P. Krishna Menon vs The Commissioner Of Income Tax

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

Court: supreme-court

Case Number: Civil Appeal No. 401 of 1956

Decision Date: 7 October 1958

Coram: A.K. Sarkar, P.B. Gajendragadkar

In the matter titled P. Krishna Menon versus the Commissioner of Income‑Tax, the Supreme Court of India delivered its judgment on 7 October 1958. The opinion was authored by Justice A. K. Sarkar, with Justices P. B. Gajendragadkar and T. L. Venkatarama serving on the same bench. The petitioner in the proceeding was P. Krishna Menon and the respondent was the Commissioner of Income‑Tax for Mysore, Travancore‑Cochin. The case was reported in the 1959 volume of the All India Reporter at page 75 and also in the Supplement to the Supreme Court Reporter in 1959 at page 133, with subsequent citations appearing in later law reports. The legal issue concerned whether a person who taught Vedanta philosophy and received monetary gifts from his disciples was liable to tax on those receipts under the Indian Income‑Tax Act of 1922, specifically section 10. The headnote summarized the Court’s findings: the assessee taught Vedanta without any intention of profit, a disciple made voluntary gifts on several occasions, and the Court held that the teaching constituted a vocation even though it was not organized or profit‑oriented. The Court further held that such voluntary payments become taxable income when they are given because of the donor’s relationship to the teacher’s vocation, rather than for purely personal reasons. The decision relied on the precedent set in Commissioner of Inland Revenue v. Incorporated Council of Law Reporting (1888) 3 Tax Cas. 105, 113, stating that an activity need not be organized or intended for profit to be a vocation. Consequently, the Court concluded that the gifts were income derived from the teacher’s vocation and were therefore chargeable to income tax.

The appeal, numbered Civil Appeal No. 401 of 1956, was filed by special leave against the judgment and order dated 8 March 1956 of the Travancore‑Cochin High Court at Ernakulam in Income‑Tax Revision No. 24 of 1954. Counsel for the appellant included senior advocates, while counsel for the respondent represented the revenue side. The appellant had previously served as a Superintendent of Police in the former Travancore State and retired around 1940. After retirement, he devoted his time to studying and expounding Vedanta philosophy, attracting a number of disciples interested in his teachings. One of these disciples was J. H. Levy, who regularly traveled from England to Travancore to attend the appellant’s discourses and to benefit from his instruction in Vedanta. The appellant opened a bank account in his name at Lloyd’s Bank in Bombay where Levy transferred substantial sums, beginning with a transfer of Rs 2,41,103‑11‑3 on 13 December 1941, and continuing with additional deposits amounting to roughly Rs 4,50,000 by August 1951. The appellant periodically transferred these funds from his Bombay account to a bank account in Trivandrum, Travancore. The tax assessments issued against the appellant formed the basis of the present appeal, raising the question of whether the monetary gifts received for Vedanta instruction were taxable under the Income‑Tax Act.

John H. Levy, a resident of London in the United Kingdom, regularly travelled to Travancore to receive instruction in Vedanta from the appellant. During each visit, which lasted a few months, he attended the appellant’s discourses and consequently benefited from the appellant’s teachings on Vedanta. Levy maintained a bank account with Lloyd’s Bank in Bombay. On 13 December 1941, he transferred the entire balance in that account, amounting to Rs 2,41,103‑11‑3, to an account that the appellant opened in his own name at the same bank. After this initial transfer, Levy continued to place additional sums into the appellant’s Lloyd’s Bank account in Bombay. By 19 August 1951, the cumulative amount deposited by Levy was approximately Rs 4,50,000. Periodically, the appellant transferred money from his Bombay account to an account he held with a bank in Trivandrum, located in Travancore.

This appeal arose from income‑tax assessment orders made against the appellant for the assessment years 1122, 1123 and 1124 of the Malayalam calendar. When converted to the Gregorian calendar, these periods corresponded to 17 August 1945 to 16 August 1946, 17 August 1946 to 16 August 1947, and 17 August 1947 to 16 August 1948 respectively. During each of these periods, Levy made deposits into the appellant’s Bombay account in the following amounts: Rs 13,304 for the first year, Rs 29,948 for the second year, and Rs 19,983 for the third year. In the same periods, the appellant transferred from his Bombay account to his Trivandrum account sums of Rs 81,200, Rs 47,000 and Rs 37,251 respectively. The Income‑Tax Officer stationed in Trivandrum assessed the appellant on the latter sums, treating them as foreign income—that is, income that arose in India and was subsequently brought into Travancore State during the relevant periods.

The matter before this Court did not involve the assessment of any other income of the appellant. The appellant challenged the assessment orders before the Appellate Assistant Commissioner, who combined the three assessments into a single appeal, dismissed the appeal and upheld the Officer’s orders. The appellant then appealed to the Appellate Tribunal, but that appeal also failed. Subsequently, the Tribunal issued an order referring two specific questions to the High Court of Travancore‑Cochin for determination. The first question asked whether the receipts from John H. Levy constituted income taxable under the Travancore Income‑Tax Act, 1121. The second question asked whether there existed material to hold that the deposits made by Levy into the appellant’s Bombay account from 1941 onward represented income that had accrued to the appellant outside Travancore State.

