# COMMISSIONER OF INCOME TAX, HYDERABAD v. NAWAB MIR BARK.AT ALI KHAN BAHADUR

- **Citation:** [1975] 2 S.C.R. 453
- **Court:** Supreme Court of India
- **Decided:** 1974-10-16
- **Case number:** Civil Appeals Nos. 1184 to 1186 and 1198 to 1200 of 1970
- **Bench:** H. R. Khanna, R.S. Sarkaria, A. C. 0Upta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-hyderabad-v-nawab-mir-bark-at-ali-khan-bahadur-6324
- **Pages:** 11

## Headnote

453
Indian Income-tax Act 1922-Trust created by assessee Corpus deposited with
the Government-Government agreed to pay Interest free of all taxes. Beneficiary
released and assigned all rights In the trust to the settlor-assessee-Whether settlorassessee entitled to tM same exemption from taxation as the beneficiary.
The assessee had created a trust of thirty lacs of rupees for the benefit of his
daughter-in-law on 8th October, 1949. On the same day an agreement was entered
into between the assessee and Government of India, the important terms of which
were that the trustees would deposit the corpus of the trust with the Government
of India; that the Government of India would pay interest on that amount at the
rate of Re. one per cent per annum free of income-tax and other taxes, to pay out
of the cor)lus such sum every year together with interest accrued thereon or on the
balance sum thereof which would in all be a sum of Rs. one lac; that the Government of India would not assess or levy on the settlor or the trustees or any of the
beneficiaries under the deed of trust any income-tax, super-tax or other taxes in
respect of the Income or corpus of the said sum of Rs. thirty lacs or part thereof,
The beneficiary released, assigned and transferred her rights, title and interest in the
trust fund in favour of the assessee and it was stated that tho settlor would be entitled to receive the amount whioh the beneficiary was entitled to free of incometax, super-tax and other taxes. The Income-tax Officer held that the receipt Qf
Rs. one lac per annum by the assessee from the trustees constituted the assessee's
income and so he was liable to pay tax thereon. The order was affirmed by the
Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The
High Court held that though the amounts received by the assessee in pursuance of
·the release deed were his income, he was entitled to exemption from payment of
taxes upon those amounts because of the agreement dated October 8, 1949, that the
assessee stood in the shoes of the original beneficiary under the trust deed and had
become entitled to all the benefits to which she was entitled.
On appeal to this Court it was contended that (I) the assessee who was a transferee of the rights of the beneficiary under the trust deed, could not get the benefit
of that exemption and (2) the question of grant of exemption to the payment of tax
to the assessee could not arise because the settlor got divested of the ownership of
the corpus.
Disniissins the appeals,
HELD : A fair reading of the agreement showe1 that the basic scheme was
that the payment of Rs. one lac under the agreement would be exempted from the
payment of tax. There is nothing in the agreement that the Government wanted
to show a special favour to the beneficiary personally and that the same would have
been with held in case the person entitled to receive Rs. one lac was not the beneficiary but the settlor. The consideration which appears to have weighed with the
Government of India in agreeing to grant exemption in the matter of tax was the
deposit of Rs. thirty lacs with the Government. That censideration held equally
good whether the person to whom the payment of Rs. one lac was made by the
trustees was the beneficiary or the assessee. The exemption was of a general and
comprehensive nature and was not restricted to the beneficiary alone. Agreement
which the Government entered into with the settlor and the trustees expressly granted exemption in the matter of payment of tax in respect of the said sum Rs. one lac
to the settlor also. The agreement makes it clear that in no event were the settlor
and the trustees and the beneficiary to be taxed in respect of payment of Rs. one
L·lac. [461 B-D; F; HJ
(2) In spite of the knowlcdse that the settlor had transferred the amount of
the trust the Government of India asreed to grant exemption to the settlor in respect
454
SUPREME COURT REPORTS
[1975] 2 S.C.R 0
of any income from th

## Text

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COMMISSIONER OF INCOME TAX, HYDERABAD
v.
NAWAB MIR
BARK.AT ALI KHAN BAHADUR
October 16, 1974
(H. R. KHANNA, R.S. SARKARIA AND A. C. 0UPTA, JJ.]
453
Indian Income-tax Act 1922-Trust created by assessee Corpus deposited with
the Government-Government agreed to pay Interest free of all taxes. Beneficiary
released and assigned all rights In the trust to the settlor-assessee-Whether settlorassessee entitled to tM same exemption from taxation as the beneficiary.
