W. O. Holdsworth And Others vs The State Of Uttar Pradesh

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No.389 of 1956

Decision Date: 4 September 1957

Coram: Natwarlal H. Bhagwati, S.K. Das, P.B. Gajendragadkar

In the matter titled W. O. Holdsworth and Others versus the State of Uttar Pradesh, the Supreme Court of India delivered its judgment on the fourth day of September, 1957. The opinion was authored by Justice Natwarlal H. Bhagwati and was pronounced by a bench comprising Justice Natwarlal H. Bhagwati, Justice S. K. Das, and Justice P. B. Gajendragadkar. The petitioners, identified as W. O. Holdsworth and others, were opposed by the respondent, the State of Uttar Pradesh. The decision is reported in the 1957 volume of the All India Reporter at page 887 and also appears in the 1958 Supplement to the Supreme Court Reports at page 296. The case concerned the interpretation of provisions relating to agricultural income‑tax, wills, trusts, annuities and the status of land held by a trustee under the Indian Trusts Act, 1882 (section 3). The statutes that were examined included the Uttar Pradesh Agricultural Income‑tax Act, 1948 (U.P. Act III of 1949), specifically sections 2(11), 3 and 11(1). The headnote reproduced the wording of section 11(1) of that Act, which provided that where a person held land from which agricultural income was derived as a common manager, receiver, administrator or similar figure on behalf of persons jointly interested in such land or in the income, the aggregate of the sums payable by each person as agricultural income‑tax would be assessed upon the common manager and that manager would be deemed the assessee for the tax payable by each person.

The factual backdrop was that the appellants were the trustees of an estate that had been settled on trust by a will, the will directing that the trustees should take possession of the trust properties and manage them with all the powers of absolute owners while paying annuities to certain named individuals. The assessing authority determined that the appellants were liable to agricultural income‑tax on the total agricultural income they received, rejecting the trustees’ contention that the tax should be computed according to the method prescribed in section 11(1) of the Act and that the liability should be split so that each annuitant’s share of tax would be paid by the trustees on their behalf. The Court held that the trustees, being the legal owners of the trust property, did not hold the land on behalf of the annuitants; each annuitant was individually interested in the income to the extent of his annuity. Consequently, section 11(1) was held not to apply, and the trustees were ordered to pay agricultural income‑tax on the entire agricultural income they received. The judgment was delivered in Civil Appeal No. 389 of 1956, an appeal by special leave from the judgment and order dated 19 April 1955 of the Allahabad High Court in Agricultural Income‑tax Miscellaneous Case No. 202 of 1952.

Counsel G. S. Pathak and G. C. Mathur appeared for the appellants, while counsel K. L. Misra, the Advocate‑General of Uttar Pradesh, and counsel C. P. Lal represented the respondent. The judgment was delivered on 4 September 1957 by Justice Bhagwati. The appeal, granted special leave, challenged the judgment of the Allahabad High Court and centered on the meaning of section 11(1) of the Uttar Pradesh Agricultural Income‑Tax Act, 1948 (Act III of 1949). The appellants were the trustees of an estate that had been settled on trust by the last will and testament dated 17 May 1917 of J. J. Holdsworth. The will created a zamindari estate known as the Lehra Estate, situated in the Gorakhpur district of Uttar Pradesh, and conferred upon the trustees the possession of all real property in the United Provinces of Agra and Oudh as well as elsewhere in British India, including the houses at Lehra and Gorakhpur, the surrounding grounds, and all live and dead stock associated with the estate. The trustees were also given authority to manage any buildings and the contents of any houses or stabling belonging to the estate, and they were to exercise all such powers as absolute owners would do, acting in the manner they deemed most advantageous. Under the terms of the will, after paying the government land‑revenue tax and all management expenses, the trustees were to hold the net rents and profits of the settled estate in trust for the purpose of paying specified annuities to twelve named annuitants. The will further provided that if in any year the net rents and profits fell below seventy thousand rupees, or if any portion of the estate were sold for less than twenty‑years’ purchase price of the net rent of seventy thousand rupees (or a proportionate amount), the annuities, except those numbered (1), (2) and (3), would be reduced proportionately, and no annuitant would be entitled to recover any shortfall from future rents or profits. In the absence of any surviving annuitant, the estate would devolve upon William Orlando Holdsworth, the testator’s son. At the relevant time seven of the annuitants had died, leaving the following annuities payable: Mrs. J. C. Holdsworth – rupees 2,500; Mr. W. O. Holdsworth – rupees 1,000; Miss Lucy Marion Holdsworth – rupees 50; Lt. Col. L. R. J. C. Wilkinson – rupees 500; and Mr. Horace Claud Holdsworth – rupees 400. The trustees entered upon the trust and administered the trust property in accordance with the provisions of the will. The Agricultural Income‑Tax Act came into force in 1949, and a notice of assessment of agricultural income‑tax was issued to the trustees for the year 1357 Fasli (1949‑50).

