1985-VIL-260-RAJ-DT

Equivalent Citation: [1986] 158 ITR 810, 53 CTR 40, 26 TAXMANN 9

RAJASTHAN HIGH COURT

Date: 19.07.1985

EKLINGJI TRUST

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : S. K. MAL LODHA., SOBHAG MAL JAIN 

JUDGMENT

The judgment of the court was delivered by

S. K. MAL LODHA J.-The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as " the Tribunal "), has referred an important question of law which has arisen out of its common order dated September 9, 1977, relating to the four assessment years 1970-71 to 1973-74.

The controversy is whether the amounts received by the assessee in the previous years relating to the aforesaid assessment years by way of compensation for the jagir lands of the assessee resumed by the State are capital receipt or revenue receipt.

The assessee, Shri Eklingji Trust, Udaipur, is a religious trust. It was established by a deed of trust dated April 12, 1955. The trust is in respect of various temples and funds. There were certain jagir lands of the various temples and the funds comprising the trust. They (jagir lands) were resumed by the State of Rajasthan under the Rajasthan Land Reforms and Resumption of Jagirs Act, 1952 (Act No. VI of 1952) (for short " the Act "). On account of the resumption of the jagir lands, the assessee became entitled to receive compensation from the State of Rajasthan and an annuity in perpetuity in accordance with clause 7 of the Second Schedule appended to the Act. One contention raised on behalf of the assessee before the Income-tax Officer was that the annuity amount received during the aforesaid four assessment years, was capital receipt as it was on account of compensation in lieu of the resumption of the jagir lands. The Income-tax Officer in the four orders, passed on different dates, held that the annuity in perpetuity, received by the assessee was not a capital asset, but was compensation paid by the Government in lieu of the actual income from the jagir lands and, therefore, was a revenue receipt liable to tax. It may be stated that the Income-tax Officer further held that the annuity received by the assessee was not agricultural income as it was not rent or revenue derived from land by agricultural operations carried on by the assessee. The assessee filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner agreed with the Income-tax Officer and held that the compensation received was not agricultural income. He, however, agreed with the contention raised on behalf of the assessee that the amount of compensation received by the assessee was a capital receipt. The material part of the order of the Appellate Assistant Commissioner is as under :

"...I am of the view that it must succeed, because the annual amounts received are in fact nothing but compensation for resumption of jagirs and this compensation had the same character as the compensation for resumption of jagirs in case of other jagirdars such as individuals. I also agree with the A/Rs. that in the case of religious institutions, Government devised the system of annual payment lasting over an indefinite period, because the Government had really a high concern for the proper management and running of such public religious institutions and, therefore, it wanted to make it sure that large amount of funds of such institutions was not placed in the hands of their management, and they could not be wasted away by the persons incharge of management within a short period. Thus, as result of this, Government took a wise decision in deciding to make payments of a part of the amount of compensation annually so that that could be annually utilised for the running and maintenance of such institutions. "

The Department went in appeal to the Tribunal. The Tribunal was of the opinion that the Government paid compensation for the jagir lands and the amount paid is not a capital sum representing the value of the asset and that the amount paid had no reference to the value of the asset at all. According to the Tribunal, the result of the resumption of jagir lands has been that a regular source of income has come into existence from which the assessee was to derive for all time to come a definite amount with assured regularity and, consequently, such receipts are income liable to tax. The Tribunal, therefore, cancelled the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Four questions were proposed by the assessee in its application under section 256(1) of the Income-tax Act, 1961 (No. XLIII of 1961) (hereinafter referred to as " the Income-tax Act "). The Tribunal has, however, referred only the following question for the opinion of this court:

" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the annuity received by the assessee in the previous years relevant to the assessment years 1970-71 to 1973-74 by way of compensation for the jagir of the assessee resumed by the State was a revenue receipt liable to tax ? "

It is clear that we have to determine whether the annuity received by way of compensation on account of the resumption of jagir lands of the assessee by the Government is a capital receipt or revenue receipt which is liable to tax.

In order to determine the nature of the annuity, it will be useful to refer to the relevant provisions of the Act and its Second Schedule.

Section 21 of the Act deals with resumption of jagir lands. The consequences of the resumption have been laid down in section 22 of the Act. For the present purpose, we shall read the material part of section 22(1) of the Act:

" 22. Consequences of resumption.-(1) As from the date of resumption of any jagir lands notwithstanding anything contained in any existing jagir law applicable thereto but save as otherwise provided in this Act

(a) the right, title and interest of the jagirdar and of every other person claiming through him in his jagir lands, including forests, trees, fisheries, wells, tanks, ponds, water channels, ferries, pathways, village sites, huts, bazars and mela grounds and mines and minerals, whether being worked or not, shall stand resumed to the Government free from all encumbrances."