The assessee had created a trust of thirty lacs of rupees for the benefit of his
daughter-in-law on 8th October, 1949. On the same day an agreement was entered
into between the assessee and Government of India, the important terms of which
were that the trustees would deposit the corpus of the trust with the Government
of India; that the Government of India would pay interest on that amount at the
rate of Re. one per cent per annum free of income-tax and other taxes, to pay out
of the cor)lus such sum every year together with interest accrued thereon or on the
balance sum thereof which would in all be a sum of Rs. one lac; that the Government of India would not assess or levy on the settlor or the trustees or any of the
beneficiaries under the deed of trust any income-tax, super-tax or other taxes in
respect of the Income or corpus of the said sum of Rs. thirty lacs or part thereof,
The beneficiary released, assigned and transferred her rights, title and interest in the
trust fund in favour of the assessee and it was stated that tho settlor would be entitled to receive the amount whioh the beneficiary was entitled to free of incometax, super-tax and other taxes. The Income-tax Officer held that the receipt Qf
Rs. one lac per annum by the assessee from the trustees constituted the assessee's
income and so he was liable to pay tax thereon. The order was affirmed by the
Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The
High Court held that though the amounts received by the assessee in pursuance of
·the release deed were his income, he was entitled to exemption from payment of
taxes upon those amounts because of the agreement dated October 8, 1949, that the
assessee stood in the shoes of the original beneficiary under the trust deed and had
become entitled to all the benefits to which she was entitled.
On appeal to this Court it was contended that (I) the assessee who was a transferee of the rights of the beneficiary under the trust deed, could not get the benefit
of that exemption and (2) the question of grant of exemption to the payment of tax
to the assessee could not arise because the settlor got divested of the ownership of
the corpus.
Disniissins the appeals,
HELD : A fair reading of the agreement showe1 that the basic scheme was
that the payment of Rs. one lac under the agreement would be exempted from the
payment of tax. There is nothing in the agreement that the Government wanted
to show a special favour to the beneficiary personally and that the same would have
been with held in case the person entitled to receive Rs. one lac was not the beneficiary but the settlor. The consideration which appears to have weighed with the
Government of India in agreeing to grant exemption in the matter of tax was the
deposit of Rs. thirty lacs with the Government. That censideration held equally
good whether the person to whom the payment of Rs. one lac was made by the
trustees was the beneficiary or the assessee. The exemption was of a general and
comprehensive nature and was not restricted to the beneficiary alone. Agreement
which the Government entered into with the settlor and the trustees expressly granted exemption in the matter of payment of tax in respect of the said sum Rs. one lac
to the settlor also. The agreement makes it clear that in no event were the settlor
and the trustees and the beneficiary to be taxed in respect of payment of Rs. one
L·lac. [461 B-D; F; HJ
(2) In spite of the knowlcdse that the settlor had transferred the amount of
the trust the Government of India asreed to grant exemption to the settlor in respect
454
SUPREME COURT REPORTS
[1975] 2 S.C.R 0
of any income from the corpus or part thereof. It would follow that the intention
of the parties was that the settlor was to be exempt in any case from payment of ~ax
in respect of income from that amount and that in the event of the ~ssessee beconung
entitled to the beneficial interest under the trust deed the exemptton from payment
of tax would be available to him. [462 C·D]
(3) Under s. 58 of the Indian Trusts Act 1882 (Act 2 of 1882) the beneficiary
competent to contract, may transfer his intere&t. The present case is not covered
by the proviso because the beneficiary transferred her interest, not during the subsistance of her m;milgc, but at the time of the dissolution of her marriage.
[462 E-F]
(4) During the three years in question the Government has acted upon agreement dated October 8, 1949 even though the beneficial interest under the trust deed
had been transferred by Princess Niloufer to the asse.ssee. Despite that transfer
the Government paid the amount of Rs. l ,00,000 under the agreement. The payment
of Re. l ,00,000 under the agreement and the exemption in the matter of tax were
linked together. It would certainly appear anomalous that the Government should
keep the corpus of the trust fund in deposit with itself on a nominal rate of interest of
Re. I per cent per annum and, at the same time, decline to give the benefit of the other
part of the agreement which relates to the exemption in respect of payment of tax ..