The High Court answered the first question affirmatively, holding that the receipts were indeed taxable income under the Act. Regarding the second question, the High Court ruled in favour of the appellant, finding that the appellant was carrying on a vocation or occupation within Travancore and that the income derived from that vocation should be considered as having arisen in Travancore. Consequently, the High Court held that the appellant was liable to tax not on the amounts he transferred into Travancore but on the amounts that had been deposited by Levy into his Bombay account during the relevant periods.

The Court held that the proceeds received from John H. Levy were to be treated as income that arose in Travancore. Consequently, the appellant was required to pay tax not on the sums that he physically transferred into Travancore, but on the amounts that Levy had credited to the appellant’s bank account in Bombay during the relevant periods. The appellant subsequently filed a special leave appeal before this Court challenging the High Court’s answer to the first question. The decision of the High Court on the second question was left untouched, because it had been decided in the appellant’s favour and no appeal on that point had been lodged by the revenue authorities. The Court observed that the matter did not present any complex problem. The issue had to be decided according to the Travancore Income‑Tax Act, 1121 (Malayalam Era). Since, for the purpose of the present case, the provisions of that Act were identical to those of the Indian Income‑Tax Act, 1922, the Court found it more convenient to refer to the latter statute.

Counsel appearing for the appellant explained that the case raised two distinct points. First, whether the appellant was carrying on a vocation, and second, assuming that he was, whether the amounts in dispute could be characterised as profits or gains of that vocation. The Court accepted this formulation of the issues and proceeded to examine them. The initial question concerned the existence of a vocation. Section 10 of the Income‑Tax Act, 1922 provided that an assessee was liable to tax on the profit or gain arising from any profession or vocation that he pursued. The factual findings revealed that the appellant himself studied Vedanta philosophy and then disseminated the knowledge he had acquired to any persons who wished to receive it. No evidence was presented to show that the appellant conditioned the instruction on the payment of a fee. Accordingly, the Court proceeded on the basis that the appellant was teaching Vedanta to his disciples without any intention of making a profit.

The Court found no difficulty in accepting that teaching, even if not a formal profession, could constitute a vocation. It considered it unnecessary to explore the various lexical meanings of the word “vocation” or to cite authorities in support of the proposition that teaching qualifies as a vocation. Nor did the Court see any reason to distinguish the teaching of Vedanta from other forms of instruction; it regarded Vedanta instruction as teaching in the same sense and therefore as a vocation. An argument was raised that the appellant’s teaching of Vedanta amounted merely to the practice of religion. The Court could not see why religious instruction would preclude the activity from being a vocation. In any event, the question of whether the appellant was, by teaching Vedanta, practising religion did not become material to the determination of his tax liability.

In this matter, the Court observed that the question of whether the appellant’s teaching of Vedanta was a religious practice was a factual determination, not a legal conclusion. The Court noted that Vedanta could be taught either as a religious practice or as a philosophical system or school of thought, and that the material on record did not contain any finding that the appellant was practicing religion while teaching Vedanta. The appellant’s counsel argued that, for an activity to be classified as a “vocation” under the Act, it must be an organised activity undertaken with the motive of making a profit; consequently, because the appellant’s teaching was neither organised nor profit‑oriented, the activity could not be characterised as a vocation. It was further contended that the term “vocation” had been placed alongside “business” and “profession,” and that because the object of a business or profession is to earn profit, only activities whose object is profit could fall within the ambit of vocation. The Court rejected these contentions as unfounded. It expressed no appreciation for the proposition that an activity must be organised to become a vocation and pointed out that a single act can amount to the carrying on of a business or profession. The Court found no lack of system or continuity in the appellant’s activity. The appellant had assembled a large number of disciples and regularly instructed them in Vedanta; even a devotee from England, Levy, travelled at regular intervals to receive instruction. These facts, the Court held, clearly demonstrated organisation and systematic operation. Moreover, the Court reiterated the well‑settled principle that the motive of the person performing an act does not determine whether the act constitutes a business, profession, or vocation. If an activity generates income, that income is taxable irrespective of the performer’s intention not to earn profit. This principle, the Court said, was firmly established in precedent, citing the 1888 decision in Commissioner of Inland Revenue v. Incorporated Council of Law Reporting(1), which held that “it is not essential to the carrying on of a trade that the people carrying it on should make a profit, nor is it even necessary to the carrying on of the trade that the people carrying it on should desire or wish to make a profit.” The Court warned that, absent such a rule, a person could simply claim that he was not engaged in a business because he did not intend to derive income from it.

