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TMI Blog1974 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 66(1) of the Act held that though the payment of Rs. 1,00,000 per year was income in the hands of the assessee, he was entitled to exemption from tax thereon under the terms of the agreement dated October 8, 1949. The matter relates to the assessment of the income for the years 1952-53, 1953-54 and 1954-55 of Nizam Mir Osman Ali Khan Bahadur, who was the Ruler of Hyderabad State prior to its integration with 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 I.T.R. 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, according to Muslim rites. On October 8, 1949, the assessee made a settlement of Rs. 30,00,000 by transferring that amount to a trust created on that day for the benefit of Princess Niloufer. The assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and that accordingly the Government of India shall not at any time 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, super-tax or other taxes, dues, duties or assessments in respect of any income or corpus of the said sum of Rs. 30,00,000 (rupees thirty lakhs) so deposited or any part or parts thereof and any such income or corpus 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 person in India provided however that if notwithstanding the provisions hereinabove contained any such 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 or corpus of the said sum of Rs. 30,00,000 (rupees thirty lakhs) 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 of assessment of his or her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trustees in this respect shall be final and binding on all persons claiming under this clause and shall not be questioned in any court of law or otherwise howsoever." Sub-clause (c) required the trustees to recover and receive from the Government of India and to pay Princess Niloufer out 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 the trust fund would in all make up the sum of Rs. 1,00,000 per annam. The first payment was to be made on November 1, 1949, and each of the subsequent payments were to be made on the first day of October in each year. The payment was 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 divorce, 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. In no case was 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises and of the said sum of Rs. 10,00,000 (rupees ten lakhs) 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 of and from the same doth hereby acquit release exonerate and discharge His Exalted Highness for ever) 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 super-tax and all other taxes whatsoever until her death or remarriage whichever event shall happen first as provided in clause 2(b) of Princess Niloufer's Trust Deed and which net interest may accrue or arise or become payable after the date of these presents until her death or remarriage, whichever event shall happen first, from or in respect of the said Princess Niloufer's Trust Fund together with full power to demand sue for and give discharges to Princess Niloufer's Trustees for the said net interest of Princess Niloufer's Trust Fund and all the estate right title interest proper claim and demand of the Princess into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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 assesee. 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 : " Whether, 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 8th October, 1949 ? " 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 deed dated September 18, 1952, constituted his i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 31 to 4 per cent. per annum. In agreeing to grant exemption from payment of tax in 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 have constituted the quid 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 benefit of that exemption was restricted to Princess Niloufer or whether 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed was executed in favour of the settlor and his status as such was not obliterated by the fact that a release deed had also been executed in his favour. The 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 of Rs. 1,00,000 to the settlor also. The agreement makes it clear 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 a settlor of the trust could not arise because as a result of the creation of the trust, the settlor 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of payment of tax. It is true that there is no equity about a tax. The above dictum has relevance when the matter relates to giving effect to the provisions of tax laws. 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 parties 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 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 v. B. M. Kharwar, 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 entit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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