THE COMMISSIONER OF INCOME-TAX, MADRAS

CHARI AND CHARI LTD.

April 9, 1965

!K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, J.J.J

. Income' Tax Act, 1922, s. 10(2)(xv)-Deduct'on claimed by assessee of commission paid to director for special duties-Rate of commission bona fide determined 'by assessee-Whether open to revenue to review such rate.

Managing Agency-Compensation for termination of-Circum- .stance.! in which such compensation is revenue.

The respondent, a private limited company, carried on business in tol:acco and other commodities and also acted as managing agents for the N company and for two other companies. It had three directors, all oI whom ""re paid a fixed remuneration for attending to the business of the company. On June, 21, 1951, the respondent company was appointed an agent of the Central Government for buying, checking, leaf dcying, and retaining and reselling tobacco under, and in accordance with, directions issued from time to time. On June 22, 1951, the respondent passed a resolution placing one of the directors, A, in "special charge" of all the work under the contract with the Central Government and agreed to pay him 30 per cent of the net profits from the contract. Under this arrangement, for the year ended 31st March 1952, commission at 30 per cent was calculated and paid to A and was claimed in the assessment year 1952-53 as a permissible deduction under s. 10(2)(xv) of the Income-tax Act,

1922. The Income-tax Officer allowed only 10 per cent of the net pcofit for the services rendered by A and disallowed the balance amount claimed by the respondent.

The managing agency agreement of the respondent with the N Company was terminated in September 1951, when the State Government acquired the undertaking of that company, and the respoQdent was paid Rs. 17,346 as compensation for premature termination of its agency. This amount \Vas taken into account by the Income-tax Officer in computng the respondent's income for the year ended March 31, 1952.

Appeals against the order of the Income-tax Officer to the Appellate Asoistant Commissioner and to the Tribunal challenging the disallowance of part of the commission and inclusion of the compensation for termination of the managing agency were unsuccessful. On a reference on both these points, the High Court decided them in the respondent's favour.

HELD: (i) The contract -.vi th the Government was, for 'the respondent, an important contract requiring special attention by a person well acquainted with the practical details of the business.

If for such special services the management as prudent business men for advancing the interest of respondent bona 'fide regarded 30 per cent o! the net profits as reasonable remW>eration the revenue authorities were not justified in reviewing that opinion'. and reducing the rate of remuneration. [697B, CJ ·

611e

Where on a consideration of the relevant materials the Appellate Tribual is of the opinion that a particular remuneration is not bona fide or is unreasonable, the High Court, in exercising its advisory 'jurisdiction, has no power to interfere with that opinion; but in the present case, material circumstances relating to the nature of the contract and the special services to be performed were not at all taken into account by the revenue authorities. [697C-E]

(ii) Ordinarily, compensation for loss of office or agency is regarded as a capital receipt; but this rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impafr the profit-making structure of the assessee, but is within the frame-work of the busiriess, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken, is revenue and not capital. However, in the absence of evidence as to what effect the determination of the managing agency of the N company had upon the business of the respondent, the mere circumstance that the respondent had managing agencies of two other companies without more would not bring the present case within the exception [698H; 699

A-CJ

Kelsal Parsons & Co. v. Co1nmissioners of Inland Re11enue, 21T.C. and Kettlewell Bullen & Co. v. C.I.T. Calcutta, [19641 8 S.C.R. 93 explained and distinguished.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 215 of 1964.

Appeal from the judgment and order dated August 24, 1961 of the Madras High Court in Case referred No. 102 of 1957.

Niren De. Additional Solicitor-General, R. Ganapathy lyer and R. N. Sachthey, for the appellant.

F R. Thiagarajan, for the respondent.

The Judgment of the Court was delivered by

Shah, J. The respondent is a private limited Company. It carried on business in hides and skins, minerals, tobacco and other commodities, and also acted as managing agents for the Nellor Power and Light Company Ltd. and for two other Companies.

