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PETITIONER: MAHARAJADHIRAJA  SIR KAMESHWAR SINGH

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BIHAR AND  ORISSA.

DATE OF JUDGMENT: 25/10/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. DAS, S.K.

CITATION:  1961 AIR  362            1961 SCR  (2)  74  CITATOR INFO :  R          1965 SC1836  (12)

ACT: Income Tax- Exemption from taxation Agricultural income from trust properties-Trustee’s remuneration a Percentage of such income  and  resting  on  trust  deed-Remuneration,  whether agricultural  income-Indian  Income-tax  Act,  1922  (11  of 1922), SS. 2(1),4(3)(viii)-

HEADNOTE: The appellant executed a deed of trust settling some of  his lands   for   the  maintenance  of   certain   temples   and Thakoorbaries.  He was to be the trustee of the institutions and  was  to  get 15% of the net income of  those  lands  as trustee’s  remuneration.  Before the income-tax  authorities the  appellant  claimed  that as the  income  received  from agricultural  properties of the trust by him as trustee  was agricultural  income  in his hands and was by virtue  of  s. 4(3)(viii)  of the Indian Income-tax Act, 1922, exempt  from liability to pay tax, the remuneration which by the covenant contained  in the deed of trust he received was also  exempt under that section because, when he appropriated a  fraction of  the  rent or revenue of agricultural lands  towards  his remuneration,  the original character of the income was  not altered. Held,  that the source of the right in which a  fraction  of the  net income of the trust was to be appropriated  by  the appellant  as  his  remuneration was not  in  the  right  to receive rent or revenue of agricultural lands, but rested in the  covenant  in  the  deed  to  receive  remuneration  for management  of  the trust, and the character of  the  income appropriated  as  remuneration  was  not  the  same  as  the character  in  which  it was received by  the  appellant  as trustee.  Consequently, the remuneration not being  received as  rent  or revenue of agricultural lands  under  a  title, legal  or beneficial in the property from which  the  income was  received,  it was not agricultural  income  within  the meaning  of s. 2(1) of the Indian Income-tax Act, 1922,  and was not exempt from taxation under s. 4(3)(viii) of the Act. Nawab  Habibulla  v.  Commissioner  of  Income-tax,  Bengal, (1943) L.R. 7,D I.A. 14 and Premier Construction Co. Ltd. v. Commissioner of Income-tax, Bombay City, (1948) L.R. 75 I.A,

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246, relied on. Commissioner  of Income-tax, Bihar and Orissa  v.  Kameshwar Singh, (1935) L.R. 62 I.A. 215, distinguished. 75

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 357 of 1958. Appeal from the judgment and order dated April 24, 1957,  of the Patna High Court in Misc.  Judicial Case No. 57 of 1955. A.   V.  Viswanatha  Sastri  and  I.  N.  Shroff,  for   the appellant. K.   N.   Rajagopal  Sastri  and  R.  H.  Dhebar,  for   the respondent. 1960.  October 25.  The Judgment of the Court was  delivered by SHAH  J.-The  appellant executed a deed  of  trust  settling certain  lands described in schedule " A " and the rents  of lands  described  in schedule " C " for the  maintenance  of certain  temples and Thakoorbaries.  The material  terms  of the deed of trust are: cl. 6:-" And whereas the declarant feels that a  Declaration of Trust should be made whereby the income of a part of  the Raj properties may be earmarked and specially devoted to the maintenance  of  the  aforesaid  institutions  as  also  the Declarant  may as hitherto treat himself and be  treated  by others  as a legal Trustee of the said institutions and  the properties  out of the income of which the said  maintenance is being and will be provided for." cl. 7:-" The declarant declares that henceforth he holds and will  hold  the properties detailed at the foot  thereof  in Schedule   "  A  "  in  trust  for  religious  purposes   of maintaining the religious institutions more fully  described in Schedule " B " annexed here-to. "  cl. 8 : "The declarant further declares that in all  lands now  held  by him in the aforesaid properties as  Bakast  or proprietor’s  private lands as in the schedule " C  "  which are  in  direct  khas cultivation  of  the  Declarant  shall henceforth be or continue to be his tenancy lands for  which the  Declarant  shall pay the rental as noted  against  such lands, annually to the " trustee for the use and benefit  of the  aforesaid institutions and the rights of the  Declarant in them 76 shall be those of a rayat under the Bihar Tenancy Act." The  net  income of all the lands set out in  Schedule  A’.’ after providing for the expenses of management and the taxes payable  thereon was estimated at  Rs. 1,81,717 and  the net rental  of  the properties described in Schedule " C  "  was estimated at Rs. 10,208 and from the aggregate of these  two amounts  after deducting 15% as trustee’s remuneration,  the balance  of the income estimated at Rs. 1,63,136-4-0 was  to be utilised for the objects of the trust. In  the  assessee’s  income  determined  by  the  Income-Tax Officer  for  the assessment year 1950-51,  Rs.  6,000  were included  as income from non-agricultural properties of  the trust.  In the view of the Income-tax Officer, the trust was not  a, public religious trust and the income  derived  from properties  not  used for agriculture was  not  exempt  from liability  to  pay tax in the hands of  the  appellant.   In appeal  against  the  order  of  assessment,  the  Appellate Assistant  Commissioner held that the income coming  to  the hands  of  the appellant from the trust properties  was  not taxable as private income of the appellant, but in his view,

