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PETITIONER: COMMISSIONER INCOME-TAX, U.P.

       Vs.

RESPONDENT: KUNWAR TRIVIKRAM NARAIN SINGH

DATE OF JUDGMENT: 09/04/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1965 AIR 1836            1965 SCR  (3) 700

ACT:     Income Tax Act, 1922 (11 of 1922), ss.  2(1)(a) and 4(3) (viii)-Agricultural Income--Nature of.

HEADNOTE:    The respondent was the head of a Hindu undivided family  and  was  the  descendant  of  a  Jagirdar. Certain  disputes  between  the  Jagirdar  and  the Zamindars in the district had been settled in  1837 by a compromise between the British Government  and the then Jagirdar, whereby, the Government  granted the Jagirdar and his heirs a pension in  perpetuity to be calculated on the basis of one fourth of  the revenue  of  the Jagir.  By  this  arrangement  the collections  from the Jagir became payable  by  the Zamindars direct to the Government and the Jagirdar and   his   successors  no  longer   remained   the proprietors  of the Jagir and became entitled  only to a pension.    The  Income-tax Officer assessed the receipt  of the  pension  by  the respondent  as  part  of  his regular income and rejected the latter’s contention that  the amount received was  agricultural  income within the meaning of s. 4(3)(viii) of the  Income- tax Act, 1922.     In appeal, the Assistant Commissioner  accepted the  respondent’s  contention,  but  the   Tribunal reversed  this  finding.   The  High  Court,  on  a reference,  decided  the  issue in  favour  of  the respondent,  on the grounds, inter alia,  that  the right conferred under the compromise of 1837 was  a right  to  a share of one-fourth in  the  net  land revenue  collections  and furthermore,  the  amount received  by the successors of the Jagirdar  varied from  year  to  year.  In  the  appeal  before  the Supreme  Court, it was also contended on behalf  of the respondent that the amount received was in  the nature of a capital receipt, being a payment to the Jagirdar  and  his successors of  compensation  for relinquishing the title to the Jagir lands.     HELD: (i) Under the compromise and  arrangement

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of 1837, the respondent had no interest in the land or in the land revenue payable in respect  thereof. [704 A]     State  of  U.P.v. Kunwar Sri  Trivikram  Narain Singh,  [1962] 3 S.C.R 213, followed.  As  the source of the income in this case was  the arrangement  of 1837, the income could not be  held to  be derived from land within the meaning of  the definition of agricultural income in s. 2(1)(a)  of the  Act.  Even if the income varied from  year  to year,  the  source  of the  income  was  still  the arrangement and not land. [705 G]     Maharajkumar Gopal Saran Narain Singh, v.C.I.T. Bihar  and Orissa, 3 I.T.R. 237, C.I.T.  Bihar  and Orissa  v. Raja Bahadur Kamkhya Narayan  Singh  and Ors,  16 I.T.R. 325, Mrs. Bacha F. Guzdar  v.C.I.T. Bombay   27,   I.T.R.   1,   MaharaJadhiraja    Sir Kameshwar   Singh,  v. C.I.T. Bihar and Orissa,  41 I.T.R. 169, followed.     (ii) The amount received by the respondent  was not  a  capital  receipt  but  revenue  income  and therefore taxable. 701 Where  an  owner of an estate exchanges  a  capital asset  for  a perpetual annuity, it  is  ordinarily taxable  in  his hands. The  position     would  be different if he exchanged his estate for a  capital sum  payable  in installments.   Such  installments when received would not be taxable as income.   But in  the present case there was no material to  show that the amount received was an instalment of  this nature. [706 H˜707C]     Commissioner  of Inland  Revenue  v.   Wesleyan and  General  Assurance Society, 30  T.C.  11,  and Perrin v. Dickson 14 T.C. 608, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  68 of 1964.     Appeal from the judgment and decree dated  July 27, 1959 of the Allahabad High Court in  Income-tax Reference No. 307 of 1957.     S.V.  Gupte,  Solicitor General,  R.  Ganapathy Iyer and R.N. Sachthey, for the appellant. A.V.  Viswanatha  Sastri and S.P.  Varma,  for  the respondent. The Judgment of the Court was delivered by     Sikri,   J.    This  appeal   pursuant   to   a certificate  granted  by the Allahabad  High  Court under s. 66A(2) of the  Income-tax Act (hereinafter referred  to  as the Act) is directed  against  the judgment of the High Court in a reference under the Act,  answering the question referred to it in  the negative.   The question referred by the  Appellate Tribunal is:                   "Whether  on a true  interpretation               of  clause  (viii) of subsection  3  of               section 4 of the indian Income-tax  Act               the sum of Rs. 36,396/- received by the               assessee  as  an allowance  during  the               previous  year of the  assessment  year               1949-50 is revenue income liable to tax               under the Indian Income-tax Act, 1922?"