For the agricultural year 1357 Fasli, which corresponds to 1949‑50, the trustees of the estate were served with a notice of assessment of agricultural income‑tax. The assessing authority, the Additional Collector of Gorakhpur, issued an order dated 14 December 1950 that assessed the trustees on the total agricultural income they received. This order rejected the trustees’ argument that the tax should be calculated in the manner prescribed by section 11(1) of the Uttar Pradesh Agricultural Income‑Tax Act and that each of the five annuitants should be held individually liable for their respective shares of the tax.

The trustees appealed this assessment before the Agricultural Income‑Tax Commissioner at Lucknow. By an order dated 22 November 1951, the Commissioner confirmed the Additional Collector’s assessment. In his reasoning, the Commissioner observed that the beneficiaries were neither jointly interested in the land held by the trustees nor in the agricultural income derived from it. He further explained that the agricultural income of the Lehra Estate accrued to the trustees because it was generated after the tenants paid rent or after the trustees themselves cultivated the land; consequently, the income did not flow directly to the beneficiaries.

Subsequently, the trustees filed an application under section 24(2) of the Act before the Agricultural Income‑Tax Board of Uttar Pradesh, seeking a reference of certain questions of law to the High Court for determination. The Board, however, exercised the discretion provided in the third proviso to section 24(2) and chose to consider the legal questions itself rather than refer them. In exercising that power, the Board held, among other things, that the entire property vested in the trustees and that the trustees could not invoke the provisions of section 11 of the Act. Accordingly, the Board declined to make any reference.

Undeterred, the trustees next moved an application under section 24(4) of the Act before the High Court of Judicature at Allahabad. They prayed that the High Court direct the Agricultural Income‑Tax Board, Lucknow, to state a case and refer the pertinent questions of law to the Court. The High Court entertained the application on 5 February 1953 and issued an order compelling the Board to refer the questions. The Board then prepared a statement of case and submitted the following question to the High Court: “Whether, on the facts and in the circumstances of the case, the trustees can be said to be holding land on behalf of the beneficiaries and can the beneficiaries be said to be jointly interested in the land or in the agricultural income derived therefrom within the meaning of section 11(1) of the Uttar Pradesh Agricultural Income‑Tax Act, 1948?” The High Court heard the reference and, by its judgment dated 19 April 1955, held that the trustees could indeed be said to be holding the land on behalf of the beneficiaries, but

In the earlier decision, the High Court answered the first part of the reference affirmatively, holding that the trustees were holding the land on behalf of the beneficiaries, but answered the second part negatively, concluding that the beneficiaries could not be said to be jointly interested in the land or in the agricultural income derived therefrom within the meaning of section 11(1) of the U.P. Agricultural Income‑tax Act, 1948. Following that decision, the trustees filed an application before the High Court under article 133(1) of the Constitution seeking leave to appeal to the Supreme Court; that application was rejected. Consequently, the trustees applied for and obtained special leave to appeal on 16 April 1956 against the High Court judgment.