T. M. Ayyadurai, T. M. Rangachari and P. C. Chakrabarti were directors of the Company. Each director was paid a fixed remuneration of Rs. 4,800 /- per annum for attending to the business of the Company. On June 21, 1951 the respondent was appointed by the Central Government as its agent for buying, checking, weighing, leaf drying, storing, transporting, retaining and reselling tobacco under and in accordance with the directions issued from time to time.

The Central Government agreed to pay to the respondent price of the tobacco purchased, charge at the rate of one anna per lb. for tobacco not redried, and at the rate of two annas per lb. for tobacco redried, and commission on all purchases.

On June 22, 1951 the respondent passed a resolution placing T.M. Ayyadurai in "gpecial charge" for arranging purchases of tobacco on credit,

694 Sl; PH.Jo:ME COPH.T ltEPOl1.T.~

inspecting tobacco at Guntur and at Madras Port, and for super- A vising shipment of tobacco. and agreed to pay him 30 per cent of the net profit as remuneration.

Under the contract with the Government of India Rs. 1,38.454/- became due to the respondent as commission in the account vear ending March 31, 1952. After providing Rs. 41.473/- for expenses, 30 ·-per cent of the balaxe being Rs. 29,094/- was paid to T. M. Ayyadurai as commiss; on B and was claimed in the assessment year 1952-53 as a permissible deduction under s. 10(2)(xvl of the Indian Income-tax /\cl, I 'J22.

The Income-tax Officer allowed only l 0 per cent of the net profit for the services rendered by T. M. Ayyadurai in the contract for tobacco purchase and sale, and disallowed Rs. 19,796/- out of the amount claimed by the respondent.

The managing agency agreement of the respondent with the Nellore Power and Light Company Ltd., was terminated with effect from September 28, 1951 when the Government of the State of Madras in exercise of the power~ conferred upon it by the Electrical Undertakings Acquisition Act, 1949 compulsorily ac- D quired the undert8king of that Company, and the respc'ndent was

paid Rs. 17,346 /- as compensation for premature termination of its agency.

This amount was taken into account by the Income-tax Officer in computing the income of the respondent in the assessment year c'.ling March 31. 1952.

Appeals against the order passed by the Income-tax Ofticer 10 E the Appellate Assistant Commissioner and to the Tribunal clnllenging the disallowance of part of the commission and inclu:;;,, n of compensation f:Jr termination of the managing agency areemcnt were unsuccessful.

Tl\e Tribunal thereafter being directed by the Higl; Court of F Judicature. Madras under s. 66(2) of the IriJian Income-tax Act, drew up a statement of the case and referred the following two questions to the High Court: -

"(!) Whether on the facts and in the cirumstaces of the case the disallowance of a sum of R;. 19.796/- out of the re, nuneration paid to Mr. T. M. Ayyad.; rai is justi- G fiable; and

(2) Whether a sum of Rs. 17.346/- which represented com

pensation received by the assessec for the loss of the managing agency vf the Nellore Power and Light Company Ltd. is income liable to •ax?" H

The High Cc'.!rt c:nswered both the questions in the negative.

Allowance in respect of the amount covered by the first question was sought by the respondent under s. 1012\(xv) of the Income-tax Act, t 922, which provided:

"any expenditure not being 'in allowance of the nature described in any. of the clauses (i) tc (xiv) inclusive, and

not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended whoJly and exclusively for the purpose of such business, profession or vocation."

The questi°'1 whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of circumstances of each case.

But as observed by this Court in Eastern Investments Ltd. v. Commissioner of lncometax, West Bengal(') the final conclusion on the admissibility of an allowance claimed is one of law. The High Court had therefore power to call upon the Tribunal to submit a statement of the case under s. 66(2) of the Indian Income-tax Act. In considering whether the expenditure to remunerate a person for services rendered is allowable under s. 10(2)(xv) the Income-tax Officer must have regard to all the circumstances, such as, nature and pecial character of the service, practice if any in the trade for payment of a percentage of profit to an employee in similar circumtances, qualifications of the employee for rendering the service. amount if any paid by the assessee to another person for rendering similar service, normalcy of the allowance having regard to the practice in the trade, existence of any other extraordinary and abnormal circumstances in the arrangement or special reasons or circumstances which may suggest that the transaction was abnormal, and the like.

