Maharajadhiraja Sir Kameshwar Singh vs Commissioner of Income Tax, Bihar and Orissa

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 357 of 1958

Decision Date: 25 October 1960

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

In this case the Supreme Court of India delivered its judgment on 25 October 1960 in a petition filed by Maharajadhiraja Sir Kameshwar Singh against the Commissioner of Income‑Tax for the Provinces of Bihar and Orissa. The opinion was written by Justice J.C. Shah, who was joined by Justice S.K. Das, and the decision is reported in 1961 AIR 362 as well as in 1961 SCR (2) 74, with a later citator reference R 1965 SC1836 (12). The dispute concerned the application of the Indian Income‑Tax Act, 1922, especially sections 2(1) and 4(3)(viii), which provide for exemption of agricultural income. The petitioner had executed a deed of trust in which he settled a portion of his lands for the maintenance of certain temples and Thakoorbaries. Under the terms of that deed he was to act as the trustee of the institutions and was entitled to receive fifteen per cent of the net income generated by those lands as remuneration for his services as trustee. Before the tax authorities the petitioner contended that the amount he received as trustee’s remuneration was in fact agricultural income falling within his hands, and that, by virtue of section 4(3)(viii), such income was exempt from tax because the character of the income did not change when he appropriated a fraction of the rent or revenue of the agricultural lands for his remuneration. The Court examined the nature of the source of the right to receive the remuneration and held that the entitlement arose from the covenant contained in the deed of trust, not from any right to receive the rent or revenue of the agricultural lands themselves. Consequently the character of the amount appropriated as remuneration was distinct from the character of the agricultural income received by the petitioner in his capacity as trustee. Because the remuneration was not received as rent or revenue of agricultural lands under a legal or beneficial title to the property, it did not qualify as agricultural income within the meaning of section 2(1) of the Act and therefore was not exempt under section 4(3)(viii). The Court relied on the authorities Nawab Habibulla v. Commissioner of Income‑Tax, Bengal (1943) L.R. 7 DI.A. 14 and Premier Construction Co. Ltd. v. Commissioner of Income‑Tax, Bombay City (1948) L.R. 75 I.A. 246, while distinguishing the earlier decision Commissioner of Income‑Tax, Bihar and Orissa v. Kameshwar Singh (1935) L.R. 62 I.A. 215. The appeal, designated Civil Appeal No. 357 of 1958, was filed against the judgment and order dated 24 April 1957 of the Patna High Court in Miscellaneous Judicial Case No. 57 of 1955. Counsel for the appellant were A.V. Viswanatha Sastri and I.N. Shroff, and counsel for the respondent were K.N. Rajagopal Sastri and R.H. Dhebar.

The Court recorded that the appellant had executed a deed of trust which transferred certain lands listed in Schedule “A” together with the rents of lands enumerated in Schedule “C” for the purpose of maintaining a number of temples and Thakoorbaries. The deed contained several essential clauses. Clause six expressed the declarant’s intention that a declaration of trust be made so that the income generated from a portion of the Raj properties could be earmarked and specially devoted to the upkeep of the named religious institutions. The clause further stated that the declarant would continue to consider himself, and be recognized by others, as the legal trustee of those institutions and of the properties whose income would be applied to their maintenance. Clause seven declared that, from that point forward, the declarant held, and would continue to hold, the properties described at the foot of Schedule “A” in trust for the religious purpose of maintaining the institutions more fully described in Schedule “B” annexed to the deed. Clause eight provided that all lands presently in the declarant’s possession, whether held as Bakast or as proprietor’s private lands and listed in Schedule “C”, which were cultivated directly by the declarant, would remain his tenancy lands. For those tenancy lands, the declarant agreed to pay the annual rent specified for each land to the trustee for the benefit of the aforementioned institutions, and his rights in those lands would be governed by the status of a rayat under the Bihar Tenancy Act.