Section 11(1) of the Act, which the Court needed to consider, provided that when any person holds land from which agricultural income is derived as a common manager, receiver, administrator or similar role appointed under any law or agreement on behalf of persons jointly interested in such land or in the agricultural income derived therefrom, the aggregate of the sums payable as agricultural income‑tax by each such person on the income derived from the land and received by the manager shall be assessed on the manager, who would be deemed the assessee in respect of the tax payable by each person and would be liable to pay the same. This provision dealt specifically with the method of computing agricultural income‑tax in circumstances where a common manager handled the income for several persons.

The charging provision of the Act was section 3, which imposed agricultural income‑tax and super‑tax at the rates specified in the schedule for each year, subject to the provisions of the Act and the rules framed under clauses (a), (b) and (c) of sub‑section (2) of section 44, on the total agricultural income of the previous year of every person. Section 2(11) defined “person” to mean an individual or an association of individuals owning or holding property for themselves or for any other, either wholly or partly for their own benefit and partly for another’s, in capacities such as owner, trustee, receiver, manager, administrator, executor or any capacity recognized by law; the definition included an undivided Hindu family, firm or company but expressly excluded a local authority. Under this definition, the trustees before the Court were included as “persons” and therefore fell within the liability to pay agricultural income‑tax under the charging section.

The liability of the trustees to pay the tax arose merely because they were “persons” within the meaning of the definition, without any additional qualifications. However, when section 11(1) applied, the assessment of agricultural income‑tax was not to be made by the ordinary method but according to the computation specified in that subsection. That method had the effect of reducing the incidence of tax because the tax liability was limited to the aggregate of the sums payable by each of the persons who were jointly interested in the land or in the agricultural income derived therefrom, rather than imposing separate assessments on each individual.

The provision requires two conditions before section 11(1) can be invoked. First, the person must hold land that generates agricultural income, either as a common manager appointed under any existing law, under an agreement, or as a receiver, administrator or a similar role acting on behalf of other persons. Second, the persons for whom the land is held must be jointly interested in that land or in the agricultural income that arises from it. When both conditions are fulfilled, the person who holds the land is required to be assessed according to the method laid down in section 11(1) of the Act. Under that method, the total amount of agricultural income‑tax that each of the jointly interested persons would owe on his share of the agricultural income actually received by the manager is pooled and assessed on the common manager, receiver, administrator or similar officer. That officer is then deemed to be the assessee for the agricultural income‑tax attributable to each of the jointly interested persons and must pay the tax on their behalf.

The court observed that the original liability for payment of agricultural income‑tax rests with the person who is interested in the land or in the income derived from it. The incidence of the tax therefore falls on that interested person, and the tax amount is calculated with reference to the aggregate income he derives. However, where the land is held by another individual who functions as a common manager, receiver, administrator or similar figure on behalf of the interested persons, the assessment of agricultural income‑tax is made on that manager rather than on each interested person individually. Section 11(1) expressly provides a mechanism for assessing tax on such a common manager, and it treats the manager as the assessee for the agricultural income‑tax that each interested person would otherwise owe, making the manager responsible for payment.

The court further noted that a common manager, receiver, administrator or similar officer falls within the definition of “person” contained in section 2(11) of the Act, because he holds property for others in the capacity of receiver, manager or administrator and is liable to pay agricultural income‑tax on the income derived from the land he holds. If no further considerations applied, the tax incidence would be based on the total income that comes into the manager’s hands. Nevertheless, because the manager holds the land on behalf of the jointly interested persons, the agricultural income‑tax is not calculated on the whole agricultural income received by the manager but is limited to the aggregate of the sums payable as tax by each of the jointly interested persons and actually received by the manager.