The normal business of the respondent was in hides and skins, minerals and tobacco. It does not appear, however, that the turnover of the Company was large. The contract to purchase tobacco on behalf of the Government of India was apparently out of the way of the normal business of the respondent and demanded the setting up of a special organisation. Under the terms of the contract the respondent W<l.S to be the agent of the Central Government for buying, checking, weighing, leaf drying, storing, transporting, retaining and reselling tobacco under and in accordance with the directions given to it from time to time by" the Government. The respondent agreed to bny tobacco within the ceiling price fixed as and when directed by (he Government, and was responsible for buying proper grades of tobacco, for correctly checking the weights, for taking delivery from the sellers, for redrying it whenever so directed, for securing proper packing for transport by rail road or sea so as to conform to standards of packing usually employed in the export of tobacco or standards to the satisfaction of the purchaser, and for getting the tobacco inspected by the Tobacco Grading Inspectorate of the Indian Central Tobacco Committee according to the AGMARK standards. The respondent had to place a godown at the disposal of the Government within their premises at Guntur.

The ; espondent had to use its best

I') 20 I.'f.R. I.

[ J !llifi j ;; S.( '.I:,

endeavour to buy. as cheaply as possible within the ceilings pres- A cnbed.and to sell it for. such maximum price as may be obtainable, not bcmg below the pnce prescribed by the Government, to re-sell

obacc~ wh i::h the Government may direct it to sell by instructions m wntmg, tn such manner and at such price as may be specified by lhe Government, and to finance the entire transaction of purchasing tobcco in the first instance out of its own funds. The res- B pondcnt was to take all necessary steps to safeguard the stocks and to maintain fire-fighting services. Goods purchased by the respondent 1f not of the grade or quality were liable to be rejected by order of the Tobacco Grading Inspector. Performance of the contract evidently required expert knowledge of the practical side of the business of purchasing tobacco, getting it redried if it was C. raw, and of packing, storing, transporting and shipping it.

The respondent had enteroo into a profitable contract, but any negligence in purchasing, storing, packing, transporting and shipping the goods might have resulted in serious. losses to the respondent.

The Income-tax Officer accepted that the expenditure D for payment of remuneration for attending to the contract was laid out for the purpose of the business of the respondent, but reduced the stipulated rate to 10 per cent on two grounds: that T. M. Ayyadurai was the brother of T. M. Rangachari, and that he was, as a director of the Company, bound to attend to all the activities of the Company including the contract.

There is no evidence that the agreement was motivated by considerations other than strictly business considerations. There is also no evidence that as a director T. M. Ayyadurai was bound to attend to all the activities of the Company including the special contract with the Central Government. The duties which the F directm was bound to perform for earning the remuneration of Rs. 400 /- per month are not on the record, but even in the opinion of the taxing authorities the duties of T: M. Ayyadurai as director did not cover attendance to the contract with the Government.

T. M. Ayyadurai and T. M. Rangachuri are brothers, but that by itself is not sufficient to justify an inference that unreasonable or G excessive remuneration was agreed to be paid. The person who was called upon to attend to a contract of this magnitude was required to have expert knowledg~ of the. busines.s, apply his _ti.me exclusively thereto, travel from !Jme to tJme, mamtam superv1s10n and control at the stag~ of purchase, redrying, packing: transport and Ioadincr for shipment. Presumably T. M. Ayyadura1 was such H a person a"nd that is why he was selected for earning for the respondent 'a large amount of commission by duly performing the contract.

