Commissioner Income-Tax, U.P. Vs.
Kunwar Trivikram Narain Singh  INSC 100 (9 April 1965)
09/04/1965 SIKRI, S.M.
CITATION: 1965 AIR 1836 1965 SCR (3) 700
Income Tax Act, 1922 (11 of 1922), ss.
2(1)(a) and 4(3) (viii)-Agricultural Income--Nature of.
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 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,  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
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.
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?" 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.
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 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 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  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' 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
"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 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)  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 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.
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 ....
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 installments 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.