In this passage the Court explained that when a common manager, receiver, administrator or a similar person holds agricultural land on behalf of several persons who are jointly interested in that land, the agricultural income‑tax is not to be calculated on the total income that comes into the manager’s hands. Instead, the tax liability is limited to the aggregate of the amounts that each of the joint owners would have to pay as agricultural income‑tax on the income they actually receive from the land. The assessment is therefore made with reference to each individual owner. For each owner the tax payable is computed on the actual quantity of agricultural income that is derived from the land and that is received by the manager as that owner’s share. The sum of the taxes that would be payable by all the owners is then charged to the manager, who is deemed to be the assessee for the tax that is payable by each owner. Because the manager is only taxed on the aggregate of the owners’ individual tax liabilities, the total tax that the manager must pay is substantially lower than the tax that would have been payable if the assessment were based on the whole agricultural income that passes through the manager’s hands.

The Court further observed that, in the course of managing or administering the land, the manager must credit to each owner an appropriate portion of the total agricultural income‑tax that he has paid. If, however, the manager were assessed on the entire income derived from the land, the amount that would be credited to each owner would exceed the tax that the owner would actually owe if the tax were levied only on the owner’s own share of the agricultural income. Consequently, the statutory provision is intended to reduce the incidence of agricultural income‑tax on each individual owner as well as on the manager who is treated as the assessee for the tax due from each owner. This reduced incidence applies only when the manager, receiver, administrator or similar person holds the land on behalf of the jointly interested persons, and not when he holds the land for his own benefit.

The expression “on behalf of” is therefore crucial. It indicates that the manager does not own the land but acts as an agent or representative of the co‑owners. He manages or administers the land either in accordance with law or under the terms of any agreement reached between the parties. There is no vestige of ownership in the manager; his entitlement is limited to the administration of the land for the benefit of those who are jointly interested in the agricultural income that the land generates.

The Court observed that the description of a person who holds land “on behalf of” others may properly apply to a receiver, manager, administrator or a similar figure, but it cannot be applied to an owner or a trustee who, like the manager or receiver, falls within the definition of “person” contained in section 2(11) of the Act. The situation of an owner required no further elaboration because an owner holds the land for his own benefit and in his own name; consequently, an owner cannot be caught within the ambit of section 111(1) of the Act. The Court then explained that a trustee occupies a position comparable to that of an owner. Under English law a trust is defined as “a confidence reposed in a person with respect to property of which he has possession or over which he can exercise a power, with the intention that he may hold the property or exercise the power for the benefit of some other person or object” (see Halsbury’s Laws of England, Hailsham edition, volume 33, page 87, paragraph 140). The property that is subject to that confidence is described as the trust property or trust estate and is usually in the legal ownership or under the legal control of the trustee, while the cestui que trust possesses a beneficial or equitable interest in it (ibid. page 89, paragraph 142). Accordingly, a trustee is generally the legal owner of the trust property and holds it for the benefit of the cestui que trust. The Court relied on the observation of Sir John Romilly, M.R., in Lister v. Pickford (1865) 34 Beav. 576, 582; 55 E.R. 757, where it was noted that a trustee who posses­ses land does so on behalf of his cestui que trust, and an error regarding the identity of the true beneficiaries does not affect the legal question. Although that remark was made in the context of limitation and adverse possession, the Court found it significant to cite further commentary by the Master of the Rolls on page 583 of the same report. The Master of the Rolls explained that even if a person mistakenly believed he was personally entitled to the property and not a trustee, the law would still deem him a trustee for the cestui que trust; the legal estate would be vested in him, no limitation period would run while he remained in possession, and he would be bound to know the law, take possession promptly upon discovering the true beneficiaries, and apply the appropriate portion of the rents for the benefit of those residuary devisees. This passage makes it abundantly clear that the legal estate is vested in the trustees, who hold it for the benefit of the beneficiaries.