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   The  relevant facts stated in the Statement  of the  case are as follows: The assessee is  a  Hindu undivided family headed by one Sri Trivikram Narain Singh  who  is a descendant of one Sri  Babu  Ausan Singh  who  was the original founder and  owner  of what is known as Ausanganj State in the district of Benaras.   The district of Benaras was  formerly  a part  of  Oudh territory. By a Treaty  between  the East India Company Nawab Asfuddaula in or about the year 1775, the province of Benaras was ceded to the British Government.  The British Government granted a sanad of Raj to Raja Chet Singh who in turn  gave the  Jagir of Parganas  Seyedpore and  Bhittery  in perpetuity to Babu Ausan Singh.  It appears that in 1796  there were some disputes between  Babu  Ausan Singh  and  the Zamindars in the district  and  the matter was referred by the Collector of Benaras  to the  Board  of Revenue in  Calcutta.  The  disputes between  the  Jagirdars  and  Zamindars  ultimately ended     in  1837  by  a  compromise  between  the British Government and the then Jagirdar Hat Narain Singh whereby the British Government 702 granted  a  pension of Rs. 36,322/8/- to  Babu  Hat Narain  Singh  anal his heirs in  perpetuity.   The quantum of this pension was calculated on the basis of  1/4th  of the revenue of the  Jagir.   By  this arrangement  the  revenue or  land  collections  of Jagir became payable by the Zamindars direct to the Government  and by the grant of the  pension,  Babu Hat  Narain  Singh  and his  successors  no  longer remained  the  proprietors of the Parganas  or  the Jagir and became entitled to merely a pension.  The letter   by  which  the  amount  of   pension   was determined at Rs. 36,322/8/- is dated 7th of  July, 1837  and was from H. Elliot Esqr.,  the  Secretary Sadar  Board  of Revenue N.W.P.  Allahabad,  to  J. Thompson Esqr., Offg. Secretary to Lt.  Government, N.W.P.".     The  pension  was paid regularly from  year  to year by the Government to Babu Har Narain Singh and his  heirs.   During  the  previous  year  of   the assessment  year 1949-50, the assessee  received  a sum  of  Rs. 36,396/- on account of  the  aforesaid pension.  The Income-tax Officer, in spite  of  the objection  of  the  assessee, held that  it  was  a regular  annual income of the assessee and did  not fall  within the category of  agricultural  income- tax.   He observed that "in fact this income  arose from  a statutory obligation of the  Government  to pay  it, and although the Government recouped  this from  the  person with whom the land  was  settled, land  in the genealogical tree of Malikana  appears in  the second degree, its immediate and  effective source is the Government’s statutory obligation  to pay it, and this obligation is not land within  the meaning  of  Income-tax Act,   vide  C.I.T.v.  Raja Bahadur Karnakhaya Harain Singh(1)".     The   assessee   appealed  to   the   Appellate Assistant  Commissioner who held that "the  alleged cash  grant  of  varying  and  unspecified   amount received  by  the appellant, in  relation  to  land revenue   of  Seyedpur  now  Tehsil   of   District Ghazipur,  clearly  fell within the  definition  of agricultural  income  under  Section  2(1)  of  the