After resumption, the right, title and interest of the jagirdar comes to an end and the jagir lands stand resumed to the Government free from all encumbrances. It has been made incumbent on the Government to pay to every jagirdar, whose jagir land is resumed, under section 21 of the Act, such compensation which is to be determined in accordance with the principles laid down in the Second Schedule. In passing, we may also notice section 27, which deals with the amount of maintenance. The jagir Commissioner has been empowered to fix the amount of maintenance to person who was entitled to maintenance allowance out of the income of any jagir, out of the compensation and rehabilitation grant payable to the jagirdar. Section 26 makes reference to the Second Schedule. Material clauses of the Second Schedule are clauses 5, 6 and 7 which are as under:

" 5. Amount of compensation money.-The compensation payable under section 26 to a jagirdar shall be seven times his net income calculated in accordance with the provisions hereinbefore contained.

6. Compensation for customs duties.-In addition to the compensation payable in accordance with clause 5, the Government shall continue to pay to the jagirdar, the compensation, if any, received by or due to the jagirdar from the Government in or for the basic year in respect of customs duties:

Provided that the amount of such compensation shall be reduced in the same proportion in which the customs duties levied by the Government are reduced.

7. Charitable and educational institutions.-Notwithstanding anything contained in section 26 or in clauses 5 and 6 of this Schedule where any jagir lands are held, whether directly or as a grant from a jagirdar for the maintenance of an institution for educational or charitable purpose, or of any place of religious worship or for the performance of any religious service,the Government shall pay by way of compensation an annuity in perpetuity equal in amount to the net income from such jagir lands in or for the basic year to the person, who is, or may hereafter be recognised in accordance with law as being charged for the time being with the duty of the maintenance of such institution or place of worship or the performance of such service.

Explanation.-For the purpose of this clause, the net income of any jagir land shall, notwithstanding anything hereinbefore contained, be an amount equal to the gross income from such land calculated in accordance with the provisions of clauses (2) and (3) minus ten per cent. of such gross income to be deducted on account of expenses of the management of the land."

A reading of clauses 5 and 7 abundantly makes it clear that compensation is payable after the resumption of the jagir lands. Under clause 5, the compensation payable to the jagirdar is seven times the net income which is to be calculated in accordance with the provisions contained in the Second Schedule. Clause 7 of the Second Schedule is applicable to charitable and educational institutions. This is an overriding clause, for, despite applicability of section 26 of the Act and clauses 5 and 6 of the Second Schedule (sic). In the case of jagir lands held for the purposes specified therein, which in this case is maintenance of charitable institution, the compensation is to be paid as an annuity in perpetuity. The manner and mode of payment of compensation is annuity in perpetuity which is equal in amount to the net income from such jagir lands in or for the basic year to the person who is under duty to maintain such institution or place of worship or performance of such service. It is, thus, clear that in clause 7, the compensation is payable in the shape of an annuity in perpetuity and for the quantum, the criterion has been laid down in it. The Tribunal was alive to the fact that the amount paid was compensation but, according to it, that amount had no reference to the value of the asset for all times to come, which the assessee had earned from the jagir lands in the basic year. The view taken by the Tribunal is that the result of resumption of jagir lands is a regular source of income and it is being ensured to the assessee. It, therefore, concluded that such receipts are revenue in nature and not a capital asset. Thus, the Tribunal has taken the manner, mode and measure, as relevant factors for determining whether the amount received by the assessee is a capital receipt or a revenue receipt. Soundness of this view is to be judged.

Before we refer to the various tests for determining the nature of the receipt (whether capital or revenue), we may consider the meaning of " annuity ". In the ordinary sense, it means the purchase of an income. It involves conversion of capital into income, but in all circumstances it is not so. The annual payments are sometimes loosely called " annuity ", when they are in fact annual instalments of capital. The nature of annuity is finally determined by the circumstances that the obligation is to pay a capital sum and instalments are merely a method of effecting payment.

It was held in Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC), that the measure and method of payment of compensation was not decisive of the character of a payment of compensation. In that case, the assessee was paid compensation under the Defence of India Rules, calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during that period. Their Lordships, after considering Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue [1922] 12 TC 427 (HL), which was affirmed in Van den Berghs Ltd. v. Clark [1935] 3 ITR (Eng. Cas) 17, quoted with approval, the following from the latter case (at p. 397 of 42 ITR) :

"There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. "

In this connection, their Lordships have expressed themselves as under (at p. 397):

" This proposition is as sound as it is well-expressed, and has been followed in numerous cases under the Indian Income-tax Act and also by this court. It is the quality of the Payment that is decisive of the character of the payment and not the method of the Payment or its measure, and makes it fall within capital or revenue. " (Emphasis added).

In P. H. Divecha v. CIT [1963] 48 ITR (SC) 222, it was held as under (at p. 231),:

" In determining whether this payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. " (Underlining is ours).

