. The Prince was married to Princess
Niloufer in Nice (France) on November 12, 1931 according to
Muslim rites. On October 8, 1949 the assessee made a
settlement of Rs. 30,00,000 by transferring that amount to a
trust created on that day for the benefit of Princess
Niloufer. The assessee, Sir Sultan Ahmed and Shavax
Ardeshir Lal, a nominee of the Government of India, were the
three trustees appointed under the Trust Deed. On the same
day an agreement was entered into between the Government of
India, the assessee, as the settlor of the trust, and the
three trustees for the deposit of Rs. 30,00,000 with the
Government of India. The amount deposited was to carry
interest at the rate of Re. 1 per cent per annum. Clauses
2, 3 and 4 of the agreement were as under :
"2. The Government of India shall out of its
revenue pay to the Trustees interest on the
said sum of Rs. 30,00,000 (Rupees Thirty Lacs
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) at the rate of one per cent per annum free
of income-tax, super-tax and all, other taxes
dues, duties and other assessments whatever
from the date from which the said sum of Rs.
30,00,000 (Rupees Thirty Lacs) shall be
deposited by the Trustees with the Government
of India until the said sum of Rs. 30,00,000
(Rupees Thirty Lacs) shall be wholly paid out
by the Govt. of India in accordance with the
provisions of these presents PROVIDED HOWEVER
that if and when the Government of India shall
pay to the Trustees any sum of money out of
the corpus of the sum of Rs.30,00,000 (Rupees
thirty lacs) in accordance with the provisions
hereof, interest shall cease to run on the
sums so paid from the date on which the
Government of India shall pay the same to the
Trustees and thereupon interest shall run only
upon the balance of the said sum of Rs.
30,00,000 (Rupees thirty lacs) for the time
being remaining in the hands of the Government
of India.
3. The Government of India shall out of the
corpus of Jr the said sum of Rs. 30,00,000
(Rupees thirty lacs) pay to the Trustees
untill the said corpus is exhausted such sum
every year as together with the interest
accured due on the said sum of Rs. 30,00,000
(Rupees thirty lacs) or on the balance thereof
for the time being remaining with the
Government of India will in all makeup the sum
of Rs. 1,00,000 (Rupees one lac ) per annum,
the first, of such payments to be made on the
1st day of November 1949 and each of the
subsequent payments to be made on the 1st day
of October of each and every year thereafter.
456
4.The Government of India hereby declares and
agrees that the interest payable on the
security of these presents shall be free from
income-tax, super-tax and all other taxes,
dues, duties, and assessments and that
accordingly the Government of India shall not
at anytime assess or levy on the Settlor or
the Trustees or any of them or on any of the
beneficiaries under the said Deed of Trust any
income-tax, supertax or other taxes dues,
duties or assessments in respect of any income
or corpus of the said sum of Rs. 30,00,000
(Rupees thirty lacs) so deposited or any part
thereof shall not at any time be included in
the income of the beneficiaries under the
provisions of the Indian Income-tax Act or any
other Act relating to taxation on the income,
gains and profits of any persons in India
PROVIDED HOWEVER that if notwithstanding the
provisions there in above contained any such
tax, dues, duties or assessments shall be
charged or levied on either the Settlor or the
Trustees or the beneficiaries under the said
Deed of Trust or any of them in respect of any
income or corpus of the said sum of Rs.
30,00,000 (Rupees Thirty lacs so deposited or
any part thereof or if any part of such income
or corpus be included in the total income of
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any of them for computing his or her total
income for the purpose of assessment of his or
her income, gains or profits by virtue of the
provisions of the Indian Income-tax Act or of
any other enactment of law for the time being
in force in that behalf in India, then the
Government of India shall forthwith refund,
reimburse and pay to such person the amount of
such tax, dues, duties or assessments charged
or levied on him or her and/or the amount of
additional tax, dues, duties or assessment
which shall have been charged or levied on him
or her by reason or any part of the said
income or corpus being included in the total
income of such person for the purpose of as-
sessing his or her total income, gains or
profits under the provisions of the Indian
Income-tax Act or any other law or enactment
for the time being in force in that behalf in
India".
According to the trust deed, the settlor, who was possessed
of a sum of Rs. 30,00,000, out of love and affection for his
daughter in-law Princess Niloufer was desirous of making a
settlement of the said amount and for that purpose he had
transferred and handed over the amount to the trustees. The
Turst deed referred to the agreement which had been on that
day entered into with the Government of India. The trustees
were required to deposit the said sum of Rs. 30,00,000
forthwith with the Government of India in accordance with
the agreement with the Government. The trustees were to
hold the trust fund in accordance with the directions
contained in the different sub-clauses of clause 2 of the
trust deed. Sub-clause (a) required the deposit of the
amount with the Government of India in accordance with the
agreement entered into on that day with the Government.
