Commissioner of Income Tax, Punjab vs. Thakur Das Bhargava

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 236 of 1955

Decision Date: 27 July 1960

Coram: S.K. Das, M. Hidayatullah, J.C. Shah

In this matter the petitioner was the Commissioner of Income‑Tax for the State of Punjab and the respondent was Shri Thakur Das Bhargava, an advocate practising at Hissar. The case was heard by a Bench of the Supreme Court of India consisting of Justice S K Das, Justice M Hidayatullah and Justice J C Shah, and the judgment was delivered on 27 July 1960. The opinion was authored by Justice S K Das and the official citation is 1960 AIR 1219, also reported as E 1977 SC 1343 (6). The dispute centred on whether a sum of money received by a lawyer in connection with a case could be treated as professional income for income‑tax purposes. The lawyer had agreed to accept the case on the condition that his clients would provide rupees 40,000 for charitable purposes and that he would establish a public charitable trust with that amount. The clients actually paid the advocate rupees 32,500, and the advocate subsequently created a trust using that money. He claimed that the rupees 32,500 received in trust for charity was not his professional income. The Commissioner of Income‑Tax and the assessing authorities rejected this claim, holding that the amount formed part of the advocate’s professional earnings and was therefore taxable.

The Court held that at the time the money was received no trust or legally enforceable obligation in the nature of a trust existed. The clients who transferred the money did not create any trust nor impose any binding duty on the advocate. Accordingly, the sum, when it entered the advocate’s possession, was his professional income, even though he later expressed a desire to set up a charitable trust with those funds. The Court observed that the advocate’s personal intention to create a trust did not, by itself, give rise to a trust or any enforceable obligation. The decision referred to the earlier authority of Raja Bejoy Singh Dudhuria v. Commissioner of Income‑Tax, Bengal, [1933] 1 I.T.R. 135. Procedurally, the appeal before the Supreme Court was Civil Appeal No. 236 of 1955, filed against the judgment and order dated 3 August 1953 of the Punjab High Court in Civil Reference No. 7/1952. The High Court had granted a certificate of fitness under sub‑section 2 of section 66A of the Indian Income‑Tax Act, 1922, dated 28 December 1953 on an application made by the Commissioner of Income‑Tax, Punjab. The appellant was represented by counsel including the Attorney‑General for India, while the respondent was represented by counsel appearing for him. The Court set out the relevant facts for the assessment year 1946‑47: Pandit Thakur Das Bhargava, an advocate of Hissar, had been assessed to income tax on a total assessable income of rupees 58,475 for the account year 1945‑46. That total included the sum of rupees 32,500 received in July 1945 for defending the accused in the Farrukhnagar case.

In the present matter, the assessee, Pandit Thakurdas Bhargava, an advocate of Hissar, was assessed for income tax for the assessment year 1946‑47 on a total assessable income of Rs 58,475. This total included an amount of Rs 32,500 which the assessor recorded as having been received by the assessee in July 1945 as remuneration for defending the accused in the case commonly referred to as the Farrukhnagar case. The assessee asserted that the sum of Rs 32,500 was not part of his professional income because it had been received in trust for charitable purposes. The Income‑Tax Officer rejected this claim, and the Appellate Assistant Commissioner, who heard the appeal against the officer’s order, also rejected it. Both officials held that the amount had been received by the assessee as his professional fee and that the subsequent creation of a trust by the assessee, formalised in a deed of trust dated 6 August 1945, did not alter the nature or character of the receipt. They further observed that the persons who paid the money did not intend to create any trust or impose any fiduciary obligation on the assessee; rather, the trust was, in law and fact, created by the assessee himself out of his professional earnings. Consequently, the officials concluded that the sum attracted tax at the moment of receipt, and that any later disposition of the money was irrelevant for tax purposes. The order of the Appellate Assistant Commissioner was appealed to the Income‑Tax Appellate Tribunal, Delhi Branch. The Tribunal, after examining the facts, expressed its conclusion in the following words: “The income in this case did not at any stage arise to the assessee. Keeping in mind the express stipulation made by the assessee when he accepted the brief there was a voluntary trust created, which had to be and was subsequently reduced into writing after the money was subscribed. The payments received from the accused and other persons were received on behalf of the trust and not by the assessee in his capacity as an individual. In this view, we delete the sum of Rs 32,500/- from the assessment.” Thereafter, the appellant moved the Tribunal for permission to state a case to the High Court on the question of law that arose from the Tribunal’s order. The Tribunal agreed that a question of law did arise and formulated it as follows: “Whether the sum of Rs 32,500/- received by the assessee in the circumstances set out in the trust deed later executed by him on 6 August 1945, was his professional income taxable in his hands, or was it money received by him on behalf of a trust and not in his capacity as an individual.” While stating the case, the Tribunal also framed an additional question concerning the timing of the trust’s creation, namely whether the trust was created at or before the payment of Rs 32,500/-, but indicated that this additional question was implicit in the principal question it had already formulated.

