IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 195 of 1982 with INCOME TAX REFERENCE No 326 of 1983 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- COMMISSIONER OF INCOME TAX Versus M K S RANJITSINHJI -------------------------------------------------------------- Appearance: MR D.A. MEHTA, MR. R.K. PATEL & MR B.D. KARIA, Advocates for the assessee MR B.B. NAYAK with MR MANISH R. BHATT Advocates for the Revenue. -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 10/02/98 ORAL JUDGEMENT (R.K.Abichandani,J.) The following two common questions have been referred by the Income Tax Appellate Tribunal, for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961, in these two references. At the instance of Revenue: (1) "Whether, the Appellate Tribunal has been right in law in holding that since the assessee was given cash annuity in lieu of the resumption of the grant of two villages, the annuity income should be taken as HUF income in the hands of the assessee, if he had the capacity of HUF for the relevant period in question?" At the instance of Assessee: (2) "Whether, on the facts and in the circumstances of the case, the Income tax Appellate Tribunal was justified in not holding that cash annuity in lieu of resumption of two villages for life time is capital receipt?" The Income Tax Reference No. 195/82 relates to the Assessment Years 1973-74 to 1975-76, while the Income Tax Reference No. 326/83 relates to the Assessment Year 1977-78. 2. The assessee belongs to the erstwhile ruling family of Wankaner. The ex-ruler of Wankaner, by his order No. 28 of Samvat Year 2004 (i.e. dated 2nd February, 1948), granted "Kapal Giras" to the assessee who was his grandson, as per the custom prevalent in the State. Under this "Kapal Giras" the assessee was given the villages of Wankia and Ratidevdi. As per the Revenue survey, the total area of village Wankia was 1904 acres and 10 guntas and the relevant portion of the village Ratidevdi was about 1991 acres and 24 guntas. The total area was thus, 4895 acres and 34 guntas. The land has been described throughout this order as "Jagir" given to the assessee under this grant. It was ordained that the name of the assessee should be entered in the record of rights and that possession of the said jagir should be handed over to him. The Revenue Department was directed to prepare a separate title deed of the said jagir in favour of the assessee and take the necessary steps to implement the order. The revenue of the current year which was recovered till the date of the order from these villages, was to be handed over to the assessee. As recorded in clause 12 of the order, the possession of the jagir was handed over to the assessee on the date on which this order was issued. 3. On 30.3.1950, the then Government of Saurashtra in its Revenue Department (Political) issued Resolution No. 27/1950 in respect of the said grant of villages Wankia and Rati Devdi and it was ordered that it was decided to resume the grant and the grantee was to be paid a cash annuity in lieu thereof for his life time. As the rival contentions center around this resolution, it is reproduced hereinunder:- "THE GOVERNMENT OF SAURASHTRA Revenue Department (Political) Rajkor D/30th March, 1950. Resolution No. 27 of 1950. GOVERNMENT RESOLUTION In pursuance of the decisions taken at Jamnagar conference of December 1948 and January 1949, the grant of village Wankia and Rati Devdi made by the Ruler to the person named below has been decided to be resumed and the grantee is to be paid cash annuity in lieu thereof. The cash annuity shown against the name of the grantee is payable to the grantee with effect from the 1st January, 1950. WANKANER Cash Annuity K.S. Ranjitsinhji Pratapsinhji Rs. 22,501/- The allowance is payable to the grantee only for his life time. By order Sd/- T.L. Shah Secretary to the Government of Saurashtra." Thus, from 1st January, 1950, the assessee was to be given cash annuity of Rs. 22,501/- in lieu of the grant of villages Wankia and Rati Devdi made by the Ex-ruler to him. It will be noted that on 30th March, 1950, the Saurashtra Grants (Resumption) Ordinance, 1949 which was first published in the Gazette on 13th January, 1950 and was amended by Ordinance No. VI, 1950 was operative. The Ordinance was promulgated to provide for the resumption or cancellation of certain grants and transfers. As stated in the preface to The Saurashtra Code, Volume I (Part-I), the State of Saurashtra came into existence with the signing of the covenant for the formation of Kathiawar by the Ruler of thirty States on 23.1.1948. The territories of a large number of semi-jurisdictional and non-jurisdictional talukdars and estate-holders were included by separate Merger Agreements. Some other States came to be included a year later by a supplementary covenant executed on the recommendation of the elected representatives of the people of these territories. The province was thus brought under one Government. The Government of the State of Saurashtra was, by Section 3 of the said Ordinance, empowered to make notified orders directing that the grant shall be deemed to have been invalid and have no effect whatever, or directing the grant to be resumed or cancelled, either forthwith or from a specified date, and was also authorised to give supplemental, incidental and consequential directions as it thought fit in the circumstances of the case by the same notified order or any subsequent order. The effect of orders made under Section 3 was, as provided in Section 4, that the land comprised