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PETITIONER: RAJA RAMESWARA RAO

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,HYDERABAD

DATE OF JUDGMENT: 04/04/1963

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. DAS, S.K. WANCHOO, K.N. GUPTA, K.C. DAS

CITATION:  1967 AIR  290            1964 SCR  (2) 847  CITATOR INFO :  D          1972 SC 260  (19,21,22)  E&D        1992 SC1495  (13,18,26,28,29,30,32)

ACT: Income  Tax-Interim maintenance allowances  and  commutation sum-Distinction-Interim   maintenance  allowances,   whether income   or   capital-Hyderabad   (Abolition   of    Jagirs) Regulation, 1358F-Hyderabad Jagirs (Commutation) Regulation, 1359F-Income-tax Act, 1922 (11 of 1922).

HEADNOTE: The Hyderabad (Abolition of Jagirs) Regulation, 1358F, which abolished Jagirs, provided by s. 14 that the amount  payable to the Jagirdars under the Regulation "shall be deemed to be interim  maintenance allowances payable until such  time  as the terms of the commutation for the Jagirs are determined." The Hyderabad Jagirs (Commutation) Regulation, 1359F, by  s. 3  laid  down that commutation sum for a Jagir  would  be  a certain  multiple of its basic annual revenue and by  s.  6, that   the   commutation  sum  for  each  Jagir   would   be distributable between the Jagirdar and Hissedars in  certain proportions.   Sub-section  (2)  of  s.  7  of  the   latter Regulation stated that "payment to a Jagirdar of the  commu- tation   sum  of  the  Jagir  shall  constitute  the   final commutation as from the 1st April 1950, of his rights in the Jagir  and if any payment by way of an  interim  maintenance allowance   under  the  said  Regulation,"  that   is,   the -Regulation  of  1358F., "is made in respect  of  a  ’period subsequent  to  the said date, the amount  of  such  payment shall  be recovered from the recipient thereof by  deduction from .... his share in the commutation sum for the Jagir." Held  that the interim maintenance allowances paid under  s. 14 of the earlier Regulation in respect of a period prior to April 1, 1950, were revenue receipts on which incometax  can be  imposed.  They were intended to be quite  distinct  from the  commutation  sum,  mentioned in it which  sum  was  ad- mittedly  a capital receipt.  The words "final  commutation" in  s. 7 (2) of the Latter Regulation did not show that  the interim  allowances  were part of the commutation  sum  and, therefore,