A proceeding was consequently instituted before the High Court under section 66 of the Indian Income‑Tax Act, and the High Court, in a judgment dated 3 August 1953, answered the question in favour of the assessee. The Court held that “the sum of Rs. 32,500/- received by the assessee was not received by him as his professional income but was received on behalf of the trust and not in his capacity as an individual.” After that decision, the appellant moved the High Court again and obtained the certificate of fitness that was referred to earlier in this judgement. The Court now proceeds to set out the facts found by the Tribunal in connection with the receipt of the sum of Rs. 32,500/- by the assessee, facts from which the Tribunal had drawn its inference. The precise issue framed by the Tribunal and subsequently answered by the High Court concerned whether, in the circumstances set out in the trust deed dated 6 August 1945, the amount of Rs. 32,500/- received by the assessee constituted professional income in his hands. To address that issue, it is appropriate first to refer to the recitals contained in the trust deed. In those recitals, the respondent declared that he had “decreased” his legal practice during the last few years and had resolved to reserve his professional income accruing after June 1944 for the payment of taxes and for charitable purposes. He further stated that, consequently, he had been acting on that resolution. He described the circumstances of the Farrukhnagar case in the district of Gurgaon, mentioning that the relatives and the accused expressed a strong desire for him to conduct the case during its trial. He explained that, after persistent requests and a promise that they would provide him with Rs. 40,000/- for charitable purposes, he agreed to conduct the case, on the condition that he would create a public charitable trust with the money. The case having concluded, the accused and their relatives handed him Rs. 32,500/- for charity and for creating the trust, and that amount was deposited in a bank; any further amount they might pay would also be included in the trust. Accordingly, he declared that he created the trust with the stated conditions, using that sum and any additional amount that might later be realized or added to the trust, after which the name and objects of the trust were listed. The Tribunal accepted as correct the respondent’s statements that he was initially unwilling to accept the brief in the Farrukhnagar case, but that he was persuaded to do so at the request of some members of the Bar and certain influential local persons, on the understanding, as the respondent put it, that the accused persons would provide Rs. 40,000/- for a charitable trust which he would establish. Ultimately, the sum of Rs. 32,500/- was paid by or on behalf of the accused persons, and, as the Tribunal observed, a charitable trust was thereby created by the respondent through the trust deed dated 6 August 1945, the recitals of which have been noted above. The question presently before the Court is

In this case, the Court examined what legal conclusion should be drawn from the facts that the Tribunal had established. Both the Tribunal and the High Court had concluded that a charitable trust had been created by the persons who had paid the money to the assessee and that the assessee’s only role under the trust deed dated 6 August 1945 was to put the terms of that trust into writing. Relying on the principle laid down by the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income‑Tax, Bengal (1) the High Court had held that, because of the overriding obligation imposed on the assessee by the payers, the amount of Rs 32,500 never became the assessee’s income; it became trust property at the moment it was paid, and therefore there was no question of the assessee applying any part of his own income. On behalf of the appellant, however, it was contended that this inference was not the correct legal reading of the facts found by the Tribunal. According to the learned Attorney‑General appearing for the appellant, the proper inference was that the sum of Rs 32,500 was received by the assessee as his professional income, and that he later created a trust by executing the deed of 6 August 1945. He argued that at the time the money was received there was no trust or any legal obligation imposed on the assessee by the payers that would have prevented the amount from becoming his professional income. He further submitted that even if a trust existed, it would make no difference unless it could be shown that the money had been diverted to the trust before it could become the assessee’s professional income. The Court held that the question could be answered briefly: based on the Tribunal’s findings, the correct legal inference was that the Rs 32,500 paid to the assessee constituted his professional income at the time of receipt and that no trust or trust‑like obligation was created at that moment. When the assessee later executed the trust deed of 6 August 1945, he applied part of his professional income to the trust property. Accordingly, the principle articulated in Bejoy Singh Dudhuria’s case (1) did not apply to the present facts. The Court also observed, as the High Court had, that a trust may be created by any language sufficient to demonstrate an intention to create a trust, and that technical words are not essential. A trust can even arise from words that are primarily conditional, but such words will constitute a trust only where the essential requisites of a trust are satisfied, namely where there are purposes independent of the donee to which the gifted property must be applied and an obligation on the donee to fulfill those purposes.

