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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 463 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. 464