Sub-clause (b) of the trust deed was as under :
"(b) To pay the net interest of the Trust Fund
or the balance thereof for the time being as
and when recovered from the
457
Government of India to the said Princess free
of Income-tax, Super-tax and all other taxes
whatsoever, until her death or remarriage,
whichever event shall happen first PROVIDED
THAT in the event of the said Prince divorcing
the said Princess it shall be open. to the
Trustees to pay the net interest of the Trust
Fund or of the balance thereof for the time
being to said Princess until her death or
remarriage, whichever event shall tak
e place.
first, if the Trustees are of the opinion that
the divorce was not due to any act or default
on the part of the said Princess AND THE de-
cision of the Trustees in this respect shall
be final and binding on all persons claiming
under this clause and shall not be questioned
in any Court of Law or otherwise howsoever."
Sub-clause (c) required the trustees to recover and receive
from the Government of India and to pay Princess Niloufer
out of the corpus of the trust fund as long as the same was
available such sum every year as together with the net
interest of trust fund would in all makeup the sum of Rs.
1,00,000 per annum. The first payment was to be made on
November 1, 1949 and each of the subsequent payments were to
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be made on the first day of October in each year. The
payment was to be made to the Princess free of income-tax,
super-tax and all other taxes. The Princess was entitled to
that sum even in the event of the Prince divorcing the said
Princess; provided the divorce in the opinion of the
trustees was not due to any act or default on her part. The
amount was to be paid to the Princess until her death or
remarriage whichever event was to occur first. In no case
was the Princess to receive any sum in excess of Rs.
1,00,000 in a year. Subclause (d) required that on the
death of the Princess, the corpus of the trust fund was to
be transferred to her issues from Prince Muazzam Jah Bahadur
in accordance with the Muslim law of succession. Sub-clause
(e) read as under:
"(e) Subject to the provisions of sub-clause
(a), (b) (c) and (d) hereof on and after the
death of the said Princess to transfer and
hand over the corpus of the Trust Fund or the
balance thereof then remaining in the hands of
the Trustees, as the case may be, to Settlor,
if he be then living, and in the event of the
Settlor predeceasing the said Princess to
transfer and hand over the corpus of the said
Fund or the balance thereof then remaining in
the hands of Trustees as the case may be to
the Nizam of Hyderabad living at that time."
Unhappy differences arose between Prince Muazzam Jah Bahadur
and Princess Niloufer. The husband and wife consequently
started living separately. No child was born, to Princess
Niloufer by marriage with the Prince. On September 18- 1952
two documents were executed. One of those documents related
to the dissolution of the marriage of Prince Muazzam Jah
Bahadur and Princess Niloufer. The above dissolution of the
marriage in the opinion of the three trustees, was not due
to any act or default on the part of Princess Niloufer. The
other document was a deed of release. The parties who
executed the deed of release were Princess Niloufer of the
first part, the assesee of the second
458
part, Prince Mauzzam Jah Bahadur of the third part and the
three trustees appointed under the trust deed dated October
8, 1949 in respect of the sum of Rs. 30,00,000 principally
for the benefit of Princess Niloufer of the fourth part.
The trustees appointed by a trust deed in respect of a trust
created by the assessee on October 8, 1949 for a sum of Rs.
one crore cithty two lakhs principally for the benefit of
Prince Muazzam Jah Bahadur were also parties to this deed of
release. By this release deed Princess Niloufer on receipt
of Rs. 10,00,000 from the asseseee released, assigned and
transferred her rights, title and interest in Princess
Niloufer Trust Fund in favour of the assessee and it was
stated that he would be entitled to receive the amounts to
which Princess Niloufer was entitled free of Incometax,
super-tax and other taxes. Clauses 1, 2 and 3 of the
release deed read as under:
"(1) That in pursuance of the said agreement
between the parties and in consideration of
the premises and of the said sum of Rs.