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848 of  the nature of capital receipts but they only meant  that the  final  commutation was the only  commutation  that  the Jagirdar was to get in respect of his rights in the Jagir. The  observation  in  Commissioner  of  Inland  Revenue   v. Butterley  & Co. Ltd. that such interim allowances were  sui generis  and  were  neither income from  property  nor  from investment  nor did it arise from the right to  compensation but  arose from the statute itself which directed it  to  be paid, approved. Shanmugha  R  Rajeswara Sethupathi  v.  Income-tax  officer, Karaikudi,  [1962] 44 I.T.R.   853. Commissioner of  Income- tax  v.  Shaw Wallace & Co. (1932) L. R. 59 I.  A.  206  and Commmissioner  of  Inland Revenue v. Butterley &  Co.  Ltd., (1956) 36 T.   C. 411, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION :Civil Appeal No. 420 of 1962. Appeal from the judgment and order dated April 3,1959 of the Andhra-Pradesh  High Court in Writ Petition No. 17  of  1956 (Referred Case). C.   Krishna Reddy, A. V. V. Nair and P. Ram Reddy, for  the appellant. K.   N.  Rajagopal  Sastri  and  R.  N.  Sachthey,  for  the respondent. 1963.  April 4. The judgment of the Court was delivered by SARKAR J.-The appellant was the proprietor of the Wanaparthy Jagir  in  the former Indian State  of  Hyderabad.   Certain payments  described as interim maintenance  allowances  were made  to  him  under the  Hyderabad  (Abolition  of  Jagirs) Regulation   1358   F,  hereafter   called   the   Abolition Regulation.   These payments were brought to tax  under  the Income-tax  Act,  1922 as income.  The  appellant  contended that they were capital and not liable to be taxed.  He  took various proceedings and eventually  849 a  case was stated to the High Court of Andhra  Pradesh  for decision of the following question :               "Whether  the interim  maintenance  allowances               received  by the assessee under the  Hyderabad               (Abolition of Jagirs) Regulation, 1358  Fasli,               are income and therefore liable to tax." The question was answered against the appellant by the  High Court and hence this appeal. The  point  at issue is whether these  payments  constituted capital or income.  The answer to this question will have to be  found  in  the  Abolition  Regulation  under  which  the payments  were  made  and  another  Regulation  called   the Hyderabed jagirs (Commutation) Regulation, 1359F  (hereafter called the Commutation Regulation) which was intended to  be supplementary  to  the  earlier  Regulation.   The  material provisions of these Regulations may, therefore, be  referred to at once. We shall first take up the Abolition Regulation.  Under s. 6 of  this  Regulation, the jagirs were included  in  "Diwani" (Government)  as from the "appointed day" to be fixed  under s. 5 and thereupon the powers, rights and liabilities of the Jagirdars in relation to the Jagirs ceased to be exercisable by or against them.  Section 3 provided for the  appointment of  an  officer called the Jagir Administrator.   Section  8 provided for payment to Government of a specified percentage of  the gross revenue, which for practical purposes  may  be taken  to be the total realisation or income of  the  Jagir,

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for   meeting  the  administration  expenses.   Section   13 required  a separate account in respect of each Jagir to  be kept  by the Jagir Administrator.  Section 10  provided  for payment to the Jagirdar out of the income of the jagir of  a sum equivalent to half of 850 what   he  was  getting  before  the  commencement  of   the Regulation,  as remuneration for managing the Jagir and  for distribution  of a like sum among the Hissedars (sharers  in the Jagir income with the Jagirdar) in a certain proportion. Section  11  provided  that  the net  income  of  the  Jagir calculated  in the manner prescribed, would  be  distributed between  the  Jagirdar and Hissedars in  the  proportion  in which  they  were entitled to the income under  the  law  in force before the commencement of the Regulation. Section  14 provided  that  the  amounts  payable  to  jagirdars   under Regulation  "shall  be  deemed  to  be  interim  maintenance allowances  payable  until such time as the  terms  for  the commutation of Jagirs are determined." These are the interim maintenance allowances with regard to which the question has arisen in this case. We  turn  now to the Commutation Regulation.  Section  3  of this  Regulation  provided that the commutation  sum  for  a Jagir  would  be  a certain multiple  of  its  basic  annual revenue, the method of calculation of which was laid down in s.  4. Section 5 stated that the commutation sum  for  every Jagir  would  be  determined  by  the  Jagir  Administrator. Section 6 said that the commutation sum for each Jagir would be distributable between the jagirdar and Hissedars in  like proportion  as  the income was  distributable  between  them under s. 1 1 of the Abolition Regulation subject to  certain deductions to which it is unnecessary to refer. It is not in dispute that as a result of the Regulations the appellant’s  rights  in his Jagir  were  extinguished.   The appellant contends that he was divested of the Jagir as from the "appointed day" fixed under s. 5 which was, it is  said, September  15, 1949.  It appears that a  somewhat  different view was taken in Shanmugha Rajeswara Sethupathi v.  Income- tax officer, Karaikudi (1).  We do not think (1)  [1962] 44 I,T.R. 853,  851 it necessary in the present case to fix the precise point of time when the Jagir was taken away from the appellant and we will proceed on the basis that the appellant’s contention is the correct one. As  we  have earlier said, the real point  for  decision  is whether the payments were of income nature or of the  nature of  capital.   If  they were made as  compensation  for  the deprivation of the Jagir, they would undoubtedly be capital. It may be stated that it is common case of the parties  that ,-the   commutation  sum  payable  under   the   Commutation Regulation was paid as such compensation. The  first  thing that we wish to observe is  that  the  two Regulations  made  a clear distinction between  the  interim maintenance   allowances  and  the  commutation  sum.    The allowances  were paid under the Abolition  Regulation  which said  nothing  about  the  right  to  the  payment  of   the commutation  sum;  that  right  was  created  only  by   the Commutation  Regulation.  The allowances were measured as  a fraction  of the current income while the commutation was  a multiple  of annual revenue.  The allowances were  recurring payments for a certain time while the Commutation sum was  a fixed  sum payable at once or by instalments.  Then we  find that  under  s. 14 of the Abolition Regulation  the  interim maintenance allowances were "payable until such time as  the