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the  remuneration  amounting to Rs. 21,274 computed  at  the rate of 15% on the net income of the trust properties in the year  in  question  not being  agricultural  income  in  the appellant’s hands was liable to be taxed.  In appeal to  the Income-tax Appellate Tribunal, Patna Bench, Patna, the order passed by the Appellate Assistant Commissioner in so far  as it  related  to remuneration received by the  appellant  was affirmed.  The High Court of Judicature at Patna  thereafter at  the  instance of the appellant directed  the  Income-tax Appellate Tribunal to submit a statement of the case on five questions  set out in the order.  The fifth question  (which is  the  only  question  material in  this  appeal)  was  as follows: "  Whether, in the facts and the circumstances of the  case, the  amount  of  Rs. 21,274 being the  amount  paid  to  the assessee  in  his  character  of  a  Shebait  of  the  Trust properties  should  have  been  held  to  be  exempted  from taxation on the ground that it is agricultural income ?" 77 The   High   Court  agreed  with  the  Tribunal   that   the remuneration was received by the appellant under a contract, and  it  was  not agricultural income,  merely  because  the source of the money was agricultural income.  The High Court accordingly  answered  the  fifth  question  "  against  the assessee".  This appeal is filed by the appellant with leave under s. 66A(2) of the Indian Income-tax Act granted by  the High  Court  limited  to the  question  whether  the  amount received  by  the appellant from the trust property  in  his character as a shebait was exempt from liability to pay The material part of the definition of " Agricultural income " in s. 2(1) is as follows:               " 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 the taxable               territories   or  subject  to  a  local   rate               assessed  and  collected by  officers  of  the               Government as such.               (b)......................................................... ....... Agricultural  income falling under cl. (a) ought  manifestly to be received as rent or revenue derived from land used for agricultural    purposes.    The   income   received    from agricultural  properties  of the trust by the  appellant  as trustee  was indisputably agricultural income in  his  hands and it was by virtue of s. 4(3)(viii) exempt from  liability to  pay  tax.  The appellant claims  that  the  remuneration which by the convenant contained in the deed of trust he has received is also exempt under s. 4(3)(viii) because, when he appropriated   a  fraction  of  the  rent  or   revenue   of agricultural  lands towards his remuneration,  the  original character of the income was not altered. 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 78 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