10,00,000 (Rupees ten lacs) paid by His
Exalted Highness to the Princess on or before
the execution of these presents (the receipt
whereof the Princess both hereby admit and
acknowledge and of and from the same both
hereby acquit release exonerate and discharge
His Exalted Highness for every) she the
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Princess both hereby release assign and
transfer unto His Exalted Highness, a11 that
the net interest of Princess Niloufer’s Trust
Fund or of the balance thereof for the time
being which is payable to the Princess free of
income-tax, super-tax and ’all other taxes
whatsoever until her death or remarriage
whichever event shall happen first as provided
in clause 2 (b) of Princess Niloufor’s Trust
Deed and which net interest may accrue or
arise or become payable after the date of
these presents until her death or remarriage,
whichever event shall happen first, from or in
respect of the said Princess Niloufer’s Trust
Fund together with full power to deman
d sue for
and give discharges to Princess Niloufor’s
Trustees for the said net interest of Princess
Niloufer’s Trust Fund AND ALL the estate right
title interest proper claim and demand of the
Princess in to and upon the said net interest
as aforesaid to HAVE RECEIVE AND TAKE the same
unto His Exalted Highness absolutely TO THE
EXTENT that His Exalted Highness shall be
entitled to receive from Princess Niloufer’s
Trustees the said net interest of Princess
Niloufer’s Trust Fund free of income-tax and
super-tax and all other taxes whatsoever which
the Princess would have received but for the
present assignment.
45 9
(2) In further pursuance of the said
agreement and for the consideration aforesaid
the Princess doth hereby release assign and
transfer unto His Exalted Highness the sums
which the Princess is entitled to receive
under clause 2(c) of Princess Niloufer’s Trust
Deed being such sum payable to her by Princess
Niloufer’s Trustees out of the Corpus of
Princess Niloufer’s Trust Fund every year as
together with the net interest of Princess
Niloufer’s Trust Fund payable to her under
clause 2(b) thereof will in all make up the
sum of Rs. 1,00,000 (Rupees one lac) per annum
and which sum of Rs. 1,00,000 payable to her
free of income-tax, super-tax, and all other
taxes whatsoever and which sums may accrue or
arise or become payable after the date of
these presents from or in respect of Princess
Niloufer’s Trust Fund
(3) Princess Niloufer’s Trustees do hereby
covenant with His Exalted Highness that they
the Princess Niloufer’s Trustees shall until
the death or remarriage of the Princess
whichever event shall happen first, pay to His
Exalted Highness the net interst of Princess
Niloufer’s Trust Fund or of the balance
thereof for the time being as and when
recovered from the Government of India free of
income-tax, super-tax and all other taxes
whatsoever as also such sum every year out of
the corpus of Princess Niloufer’s Trust Fund
as together with the net interest of Princess
Niloufer’s Trust Fund as aforesaid will in all
make up the sum of Rs. 1,00,000 (Rupees one
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lac) per annum TO THE EXTENT that the whole of
the said sum of Rs. 1,00,000 (Rupees one lac)
which the Princess would have received under
clauses 2(b) and 2(c) of the said Princess
Niloufer’s Trust Deed but for the present
assignment shall be paid to His Exalted
Highness free of income-tax, super-tax and all
other taxes whatsoever so long as the same
shall be available."
Pursuant to the above release deed, the sum of Rs. 1,00,000
received from the Government of India under agreement dated
October 8, 1949 which used to be paid by the trustees to
Princess Niloufer, was paid during each of the three years
with which we are concerned to the assessee. The income-tax
officer held that the receipt of Rs. 1,00,000 by the
assessee in each year from the trustees constituted his
income and he was liable to pay tax thereon. The order of
the income-tax officer was affirmed on appeal by the
Appellate Assistant Commissioner as well as by the Tribunal.
On application filed under section 66 (1) of the Act the
following question, along with some other questions, was
referred to the High Court .
"Whether on the facts of the case, the sum of
Rs. 1,00,000 received by the assessee from the
Trustees of Princess Niloufer Trust was liable
as income under the income Tax Act and if
so, whether the assessee was entitled to
exemption from tax of the income under the
terms of the Agreement entered into with the
Government of India on 8/10/1949?"
460
The High Court held, as already mentioned earlier, that the
amounts of Rs. 1,00,000 received by the assessee in each of
the three years in pursuance of the release deed dated
September 18, 1955 consituted his income. It was, however,
held that the assessee was entitled to exemption from
payment of tax in respect of the amount of Rs. 1,00,000
because of the agreement dated October 8, 1949. In the
opinion, of the High Court the assessee stood in the shoes
of Princess Niloufer who was the original beneficiary under
the trust deed and become entitled to all the benefits to
which the Princess was entitled.
Mr. Manchanda on behalf of the appellant has assailed the
judgment of the High Court and has contended that the
exemption from payment of tax in respect of the sum of Rs.
