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
SV Gupte Solicitor General R Ganapathy Iyer and RN Sachthey for the appellant
AV Viswanatha Sastri and SP 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 section 66A2 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 36396 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 363228 to Babu Hat Narain Singh anal his heirs in perpetuity
The quantum of this pension was calculated on the basis of 14th 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 363228 is dated 7th of July 1837 and was from H Elliot Esqr the Secretary Sadar Board of Revenue NWP Allahabad to J Thompson Esqr Offg
Secretary to Lt Government NWP
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 36396 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 CITv
Raja Bahadur Karnakhaya Harain Singh1
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 21 of the Incometax Act The Income tax Officer appealed to the Income tax Appellate Tribunal
The Tribunal held that the sum of Rs 36396 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 43viii 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 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 vs Kunwar Sri Trivikram Narain Singh1
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 30612 13 0
The allowance was in a sense related to the land revenue assessed on the land ie 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  704 Uttar Pradesh vs Kunwar Sri Trivikram Narain Singh1 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 section 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 vs Commissioner of Income tax Bihar and Orissa2 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 240000to 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 vs Raja Bahadur Kamakhaya Narayan Singh and construed the word derived  as follows The word derived is not a term of article 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 Bombay4 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  2 3 16 ITR325 4 705 The same test was adopted by this Court in Maharajadhiraja Sir Kameshwar Singh vs Commissioner of Income tax Bihar and Orissa1 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 43viii
 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 section 21a 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  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 vs Wesleyan and General Assurance Society1 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 vs Commissioner of Inland Revenue2
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 TC II
2 707 his estate for a capital sum payable in installments
The installments when received would not be taxable income
Mr Sastri relying on Perrin vs Dickson1 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


Summary:
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 section 43viii 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 UPv
Kunwar Sri Trivikram Narain Singh   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 section 21a 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 vs
CIT Bihar and Orissa  CIT Bihar and Orissa vs Raja Bahadur Kamkhya Narayan Singh and Ors  Mrs Bacha F Guzdar vs
CIT Bombay  MaharaJadhiraja Sir Kameshwar Singh vs CIT Bihar and Orissa  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 H707C Commissioner of Inland Revenue vs Wesleyan and General Assurance Society  and Perrin vs Dickson  referred to