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Incometax Act."     The Income-tax Officer appealed to the  Income- tax Appellate Tribunal.  The Tribunal held that the sum of Rs. 36,396/- was chargeable to tax under the Act  as the income was not agricultural income  for "although  the pension was determined with  respect to  the  quantum of the rent  collection  the  rent collections or the land could not be said to be the immediate source of the pension. The source of  the pension   was   a  liability  undertaken   by   the Government for extinguishing the proprietary rights of  the Jagirdar and when the immediate  source  of the  income was not land or rent  collections  from land,  it is difficult to hold that the receipt  of the  assessee  was agricultural income  within  the meaning  of  Section 4(3)(viii) of  the  Income-tax Act."     The  High Court held that from the language  of the  letter of July 7, 1837, it was  manifest  that the right which was conferred (1948) 16 I.T.R. 325.         703 was  a  right to a share of one-fourth in  the  net land  revenue collections after deducting costs  of Tahsil  establishment. It relied on the  fact  that the   amount  which  had  been  received   by   the successors of Babu Harnarain Singh varied from year to  year.  It observed that "the  language  of  the letter  and this conduct of  the  parties can  only lead  to  the inference that,  by  this  settlement contained in the letter of 7th July, 1837, Babu Har Narain  Singh  and his successors were  granted  in perpetuity  a  right  to  one-fourth  of  the  land revenue  collections  themselves and not  merely  a right to receive u sum of money calculated on  that basis."   The High Court accordingly  answered  the question in the negative.     The  learned Additional  Solicitor-General,  on behalf of the appellant, contends that according to the true interpretation of the letter dated July 7, 1837,  no right in the land revenue was granted  to the  assessee.  He relies on the decision  of  this Court  in  State  of Uttar Pradesh  v.  Kunwar  Sri Trivikram  Narain Singh(1). That case arose out  of the  writ petition filed by the present  respondent in the High Court of Judicature at Allahabad for  a writ  in  the nature of mandamus calling  upon  the State of Uttar Pradesh to forbear from  interfering with his right to regular payment of the  "pension, allowance  or  Malikana"  payable in  lieu  of  the hereditary estate of Harnarain Singh in respect  of parganas  "Syudpore Bhettree" and for an order  for payment of the "pension, allowance or malikana"  as it  fell  due.   This Court  interpreted  the  same letter,  dated  July  7,  1837,  and  came  to  the conclusion that the respondent did not acquire  any interest  in land or any land revenue.   Shah,  J., speaking for the Court, observed:                   "Because  the annual  allowance  is               equal  to  a fourth share  of  the  net               revenue of the mahals, the right of the               respondent   does   not   acquire   the               character of an interest in land or  in               land  revenue.  Under the  arrangement,               the  entire  land  revenue  was  to  be