The Appellate Assistant Commissioner merely paraphrased the decision of the Income-tax Officer and regarded 10 per cent of the net profits as reasonable. The Appellate Tribunal observed that the Appellate Assistant Commissioner had given "clear and

c.r:r. t'. 1,,, HAU.I A:'.llU VHAHl (."'Jlrtk. J.j !iUT

convincing reaso.ns in support of the disallowance" to which they had nothing more to add.

An analysis of the reasons given by the Income-tax Officer 'discloses 110 grounds to support the view. that remuneration at a rate exceedill'g 10 per G.(:nt of the net profit was excessive or unreasonable. We arc of the view that the

contract with the Government was for the respondent an important contract requiring constant and vigilant application ancf supervision by a person well-acquainted with the practical details of the business. If the management of the respondent as prudent businessmen for advancing the interest of the respondent bona fide regarded

30 per cent of the net profits as reasonable remuneration, the revenue authorities were not justified in reviewing their opinion and reducing the rate of remuneration. It is true that if on a consideration of the relevant materials, the Appellate Tri]:mnal is of the opinion tht a partictJlar remuneration stipulated to be paid is not bona fide, or is unreasonaple. the High Court in exercising i~ advisory jurisdiction has no power to interfere with that opinion.

But the material circumstances relating to the nature of the contract. the services to be perf'Q[med and_ the nature, of. the duiies by the employee :were not at all laken into account by the Tribunal and the income-tal( authorities. We lherefore agree with the High Court that the first question should be answered in thv negative.

The contract under which the respondent Company was aµ..- - pointed managing agent for the Nellore Power and Light Company Ltd., was to ensure till 1960, but it had to be prematurely terminated because the .Govei"nment of Madras exercising its powers under the Madras Electrical Undertakings Acquisition Act, 1949 had compulsorily acquired the electricity undertaking.

With the acquisition of t_hat undertaking the right of the respondent as managing agent ceased.

Under s. 15 of the El"ctrical Undertakings Acquisition Act, the Government was bound to .pay compensation which would include compensation for termination of the managing agency agreement. The respondent received Rs. 17.346/- as compensation for termination of. the agency, comp!!ted in the manner laid down i1,1 s. 15 of that Act. Prima facie, such a receipt being in lieu of extinction' of an asset of the assessee, is a capital receipt. It was urged, however, on behalf of the revenue that the respondent was carrying on business of taking up managing agencies and that. by the extinctiOQ of one of the managing agencies, the business structure of the respondent was not impaired. In a recent judgmerl delivered by this Court in Kett/eweil Bullen and Company Ltd., v. Commissioner of Income-tax, Calcutta('}. it was pointed out.that:

"It may be broadly stated that what is receive<!_ for Joss of capital is a capital receipt-: vha< is received as profit in a trading transaction is tax&ble income. But the

~~~~~~~~

(') [!964) s s:c.R. 93 .

'698

SUPREME

COUR1' REJ'OR'l'S [J 965] 3 S.C.l!..

difficulty arises in ascertainting whether what is receiv- A ed in a given case is compensation for loss of a source of income, or profit in a traQ.iilg-transaction."

The Court further observed :

"It cannot be said as a general rule, that what is deti:rmina- B tive of the nature of the receipt is extinction or compulsory cessation of an agency or office.

Nor can it b, e said that compensation received for extinction of an agency_ may always be equated with price received on sale of goodwill of a business.

The test applicable to contracts for termination of agencies is: '¥hat has the C assessee parted with in lieu of money or money'!; worth received by him which is sought to be taxed? If compensation is paid for cancellation of ll. contract of. agency, which does not affect the trading structure .of 1 the business of tl.1e recipient, or involve loss of an emluring asset, leaving the taxpayer free to carry on D his trade released from the contract which is cancelled, the receipt will be a trading receipt: where the cancellation of a contract of agency iqipairs the trading structure, or involves loss of an enduring asset, . the amount paid 'for compensating the loss is capital:"

Turni_ng to the facts of the present case, it must in the tii; st E instance be--0bsert'ed that it -is for fhe revenue to establish that a 'particular receipt is income liable to .tax, and beyond stating that. the respondent was t, he ; nanaging agent of the Nellore Power and Light Company Ltd. and of two other Co:n!Janies, there is no other evidence about the nature of the bi1sines~ of the two other Companies of which the respondent was the mai1agihg-.agent, about F their relative importance qua the managing agency of the Nellore Power and Light Company Ltd., and whether by reason of the extinction of the managing agency of the Nellore Power and Light J;; ompany Ltd., any enduring asset was lost to 'the,'respondent, or

"rti; trading organisation was adversely affected.

The Income-tax Officer observed that the "Company's business of Managing G Agency as such bad not come to an end", the Company still continues as "tnanaging agents of other 'companies".

Even after surrender of one of the agencies, the Company carries on business as

before, its structure not being affected" and therefore "the receipt is to be considered as revenue, in accordance with the decision in Ke/sa/ Parsons and Company v. C.I.1?.. 21 T.C. No. 608.". and H with t11a\'view the Appellate Assistant Commissioner and the Tribunal agreed.

But in the absence of evidence as to 'what effect the determination of tlJe managipg agency of the Nellore Power and Light Company LJd., had upon "the business of the respondent_ the 1ncrc circunistance that the respondent iHid n1anaging :Jgencies of l\.VO other companies \Vithout-'1lore ; viii not bring th-e cas~ \\ 1th'.n J.:t'l\al P<a.,011\' unci Cfl111pnn_r v ('nnuni., s:t)/!ers {lj fn!ana Reic~

C, I.T. V. CHARI AND CHARI (/j/ia/i, J.)

nue('). In Kettlewell Bullen and Company's case(') this Court pointed out that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but the rule is subject to an exception tha.t payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit-making structure of the assessee, but is within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated, and fresh agencies may be taken, is revenue and not capital. Ke/sal Parsons and Company's case(') falls within the exception to the ordinary rule, and circumstances which brought the case of the respondent within the exception must be clearly established. The High Court was of the opinion that compensation received for taking over the Nellore Power and Light Company Ltd., was a capital receipt not liable to be taxed, and on the materials placed before us; we are unable to disagree with the High Court on this question.

The appeal therefore fails a'nd is dismissed with costs.

Appeal dismissed.

--·-----

1') 21 T.C. 608.

1 ~} i1fl4"l ~.r, R,

THE COMMISSIONER OF INCOME-TAX, MADRAS

CHARI AND CHARI LTD

April 9, 1965

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI, J.J

Tax Act, 1922

s. 10(2)(xv)

June, 21, 1951

Central Government

June 22, 1951

31st March 1952

s. 10(2)(xv)

Income-tax Act

March 31, 1952

CIVIL APPELLATE JURISDICTION

Madras High Court

Niren De

R. Ganapathy lyer

R. N. Sachthey

F R. Thiagarajan

Shah

Nellor Power and Light Company Ltd.

T. M. Ayyadurai

T. M. Rangachari

P. C. Chakrabarti

June 21, 1951

T.M. Ayyadurai

Guntur

Madras

Government of India

Nellore Power and Light Company Ltd.

September 28, 1951

Government of the State of Madras

Income-tax Act

T. M. Ayyad