It is true that there is no equity about tax. The above dictum has a relevance when
the matter relates to giving effect to the provisions of tax law. The dictum would
not, however, be attracted when the question before the court as in the present case
is the construction of an agreement and finding out the intention of the parties
thereto as manifested by its terms. [462 G-H]
CIVIL
APPELLATE
JURISDICTION: Civil Appeals Nos. 1184 to
1186 and 1198 to 1200 of 1970
From the Judgment & Order dated the 25th July, 1969 and 25th
September, 1969 of the Andhra Pradesh High Court in Referred
Case No. 39 of 1965 and. IO of 1966 respectively.
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M. C. Manchanda, B. B. Ahuja and S. P. Nayar for the AppLllant.
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S. V. Gupte, Anwarulla Pasha, J. B. Dadachanji, A. Subba Rao
and Mrs. Anjali K. Varma, for the Respondent.
The Judgment of the Court was delivered by
KHANNA, J.-The sho11 question which arises for determination
in these six civil appeals Nos. 1184 to 1186 and 11-98 to 1200of1970
which have been filed on certificate by the Commissioner ofJncometax against the judgment of the Andhra Pradesh High Court is
whether, on the facts of the case, the sum of Rs. l,00,000/- received
by the assessee from the Trustees of Princess Niloufer Trust constituted income under the Indian Income-tax Act, 1922 (hereinafter
referred to as the Act) and if' so, whether the assessee was entitled
to exemption from tax in .respect of the income under the terms
of the agreement entered into with the Government of India on
October 8, 1949.
The High Court to which the above question
was referred l!nder section 66 (1) of the Act held that though the
payment of Rs. 1,00,000/- per year was income in the band of the assessee, he was entitled to oxetnption from tax thereon under the
terms of agreement dated October 8, 1949.
Thr matter relates to the assessmt>nt of the income for the years
1952-53, 1953-54 and 1954-55 ofNizam Mir Osman Ali Khan Bahadur
who was the Ruler of Hyderabad State prior to its integration with
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455
the Union of India.
A large number of questions arose· during the
course of the assessment, but we are no longer concerned with them.
Indeed, most of the questions were decided in the light of the decision
of this Court. in respect of the assessment of this very assessee for
the previous years. The decision of this Court is reported in 59
ITR 666.
We may now set out the facts giving rise to the question reproduced above .
Prince Muazzam Jah Bahadur is the second son
. of the assessee.
The Prince was married to Princess Niloufer
• in Nice (France) on November 12, 1931 ae¢ording to Muslim rites.
On October 8, 1949 the assessee made a settlement of Rs. 30,00,000
by tramsferring that amount to a trust created on that day for the
benefit of Princess Niloufer. The assessee, Sir Sultan Ahmed and
Shavax Ardeshir Lal; a nominee of the Government of India, were
the three trustees appointed under the Trust Deed.
On the same
day an agreement was entered into between the Govermnnet of India,
the assessee, as the settlor of the trust, and the three trustees for the
dep~sit of Rs. 30,00,000 with the Government of India.
The amount
deposited was to carry interest at therate of Re. l per cent per annum.
Clauses 2, 3 and 4 of the agreement were as under :
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"2. The Government of India shall out of its revenue
:pay to the Trustees 'interest on the said sum of Rs. 30,00,000
·(Rupees Thirty Lacs ) at the rate of one per cen_t per annum
free of income-tax; super-tax and all other taxes dues, · duties
and other assessments whatever from the date from which
the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) shall be
deposited by the Trustees with the Government of India until
the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) shall be
wholly paid out by the Govt. of India in accordance with the
provisions of these presents PROVIDED HOWEVER that if
and when the Government of India shall pay to the Trustees
any sum of money out of the corpus of the sum of Rs30,00,000
(Rupees thirty lacs) in accordance with the provisions hereof,
interest shall cease to run on the sums so paid from the date
on which the Government of India shall pay the same to
the Trustees and thereupon interest shall run only upon the
balance of the said sum of Rs. 30,00,000 (Rupees thirty lacs)
for the time being remaining in the hands of the Government
of India.