in the grant in respect of which the notified order was made, was deemed to vest in and belong to the Government and any right, title or interest which the grantee or any person claiming through him may have had or claiming therein was to determine. Thus, on issuance of the notified order resuming the grant, the rights of the grantee stood extinguished. As provided by Section 5, no notified order made by the Government under Section 3 of the Ordinance could be called in question in any Court. The grants in respect of which notified orders could be made, were specified in the Schedule created under Section 3 of the Ordinance, and the grant which was made in favour of the assessee figured at entry 60 of the Schedule which reads as under:- 60. "WANKANER 1. Full description of land:- Village Vankia (1904 acres 10 Gunthas) Khalsa in Village Rati Devli (1991 acres 24 Gunthas) 2. Name and full description of grantee:- K.S.D. Ranjitsinhji Pratapsinhji of Wankaner. 3. Full description of document by which the grant was made:- Hazur Javak No. 28 dated the 2nd February, 1948." Since the Government of Saurashtra was empowered to direct resumption of grants mentioned in the Schedule Created under Section 3 of the Ordinance including the grant which was made in favour of the assessee, it would be reasonable to assume that the resumption of the assessee's grant under the Government resolution dated 30.3.1950 was referable to these powers of the Government and that the grant was resumed by issuing the said notified order in exercise of its powers by the Government of Saurashtra conferred upon it under the provisions of Section 3 of the Ordinance. It appears that for some reason, which is not clearly forthcoming, the amount payable under the Resolution order dated 30.3.1950 to the assessee was with-held from October, 1963 to October, 1969. However, it came to be released as is reflected from the order of the Collector, Rajkot dated 6.2.1970, a copy of which is at Annexure "E" of the paper-book. The amount was to be debited by the Government under the Head - "76 other Misc. Compensation and Assignment - A-2- division in lieu of resumed lands", as sanctioned under the said grant. The cash annuity of Rs. 22,501/- which was payable under the resumption order in lieu of the grant of the villages which were resumed, was shown by the assessee in the return of income for the Assessment years 1951-52 to 1953-54 and at that time, the assessee had contended that the said amount of cash annuity was not taxable in view of the fact that it was a capital receipt. That contention came to be negatived by the ITO relying upon the decision in Maharajkumar Gopal Saran Narain Singh V. Commissioner of Income Tax, Bihar and Orissa, reported in Volume III (1935) ITR 237. In appeal, the AAC by his consolidated order dated 16.12.1954, dismissed the appeals of the assessee holding that the cash annuity of Rs. 22,501/- received by him from the Government was an income which was chargeable to tax. The assessee did not carry the matter further and offered the cash annuity for tax in each of the assessment orders upto Assessment Year 1972-73. However, at the hearing before the ITO in respect of the Assessment Year 1973-74, the assessee's authorised representative put in writing by letter dated 28.7.1975 the contention of the assessee that the cash annuity of Rs. 22,501/- was not an income and that it was a capital receipt. It was also submitted that the said amount was received by the assessee in the nature of compensation granted by the Government in lieu of taking over the villages from the assessee. The Income Tax Officer negativing the assessee's contention, held that the cash annuity which was payable during the life time of the assessee could not be treated as compensation and that the assessee had in fact exchanged the capital asset for a life annuity of Rs. 22,501/- per annum, which was in the nature of income. It was held that the case was fully covered by the decision of the Privy Council in Maharajkumar Gopal Saran Narain Singh (supra) and that the decision of the Supreme Court in the case of SRV Shivram Prasad Vs. CIT reported in CIT, A.P 82 ITR 527 on which the assessee relied, had no application to the facts of this case. As regards the contention, which was raised during the hearing by the assessee that the income should be assessed as that of the HUF on the ground that the impartible asset belonged to the joint family, it was held that these villages were given to the assessee who was the grand-son of the Ruler as per the custom and that it was not an estate belonging to the HUF. The ITO held that the status of the assessee was of individual and not of HUF as claimed during the hearing in the letter dated 28.7.1975. On appeal, the order of the ITO was confirmed by the AAC. On further appeal to the appellate Tribunal, the Tribunal held that the grant of two villages to the assessee as "Kapal Gira" were in the nature of HUF property, because, the grant was made from the ancestral impartible estate and as the assessee was given cash annuity in lieu of the resumption of the grant, the annuity income should be taken as HUF income in the hands of the assessee. The Tribunal held that the cash annuity in lieu of the resumption of grant should be treated as annuity income and not capital receipt. The Tribunal also held that the decision of the Supreme Court in SRV Shivram Prasad Behadur (supra) and other decisions on which reliance was placed did not help the assessee in his contention that the sum which was payable as cash annuity was a capital receipt and was paid by way of compensation for resumption of his villages. In the above background, the aforesaid two questions; one at the instance of the Revenue and the other at the instance of the assessee, have arisen from the order of the Tribunal for our consideration. 