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             collected by the Government and in  the               collection  Harnarain  Singh  and   his               descendants    had   no   interest   or               obligation.   As  a  consideration  for               relinquishing the right to the land and               the revenue thereof, the respondent and               his  ancestors were given an  allowance               of Rs. 30,612-13-0.  The allowance  was               in a sense related to the land  revenue               assessed on the land, i.e. it was fixed               as  a percentage of the  land  revenue;               but   the  percentage  was   merely   a               measure,  and indicated the  source  of               the   right  in  lieu  of   which   the               allowance was given."     The learned counsel for the respondent, Mr.  A. Viswanatha   Sastri   urges  that   on   its   true interpretation  the  letter  dated  July  7,  1837, showed  an arrangement for sharing collections.  We are  unable  to  agree  with  his  contention.   We respectfully adopt the reasoning and conclusion  of this Court in the case of State of [1962] 3 S.C.R. 213. 704 Uttar  Pradesh  v.  Kunwar  Sri  Trivikram   Narain Singh(1)  and hold that the respondent,  under  the arrangement, had no interest in land or in the land revenue payable in respect thereof.     If  this  is  the true  interpretation  of  the arrangement arrived at, the question arises whether the  pension or allowance is  agricultural  income. ’Agricultural income’ is defined in s. 2 of the Act as follows:               "(1) "agricultural income" means--                  (a) any rent or revenue derived from               land  which  is used  for  agricultural               purposes and is either assessed to land               revenue in British India or subject  to               a local rate assessed and collected  by               officers of the Crown as               such:  ......  " In   Maharajkumar  Gopal  Saran  Narain  Singh   v. Commissioner  of Income-tax, Bihar  and  Orissa(2), the  facts were that the assessee had conveyed  the greater  portion of his estate.  The  consideration for the transfer was, inter alia, an annual payment of  Rs.  2,40,000/to the assessee  for  life.   The Privy  Council held that this "annual  payment  was not  agricultural  income  as it was  not  rent  or revenue derived from land but money payable under a contract  imposing  a  personal  liability  on  the covenantor the discharge of which was secured by  a charge on land." The  Privy Council, in Commissioner  of  Income-tax Bihar and     v.  Raja  Bahadur Kamakhaya Narayan  Singh  and construed the word ’derived’ as :follows:                  "The word "derived" is not a term of               art.  Its use in the definition  indeed               demands  an enquiry into the  genealogy               of the product.  But the enquiry should               stop  as soon as the effective   source               is  discovered.   In  the  genealogical               tree   of  the  interest  land   indeed               appears  in the second degree, but  the

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             immediate and effective source is rent,               which  has  suffered  the  accident  of               nonpayment.   And  rent  is  not   land               within the meaning of the definition."                   This  Court observed in Mrs.  Bacha               F.   Guzdar,  Bombay  Commissioner   of                             Income-tax, Bombay(4) as follow:                   "Agricultural income as defined  in               the  Act  is intended to refer  to  the               revenue received by direct  association               with   the  land  which  is  used   for               agricultural   purposes  and   not   by               indirectly extending it to cases  where               that  revenue or part  thereof  changes               hands either by way of distribution  of               dividends or otherwise."                (1)  [1962] 3 S.C.R. 213.               (2)  3 LT.R. 237.               (3)  16 I.T.R.325               (4)  27 LT.R. 1.               705                   The  same test was adopted by  this               Court in Maharajadhiraja Sir  Kameshwar               Singh  v. Commissioner  of  Income-tax,               Bihar and Orissa(1) and the Court again               looked  to the source of the  right  in               order  to determine whether income  was               agricultural  income or not. Shah,  J.,               observed:                   "The  appellant has  no  beneficial               interest  in  the lands which  are  the               subject-matter of the trust: nor is  he               given  under  the  trust  a  right   to               receive and appropriate to himself  the               income  of  the properties  or  a  part               thereof  in  lieu  of  any   beneficial               interest in that income.  The source of               the  right in which a fraction  of  the               net  income  of  the  trust  is  to  be               appropriated  by the appellant  as  his               remuneration  is  not in the  right  to               receive rent or revenue of agricultural               lands, but rests in the covenant in the               deed   to  receive   remuneration   for               management of the trust.  The income of               the trust appropriated by the appellant               as remuneration is not received by  him               as   rent  or  revenue  of  land;   the               character of the income appropriated as               remuneration due is again not the  same               as  the  character  in  which  it   was               received  by the appellant as  trustee.               Both  the source and character  of  the               income  are, therefore, altered when  a               part  of  the income of  the  trust  is               appropriated  by the appellant  as  his               remuneration,    and   that   is    so,               notwithstanding  that  computation   of               remuneration is made as a percentage of               the income, a substantial part  whereof               is   derived   from  lands   used   for               agricultural       purposes.        The               remuneration not being received as rent               or revenue of agricultural lands  under               a  title,  legal or beneficial  in  the