In this matter, the Court observed that, irrespective of the position under English law, the Indian Trusts Act of 1882 (II of 1882) states a clear and categorical rule concerning the ownership of trust property. Section 3 of the Act defines a trust as an obligation that is attached to the ownership of property and that arises from a confidence placed in, and accepted by, the owner, or that is declared and accepted by the owner, for the benefit of another person or for the benefit of both another person and the owner. The person who accepts this confidence is designated as the “trustee,” while the person for whose benefit the confidence is accepted is designated as the “beneficiary.” The “beneficial interest” or “interest” of the beneficiary is described as the beneficiary’s right against the trustee in his capacity as owner of the trust property, and the subject matter of the trust is termed “trust property” or “trust money.” These definitions underline that the trustee is the legal owner of the trust property, and that the beneficiary possesses only a right against the trustee as the owner. Consequently, the trust property vests in the trustee, who holds it in his own name even though he holds it for the benefit of the beneficiaries. The Court emphasized that the expressions “for the benefit of” and “on behalf of” are not synonymous; the former indicates a benefit enjoyed by another and creates a relationship between trustee and beneficiary (cestui‑que‑trust), whereas the latter suggests an agency relationship akin to that of a principal and an agent, where one party acts on behalf of another. Accordingly, Section 11(1) can apply only where land that yields agricultural income is possessed by a common manager, receiver, administrator, or similar figure who holds the land “on behalf of,” that is, as an agent or representative of persons who are jointly interested in such land or in the agricultural income derived therefrom. Even if those persons are beneficiaries under a deed of trust, they do not fall within the category of persons on whose behalf the trustees hold the land, and the trustees themselves are not described as common managers, receivers, administrators, or the like for the purpose of invoking Section 11(1). Therefore, trustees do not hold the agricultural land on behalf of the beneficiaries; they hold it in their own right, albeit for the beneficiaries’ benefit. Moreover, the beneficiaries are not necessarily persons who are jointly interested in such land or its agricultural income. The term “jointly interested” is a well‑known legal concept signifying an undivided interest in the land or its income, as opposed to a separate or individual interest. If a true reading of the deed of trust shows that the interest created in the beneficiaries is a separate or individual interest, then it cannot be treated as a joint interest for the purposes of Section 11(1).

In this case the Court explained that the fact that each beneficiary possessed a separate or individual interest in the land or in the agricultural income generated from that land does not, merely because the beneficiaries share a common interest, convert those separate interests into a joint interest in the land or its agricultural income. The expression “jointly interested” was held to have a precise legal meaning and, because it appears in a statute, it cannot be interpreted in the ordinary or popular sense as merely a common interest or an interest enjoyed collectively by one person together with others. Consequently, if the construction advanced for the purpose of interpreting section 11(1) of the Act is accepted, it follows that the appellants, who acted as trustees under the deed of trust in the present matter, did not hold the land that produced agricultural income in the capacity of a common manager, receiver, administrator, or any similar role on behalf of the annuitants. Moreover, the annuitants themselves were not jointly interested in that land or in the agricultural income derived therefrom. As a result, the conditions required for section 11(1) of the Act to operate were never satisfied.

The Court further observed that the appellants were the legal owners of the trust estate and that they held the land producing agricultural income in their own right, not “on behalf of” the annuitants. Each annuitant, on the other hand, held only a separate or individual interest in the agricultural income to the extent of the annuity payable to that annuitant under the deed of trust, and the interest of one annuitant was unaffected by any change in the interest of another annuitant. Because neither of the two prerequisite conditions for the operation of section 11(1) was fulfilled, the Court concluded that the High Court had erred in answering the first part of the reference in the affirmative, even though its negative answer to the second part was correct. The Court was of the opinion that both parts of the question should have been answered negatively. Nevertheless, the ultimate consequence remained unchanged, and consequently the appeal filed by the appellants was bound to fail. Accordingly, the appeal was dismissed with costs, and the order of dismissal was affirmed.