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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, 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 Government of India, the assessee, as the settlor of the trust, and the three trustees for the deposit of Rs. 30,00,000 with the Government of India. The amount deposited was to carry interest at the rate of Re. 1 per cent per annum. Clauses 2, 3 and 4 of the agreement were as under :

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 daughter in-law Princess Niloufer was desirous 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 of Rs. 30,00,000 forthwith 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 of the 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 :

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 settlor 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 assessee as the settlor. 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 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 expressely 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 made an annexure 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 Mr. 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 not 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 beneficial interest tinder 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 agreement and the exception in the matter of tax were linked to-ether. 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. 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 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. 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 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 Incometax Gujarat II v. B. M. Kharwar(1) 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 relationship. 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 evidence oral 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 costs. One hearing fee.