Patna High Court
Commissioner Of Income-Tax, Bihar And ... vs Maharajadhiraj Sir Kameshwar Singh. on 9 January, 1953
Equivalent citations: [1953]23ITR190(PATNA), AIR 1953 PATNA 231
JUDGMENT
RAMASWAMI, J. - In this case the Income-tax Appellate Tribunal has formulated the following question of law for the determination of the High Court :-
"Whether in the circumstances of this case the sums of Rs. 7,917 for the assessment year 1945-46 and Rs. 9,458 for the assessment year 1946-47 paid by the assessee to the Viceroys War Purposes Fund are taxable in the hands of the assessee ?"
According to the statement of the case the assessee who is Maharaja of Darbhanga purchased Government Securities 1943-55 bearing interest at 3 per cent. on 17th November, 1943. The interest on these securities amounted to a sum of Rs. 7,917 for the assessment year 1945-46 and Rs. 9,458 for the assessment year 1946-47. It is not disputed that these figures are correct or that the amount of interest was actually paid to the Viceroys War Purposes Fund by the assessee. It is claimed that the Maharaja of Darbhanga purchased securities as a result of correspondence between between him and the Vicereine of India. The assessee had agreed that he would purchase 10 lacs worth of securities and that the interest therefrom would be paid to the Viceroys War Purposes Fund for the duration of the War. Before the Income-tax authorities it is claimed on behalf of the Maharaja that it should be held that a trust was created and that the interest accrued should not be taxed for the respective assessment years. As regards 1945-46 assessment the Appellate Assistant Commissioner did not agree with the submission made by the assessee and ordered that the amount of interest should be taxed. For the assessment year 1946-47, however, the Appellate Assistant Commissioner adopted a different view and agreeing with the contention of the assessee held that the amount of interest was not taxable. Appeals were preferred against the order of the Appellate Assistant Commissioner in each case on behalf of the department and on behalf of the assessee. The income-tax Appellate Tribunal held after hearing the parties that the amount of interest was not taxable in the hands of the assessee for both the assessment years.
On behalf of the Commissioner of Income-tax learned Standing Counsel stressed the argument that the view taken by the Income-tax Appellate Tribunal is erroneous, that on a proper construction of Section 16(1)(c) of the Indian Income-tax Act the amount of interest which had accrued for the two assessment years on the amount of securities which had been purchased by the Maharaja was taxable in his hands. It was contended that no trust was created with respect to the securities purchased by the Maharaja but there was a mere promise made by the Maharaja to pay donation of the interest received from the securities to the Viceroys War Purposes Fund. To put it differently, the argument is that there was no legally enforceable agreement between the Maharaja of Darbhanga on the one hand and the Viceroy or Vicereine of India on the other hand to the effect that the assessee would pay the amount of interest accrued on the Government securities for the period of the duration of the war. It was further argued that the third proviso to Section 16(1)(c) does not contemplate a settlement or disposition in favour of an artificial entity like the Viceroys War Purpose Fund. It was submitted that the assessee could claim exemption under the third proviso only in a case where settlement or disposition is made in favour of a living person and not in a case where an artificial entity either incorporated or unincorporated is a beneficiary under the transaction. The question at issue depends upon the proper construction of Section 16(1)(c) which states as follows :-
"In computing the total income of an assessee -
(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not... shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor :
Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly or the income or assets to the settlor,disponer or transferor.....
Provided further that the expression settlement or disposition shall for the purposes of this clause include any disposition, trust, covenant, agreement, or arrangement, and the expression settlor or disponer in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made :
Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settler or disponer derives no direct or indirect benefit but that the settler shall be liable to be assessed on the said income as and when the power to revoke arises to him."
We are concerned with the third proviso to section 16(1)(c) in this case. The first question which arises is whether the promise made by the Maharaja of Darbhanga that he would pay the interest on the Government securities to the Viceroys War Purposes Fund so long as the war lasted is a legally enforceable obligation. From the statement of the case it appears that there was correspondence between the Maharaja of Darbhanga and the Vicereine of India, as a consequence of which it was agreed by the Maharaja that he would purchase 3 per cent. Government loan to the extend of 10 lacs and that he would pay the interest accrued on the securities for the duration of the war. The Income-tax Appellate Tribunal in its order dated the 27th October, 1949, held that a trust was created of this Fund and the income therefrom is not taxable in the hands of the appellant. The tribunal said : "The claim of the assessee is that by virtue of correspondence between the Vicereine and the appellant, the appellant purchased Rs. 10 lakhs worth of securities and agreed that the interest therefrom should go to the Viceroys War Purposes Fund as long as the War lasted. It is submitted in the circumstances that it should be held that a trust was created of this Fund and the income therefrom should not be taxed in the hands of the appellant. It is not the case of the appellant that the securities were transferred to the Fund, but it is claimed that a trust was created during the lifetime of the person meaning the beneficiary, i.e., the Viceroys War Purpose Fund. This view has been accepted by the Appellate Assistant Commissioner for assessment of 1946-47. We are inclined to hold that this view of the Appellate Assistant Commissioner is correct."