According to the financial estimates set out in the trust, the net income from all the lands enumerated in Schedule “A”, after deducting management expenses and taxes, was calculated at Rs. 1,81,717. The net rental income arising from the properties listed in Schedule “C” was estimated at Rs. 10,208. From the combined total of these two figures, a deduction of fifteen per cent was made to cover the trustee’s remuneration, leaving a balance of Rs. 1,63,136‑4‑0. The deed provided that this remaining amount would be applied to the objects of the trust. In the assessment year 1950‑51, the Income‑Tax Officer determined the appellant’s income and included Rs. 6,000 as income derived from non‑agricultural properties of the trust. The Officer held that the trust was not a public religious trust and that income arising from properties not used for agriculture was not exempt from tax in the hands of the appellant. On appeal, the Appellate Assistant Commissioner ruled that the income received by the appellant from the trust properties was not taxable as the appellant’s private income. However, the Commissioner considered the remuneration amounting to Rs. 21,274—calculated at fifteen per cent of the net trust income for that year—to be taxable, because it was not agricultural income in the appellant’s hands. The appellant then appealed this finding before the Income‑Tax Appellate Tribunal, Patna Bench.

In this case, the Income‑tax Appellate Tribunal, Patna Bench, affirmed the order of the Appellate Assistant Commissioner to the extent that it dealt with the remuneration received by the appellant. Subsequently, the High Court of Judicature at Patna, on the appellant’s request, directed the Tribunal to present a statement of the case based on five questions specified in the order. The fifth question, which was the sole issue of material significance in the present appeal, asked whether, given the facts and circumstances, the sum of Rs 21,274 paid to the assessee in his capacity as the shebait of the trust properties should have been held exempt from tax on the ground that it constituted agricultural income. The High Court concurred with the Tribunal that the remuneration was paid to the appellant under a contract and that it could not be characterized as agricultural income merely because its source was agricultural income. Accordingly, the High Court answered the fifth question against the assessee. The appellant then filed the present appeal, obtaining leave under section 66A(2) of the Indian Income‑tax Act, with the scope limited to the question of whether the amount received by the appellant from the trust property in his role as shebait was exempt from tax liability. Section 2(1) of the Act defines “agricultural income” as follows: (a) any rent or revenue derived from land used for agricultural purposes and either assessed to land revenue in the taxable territories or subject to a local rate collected by government officers as such; (b) … Agricultural income falling under clause (a) must clearly be received as rent or revenue from land used for agricultural purposes. The income that the appellant received from the agricultural properties of the trust in his capacity as trustee was undeniably agricultural income in his hands and, by virtue of section 4(3)(viii), was exempt from tax. The appellant contended that the remuneration he received, pursuant to the covenant contained in the deed of trust, should likewise be exempt under section 4(3)(viii) because, when he appropriated a portion of the rent or revenue of agricultural lands as remuneration, the original character of the income was not altered. The appellant, however, possessed no beneficial interest in the trust lands and was not entitled under the trust to receive or appropriate the income of the properties, or any part thereof, as a matter of beneficial interest. The source of the right to appropriate a fraction of the trust’s net income as remuneration lay not in the right to receive rent or revenue from agricultural lands, but in the covenant in the deed that provided remuneration for his management of the trust.

The Court explained that the income of the trust which the appellant appropriated as remuneration was not received by him in the form of rent or revenue of land; consequently the character of the income that he took as remuneration was different from the character of the income he received in his capacity as trustee. Because both the source and the character of the income changed when a portion of the trust’s income was diverted to the appellant as his remuneration, the Court held that the alteration occurred even though the amount of remuneration was calculated as a percentage of the trust’s total income, a large part of which derived from lands used for agricultural purposes. Since the remuneration was not received as rent or revenue of agricultural land under any legal, beneficial, or title‑based right in the property that generated the income, the Court concluded that such remuneration did not qualify for exemption under section 4(3)(viii). The Court then referred to earlier authorities to illustrate the meaning of “agricultural income” under section 2(1) of the Income‑Tax Act. In Nawab Habibulla v. Commissioner of Income Tax, Bengal, the Privy Council held that remuneration received by a mutwalli of a wakf estate, irrespective of the nature of the wakf’s properties or the amount of income generated by the wakf, was not agricultural income within the meaning of section 2(1) even though the wakf’s income originated from agricultural land. In Premier Construction Co., Ltd. v. Commissioner of Income Tax, Bombay City, the Privy Council further ruled that income received by a taxpayer which does not itself fall within the definition of agricultural income does not acquire the character of agricultural income merely because of the source from which it is derived or the method by which it is computed. However, the Council observed that if the income received does fall within the definition of agricultural income, it is exempt regardless of the character in which the assessee receives it. The Court illustrated this principle with a case where a managing agent of a company was contractually entitled to a minimum annual salary of Rs 10,000, payable irrespective of the company’s profitability; if ten percent of the company’s profits exceeded Rs 10,000, the agent was to receive an additional amount calculated as a percentage of those profits without regard to the source of the profits. One of the sources of the company’s profit was agricultural income, yet the Privy Council held that the assessee received no agricultural income as defined by the Act because he received remuneration for personal services computed on the employer’s profit. Finally, the Court cited Commissioner of Income Tax, Bihar and Orissa v. Kameshwar Singh, where income received by a mortgagee who entered into possession of mortgaged properties was held to be agricultural income because, under the mortgage deed, the mortgagee stood in the position of a landlord dealing directly with cultivators, collecting rents, paying government revenue, and exercising all rights of ownership, thereby receiving income in a manner that gave it the character of agricultural income.