3. Thi Government of India shall out of the corpus of
the said sum of Rs. 30,00,000 (Rupees thirty lacs) . pay· to the
Trustees untill the said corpus is exhausted su'ch sum every
year as together with the interest accured due on the said' sum
of Rs. 30,00,000 (Rupees thirty lacs) or on the balance thereof
for the time being remaining with the Govenment of India will
in all make up the sum of Rs. 1,00,000 (Rupees one )ac) per
annum, the first, of such payments to be made on the 1st day
of November '1949 and each of the subsequent payments
to be made on the 1st' day of October of each and every year
thereafter.
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456
SUPREME COURT REPORTS
[1975] 2 S.C.R·
4. The Government of India hereby declares and agrees
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that the interest payable on the security of these presents
shall be free from income-tax, super-tax and all other taxes,
dues, duties, and assessments and that accordingly the Government of India shall not at anytime assess or levy on the
Settlor or the Trustees or any of them or on any of the beneficiaries under the said Deed of Trust any income-tax, supertax or other taxes dues, duties or assessments in respect of
B
any income or corpus of the said sum of Rs. 30,00,000 (Rupees
thirty lacs) so deposited or any part thereof shall not at any
time be included in the income of the beneficiaries under the
provisions of the Indian Income-tax Act or any· other Act
relating to taxation on the income, gains and profits of any
persons in India PROVIDED HOWEVER that if notwithstanding the provisions thereina bove contained any such
C
tax, dues, duties or assessments shall be charged or levied
on either the Settlor or the Trustees or the beneficiaries under
the said Deed of Trust or any of them in respect of any income
9r corpus of the said sum of Rs. 30,00,000 (Rupees Thirty
lacs) so deposited or any_ part thereof or if any part of such
income or corpus be included in the total income of any of
them for computing his or her total income for the purpose
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of assessment of his or her income, gains or profits by virtue
of the provisions of the Indian Income-tax Act or of any other
enactment of Jaw for the time being in force in that behalf
in India, then the Government of Irtdia shall forthwith refund,
reimburse and pay to such person the amount of such tax,
dues, duties or assessments charged or levied on him or her
and/or th1: amount of additional tax, dues, duties or assessment
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which shall have been charged or levied on him or her by
reason or any part of the said income or corpus being included in the total income of such person for the purpose of assessing his or her total income, gains or profits under the
provisions of the Indian Imncome-tax Act or any other law or
enactment for
the time bei.ng in force in that behalf in
India".
F
According to the trust deed, the settlor, who was possessed of
a sum of Rs. 30,00,000, out of love and affection for his daughterin-law Princess Niloufer was desirious of making a settlement of the
said amount and for that purpose he had transferred and handed
over the amount to the trustees.
The Turst deed referred to the
agreement which had been on that day entered into with the Government of India. The trustees were required to deposit the said sum
G
of Rs. 30,00,000forthwith with the Government of India in accordance
with the agreement with the Government.
The trustees were to hold
the trust fund in accordance with the directions contained in the different sub-clauses of clause 2 of the trust deed.
Sub-clause (a)required
the deposit o.fthe amount with the Government of India in accordance
with the agreement entered into on that day with the Government.
Sub-clause (b) of .the trust deed was as under :
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"(b) To pay the net interest of the Trust Fund or the balanc:e
thereof for the time being as and when recovered from the
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Government of India to the said Princess free of Income-tax
Super-tax and all other taxes whatsoever, until her death orre~
~arriage, whicheve.r event shall happen first PROVIDED THAT
m the event of the said Prince divorcing the said Princess it shall
be open to the Trustees to pay the net interest c.fthe Trust Fund
or of the balance thereof for the time being to said Princess until
~er death or remarriage, whichever event shall take place first,
1fthe Trustees are of the opinion that the divorce was not due to
any act or default on the part of the said Princess AND THE decision of the Trustees in this respect shall be. final and binding
on all persons claiming under this clause and shall not be questiollf'd in any Court of Law or otherwiEe howsoever."