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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 property from  which  the income is received, it’ is not income exempt under s.  4(3) (viii). We may briefly refer to the authorities which illustrate the meaning of " agricultural income " in s. 2(1) of the Income- tax Act. In   Nawab  Habibulla.  v.  Commissioner  of   Income   Tax, Bengal(1),  the  Privy Council held  that  the  remuneration received  by a mutwalli of a wakf estate, not  depending  on the nature of the properties or assets which constitute  the wakf  nor  on  the amount of income derived  from  the  wakf estate, is not agricultural income within the meaning of  s. 2(1)  of  the Indian Income-tax Act even though  the  income derived  by  the  wakf estate is from  properties  used  for agricultural purposes. In Premier Construction Co., Ltd. v. Commissioner of  Income Tax, Bombay City (2), it was held by the Privy Council  that income received by an assessee not itself of a character  to fall  within the definition of agricultural income does  not assume the character of agricultural income by reason of the source  from which it is derived, or the method by which  it is calculated.  But if the income received falls within (1) (1943) L.R. 70 I.A. 14. (2) (1948) L.R. 75 I.A. 246. 79 the  definition of agricultural income, it earns  exemption, in  whatever  character the assessee receives it.   In  that case,  the  remuneration payable to a managing  agent  of  a company  in consideration of services to be rendered  was  a minimum annual salary of Rs. 10,000 payable irrespective  of whether  the  company made. any profit; but if  10%  of  the profits  made by the company exceeded Rs. 10,000  the  agent was  to  get  an additional  remuneration  calculated  as  a percentage upon the profits of the company without regard to the  source from which those profits were derived.   One  of the  sources  of  income of  the  company  was  agricultural income.  It was held by the Privy Council that the  assessee received  no agricultural income as defined by the  Act:  he received remuneration under a contract for personal  service calculated on the amount of profits earned by the employer. In Commissioner of Income Tax, Bihar and Orissa v. Kameshwar Singh(1),  income  received  by a mortgagee  who  went  into possession  of  properties mortgaged to him was held  to  be agricultural income; but that was because under the deed  of mortgage,  the  mortgagee  was to be in  possession  of  the properties  and  in his relation to the cultivators  of  the soil, he stood in the position of landlord dealing  directly with  them and collecting the rents.  The mortgagee  had  to pay  Government revenue, cesses and taxes and his  name  was registered  in the Land Registration Department.   He  alone was able to sue for rent whether current or arrears, to  sue for  enhancement  or for ejectment and was  able  to  settle lands  with  raiyats and tenants in all the  properties,  in fact, he was in a position to take all proceedings which the

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mortgagor  would  have  been able to take  in  the  ordinary course if the lands leased and mortgaged had remained in the mortgagor’s possession.  The mortgagee received the  income, because  of  the  legal ownership vested in  him  and  even though  under  the  covenant of the mortgage  deed,  he  was required  to  appropriate the income towards his  dues,  the income in his hands did not cease to be agricultural income. In Kameshwar Singh’s case (1), the court was called upon  to consider (1) (1935) L.R. 62 I.A. 215. 80 the  nature of the primary receipt by the mortgagee and  not of  the appropriation made under the coven. ant of the  deed of mortgage. In  K. B. Syed Mohammad Isa and another v.  Commissioner  of Income  Tax, Central and United Provinces (1), the  assessee was  a mutwalli appointed under two deeds.  Under  both  the deeds,  he was to receive agricultural and  non-agricultural income  and to utilise the same for purposes of  the  trust. Under one of. the two deeds of trust, the balance was to  be retained  by the mutwalli for his personal expenses  and  in the  other  in  lieu of his services.  It was  held  by  the Allahabad  High  Court  that  the  residue  of  the  amounts retained by the mutwalli under both the deeds of trust  was, as  agricultural income, exempt from liability to  pay  tax. In  the view of the court, though the language used  in  the two  deeds  of  trust was different, the  intention  of  the settler  was the same: the mutwalli was required to  perform the functions of his office and so long as he did so, he was entitled in consideration of this service to appropriate the residue of the profits.  But in each case, the mutwalli  was a  beneficiary with an obligation attached to his  enjoyment of  the  benefit, and had therefore two capacities,  one  as mutwalli  and the other as beneficiary.  The court on  those facts held that the balance of the income from the zamindari went" through the mutwalli " to the beneficiary by virtue of an  obligation  imposed under the terms of  the  trust  deed itself  upon the income of the property’.  The mutwalli  was the channel through which the beneficiary received the money and  the  beneficiary was to all intents  and  purposes  the direct  recipient of the income, and there was no change  of source and no alteration in the character of the income.  It remained  agricultural income after it had passed  into  the hands  of  the  beneficiary.   In  the  present  case,   the appellant has no beneficial interest in the trust  property. The  appellant  so far as his remuneration is  concerned  is again not the direct recipient of the income of the (1) I,L.R. [1942] All. 425. 81 both altered when agricultural income is appropriated  under the  covenant  in  the deed of  trust  as  remuneration  for services rendered. In this view, the appeal fails and is dismissed with costs. Appeal dismissed.