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

2. 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 founded and owner of what is known as Ausanganj State in the district of Benares The district of Banares was formerly a part of Oudh territory. By a Treaty between the East India Company and Nawab Asafuddaula in or about the year 1775, the province of Benares 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 Benares 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 Har Narain Singh whereby the British Government granted a pension of Rs. 36,322/8/- to Babu Har Narain Singh and his heirs in perpetuity. The quantum of this pension was calculated on the basis of 1/4th of the revenue of the Jagir. By this arrangement the revenue or land collections of Jagir became payable by the Zamindars direct to the Government and by the grant of the pension, Babu Har Narain Singh and his successors no longer remained the proprietors of the Parganas or the Jagir and became entitled to merely a pension. The letter by which, the amount of pension was determined at Rs. 36,322/8/. is dated 7th of July, 1837 and was from H. Ellliot Esqr., the Secretary Sadar Board of Revenue N.W.P. Allahabad, to J. Thompson Esqr., Offg. Secretary to Lt. Governor. N.W.P."3. The pension was paid regularly from year to year by the Government to Babu Har Narain Singh and his heirs. During the previous year of the assessment year 1949-50, the assessee received a sum of Rs. 36,396 on account of the aforesaid pension. The Income Tax Officer, in spite of the objection of the assessee, held that it was a regular annual income of the assessee and did not fall within the category of agricultural income tax. He observed that "in fact this income arose from a statutory obligation of the Government to pay it, and although the Government recouped this from the person with whom the land was settled, land in the genealogical tree of Malikana appears in the second degree, its immediate and effective source is the Governments statutory obligation to pay it, and this obligation is not land within the meaning of Income-tax Act, vide Commer of Income-tax v. Kamakhya Narain Singh, (1948) 16 ITR 325: (AIR l949 PC 1)."4. The assessee appealed to the Appellate Assistant Commissioner who held that "the alleged cash grant of varying and unspecified amount received by the appellant, in relation to land revenue of Seyedpur now, Tehsil of District Ghazipur, clearly fell within the definition of agricultural income under Section 2(1) of the Income-tax Act."5. The Income tax Officer appealed to the Income Tax Appellate Tribunal. The Tribunal held that the sum of Rs. 36,396 was chargeable to tax under the Act as the Income was not agricultural income for "although the pension was determined with respect to the quantum of the rent collection the rent collections or the land could not be said to be the immediate source of the pension: The source of the pension was a liability undertaken by the Government for extinguishing the proprietary rights of the Jagirdar and when the immediate source of the income was not land or rent collections from land, it is difficult to hold that the receipt of the assessee was agricultural income within the meaning of Section 4(3)(vii) of the Income Tax Act."6. The High Court held that from the language of the letter of July 7, 1837 it was manifest that the right which was conferred was a right to a share of one fourth in the net land revenue collections after deducting costs of Tehsil establishment. It relied on the fact that the amount which had been received by the successors of Babu Har Narain 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 a sum of money calculated on that basis." The High Court accordingly answered the question in the negative.

Court's reasoning:
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.