Sub-clause {c) required the trustees to recover and receive frnm the
Government of India and to pay Princess Niloufer o'ut of the corpus
of the trust fund as long as the same was available such sum every year
as together with the net interest of trust fund would in all make up the
sum of Rs. 1,00,000 per annum. The first payment was to be made
on November I, 1949 and each of the subsequent payments mre to
be made on the first day of October in each year. The payment 1was
to ,be made to the Princess free of income-tax, super-tax and all other
taxes. The Princess was entitled to that sum even in the event of the
Prince divorcing the said Princess; provided the divcrce in the opinion
of the trustees was not due to any act or default on her part. The
amount was to be paid to the Princess until her death or remarriage
whichever event was to occur first. ln no case wa~ the Princess to
receive any sum in excess of Rs. 1,00,000 in a year. Sub-clause (d)
required that on the death of the Princess, the corpus of the trust fUnd
was to be transferred to her issues from Prince Muazzam Jah Bahadur in accordance with the Muslim law of succession. Sub-clauEe (e)
read as under:
"(e) Subject to the provisions ofsub-clames (a), (b) (c) and
(d) hereof on and after the death of the said Princess to transfer and hand over the corpus of the Trust Fund or the balance
thereof then remaining in the hands of the Trustees, as the case
may be, to Settlor, if he be then living, and in the event of the
Settlor predeceasing the said Princess to transfer and hand over
the corpus of the said Fund or the balance thereof then remaining inrhe· hands of Trustees as the case may be to the Nizam
of Hyderabed living at that time."
Unhapp:y differences arose between Prince Muazzam Jah Bah!l~ur
and Princess Niloufer. The husband and wife come;quently started hvmg
separately. No child was born to Princess Niloufer by marriage with the
Prince. On September 18; 1952 two documents were executed. One of
those documents related to the dissolutton of the marriage of Prince
Muazzam Jah Bahadur and Princess Niloufer. The above dissolution
of the marriage in the o'pinion of the three trustees, was not due to
any act or default on the part of Princess Niloufer. The other document
was a deed cif release. Tho parties who executed the deed of release
. were Princess Niloufer of the first part, the asse~see of the second
4 58
SUPREME COURT REPORTS
[1975] 2 S.C.R·
part, Prince Mauzzam Jah Bahadur of the third part and the. three
trustees appointed under the: trust deed dated October 8, 1949 1!1 respect of the sum of Rs. 30,00,000 principa.lly for the benefit of Princess
Niloufer of the fourth part.
The trustees appointed by a trust deed
in respect of a trust creakcl by the assessee .on October 8, 1949 for
a sum of Rs. one crore eithty two lakhs principally for the bcr&fit
of Prince Muazzam Jah Bahadur were also parties to this dee·d of ·
release.
By this release deed Princess Niloufer on receipt of
Rs. 10,00,000 from the assessee released, assigned and transferred
her rights, title and interest in Princess Niloufer Trust Fur.d in favour
of the assess1,e and it was stated that he would be entitled to receive
the amounts to which Princess Niloufor was entitled free of incometax, super-tax and other taxes.
Clauses 1, 2 and 3 of the release deed
read as undc~r :
"(1) That in pursuance of the said agreement between the
parties and in consideration of the premises ar.d of the mid
sum of Rs .. 10,00,000 (Rupees ten lacs) paid by His Exalted
Highness to the Princess on or before the execution of these
presents (the receipt whereof the Princess doth hereby admit and
acknowledge and cf and from the same do{h hereby acquit release exo11erate and discharge His ltxalted Highness for every)
she the Princess doth hereby release assign and transfer unto His
Exalted Highness, all that the net interest of Princess Niloufer's
Trust Fund or of the balance thereof for the time being which is
payable to the Princess free of income-tax, st1per-tax and .all
other taxes whatsoever until her' death or remarriage whichever
event shail happen first as provided in clause 2 (b) of Princess
Niloufer's Trust Deed and which net interest may accrue or arise
or become payabI.e after ti¥: date of these presents until her
death or remarriage, whichever event shall happen first, frcm or
in respect of the said Princess Niloufer's Trust FuJld together
with fl.ill power to demand sue fer and give discharges to
Princess Niloufer's Trustees for the said net interest of Princess
Niloufei:'s Trust Fund AND ALL the estate right title
interest proper claim and demand of the Princess in to and upon
the said net interest a.s aforesaid to HA VE RECEIVE AND
TAKE the same unto His Exalted Highness absoiutcly TO THE
EXTENT that His Exalted Highness shall be entitled to receive
from Princess .. Niloufer's Trustees the said net interest of Princess Niloufer's Trust Fund free of income-tax and super-tax and
all other taxes whatsoever which the Pri11cess would have
received but for the present assignment.