s. 1012

Income-tax Act

s. 66(2)

Income-tax Act

s. 10(2)(xv)

Indian Central Tobacco Committee

T: M. Ayyadurai

T. M. Rangachuri

T. M. Ayyadura1

Assistant Commissioner

s. 15

Undertakings Acquisition Act

s. 15

Nellore Power and Light J;; ompany Ltd.

Kettlewell Bullen and Company


COMMISSIONER INCOME-TAX, U. P. v.

KUNWAR TRIVIKRAM NARAIN SINGH

April 9, 1965 [K. SUBBA RAO, J. c. SHAH AND s. M. Snrn, JJ.]

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

The respondent was the head oI a Hindu undivided family and was the descendant of a J agirdar. Certain disputes between the .Jagirdar and the Zamindars in the district had been settled in 1837

b:Y 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 basi; of onefourth of the revenue of the Jagir. By this arrangement the collections from the Jagir became payable by the Zamindai's direct to the Government and the Jagirdar and his successors no longer remained the proprietors of the J agir 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)(:-"iii) 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. in:er 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 J agirdar varied from year to year. In the appeal before the Su~ .eme 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 J agirdar and his successors of compensation for relinquishing the title to the J agir 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, [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 l:e 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.l.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.

Bobau 27, I.TR 1, Maharajadhiraja Sir Kaineshwar Singh, v.

C.UJ.'. 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.

B •

c.r.T. v. KUNW.AR TRIVIKRAM (Sikri, J.) 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 instalments. Such instalments 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] B 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 l 957.

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 previ0us 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 G 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 Asafuddaula 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 H Raja Chet Singh who in turn gave the Jagir of Parganas Seyedpore and Bhittery in perpetuity to Babu Ausan Singh. It appears that in l 796 there were some displltes between Babu.Ausan Singh ard the Za, mindars 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 l)etween the British Government and the \hen Jagirdar Har Narain Singh whereby the British Government

SUPREME

COURT

REPORTS [1965] 3 s.c.R.

grante~ a !?ens.ion of Rs._ 36,322/8/- to Babu Har Narain Singh A and his he1rs m perI?etmty.

The quantum of this pension was ca!culated on the basis of l /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 Har Narain Singh and his successors no longer remained the proprietors of the Parganas or the Jagir B 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 D 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 Mafikana 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 E of Income-tax Act, vide C.l.T. v. Raja Bahadur Kamakhaya Narain Singh(')".

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 F 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 G income for "although the pension was determined with respect to the quantum of the rent collction _the rent collections or _the land could not be said to be the iwmed1ate source of the pens10n. The source of the pension was a liaility ul'.dertaken by th~ Government for extinguishing the propnetary nghts of the Jag1rdar and when the immediate source of the income was not Ian? or rent H collections from land, it is_ difficult t? old that the. receipt of he assessee was agricultural mcome w1thm the meamng of Section 4(3)(viii) of the Income-tax Act." The High Court held that from the language of the letter of July 7, J 837, it was manifest that the. right which was conferred

(') (1948) 18 l.T.R. 325.

C.I.T. t>.

KU;,, WAR TRIVIKRAM (Sikri, J.) i03

A 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 i_n B 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 a sum of money calculated on that basis." The High Court accordingly answered the question in the negative. a 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 SriTrivikram Narain Singh(').

That case arose out of the writ petition filed by the present res- D pondent 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 J!l 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 S.ingh 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 ailowance was iri 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 c011ections. We are unable to agree with his contention. We respectfully adopt the reasoning and conclusion of this Court in the case of State of

I') [1962] 3 S.C.R. 213.

70.1 SUPREME couar JIEPOJ:TS [l 9U5] :; ,;, v.11.