It was held that to assume a profit motive for every activity would be absurd; what mattered was whether the activity actually generated income, irrespective of the label applied to it such as business, profession, vocation or any other description, and regardless of the intention of the person who carried it on. The Court referred to the observation of Rowlatt, J., in Stedeford v. Beloe (2), a passage that had been pointed out by counsel for the respondent. That observation, which stated that a pension granted to a retired headmaster could not be taxed because “there is no background of business in it,” was not intended to create a rule that a profit motive is indispensable to a business, profession or vocation. The pension would be taxable only if it arose out of the office held, and that case turned on the fact that the headmaster had retired before the pension was granted and therefore did not hold any office at that time, as confirmed by the decision of the House of Lords in the same matter (1). Applying that principle, the Court concluded that the appellant’s teaching of Vedanta could correctly be described as the carrying on of a vocation by him. The next issue for determination was whether the sums paid by Levy constituted income that the appellant received by virtue of his vocation as a Vedanta teacher.

During the arguments, counsel for the appellant relied upon a large number of Indian and English authorities. Those authorities illustrated the well‑settled rule that a voluntary payment is not taxable when it is made for reasons purely personal to the donee and unrelated to his office or vocation, but becomes taxable when it is made because of the donee’s office or vocation. The Court indicated that it was not necessary to discuss those authorities in detail because the present case was straightforward and did not require citation of additional precedents. The sole question therefore reduced to whether the monies were received by the appellant because of his vocation.

Counsel for the respondent argued that the facts demonstrated that the payments were purely personal gifts. He highlighted an affidavit of Levy in which Levy declared that “all sums of money paid into his account by me have been gifts to mark my esteem and affection for him and for no other reason.” Nevertheless, within the same affidavit Levy also stated, “I have had the benefit of his teachings on Vedanta.” The Court emphasized that the critical enquiry was not the donor’s perception of his act but the reason why the donee received the money. Accordingly, the Court quoted Collins, M. R., in Herbert v. McQuade, referring to Inland Revenue v. Strong, noting at page 649 that the judgment affirmed a principle of law: when the receipt of money is linked to the donee’s office or vocation, it is taxable, irrespective of whether the donor acted voluntarily.

In this case the Court observed that a sum of money can become subject to income tax even when the contributors made the payment voluntarily. The governing test, according to the Court, is to examine whether, from the perspective of the recipient, the money was received by virtue of the recipient’s official position. If the receipt is linked to the office, the voluntary or compulsory nature of the contributors’ act does not affect the tax liability. Once it is established that the funds accrued to a person because of his office, the Court held that the liability to income tax cannot be negated merely because the contributors had no legal duty to make the payment. The Court reiterated the well‑settled principle that the essential question in such matters is whether the receipt is a personal gift or remuneration, quoting the earlier observation of Rowlatt J. in Reed v. Seymour that the inquiry is “whether it is in the nature of a personal gift or is it a remuneration?” This formulation was later endorsed by Viscount Cave, L.C., when the case reached the House of Lords, who added that remuneration is taxable while a genuine gift is not, referring to Seymour v. Reed. Applying this principle, the Court found it impossible to conclude that the sums paid to the appellant were not made in consideration of the teachings he provided. The donor, Mr. Levy, had expressly admitted that he benefitted from the appellant’s instruction, and the Court determined that the gifts were given because of that teaching. Although Mr. Levy also stated that his gifts expressed esteem and affection, the Court recognized that such feelings arose from the teaching itself, making the teaching the direct cause of the gifts. Counsel for the respondent argued that the causal chain should not be pursued so far as to connect the gift with the teaching, but the Court rejected that line of reasoning. A similar argument had been considered in Blakiston v. Cooper, where Lord Ashbourne remarked that offerings, though presented as marks of esteem, were nonetheless given to the vicar in his capacity as vicar and formed part of the profits of his office. The Court concluded that in the present case the instruction provided by the appellant was not merely a convenient circumstance but the true causa causans of the donor’s payments. The regularity and repetition of the payments, coinciding with the donor’s visits to the appellant, further supported the view that the amounts were remuneration for the appellant’s vocation as a teacher of Vedanta.

In the case before the Court the appellant had received sums of money as remuneration for providing instruction in Vedanta. The appellant’s counsel argued that the first receipt of Rs 2,41,103‑11‑3 was an unduly large amount to be regarded as consideration for the teaching rendered. The Court was not persuaded by that contention and, in any event, indicated that the present proceeding was not concerned with that particular payment. The matter for determination was the series of later remittances, each of which was of a considerably smaller quantum, and for which no allegation had been made that they were excessive to the extent of being unreasonable consideration for the lessons imparted. The Court further observed that these later sums were made voluntarily, and that the precise appraisal of the monetary value of the Vedanta instruction was not a material issue. It was noted that if the initial large payment could not be sustained as payment for the teaching, then it could not be sustained as a pure gift either. Adopting the view that the payments under scrutiny represented income arising from the appellants’ vocation as teachers of Vedanta, the Court held that section 4(3)(vii) of the Income‑Tax Act could not be invoked to grant exemption. The statutory provision would apply only where a payment could be shown not to have originated from the exercise of a profession or vocation. Accordingly, the Court concluded that the appeal could not succeed, ordered the appeal to be dismissed, and awarded costs against the appellant.