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(2) In further pursuance of the said agreement and for
the consideration aforesaid the Princess doth hereby release
assign and transfer unto His Exalted Highness the sums which
the Princess is entitled to receive under clause 2( c) of Princess
Niloufer's Trust Deed being such sum payable to her by
Princess Niloufer's Trustees out of the Corpus of Princess
Niloufer's Trust Fund every year as together with the net
interest of Pr'incess Nilo.ufer's Trust Fund payable to her under
clause 2(b) thereof will in all make up the sum of Rs. 1,00,000
(Rupees one lac) per annum and which sum of Rs. 1,00,000
payable to her free of income-tax, super-tax, and all other taxes
whatsoever and which sums may accrue or arise or beome payable after the date of these presents from or in respect of
Princ~ss Niloufer's Trust Fund. . . .
. . . .
. ...
(S) Princess Niloufer's Trustees do hereby covenant with
His Exalted Highness
that they the
Princess Niloufer's
Trustees shall until· the death or remarriage of the Princess
whichever event shall happen first, pay to His Exalted Highness
the net interst of Princess Ni!oufer's Trust Fund or of the balance thereof for the time being as and when recovered from
the Government of India free of income-tax, super-tax and
all other taxes whatsoever as also such sum every year out of the
corpus of Princess Niloufer's Trust Fund as together with the
net interest of Princess Niloufer's Trust Fund as aforesaid will
inallmakeup the sumof Rs. 1,00,000 (Rupees one!ac) per
annum TO THE EXTENT that the whole of the said sum of
Rs. 1,00,000 (Rupees one lac) which the Princess would have
received under clauses 2(b) and 2(c) of the said Princess
Niloufer's Trust Deed but for the present assignment shall be
paid to His Exalted Highness free of income-tax, super-tax
and all other taxes whatsoever so long as the same sihall be
available."
Pursuant to the above release deed, the sum of Rs. 1,00,000
received from the Government ofJndia under agreement dated October
8, 1949 which used to be paid by the trustees to Princess Niloufer,
was paid during each of the three years with which we are concerned
to the assessee.
The income-tax officer held that the receipt .of
Rs. 1,00,000 by the assessee in each year from the trustees constituted his income and he was liable to pay tax thereon.
The order
of the income-tax officer was affirmed on appeal by the Appellate
Assistant Commissioner as well as by the Tribunal.
On application filed under section 66 (1) of the Act the following question, along
with some other questions, was referred to the High Court :
"flhether on the facts of the case, the sum of Rs. 1,00,000
received by the assessee from the Trustees of Princess Niloufer
Trust was liable as income under the Income Tax Act and
if so, whether the assessee was entitled to exemption from tax
of the income under the terms of the Agreement entered into
with the Government of India on 8/10/1949 ?"
460
SUPREME COURT REPORTS
[1975] 2 S.C.R·
The High Court held, as already mentioned earlier, that the amounts
of Rs. 1,00,000 received by the assessee in each of the three years
in pursuance of the release dec:d dated September 18, 1955 con~ituted
his income.
It was, however, held that the assessee was entitled to
exemption from payment of tax in respect of the amount of Rs.1,00,000
because of the agreement dated October 8, 1949.
In the opinion
of the High Court the assessee stood in the shoes of Princess Niloufer
who was the original beneficiary under the trust deed and become
entitled to all the benefits to which the Princess was entitled.
Mr. Manohanda on behalf of the appellant has assailed the judgment of the High Court and has contended that the exemption from
payment of tax in respect of the sum of Rs. 1,00,000 received under
the trust deed could be availed of by Princess Niloufer. The assessee,
who was a transferee of the rights of Princess Niloufer's under
the trust deed, could not get the benefit of that exemption.
Normally
an amount received as income is exigible to tax, and in case th1e
assessee seeks exemption :from the payment of tax in respect of that
income, the onus lies upon him. The assessee, according to the
learned counsel, has failed to discharge that onus. As against the
above, Mr. Gupte on behalf of the assessee-respondent has contended
that a fair reading of the agreement dated October 8, 1949 goes to
show that the benefit of exemption from payment of tax in respect
of the sum of Rs. 1,00,000 was not confined to Princess Niloufer only
but could also be availed of by the assessee. After hearing the
learned counriel for the parties at length, we are of the opinion
that the contention of Mr. Gupte is well founded.
We have set out above the material part of agreement dated
October 8, 1949 which was entered into by the .Government of India,
the assessee and the three trustees, and it would appear · therefrom
that an arrangement was arrived at between the three parties in respect of the amount of Rs. 30,00,000.