Uttar Pradesh v. Kunwr1r Sri frivikram Narain Singh(') and hold A that the rspondent, under the arrangement, had no interest in land or in the 1and 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 B as follows: -

"(J) "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 C assessed and collected by officers of the Crown as such: ...... "

In Maharajkumar Gopa/ Saran Narain Singh v. Commissioner of Income-tax, Bihar and Orissa('), the facts were that the asscssee had conveyed the greater portion of his estate. The consideration for D the transfer was, inter a/ia, 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 C<_!ntract imposing . a personal liability on the covenantor the discharge of which was secured by a charge on land." E

The Privy Council, in Commissioner of Income-tax Bihm and Orissa v. Raja Bahadur Kamakhaya Narayan Singh and Others('),

construed the word 'derived' as follows:

"The word "derived" is not a term of art.

Its use in the definition indeed demand~ an enquiry into the gene- F alogy 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 11ppears

in the second degree, but the immediate and etlectiv~ source is rent, which has suffered the accident of nonpayment. And rent is not land within the meaning G of the definition."

This Court observed in Mrs. Bacha F. Guzdar, Bombay v.

Commissioner of -Income-tax, Bombay(') as follow:

"Agricultural income as defined in the Act is intended to

refer to the revenue received by direct association with H 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."

(') fl962] 3 S.C.R. 213.

(') 3 I.T.R. 237.

(') 16 I.T.R. 321i. (') 27 I.T .R. l.

C.I.T.

KUNWAR TRIVIKRAM (Sikr'. J.) 705

The same test was adopted by this Court in Maharajadhiraju Sir Kameshwar Singh v. Commissioner of Income-tax, Bihar and Orissa(') 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 riot in the right to receive rent or revenue of agricultural lands, but rest~ 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 inc<;>me, 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 decision's 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 G 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, ii is not agricultural income as defined in the Act.

H 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

I') 41 I.T.R. 169.

706 St'l'l~KME l'OllltT lU<; l'ORTS [l9Gti] :l s.u.11.

compensation for relinquishing his title to the lands in dispute, A 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 considtr the quality of the income and not its periodicity. He refers to the following passage from the speech of Viscount Simon in Confmissioner of Inland Revenue v. Wesleyan and General B Assurance. Society('): ~

' "It may be welt to repeat two propositions which are welt 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 0 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 wmld 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 par- D ties 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.

AnJther 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 fre- F quently 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 mehod 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 B the decision of the House of Lords in the case of Duke of Westminster v. Commissioner of Inland Revenue(')".

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

(') 30 T.C. II.

(1) ID T.C. ,90.

U.LT. v. KUN\VAH. THIVJKRAM (Sikrt, J.) /\;7

A his estate for a capital sum payable in instalments.

The instalments when received would not be taxable income.

Mr. Sastri, relying on Perrin v. Dickson(') 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.

!n 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.

C') JO T.C. tel.

COMMISSIONER INCOME-TAX, U

KUNWAR TRIVIKRAM NARAIN SINGH

April 9, 1965

K. SUBBA RAO, J.

c. SHAH

Tax Act, 1922

ss. 2(1)(a) and 4(3)

British Government

Jagirdar

s. 4(3)(:-"iii)

Income-tax Act, 1922

s. 2(1)(a)

Allahabad High Court

S. V. Gupte

R. Ganapathy Iyer

R. N.

Sachthey

A. V. Viswanatha Sastri

S. P. Varma

Sikri

s. 66A(2)

Income-tax Act

section 3

section 4

Income-tax Act

Indian Income-tax Act, 1922

Trivikram Narain Singh

Babu G Ausan Singh

Benaras

Oudh

East India Company Nawab Asafuddaula

H Raja Chet Singh

Parganas Seyedpore

Bhittery

Babu Ausan Singh

Babu.Ausan Singh

Calcutta

Jagirdars

Zamindars

Babu Har Narain Singh

Jagir

7th of July, 1837

H. Elliot Esqr

J. Thompson

Income-tax Act

Section 2(1)

Income-tax Appellate Tribunal

Section 4(3)(viii)

Income-tax Act

WAR TRIVIKRAM

Babu Harnarain Singh

7th July, 1837

July 7, 1837

High Court of Judicature at Allahabad

State of Uttar Pradesh

Harnarain Singh

Shah

Harnarain S.ingh

A. Viswanatha Sastri

[1962] 3 S.C.R. 213

SUPREME couar JIEPOJ:TS [l 9U5]

s. 2

British India

KUNWAR TRIVIKRAM

section 4(3)(viii)

s. 2(1)(a)

Sastri

Viscount Simon

Simon

Sikrt