4. By question No.1, which is raised at the instance of the Revenue, we are called upon to decide whether the Tribunal rightly held that the amount should be treated as HUF income in the hands of the assessee. The factual background shows that the grant of these villages was given by the then Ruler to the assessee, who was his grand-son, as per the tradition and this grant was known as "Kapal Giras". The expression "Kapal Giras" as defined in Bhagvatgomandal means, "jagir given to the Princes or `Bahayats' for their maintenance". The contention that the assessee had received the grant as a member of the family, found favour with the Tribunal on the basis of a mention of the family tradition, as per which "Kapal Giras" was to be given to the grand-son, in the first paragraph of the grant. In this connection, it will be noted that the AAC had disallowed the claim of the assessee on the ground that at the material time, the villages had already been given to the assessee and that what Section 10(2) of the Act exempted, was only the sum paid out of the income of the estate belonging to the family and that as the source itself was parted with by the family in favour of the assessee, the income derived out of that source accrued to the assessee and not to the impartible estate belonging to the family. The Tribunal, however, noted that the case of the assessee did not depend upon the exemption under Section 10(2) of the Act, but what he contended was that the annuity income in his hands was HUF income itself and that it was not liable to tax in his capacity as an individual. The Tribunal found that the "Kapal Giras" was in the nature of HUF property in the hands of the assessee because it was made from the ancestral impartible estate. There is no dispute about the fact that from 1950-'51 upto 1972-73, the assessee had filed his returns as an individual and it was never his case all throughout those years that the cash annuity which he received was the income of the HUF. The learned Counsel appearing for the assessee in order to support the decision of the Tribunal on this count, placed reliance on the decision of the Rajasthan High Court in Thakur Gopal Singh V. CWT, reported in 99 ITR 345. However, in that case there was no controversy between the parties that the jagir was ancestral and impartible. In the facts of that case, it was held that merely because the property was ancestral and its succession was governed by the rule of primogeniture, it did not mean that the estate was not capable of being a joint family property. In our view, for ascertaining as to whether the grant was meant for the assessee as an individual or that it was held by the HUF of the assessee, the matter is required to be decided from the nature of the grant and the source from which it emanated. The ex-ruler had an absolute right over the villages, which he granted to the assessee. Merely because the grant was made as per the family tradition, that would not mean that the ruler held the villages as a part of the family estate. The wordings of the grant clearly show that it was intended to be given only to the assessee and not to all the family members of the assessee. The villages did not come in the hands of the assessee by way of any ancestral property devolving on him, but they were what is described in the grant as a `jagir' meant for the grand-son i.e. the assessee, as per the family tradition. The assessee also took it as a grant for himself and it was never treated by him as something which belong to his HUF and not to him alone. The conduct of the assessee, in the background of the nature of the grant, of filing the returns and showing the receipts as his individual receipts for over two decades from 1950-51 upto 1972-73 could not have been so lightly ignored by the Tribunal. This was a very material feature of the case, which did not attract the attention of the Tribunal. Even in the decision of this Court in Pari Mangaldas Girdhardas V. Commissioner of Income Tax, reported in 1977 CTR (Guj.) 647, on which reliance was placed on behalf of the assessee by his learned Counsel, the Court, while holding that principle of reprobate and the bar of estoppel cannot be invoked against an assessee and the assessee can change his stand, in terms held that the conduct of the assessee in relation to past years would be relevant if he fails to furnish any satisfactory explanation. The assessee undoubtedly would be entitled to give an explanation as to its earlier conduct and to urge that he had taken a stand that he committed a mistake or error. In the present case however, the assessee who for over a period of two decades had shown his receipts as individual receipts, while suddenly during the course of argument for the relevant year raising a question in a letter through his representative, did not at all explain his conduct of all those years of treating these receipts as his individual receipts. The Tribunal was, in our opinion, therefore in error in holding that the cash annuity which was received by the assessee should be taken as HUF income in the hands of the assessee and the question No.1 will therefore, have to be answered in the negative against the assessee and in favour of the Revenue. 