In this Court Mr. S. K. Majumdar who ably argued the case on behalf of the assessee attempted to support the view of the Tribunal that a trust was created. It is obviously impossible to accept this argument. Learned counsel further contended that there was an agreement on the part of the Maharaja that he would pay the amount of interest accrued on the Government securities year after year so long as the war lasted. Learned counsel in fact submitted his argument in the alternative. In the first place, learned counsel said that there was a legally enforceable obligation on the part of the Maharaja of Darbhanga and the Income-tax authorities have rightly exempted levy of tax on the interest which had been paid to the Viceroys War Purposes Fund. In the alternative learned counsel submitted that even it there was a mere promise, not legally enforceable on the part of the Maharaja, the third proviso to Section 16(1)(c) would operate and the Maharaja would be entitled to claim exemption of income-tax on the amount of interest accrued on securities for the two assessment years. As regards the first alternative argument presented by Mr. Majumdar I am of opinion that, upon the facts disclosed in the statement of the case, the so-called agreement of the Maharaja to pay interest on the securities as donation to the Viceroys War Purposes Fund is not a legally enforceable promise. There is nothing to show that there was a contract or agreement in the legal sense between the the Maharaja and the Vicereine of India or any one else representing the Viceroys War Purpose Fund. There is nothing to suggest that there was any consideration of any sort or description for the Maharajas promise to pay the interest. The Maharaja no doubt paid the amount of interest to the War Purpose Fund not because there was any legal obligation to pay or there was any legal contract. It was a mere promise of donation and it is entirely voluntary on the part of the Maharaja and voluntary also on the part of the Vicereine. There was no intention of the parties in entering into an agreement that any legal obligation should be created. Unless there was an intention on the part of the Maharaja that any legal obligation should be created I do not think that there was a contract in the legal sense and there was any binding legal obligation on the pat of the Maharaja to pay the amount of donation he had promised to the Vicereine. The principle has been stated beyond any possibility of doubt by Lord Atkin in Balfour v. Balfour, "To my mind those agreements, or many of them, do not result in contracts at all, and they do not result in contracts even though there may be what as between other parties would constitute consideration for the agreement. The consideration, as we know, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. That is a well-known definition, and it constantly happens, I think, that such arrangements made between husbands and wife are arrangements in which there are mutual promises or in which there is consideration in form within the definition that I have mentioned. Nevertheless they are not contractors, and they are not contracts because the parties did not intend that they should be attended by legal consequences. To my mind it would be of the worst possible example to hold that agreements such as this resulted in legal obligations which could be enforced in the Courts." The principle is also stated in an earlier case, the facts of which bear a close parallel to the facts of the present case. In In re Hudson A verbally promised to give Pounds 20,000 to the Jubilee fund of the Congregational Union, and also filled up and signed a blank form of promise not addressed to anyone, but headed "Congregational Union of England and Wales Jubilee Fund," whereby he promised to give Pounds 20,000, in five equal annual installments of Pounds 4,000 each, for the liquidation of chapel debts. A paid three installments of Pounds 4,000 to the fund within three years from the date of his promise, and then died leaving the remaining two installments unpaid and unprovided for. The Congregational Union claimed Pounds 8,000 from As executors, on the ground that they had been led by As promise to contribute larger sums to churches than they would otherwise have done; that money had been given and promised by other persons in consequences of As promise; that grants from the Jubilee Fund had been promised to cases recommended by A; and that churches to which promises had been made by the committee, and the committee themselves, had incurred liabilities in consequences of As promise. It was held by the Court of Chancery that the action must fail on the ground that there was no enforceable contract and that there was no consideration to support the contract. At page 820 Pearson, J., who pronounced the opinion of the Court stated : "The first question is whether or not there is any contract at all to pay. I mean a contract in the legal sense of the word contract; was there any consideration of any sort or description for Mr. Hudsons promise to pay pounds 20,000 - anything that could be considered a consideration either in this court or elsewhere ? I am utterly at a loss to ascertain that there was any consideration. The parties expressed their intention to contribute, and I have no doubt that, if Mr. Hudson had lived and had been able to pay his two remaining installments of pounds 4,000 each, he would have paid them; but then he would have paid them in the same manner in which he paid the previous installments, not as being bound by a legal contract to pay, or as paying a debt, but as making, from time to time, a charitable gift which he had expressed his intention to make, and which he continued minded to make. Now, here, the only promise was this, that, at the meeting he said that he would give -that is to say, that he intended to give - pounds 20,000. What is the consideration for the promise which was to make it a contract ? There was no consideration at all." There are Indian authorities to the effect that a promise to pay donation may be legally enforceabe in certain circumstances. For instance, in Kedarnath Bhattacharji v. Gorie Mahomed it was held by a Bench of the Calcutta High Court that a suit will lie to recover a subscription promised if the subscriber knew that, on the faith of his and other subscriptions, an obligation was incurred to a contractor for the purpose of erecting a building to be paid for out of the monies subscribed. This case was followed by District Board of Ramnad v. Mahomed Ibrahim in which it was held that a promise to pay a subscription becomes enforceable as soon as any definite steps have been taken in furtherance of the object and on the faith of the promised subscription. These decisions may be explained on the ground that there was not a bare promise or agreement to pay but there was an estoppel against the promisor on the definite steps had been taken in furtherance of the object and on the faith of the promisor to pay the subscription. This was the view taken in Abdul Aziz v. Masum Ali in which a Muhamadan promised Rs. 500 to a fund started to rebuild a mosque but no steps were taken to rebuild the mosque and it was held by the High Court that the promise was without consideration and the subscriber was not liable. To a similar effect is the decision in Doraswamy Iyer v. Arunachalam in which it was held by Cornish, J., that mere promise to subscribe a sum of money or the entry of such promised sum in a subscription list did not furnish any consideration for any contract or legally enforceable agreement. Upon this review of the authorities it is clear that mere promise to pay subscription without any allegation of any estoppel would not constitute a legally enforceable contract. The argument of Mr. Majumdar that the agreement of the Maharaja in the present case is legally enforceable cannot be sustained.