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terms  for  the commutation of Jagirs are  determined".   In other words, after the terms for commutation are determined, the  interim  maintenance  allowances are  to  cease  to  be payable.   It  follows that when compensation begins  to  be paid,  the  payments of the maintenance allowances  have  to stop. Lastly, we find this distinction emphasised in sub-sec.  (2) of S. 7 of the Commutation Regulation.  That provision is in these terms : 852               "The payment to a Jagirdar or Hissedar of  his               appropriate  share in the commutation  sum  of               the   Jagir   shall   constitute   the   final               commutation  as  from April 1,  1950,  of  his               rights in the Jagir and if any payment by  way               of an interim maintenance allowance under  the               said Regulation is made in respect of a period               the  whole or part of which is  subsequent  to               the said date, the amount of such payment  or,               as the case may be, the appropriate proportion               of  such  amount shall be recovered  from  the               recipient thereof by deduction from the  first               payment made to him on account of his share in               the commutation sum for the Jagir". The words "said Regulation" in this subsection refer to  the Abolition Regulation. It seems to us that though somewhat cumberously worded,  the intention  behind  the  sub-section is not  in  any  serious doubt.   Its  object  was  to  provide  that  the  date   of determination of the terms of commutation mentioned in s. 14 of  the Abolition Regulation would be April 1, 1950  and  no interim  maintenance allowances would be paid in respect  of any  period after that date but thereafter only  commutation sum  would  be paid.  Now this commutation sum  is  the  sum determined  as  provided in ss. 3 and 4 of  the  Commutation Regulation.  The interim maintenance allowances are no  part of the commutation sum so determined.  Furthermore, the sub- section  expressly provides that if any interim  maintenance allowance is paid in respect of a period subsequent to April 1,  1950,  that  payment  is to  be  recovered  out  of  the commutation  sum  payable  under  this,  Regulation.   Quite clearly,  therefore, only what was paid in respect’  of  the period prior to April 1, 1950 was to be interim  maintenance allowance,  and  what was thereafter paid  was  towards  the commutation SUM.  853 It  was contended on behalf of the appellant that the  words ""final  commutation"  in  the subsection  showed  that  the interim  maintenance  allowances  were  also  part  of   the commutation  sum.  It seems to us impossible to accept  this contention  for that would make the two the same, which,  as we   have  shown  earlier,  they  could  not  be.    "’Final commutation"  meant the only commutation that  the  Jagirdar was to get in respect of his rights in the Jagir, that is to say,  he  was  to get no other  commutation.   In  fact,  as already  stated,  if any interim maintenance  allowance  was paid  after the commutation became payable, that was  to  be recovered from and not added to the commutation. We  have  earlier said that it is not in  dispute  that  the commutation sum was paid as compensation for the loss of the Jagir and was, therefore, capital which was not liable to be taxed.   We  thus  find that the Regulations  make  a  clear distinction between the commutation sum or compensation  and the  interim maintenance allowances.  These allowances  were obviously not intended to be compensation.