5. The major controversy however, in these proceedings have centered around the question No.2, which has been raised at the instance of the assessee. Voicing his grievance against the Tribunal not holding that cash annuity in lieu of resumption of two villages for life was capital receipt, the learned Counsel appearing for the assessee argued that though described as a cash annuity the amount which was to be paid to the assessee under the resumption order was in fact and in reality, compensation payable in lieu of the extinguished capital of the assessee. It was submitted that the `jagir' which was granted to the assessee was an income producing asset and that source stood extinguished by a notified order, which was relatable to the provisions of Sections 3 and 4 of the said Ordinance. It was submitted that the cash annuity which was given, was not annuity properly so called and these were only annual payments for life given to the assessee in lieu of resumption of the "jagir", which was given to the assessee under the said grant. It was submitted that the compensation which was paid under the resumption order was not compensation for the loss of income, but it was compensation for the loss of the estate and therefore, the amount should be treated as capital receipt in the hands of the assessee. It was further argued that merely because periodic payments till the life time of the assessee at the amount fixed was ordered, it could not be said that the payment was not an annual payment of compensation for life and that it was annuity, which could be taxed as income. In the alternative, it was submitted that if it was held that there was no provision for compensation since the resumption order did not use that expression of "compensation", the payment should be treated as a voluntary ex-gratia payment and not as income. It was submitted that in reality, even if it was treated as compassionate or voluntary ex-gratia payment it would, in effect, amount to a sort of compensation to the assessee. Reliance was placed by the learned Counsel in support of his contentions on the decisions of the Supreme Court in SRV Shivram Prasad Behadur Vs. C.I.T, reported in 82 ITR 527; Padmaraje R. Kadambande V. CIT, reported in 195 ITR 877; on the decision of the Rajasthan High Court in the case of Eklingji Trust Vs. CIT, reported in 158 ITR 810 and the decision of the Bombay High Court in H.H. Maharani Shri Vijaykuverba Saheb of Morvi Vs. CIT, Bombay, reported in 49 ITR 594. The learned Counsel appearing for the Revenue argued that the grant which was made in favour of the assessee by the ex-ruler, was intended for his maintenance and there was no capital asset transferred to the assessee under that grant. It was submitted that the use of expression "cash annuity" in the resumption order was conclusive and the word "annuity" clearly suggested that what the assessee was to get, was an yearly income during his life time. It was submitted that the capital asset if any, was transferred for a life annuity and therefore, the receipt of life annuity was an income. It was submitted that cash annuity which was given, was not relatable to the quantum of value of the capital asset and these amounts cannot therefore be treated as payment of a capital sum by instalments. Reliance was placed by the learned Counsel in support of his submissions on the decision of the Privy Council, in the case of Maharajkumar Gopal Saran Narain Singh (supra); decision of Bombay High Court in H.H Maharani Shri Vijaykuverba Saheb of Morvi & anr. (supra); decision of Patna High Court in Sayed Sadat Abdul Masud Vs. CIT, Bihar, reported in 118 ITR 939, decision of Kerala High Court in Sreepadam (HUF) Vs. CIT, reported in 172 ITR 471 and the decision of the Supreme Court in CIT, U.P Vs. Kunwar Trivikram Narain Singh, reported in 57 ITR 29. 6. In the facts noted above, we have referred to the nature of the grant which was made in favour of the assessee. The grant clearly speaks of a title deed of `jagir' being given to the assessee and to the fact that the possession of the area of the two villages, which were granted, was handed over to the assessee. Even the resumption order refers to the lands of the two villages being resumed. It would therefore, be erroneous to contend that there was no capital asset given under the said grant to the assessee. The assessee acquired status of a "Kapal Girasdar" coupled with possessory rights in the villages and as a grantee, right to collect the revenue therefrom. It is not as if under the said grant some specified amount only was given by way of maintenance to the assessee. We therefore, cannot accept the contention of the learned Counsel for the Revenue that there was no capital asset given under the grant to the assessee by the ex-ruler and that only the revenue income from the villages was the subject matter of that grant. 7. We now proceed to examine the stand of the Revenue that the description of the payment which was to be given for life time of the grantee as `cash annuity' conclusively indicated that annuity income was intended to be given to the assessee. The word "annuity" as used under the taxing statutes, for taxing annuities of income, has a definite meaning. The word annuity occurred in clause (viii) of sub-section (24) of Section 2 which defined income. An annuity payable by an employer would be taxable under Section 15 of the said Act and other annuities would fall under Section 56 under the head Income from other sources. In Foley Vs. Fletcher (3 H&N 769, at 785 = 117 RR 967), an annuity was