Learned counsel then submitted the alternative argument that even if the promise of the Maharaja was not legally enforceable, the third proviso to Section 16(1)(c) would still be applicable and the Maharaja would be entitled to be granted exemption of income-tax on the amount of donations he had paid. It was pointed out by the learned counsel that the second proviso defines the expression "settlement or disposition" to include any disposition, trust, covenant, agreement or arrangement. But it is not possible, in my opinion, to construe the expression "settlement or disposition" in such a wide manner as is contended for by Mr. Majumdar. It is manifest on examination of the language of second and third provisos that "settlement or disposition" must refer to settlement or disposition which is legally enforceable. This view is supported by the clause in the third proviso which stated that the settlement or disposition shall not be revocable for a period exceeding six years or during the lifetime of the person. Unless there was a legally enforceable settlement or disposition how is it possible for the settler or disponer to make a revocation. The last portion of the proviso states that the settler shall be liable to be assessed on the said income as and when the power to revoke arises to him. If the expression "settlement or disposition" is construed to include legally enforceable and legally nonenforceable transaction it is not possible to attribute any sensible meaning to the last portion of the third proviso which reserves the right of assessment on the income of the settlor when the power to revoke arises to him. The language of the first proviso is also relevant in this connection. This proviso states that a settlement, disposition or transfer shall be deemed to be revocable if it contain any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor. This proviso speaks of a revocable transaction and it is not apt use of language to say that a transaction which is not legally enforceable can be revoked. In view of these consideration I am of opinion that the third proviso which must be read in the context of the other two provisos of Section 16(1)(c) must be construed to relate to a settlement or disposition which is legally enforceable and not to a settlement or disposition which cannot be legally enforced.
In the course of the argument Mr. Majumdar referred to Ramji Keshavji v. Commissioner of Income-tax, Bombay, and D. R. Shahapure v. Commissioner of Income-tax, Bombay, in support of his contention that Section 16(1)(c) would be applicable. In Ramji Keshavji v. Commissioner of Income-tax, Bombay, the assessee had executed in favour of his wife a deed of trust by which he conveyed certain properties to the trustees and reserved to himself the right to occupy a portion of the premises which was already in his occupation. Clause (3) of the deed provided that the net income from the properties should be paid to his wife during her lifetime and that she should maintain her minor children by the assessee and should run the household. Clause (4) provided that in the event of the assessee surviving his wife, the income should be paid to him. In making assessment for the year 1941-42 the Income-tax authorities included in the total income of the assessee under the provisions of proviso (1) to Section 16(1)(c) the income from the properties paid to his wife. It was held by the High Court that the income derived from the trust properties and payable to the assessees wife during her lifetime could not be deemed to be the assessees income by virtue of the third proviso to Section 16(1)(c). The facts of this case are wholly different from the facts with which we are concerned in the present case. There was a valid and legally enforceable deed of trust by the assessee in favour of his wife conveying certain properties and providing certain income to his wife for her lifetime. The decision is obviously right but it has no bearing on the question at issue in the present case. The same comment applied to Shahapure v. Commissioner of Income-tax, Bombay in which the assessee, with a view to make provision for his fifth wife, made an entry in his business books that an estate worth Rs. 20,000 would be handed over to his wife for her benefit up to her death. There was a clause that the capital supplied would remain entirely the property of the assessee but the wife would get the income over it up to the end of her life. Upon these facts it was held that the entry was an irrevocable covenant to pay the income accruing on Rs. 20,000 in favour of the wife for her lifetime. It is manifest that the settlement in this case was legally enforceable. The principle has no possible application to the present case where the question at issue is different.
For the reasons expressed I think that in the circumstances of this case the sums of Rs. 7,917 for the assessment year 1945-46 and Rs. 9,458 for the assessment year 1946-47 paid by the Maharaja of Darbhanga to the Viceroys War Purpose Fund are taxable in the hands of the assessee.
The question must accordingly be answered in favour of the Commissioner of Income-tax and the assessee must pay the costs of the reference. Hearing fee Rs. 200.
SARJOO PROSAD, J. - I agree.
Reference answered accordingly.