In that earlier decision, the court held that the income received by a mortgagee who had taken possession of mortgaged properties was to be treated as agricultural income because, under the deed of mortgage, the mortgagee assumed the role of landlord in relation to the cultivators of the soil. The mortgagee dealt directly with the tenants, collected rents, paid government revenue, cesses and taxes, and had his name entered in the Land Registration Department. He alone possessed the right to sue for rent, whether current or in arrears, to sue for enhancement or for ejectment, and to settle lands with raiyats and tenants throughout all the mortgaged properties. In effect, he could exercise every proceeding that the mortgagor could have taken had the lands remained in the mortgagor’s possession. The income that the mortgagee received flowed to him because legal ownership was vested in him; although the mortgage deed required him to appropriate that income towards his dues, the character of the income did not cease to be agricultural merely because of that appropriation. In the case of Kameshwar Singh (1) the court was required to consider the nature of the primary receipt by the mortgagee rather than the subsequent appropriation made under the covenant of the mortgage deed. In a later case, K. B. Syed Mohammad Isa and another v. Commissioner of Income Tax, Central and United Provinces (1), the assessee acted as a mutwalli appointed under two separate deeds of trust. Both deeds directed him to receive agricultural and non‑agricultural income and to use the monies for the purposes of the trust. Under one deed, the balance of the receipts was to be retained by the mutwalli for his personal expenses, and under the other, the balance was to compensate him for his services. The Allahabad High Court held that the portion of the amounts retained by the mutwalli under both deeds constituted agricultural income and was therefore exempt from tax. The court observed that, although the wording of the two deeds differed, the settlor’s intention was identical: the mutwalli was required to perform the functions of his office and, so long as he performed those functions, he was entitled in consideration of his service to appropriate the surplus of the profits. However, in each situation the mutwalli was simultaneously a beneficiary with an attached obligation, giving him two capacities—one as mutwalli and another as beneficiary. The court concluded that the balance of the income from the zamindari passed “through the mutwalli” to the beneficiary by virtue of an obligation imposed by the trust deed on the property’s income. Consequently, the mutwalli functioned merely as a conduit, and the beneficiary was, for all intents and purposes, the direct recipient of the income, which remained agricultural in character after passing into the beneficiary’s hands.

In the judgment it was observed that the character of the income did not change when it was transferred; there was no alteration in its source and no modification in its nature. The Court held that the income continued to be classified as agricultural income even after it passed into the hands of the beneficiary under the trust. Applying this principle to the present litigation, the Court noted that the appellant did not possess any beneficial interest in the trust property. Consequently, with respect to the appellant’s remuneration, the Court found that he was not the direct recipient of the income derived from the trust estate. The record also contains a citation to I,L.R. [1942] All. 425 for reference. The Court further observed that the situation would be different only if agricultural income were appropriated by virtue of a covenant in the deed of trust as payment for services rendered; in such a case both the source and the character of the income could be said to be altered. Since none of those conditions applied here, the appeal was found to be without merit. Accordingly, the appeal was dismissed and the costs of the proceeding were awarded against the appellant. The order therefore concluded with the succinct statement that the appeal was dismissed.