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The question then arises, if these allowances were not  paid as  compensation for the loss of the Jagir and were  not  of the  nature of capital as such, what was their nature  ?  We think  that  if  we have regard to  the  provisions  of  the Regulations under which they were paid, as we must, there is no  doubt that they were of the nature of income.  No  doubt they  were not income of any of the kinds that are  commonly found, but are, as Lord Radcliffe said in a case to which we shall  later refer, Sui generis.  We proceed now to  discuss why we think they were income. These allowances, we notice, were treated by the Regulations as something other than the compensation for the loss of the Jagir.  They were, therefore, 854 not treated as capital as representing compensation for  the Jagir.   If they were not capital for the reason  that  they were not compensation for the loss of the Jagir, we find  no ground  on  which we can say they were  capital.   It  would follow  that they must be income and taxable as such.   They were certainly not windfall for a right to them was  created by,  the  Abolition Regulation, a right which  under  s.  21 could be enforced in a civil court.  Then we find that these allowances  were  payable with a regularity and  were  of  a recurring   nature,   both  of  which  are   recognised   as characteristic  of income : see the Commissioner of  Income- tax  v. Shaw Wallace & Co. (1).  Next. we observe  that  the Regulation advisedly called the payments "maintenance allow- ances," a nomenclature peculiarly suited to payments of  the nature  of income.  Lastly, it may be pointed out  that  the payments  were made for the interim period between the  time when  the income of the Jagir began to be collected  by  the Government  through  the Jagir Administrator  and  April  1, 1950, when the compensation for the loss of the Jagir  first became  payable.   The payments were, therefore, by  way  of compensation  for the loss of income in the interim  period. In  the  words of Jenkins L. J. as will appear  later,  they were  "income-compensation"  and  therefore  of  the  income nature. We  think  for  all these reasons  the  interim  maintenance allowances were taxable income.  If a source had to be found for them, the Regulation had to be held to be the source. A case very near to the one in hand and a case that throws a great  deal  of light on the problem that faces  us  in  the Commissioner  of Inland Revenue v. Butterley Co.  Ltd.  (2). We  think a detailed reference to it can be very  profitably made.   That  case  was  concerned  with  the  English  Coal Industry (1) (1932) L.R. 59 I.A, 206. (2) (1936) SOT,(], 411,  855 Nationalisation Act, 1946, which nationalised the collieries and   divested  all  owners  of  them  and  the   businesses concerning them.  Under this Act and the Coal Industry  (No. 2)  Act,  1949,  the assessee  company  became  entitled  to compensation  for the assets transferred to  the  Government and  to  certain  payments  called  "revenue  payments"  and "interim income" for the period between what was called  the primary vesting date and the date on which compensation  for the assets taken away was fully satisfied.  The question was with  regard  to these payments.  The assessee  company  had contended  in  the beginning that the payments were  not  of income  nature at all.  In the Court of appeal however  that contention  was  abandoned  and it  was  conceded  that  the payments  were  of  income nature.   The  only  dispute  was whether  they  were  income chargeable  to  profits  tax  as