It was agreed that the trustees
would deposit that amount with the Government of India. The GoverDlment of India for its part agreed to pay interest on that amount a.t
the rate of Re. 1 per cent per annum free of income-tax and other
taxes.
The Government of India also agreed to pay out of the corpus
of Rs. 30,00,000 such sum every year as together with interest accrued
due on the said sum of Rs. 30,00,000 or on the balance sum thereof
would in all make up the sum of Rs. 1,00,000.
It was further agreed
that the Government of India would not ·at any time assess or levy
on the settlor or the trustees or any of the beneficiaries under the
deed of trust any income-tax, super-tax or other taxes. in· respect
of the income: or corpus of the said sum of Rs. 30,00,000 or part thereof.
The rate of interest prevailing at the time of the agreement on Government and gilt-edged securities was admittedly 3t to 4 per cent
per annum. In agreeing to grant exemptio11 from payment of tax i.n
respect of the: amount payable under the agreement, the Government
was apparently influenced by the consideration that it was paying
interest at the rate of Re. 1 per cent instead of the prevailing rate of
Rs. 3 1/2 to 4 per cent. The exemption regarding tax appears to
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have constituted the qui'd pro quo for the saving made by the Government of India in the matter of payment of interest.
At the time
the agreement was entered into, the beneficiary under the deed of trust
was Princess Niloufer.
Question, however, arises 'whether the ber.efit
of that exemption was restricted to Princess Nilcu.fer er \\hfhr
the assessee, who stepped into the shoes of Princess Niloufer under
the deed of release, could also avail of that benefit.
So far as this
aspect is concerned, we are of the opinion that a fair reading of the
agreement shows that the basic scheme of the agreement was that
the payment of
Rs.
1,00,000 under the
agreement
would
be exempted from the payment of tax.
In the opening words of
clause 4 of the agree!llent, the Government of India declared and
agreed unequivocally "that the interest payable on the security
of these presents shall be free from income-tax, super-tax and all other
taxes, dues, duties and assessments". There is nothing in the agreement that the Government wanted to show a special favour to Princess
Niloufer personally and that the same would have been withheld in
case the person entitled to receive Rs. 1,00,000 was not the princess
but her father-in-law.
The consideration which appears to have
weighed with the Government of India in agreeing to grant exemption
in the matter of tax was the deposit of Rs. 30,00,000 with the Government.
That consideration held equally good whether the person
to whom the payment of Rs. 1,00,000 was made by the trustees was
Princess Niloufer or the assessee.
It was also agreed under the agreement that "the Government of
India shall not at any tim~ assess or levy on the settler or the trustees
or any of the beneficiaries under the said trust deed any incometax .. super-tax or other tax, dues, duties or assessments. There is
11othing in respect of any income or corpus of the said sum of
Rs. 30,00,000 so d((posited or any part thereof".
Reference to the
settler, trustees 0r beneficiaries in the above passage shows that the
exemption was of a general and comprehensive nature and was not
restricted to Princess Niloufer alone.
The said reference would
also not detract from the dominant intention of the parties manifested in the agreement that the payment of Rs. 1,00,000 was to be
free of tax.
It is not necessary to express opinion on the point as to whether
the assessee to whom under clause (e) of the trust deed the corpus of
trust fund or the balance thereof then remaining in the hands of the
trustees was to be paid on the death of Princess Niloufer was a beneficiary under the trust. The assessee in any case as the settler of the
trust.
The fact that he became entitled to receive Rs. 1,00,000 per
annum because of the release deed would not affect the status of the
asses see as the settler. The present is not a case wherein the release
deed was executed in favour of a stranger but, on the contrary, the
release deed was executed in favour of the settler and his status as
such was not obliteiated by the fact that a release deed had also been
executed in his favour. The agreement which the Government
entered into with the settler and the truste.es expressely granteJ
exemption in the matter of payment of tax in respect of the said sum
462
SUPREME COURT REPORTS
[1975] 2 s.c.R.
of Rs. l,00,000 to the settlor also.
The agreement makes it ciear
that in no event were the settlor, the trustees and the beneficiaries
.to be taxed in respect of the payment of Rs. 1,00,000.
It has been, argued on behalf of the appellant that the question
of the grant of exemption on the payment of tax to the. assessee as
" settlor of the trust could not arise because as a result of the creation
of the trust, the 11ettlor got divested of the ownership of the amount
of Rs. 30,00,000.