The Court observed that the essential elements of a trust were present only when the purpose of the gifted property was independent of the donee and when the donee was bound to apply the property to those purposes. The Tribunal’s findings demonstrated clearly that the individuals who paid Rs 32,500 did not use any mandatory language that would create a trust or impose an obligation on the recipient. Their sole intention was to obtain the professional services of the assessee in the Farrukhnagar matter. Initially the assessee was reluctant to render his services, but he later agreed on the condition that he would himself establish a charitable trust with the money received for defending the accused. This intention was unmistakably confirmed by the trust deed dated 6 August 1945, in which the assessee declared that he was setting aside his professional income earned after June 1944 for the payment of taxes and for charitable purposes, and that any income received from the Farrukhnagar case would be transferred into a charitable trust. The deed, which the Tribunal accepted as accurate, showed that the assessee created the trust based on his own conditions. No statement in the deed or elsewhere indicated that the payers had created a trust or imposed a legally enforceable duty on the assessee. Even the affidavit of the assessee recorded that the accused had agreed to provide Rs 40,000 for a charitable trust that he would establish, with a clear understanding that the funds would not be used for personal purposes. The affidavit contained no suggestion that the payers themselves had created the trust or imposed any obligation on the assessee. Thus, the desire expressed by the assessee to form a trust out of his fees was a voluntary intention that, by itself, neither created a trust nor gave rise to a legally binding duty.

The Court agreed with the Appellate Assistant Commissioner, who had noted that only if the accused persons had themselves decided to establish a charitable trust in memory of the professional assistance they received, and had appointed the assessee as trustee, could it be argued that the money was earmarked for charitable purposes from the outset. The Commissioner observed that no such indication existed in the record. Consequently, the Court held that the money received by the assessee was his professional income at the time of receipt, despite his earlier expression of an intention to create a charitable trust with those funds. The Court affirmed that the Appellate Assistant Commissioner’s view was correct: the receipt of the sum did not constitute a trust, nor did it create any enforceable obligation, and therefore the amount was taxable as professional income in the hands of the assessee.

The Court held that the sum of Rs 32,500 received by the assessee constituted his professional income and that, consequently, the assessee was clearly liable to pay tax on that amount. Accordingly, the Court affirmed that the proper answer to the question referred to the High Court was that the amount of Rs 32,500 received by the assessee was professional income taxable in his hands. Counsel for the respondent urged the Court to consider a number of earlier decisions in which the principle laid down in Bejoy Singh Dudhuria’s Case (1) had been applied. The counsel argued that when a sum is allocated out of revenue because of an overriding title or obligation that exists before the sum becomes income in the hands of the assessee, such an allocation may arise from a court decree, an arbitration award, or even from the provisions of a will or deed. The Court examined this submission and, in view of the conclusion it had reached, found that the authorities relied upon could not assist the respondent’s position and therefore it was unnecessary to analyse them further. The Court concluded that no overriding obligation was imposed on the assessee at the time when the sum of Rs 32,500 was received by him, as reflected in the citation of Bejoy Singh Dudhuria’s Case (1) [1933] 1 I.T.R. 135. Consequently, the Court allowed the appeal, set aside the judgment and order of the High Court, and held that the answer to the question was in favour of the appellant, namely that the sum of Rs 32,500 received by the assessee was his professional income taxable in his hands. The appellant was awarded costs throughout, and the appeal was allowed.