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profits  of a trade or business carried on by  the  assessee company.  The decision was that the payments were not income or profit of any trade or business. We will first read from a part of the judgment of Jenkins L. J.  in the Court of Appeal.  He said (p. 437), "The  Act  of 1946  studiously  avoids describing the  interim  income  as interest on or income of the compensation." Then the learned Lord  justice  pointed  out that the  payments  were  to  be calculated  by reference to the past earning of the  concern and   bore  no  relation  at  all  to  the  amount  of   the compensation and proceeded to observe, (p. 438), ,,I find it difficult  to  hold that the interim  income  payable  under these  Acts,  defined  and measured in the way  it  is,  can properly  be  described as income of  the  compensation  and there is, I think, much to be said for the view that, albeit itself  in  the nature of income, it is not income,  of  the compensation  but rather income-compensation, if I  may  use that  expression,  that is to say, a  series  of  periodical payments an independent right to      856 which is conferred by the Act by way of compensation for the loss  of income sustained in respect of the  period  between the   primary  vesting  date  and  the   ascertainment   and satisfaction   of   the  compensation."   We   think   these observations  can  be  applied in all  their  force  to  the payments  with  which the present case is  concerned.   Here also the interim payments had no relation to the commutation sum, that is, compensation for the loss of the Jagir.  It is clear  that  Jenkins  L. J. was treating the  payment  as  a species of income and we also think that the payments in the present case cannot be treated otherwise. There are some observations in speech of Lord Radcliffe when he  dealt  with this case on appeal to the  House  of  Lords which  we think may be usefully quoted here.   He  observed, (p.  449-50), "The Coal Industry Nationalisation Act,  1946, legislated  for  a revolution in the coal industry  of  this country..................  These  interim  income   payments which   are  now  in  question  are  the  product  of   that disturbance  and adjustment, and it does not seem to  me  at all  surprising that they cannot well be related to  any  of those  other kinds of receipt which normally come  into  the accounts of a company conducting a trade or business.   They are sui generis and it would, I think, lead to confusion  if they  were  described in any terms except  those  which  are strictly  applicable  to their  own  special  circumstances. Thus,  they  were paid because the  nationalisation  Statute decreed that they should be paid.  They would not have  been payable to the Respondents if they had not been conducting a colliery business at the vesting date, and in that sense, of course,  they were paid to and received by  the  Respondents for  no  other  reason than that they  had  been  owners  of colliery assets and had been in the colliery trade.  Equally of course, the interim income payments that the  Respondents got were fixed either as a  857 proportion of the profits which they had been earning in the colliery   trade  before  the  date  of  vesting  or  by   a computation of interest at varying rates upon sums  received from time to time by way of capital compensation.  But, when all   that  is  said,  the  fact  remains  that   the   only identifiable  origin of the payments was the  Statute  which authorised them and at the same time defined their terms and methods of computing.  It is natural enough that moneys paid in  this way, described by their instrument of  creation  as ’interim  income’,  should be regarded as inherently  of  an

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income nature when the question arises of subjecting them to any tax that bears upon income as a chargeable subject.  But I do not think that in any proper use of the words can  they be said to arise from a source of income, in the sense  that income  or profits’ for the moment I am not  concerned  with any  difference between the two terms can be said  to  arise from  a trade or a business or an investment or  some  other piece of property that admits of use or enjoyments." He also observed, (451-52), "I have already explained why they  were not  income  from  investments.  By  a  similar  process  of reasoning  they were not, in my view, income from  property. It  does  not clear up the matter to say that the  right  to compensation-and,  for  that matter, the  right  to  interim income--was a chose in action.  The interim income  payments did  not  arise  from the right to  compensation  as  income arises from income-producing property.  They arose from  the Statute itself which decreed that they were to be paid." We venture to think that the observations that we have  read from  the English case in the preceding paragraphs give  the correct picture of the nature of the payments.  It was found unarguable that the interim payments under the English  Acts were  not of income nature.  The payments with which we  are concerned were made under statutory provisions 858 completely parimateria with those under consideration in the English case.  We, therefore, hold that the interim payments to the appellant were income and liable to tax. It  appears  that  there were in  this  case  four  payments totalling  Rs. 1,47,857-4-0 of which the first was  made  on January 25, 1950 and the other three on April 10, 1950, July 3,  1950  and  August 3, 1950, respectively.   It  does  not appear  to have been found whether the last three  payments, which it will be noticed had been made after April 1,  1950, were   in  respect  of  the  commutation  sum   or   interim maintenance.   It  was  for that reason  that  the  Tribunal directed  the Income-tax officer concerned to  institute  an enquiry   as  to  the  nature  of  these   three   payments. Apparently, the High Court approved of that order.  We  also take the same view.  We think that the question was answered correctly  by  the  High Court by saying  that  the  interim maintenance allowance received by the assessee which do  not form  part  of  the commutation amount are  income  and  are liable to be taxed and that the payments made subsequent  to April 1, 1950, towards commutation amount are not income and not liable to be taxed. The  result  is that this appeal fails  and  is  accordingly dismissed with costs.                      Appeal dismissed.  859