1,00,000 received under the trust deed could be availed of
by Princess Niloufer. The assessee, who was a transferee of
the rights of Princess Niloufer’s under the trust deed,
could not get the benefit of that exemption. Normally an
amount received as income is exigible to tax, and in case
the assessee seeks exemption from the payment of tax in
respect of that income, the onus lies upon him. The
assessee, according to the learned counsel, has failed to
discharge that onus. As against the above, Mr. Gupte on
behalf of the assessee-respondent has contended that a fair
reading of the agreement dated October 8, 1949 goes to show
that the benefit of exemption from payment of tax in respect
of the sum of Rs. 1,00,000 was not confined to Princess
Niloufer only but could also be availed of by the assessee.
After hearing the learned counsel for the parties at length,
we are of the opinion that the contention of Mr. Gupte is
well founded.
We have set out above the material part of agreement dated
October 8, 1949 which was entered into by the Government of
India, the assessee and the three trustees, and it would
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appear therefrom that an arrangement was arrived at between
the three parties in respect of the amount of Rs. 30,00,000.
It was agreed that the trustees would deposit that amount
with the Government of India. The Government of India for
its part agreed to pay interest on that amount at the rate
of Re. 1 per cent per annum free of income-tax and other
taxes. The Government of India also agreed to pay out of
the corpus of Rs. 30,00,000 such sum every year as together
with interest accrued due on the said sum of Rs. 30,00,000
or on the balance sum thereof would in all make up the sum
of Rs. 1,00,000. It was further agreed that the Government
of India would not at any time assess or levy on the settlor
or the trustees or any of the beneficiaries under the deed
of trust any income-tax, super-tax or other taxes in respect
of the income or corpus of the said sum of Rs. 30,00,000 or
part thereof. The rate of interest prevailing at the time
of the agreement on Government and gilt-edged securities was
admittedly 3 1/2 to 4 per cent per annum. In agreeing to
grant exemption from payment of tax in respect of the amount
payable under the agreement, the Government was apparently
influenced by the consideration that it was paying interest
at the rate of Re. 1 per cent instead of the prevailing
rate of Rs. 3 1/2 to 4 per cent. The exemption regarding
tax appears to
461
have constituted the quid pro quo for the saving made by the
Government of India in the matter of payment of interest.
At the time the agreement was entered into, the beneficiary
under the deed of trust was Princess Niloufer. Question,
however, arises whether the benefit of that exemption was
restricted to Princess Niloifer or whether the assessee, who
stepped into the shoes of Princess Niloufer under the deed
of release, could also avail of that benefit. So far as
this aspect is concerned, we are of the opinion that a fair
reading of the agreement shows that the basic scheme of the
agreement was that the payment of Rs. 1,00,000 under the
agreement would be exempted from the payment of tax. in the
opening words of clause 4 of the agreement, the Government
of India declared and agreed unequivocally "that the
interest payable on the security of these presents shall be
free from income-tax, super-tax and all other taxes, dues,
duties and assessments". There is nothing in the agreement
that the Government wanted to show a special favour to
Princess Niloufer personally and that the same would have
been withheld in case the person entitled to receive Rs.
1,00,000 was not the princess but her father-in-law. The
consideration which appears to have weighed with the
Government of India in agreeing to grant exemption in the
matter of tax was the deposit of Rs. 30,00,000 with the
Government. That consideration held equally good whether
the person to whom the payment of Rs. 1,00,000 was made by
the trustees was Princess Niloufer or the assessee.
It was also agreed under the agreement that "the Government
of India shall not at any time assess or levy on the settlor
or the trustees or any of the beneficiaries under the said
trust deed any incometax, super-tax or other tax, dues,
duties or assessments. There is nothing in respect of any
income or corpus of the said sum of Rs. 30,00,000 so
deposited or any part thereof". Reference to the settlor,
trustees or beneficiaries in the above passage shows that
the exemption was of a general and comprehensive nature and
was not restricted to Princess Niloufer alone. The said
reference would also not detract from the dominant intention
of the parties manifested in the agreement that the payment
of Rs. 1,00,000 was to be free of tax.
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It is not necessary to express opinion on the point as to
whether the assessee to whom under clause (e) of the trust
deed the corpus of trust fund or the balance thereof then
remaining in the hands of the trustees was to be paid on the
death of Princess Niloufer was a beneficiary under the
trust. The assessee in any case as the settlor of the
trust. The fact that he became entitled to receive Rs.
1,00,000 per annum because of the release deed would not
affect the status of the assessee as the settlor. The
present is not a case wherein the release deed was executed
in favour of a stranger but, on the contrary, the release
deed was executed in favour of the settlor and his status as
such was not obliterated by the fact that a release deed had
also been executed in his favour. The agreement which the
Government entered into with the settlor and the trustees
expressely granted exemption in the matter of payment of tax
in respect of the said sum
462
of Rs. 1,00,000 to the settlor also. The agreement makes it
clear that in no event were the settlor, the trustees and
the beneficiaries to be taxed in respect of the payment of
Rs. 1,00,000.
