Case: Commissioner Income-Tax, U.P Vs. Kunwar Trivikram Narain Singh

by this Court in Kameshwar Singh v. Commr of Income-Tax, B and O, (1961) 41 ITR 169 : (AIR 1961 SC 362 ) 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)."13. 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.14. 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.15. 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 assessees predecessor had received 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 Commr. of Inland Revenue v. Wesleyan and General Assurance Society, (1949) 30 TAX Cas. 11;"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 law 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. Commrs of Inland Revenue (1935) 19 Tax Cas. 490.16. 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 his estate for a capital sum payable in instalments. The instalments when received would not be taxable income.17. Mr. Sastri, relying on Perrin v. Dickson, (1929) 14 Tax Cas. 608 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 assessees predecessor in 1837.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]13. 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.14. 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.15.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 assessees predecessor had received 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 Commr. of Inland Revenue v. Wesleyan and General Assurance Society, (1949) 30 TAX Cas.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 law 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 calltherefore, 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 Simona 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: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. Commrs of Inland Revenue (1935) 19 Tax Cas. 490.16. 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 his estate for a capital sum payable in instalments. The instalments when received would not be taxable income.17. Mr.Sastri, relying on Perrin v. Dickson, (1929) 14 Tax Cas. 608contends 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 assessees predecessor in 1837.