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             property  from  which  the  income   is               received, it is not income exempt under               section 4(3)(viii)."   It  follows  from  the  decisions  of  the  Privy Council and the judgments of this Court cited above that if it is held in this case that the source  of the allowance or pension is the arrangement arrived at  in 1837. then the income cannot be held  to  be derived  from  land  within  the  meaning  of   the definition  in s. 2(1)(a) of the Act.  It seems  to us  that  in  this case the  source  of  income  is clearly  the  arrangement arrived at in  1837  and, therefore, it is not agricultural income as defined in the Act.     Mr. Sastri sought to distinguish those cases on the ground that the allowance here varied from year to  year. Assuming that the allowance  varied  from year  to  year,  the source  of  the  income  still remains the arrangement and not land.     The  next  point that arises in  this  case  is whether  the  allowance is taxable income  at  all. Mr. Sastri contends that it is capital receipt.  He says   that  if  the  assessee’s  predecessor   had received ) 41 I.T.R. 169. 706 compensation  for  relinquishing his title  to  the lands  in dispute, that would have been  a  capital receipt and not taxable.  He further says that  the allowance was in fact a payment of the compensation for  relinquishing  the title to those  lands.   He says  that  we  must consider the  quality  of  the income  and not its periodicity. He refers  to  the following passage from the speech of Viscount Simon in Commissioner of Inland Revenue  v.  Wesleyan and General Assurance Society(1):     "It  may  be well to  repeat  two  propositions which  are well established in the  application  of the  law relating to Income-tax.  First,  the  name given  to  a transaction by the  parties  concerned does  not  necessarily  decide the  nature  of  the transaction.   To  call a payment a loan if  it  is really an annuity does not assist the taxpayer, any more  than to call an item a capital payment  would prevent it from being regarded as an income payment if that is its true nature.  The question always is what is the real character of the payment, not what the parties call it." He,  therefore,  asked  us to  disregard  the  word ’pension’  in  the letter dated July 7,  1837,  and determine  the  real  character  of  the   payment. Another  passage from the speech of Viscount  Simon is also relevant.  Lord Simon observed:     "Secondly,  a  transaction which, on  its  true construction,  is of a kind that would escape  tax, is  not taxable on the ground that the same  result could be brought about by a transaction in  another form which would attract tax. As the Master of  the Rolls  said in the present case: ’In  dealing  with Income-tax  questions  it  frequently happens  that there  are  two  methods at least  of  achieving  a particular  financial  result.   If  one  of  those methods  is  adopted tax will be payable.   If  the other   method   is  adopted,  tax  will   not   be payable  ....

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The net result from the financial point of view  is precisely the same in each case, but one method  of achieving it attracts tax and the other method does not.  There have been cases in the past where  what has  been called the substance of  the  transaction has been thought to enable the Court to construe  a document  in  such a way as to  attract  tax.  That particular  doctrine of substance as distinct  from form was, I hope, finally exploded by the  decision of  the  House  of Lords in the  case  of  Duke  of Westminster v. Commissioner of Inland Revenue(2)".     It seems to us that where an owner of an estate exchanges a capital asset for a perpetual  annuity, it  is  ordinarily  taxable  income in  his  hands. The position will be different if he exchanges  (1) 30 T.C. II.  (2) 19 T.C. 490.            707 his  estate for a capital sum payable in installments.   The installments when received would not be taxable income.     Mr.  Sastri,  relying on Perrin v.  Dickson(1)  contends that  an annuity is not always taxable as income.   This  is true, but in this case no material has been produced to show that  the allowance was in fact a payment in instalments  of the   value  of  the  disputed  title  of   the   assessee’s predecessor in 1837.     In  the  result, we hold that the allowance  is  revenue income and not exempt from taxation as agricultural  income. Therefore,  we  accept the appeal and  answer  the  question referred  in the affirmative.  The appellant will  have  his costs here and in the High court. Appeal allowed. (1) 14 T.C. 603