It has been argued on behalf of the appellant that the
question of the grant of exemption on the payment of tax to
the assessee as :a settlor of the trust could not arise
because as a result of the creation of the trust, the
settlor got divested of the ownership of the amount of Rs.
30,00,000. Reference in this connection is made to the
recitals in the trust deed to the effect that the settlor
had transferred and handed over to the trustees the amount
of Rs. 30,00,000. We are not impressed by this argument.
The Government of India was aware of the above recitals in
the trust deed at the time it entered into the agreement
dated October 8, 1949. The copy of the trust deed was made
an annexure of the agreement and there was a reference to
the terms of the trust deed in the agreement. In spite of
the knowledge that the settlor had transferred the amount of
Rs. 30,00,000 the Government of India agreed to grant an
exemption to the settlor in respect of any income from the
corpus of the said amount of Rs. 30,00,000 or part thereof.
It would follow from the above that the intention of the
parties was that the settlor was to be exempt in any case
from payment of tax in respect of the income from that
amount and that in the event of the assessee becoming
entitled to the beneficial interest under the trust deed,
the exemption from payment of tax would be available to him.
Argument was also advanced by Mr. Manchanda that Princess
Niloufer, who was the beneficiary under the trust, could not
transfer her beneficial interest in favour of the assessee.
This contention cannot be accepted in view of section 58 of
the Indian Trusts Act, 1882 (Act 2 of 1882), according to
which the beneficiary if competent to contract, may
transfer, his interest, but subject to the law for the time
being in force as to the circumstances and extent in and to
which he may dispose of such interest. The present case is
not covered by the proviso to that section. The proviso
prevents a married woman from depriving herself during her
marriage of her beneficial interest in property which is
transferred or bequeathed for her benefit. As would appear
from the resume of facts given above, Princess Niloufer
transferred her interest not during the subsistence of her
marriage but at the time of the dissolution of her marriage.
It may also be mentioned that during the three years with
which we are concerned, the Government has acted upon
agreement dated October 8, 1949 even though the beneficial
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interest tinder the trust deed had been transferred by
Princess Niloufer to the assessee. Despite that transfer
the Government paid the amount of Rs. 1,00,000 under the
agreement. The payment of Rs. 1,00,000 under the agreement
and the exception in the matter of tax were linked to-ether.
It would certainly appear anomalous that the Government
should keep the corpus of the trust fund in deposit with
itself on a nominal rate of interest of Re. 1 per cent per
annum and, at the same time decline to give the benefit of
other part of the agreement which relates to the exemption
in respect of payment of tax. it is true that
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there is no equity about tax. The above dictum has a
relevance when the matter relates to giving effect to the
provisions of tax law. The dictum would not, however, be
attracted when the question before the court as in the
present case is the construction of an agreement and finding
out the intention of the parties thereto as manifested by
its terms. What we are here essentially concerned with is
whether the parties to the agreement intended or it was ever
within their contemplation that the settlor should pay tax
on the amount of Rs. 1,00,000 in case of the beneficial
interest under the trust deed devolved upon him, even though
the corpus of the trust fund remained in deposit with the
Government on an interest of Re. 1 per cent per annum.
Mr. Manchanda has referred to the case of Commissioner of
Incometax Gujarat II v. B. M. Kharwar(1) wherein it has been
laid down that the taxing authorities are not entitled, in
determining whether a receipt is liable to be taxed, to
ignore the legal character of the transaction which is the
source of the receipt and to proceed on what they regard as
"the substance of the matter". The taxing authority is
entitled, and is indeed bound, to determine the true legal
relation resulting from a transaction. If the parties have
chosen to conceal by a device the legal relation, it is open
to the taxing authorities to unravel the device and to
determine the true character of the relationship. But the
legal effect of a transaction cannot be displaced by probing
into the "substance of the transaction". This principle
applies alike to cases in which the legal relation is
recorded in a formal document, and to cases where it has to
be gathered from evidence oral and documentary-and conduct
of the parties to the transaction. There can, in our
opinion, be hardly any dispute so far as the above
proposition is concerned. The appellant, however, cannot
derive assistance from it. The answer to the question with
which we are concerned in the present case depends upon the
terms of agreement dated October 8, 1949. In case we find
that the payment of Rs. 1,00,000 in each of the three years
is covered by the above agreement, the exemption granted
thereby cannot be withheld from the assessee.
In the result the appeals fail and are dismissed with costs.
One hearing fee.
P.B.R.
Appeals dismissed.
(1) [1969] 72 I.T.R. 603.
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