To quote from their Lordships' observations (at pp. 231 & 232):

" To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt, one may have to examine the motive out of which the payment was made. It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as 'pay', 'remuneration', etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. "

S. R. Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 (SC), was a case under the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948, as applicable to Andhra Pradesh. Interim payment under section 50(2) of the said Act was received every year by a former, holder of an estate which was abolished under the aforesaid Act, during the period between the taking over of the estate and final determination and deposit of compensation under the Act. The question arose whether the interim payment was of capital nature and not liable to tax. It was held in that case that it was a capital receipt.

In Shanmugha Rajeswara Sethupathi v. ITO [1962] 44 ITR 853 (Mad), the estate of the assessee was taken over by the Government under the Madras Estates (Abolition and Conversion into Ryotwari) Act. A lump sum was deposited by way of advance compensation. Interim payment under section 50 of the said Act was also deposited. The Income-tax Officer issued notice for assessing the interim payment. An argument was raised that the interim payment was part of the compensation which he received for the loss of his estate and should, therefore, be regarded as capital and not income. In these facts, it was held that the terminology used in the Abolition Act was not conclusive in so far as the character of the payments for the purposes of the Indian Income-tax Act, 1922, falls to be considered. The important observations made are these (p. 869):

"...that the interim payments were made to the landholders not as income or as interest on the undeposited portion of the compensation; these payments in so far as the scheme of the Act reveals their nature were clearly in addition to the compensation provided in section 39 of the Act to compensate for the deprivation of the estate and for the loss of an income producing asset of the landholders. They are accordingly of capital nature and not liable to income-tax. "

The question pertaining to compensation for compulsory acquisition arose in Ukhara Estate Zamindaries P. Ltd. v. CIT [1979] 120 ITR 549 (SC). Tulzapurkar J., speaking for the court, observed as under (at pp. 558 & 559):

" So far as the amounts of compensation received by the assessee for compulsory acquisition of portions of land are concerned, the same would obviously partake of the character of capital receipt inasmuch as compulsory acquisition could not be said to be a voluntary transaction or a voluntary deal entered into by the assessee with the Land Acquisition Collector and the compensation would be a substitute for the capital asset lost by the assessee. " (Underlining is ours).

Some principles that can be deduced from the aforesaid decisions for determining whether a particular amount received by the assessee is capital or revenue in nature, are these:

(1) the fact that a certain payment is measured by the estimated annual yield or profits does not make the payment an income receipt ;

(2) the fact that the receipt is a periodic receipt or a single receipt is immaterial for the purpose of determining its nature; an income receipt is not necessarily recurring, nor a capital receipt necessarily single;

 (3) the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the Payment, not what the parties call it.

In the light of these principles, we now proceed to examine whether the annuity in perpetuity paid as compensation to the assessee is capital or revenue in nature. As stated above, the mere name given in clause 7 of the Second Schedule appended to the Act will not be decisive for determining its nature: capital or revenue. One test, which we want to apply is whether the principal is gone for ever and it is satisfied by periodical payments (see Perrin v. Dickson [1929] 14 TC 608 (CA)). The compensation paid for was for resumption of jagir lands, i.e., for taking away, and so it is a capital receipt. The statutes which take away others' property generally provide for payment of compensation. Thus, it is clear that the payment of annuity in perpetuity equal in amount to the net income from the jagir lands by way of compensation in view of the tests laid down in S. R. Y. Sivaram Prasad Bahadur's case [1971] 82 ITR 527 (SC), is in the nature of capital receipt.

Learned counsel for the Revenue, however, invited our attention to Sayed Sadat Abdul Masud v. CIT [1979] 118 ITR 939 (Pat), in which question arose whether a perpetual annuity received as compensation from the State Government is nothing but income ? In that case, the trust was receiving income out of certain assets which had been endowed to deities, for whom the trust had been created. Those assets vested in the State of Bihar, but the income from the assets continued to flow for the purpose of the trust. In these facts, it was observed as under (at p. 943):

" It obviously means that the income arising from the trust properties shall continue to be paid to the trust, with only this difference that after the vesting of the estate, now it shall be paid by the State. The annuity received shall, therefore, continue to bear the same character as it had when the assets, out of which the income arose, were held in private hands."

This decision is clearly distinguishable on facts and we have no hesitation in saying that it is of no assistance to the learned counsel for the Revenue.

For the reasons mentioned hereinabove, we are of the opinion that the Tribunal was not right in holding that the annuity received by the assessee in the previous years, by way of compensation for the resumption of the jagir lands by the Government, was a revenue receipt liable to tax. In our opinion, the compensation that was paid to the assessee by way of annuity in perpetuity after the resumption of the jagir lands was a capital receipt.

The question referred to us is answered in the negative, i.e., in favour of the assessee and against the Revenue,

There will be no order as to costs.

Let the Tribunal be informed of the judgment as required by section 260(1) of the Act.

 

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