Reference in this connection is made to the recitals
in the trust deed to the effect that the settlor . had transferred and
handed over to the trustees the amount of Rs. 30,00,000. We are
not impressed by this argument.
The Government of India was
.aware of the above recitals in the trust deed at the time it entered into
the agreement dated October 8, 1949. The copy of the trust deed was
made an anneir.ure of the agreement and there was a reference to
the terms of the trust deed in the agreement.· In spite of the knowledge
·that the settlor had transferred the amount of Rs. 30,00,000 the Government of India agreed to grant an exemption to the settlor in respect
·Of any income from the corpus of the said amount of Rs. 30,00,000
or part thereof. It would follow from the above that the intention
of the parties was that the settlor was to be exempt in any case from
payment of tax in respect of the income from that amount and that
in the event of the assessee becoming entitled to the beneficial interest
under the trust deed, the exemption from payment of tax would be
.available to him.
· Argument was also advanced_ by Mi. Manchanda that Princess
Niloufer, who was the beneficiary under the trust, could not transfer
her beneficial interest in favour of the assessee. This contention
cannot be accepted in view of section 58 of the Indian Trusts Act, 1882
(Act 2 of 1882), according to which the beneficiary if competent
to contract, may transfer, his interest, but subject to the law for the
time being in force as to the circumstances and extent in and to which
he may dispose of such interest.
The present case is not covered
by the proviso to that section.
The proviso prevents a married
woman from depriving herself during her marriage of her beneficial
interest in property which is transferred or bequeathed for her benefit.
As would appear from the resume of facts given above, Princess Niloufer
transferred her interest n.ot during the subsistence of her marriage
but at the time of the dissolution of her marriage.
It may also be mentioned that during the three years with which
we are concerned, the Government has acted upon agreement· dated
October 8, 1949 even though the benefic:ial' interest under the trust
deed had been transferred by Princess, Niloufer to the assessee.
Despite that transfer the Government paid the amount of Rs.1,00,000
under the agreement. The payment of Rs. 1,00,000 under the agree·
ment and the exception in the matter of tax were linked together.
It would certainly appear anomalous that the Government should
keep the corpus of the trust fund in deposit with itself on a nominal
:rate of intere~t of Re. 1 per cent per annum and, at . the same time
decline to give the benefit of other part of the agreement which
.relates to the exemption in respect of payment of tax. It is true that
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there is no equity about tax.
The above dictum has a· relevance when
the matter relates to giving effect to the provisions of tax Jaw.
The
dictum would not, however, be attracted when the question before
the court as in the present case is the construction of an agreement
and finding out the intention of the parties thereto as manifested
by its terms. What we are here essentially concerned with is whether
the pa~ies, to the agreement intended or it was ever within their contemplation that the settlor should pay tax on the amount of Rs.
1,00,000 in case of the beneficial interest under the trust deed devolved
upon him, even though the corpus of the trust fund remained. in
deposit with the Government on an interest of Re. 1 per cent per annum.
Mr. Manchanda has referred to the case of Commissioner of Income.
tax Gujarat II v. B. M. Kharwar(I) wherein it has been laid down
that the taxing authorities are not entitled, in determining whether
a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they
. regard as "the substance of the matter". The taxing authority
is entitled, and is indeed bound, to determine the true legal relation
resulting from a transaction. If the parties have chosen to conceal
by a device the legal relation, it is open to the taxing authorities to
unravel the device and to determine the true character of the realtion-
. ship. But the legal effect of a transaction cannot be displaced. by
probing into the "substance of the transaction".
This principle
applies alike to cases in which the legal relation is recorded in a formal
document, and to cases where it has to be gathered from evidenceoral and documentary-and conduct of the parties to the transaction.
There can, in our opinion, be hardly any dispute so far as the above
proposition is concerned.
The appellant, however, cannot derive
assistance from it.
The answer to the question with which we are
concerned in the present case depends upon the terms of agreement
dated October 8, 1949. In case we find that the payment of Rs. 1,00,000
in each of the three years is covered by the above agreement, the exemption granted thereby cannot be withheld. from the assessee:
In the result the appeals fail and are dismissed with co.sts. One
hearing fee.
P.B.R.
Appeals dismissed.
(I) (19~9] 72 l.T.R. 603.