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TMI Blog1942 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee moved the Commissioner to refer five so-called questions of law to this Court, but the Commissioner found that only one question of law arose. He accordingly referred the following question to this Court : "Whether in the circumstances of the case the sums received by the applicant out of the income of the trusts either as remuneration for services rendered, as one of the trustees or in his capacity as a beneficiary could be regarded in his hands as agricultural income within the meaning of Section 2(1) of the Income-tax Act ?" The Commissioner is of opinion that the question should be answered in the negative. There is a parallel reference in respect to the assessee's brother, Syed Mohammed Umar ; but we need not concern ourselves about that, for the Commissioner says that the facts and the question of law involved are identical. There was a third brother, but he is dead. On the 7th September 1886 a man named Sheikh Karim Baksh made a waqf alal-aulad in respect to certain properties, and under the provisions of the trust-deed the assessee and his brothers-who are the sons of a daughter of the founder's sister's son-ultimately became the mutawal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney from the fund held by himself as mutawalli he "received" it as agricultural income within the meaning of Section 4(3) of the Act or whether, in the process of passing through his hands as mutawalli into his hands as beneficiary, it lost its character of agricultural income ; whether in other words, a new source was created, the effect of which was that the money which passed into his hands as beneficiary ceased to be agricultural income. In Zamindarini of Tiruvarur v. Commissioner of Income-tax [1929] ILR 52 Mad. 827, a Full Bench of the High Court of Madras held that the fact that a pecuniary legacy bequeathed by a zamindar had to be paid by his executor out of agricultural income did not make the legacy an "agricultural income" within the meaning of Section 2(1) of the Act. The judgment is very brief and no reasons are given for the decision.: In Sundrabai Saheb v. Commissioner of Income-tax, Bombay [1931] 5 ITC 493, a widow was in receipt of an allowance by way of maintenance from the executor of her late husband's estate and she claimed-but did not prove-that the estate consisted of agricultural land. A Bench of the High Court of Bombay held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s remuneration for discharging the duties of his office and as such comes within Section 3(2)(viii) of the Income-tax Act, 1918, being a receipt arising from the exercise of his vocation, whether the fund from which he is paid comes originally from an agricultural source or not." Panckridge, J., did not agree with this view. He says : "I am inclined to the view that agricultural income does not lose its right to exemption because it can be brought under one of the heads of income set out in Section 6. To my mind the important thing is that the consent decree does not purport to provide for payment of any rent or revenue to the assessee. What it provides for is the payment of a specified sum in currency. It is not necessary to decide what the position would be, if the decree provided that the assessee should be remunerated by the rents and profits of a portion of the waqf properties, or by a proportion of the entire rent of the waqf properties. I am not, as at persent advised, inclined to agree with the submission put forward on behalf of the Income-tax Department that rents payable to the assessee, under an arrangement such as I have mentioned, would not be entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned Panckridge, J., observed : "I cannot think that the assessee can avoid taxation by selecting one source of the remuneration payable to him rather than the other. Although it is admitted that the properties of the waqf are entirely agricultural yet there may be cases where waqf properties consist both of agricultural properties and urban properties. Again I cannot think that the mutawalli in such a case could escape tax by electing to take his remuneration from the rents of the agricultural properties alone, nor do I think that the law can contemplate any sub-division of his remuneration according to the proportion which the agricultural income of the waqf bears to the non-agricultural income." For my own part I find it difficult to appreciate why the assessee should be penalised by having his whole bounty treated as assessable to income-tax. Supposing there was a composite fund in the hands of a mutawalli containing agricultural income amounting to ₹ 10,000, and non-agricultural income amounting to ₹ 500, it would be exceedingly hard on the assessee beneficiary if the whole balance which he was entitled to appropriate after the purposes of the waqf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y non-agricultural, and constituted a perpetual waqf of them. So far as the trusts of the waqf are concerned they may be shortly stated. After limiting the succession of mutawallis, of whom the assessee is now one, the Settlor by paragraph 4 directed them to keep down the Government revenue, expenses of management and litigation and other expenses out of the income, subject thereto to apply the income in making the payments for charitable and other purposes set out in the second schedule and finally, subject to both the foregoing trusts, to "utilise the balance for their personal expenses." There were at the material time two mutawallis of whom the assessee was one and in effect, therefore this ultimate trust of the residuary income of the properties amounted to a direction to divide the surplus income between themselves. Under the second waqf-nama, which is dated the 17th April, 1906, the Settlor, who in this case was Sheikh Abdus Samad, constituted a waqf consisting of both agricultural and non-agricultural properties in the Allahabad district and, after limiting the succession of mutawallis under which the assessee at the material time held that office, declared certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner's contention may be stated by saying that he adopts the view that, once the income of the agricultural properties reached the hands of the assessee in his primary character as mutawalli, its character as "agricultural income" was exhausted and therefore when the residue, after satisfying the prior trusts, was appropriated by the assessee in his secondary capacity as beneficiary, it has ceased to be "agricultural income" and had lost the protection of Section 4(3)(viii) of the Income-tax Act. I regret that I do not think that this is the correct view. Before examining the alternative view, however, it is desirable to refer to the terms of the residuary limitations of income. Neither is expressed to be a "salary," nor do I think it true to say, as the Commissioner has done, that either entitled the assessee to receive "a specific sum" as remuneration for managing the trust property. It would, however, be idle to deny that the motive, or perhaps, the condition, of his receiving the share of residuary income at all was in both cases the performance of his duties as mutawalli, and indeed, in one case, it is expressed to be "in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the office should have changed its character. For the purposes of handling the income of the waqf properties, the mutawalli is, in my view, indistinguishable from any ordinary trustee. Wherever the legal estate may technically be vested, the duty of the mutawalli was to collect and receive the income, to pay out of it prior charges and to distribute the residue to the ultimate beneficiaries. Nor can it make the least difference that the mutawalli himself occupied both positions. The result was merely that, instead of paying over the ultimate surplus income to a third person, he appropriated and retained it to himself. We have been referred to a number of authorities both in support and in opposition to this view. In the case of Zamindarini of Tiruvarur v. The Commissioner of Income-tax [1929] ILR 52 Mad. 827 three Judges of the Madras High Court took the view without giving fully their reasons for it, that a pecuniary legacy expressed to be payable out of agricultural income is not itself "agricultural income". In Sundrabai Sahib v. Commissioner of Income-tax, Bombay [1931] 5 ITC 493, two Judges of the Bombay High Court have held that an annuity by way of maintenance had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption because it can be brought under one of the heads set out in Section 6............................" If that is the true view, as, with great respect, I am inclined myself to think it is, then it completely disposes of the Commissioner's finding that, because of its character as remuneration, it has lost its character as agricultural income. As I have already said, the case before us is a much stronger one in the taxpayer's favour than was this Calcutta case and I think myself, without venturing to suggest which of the learned Judges may have been right in the Calcutta case on its particular facts that in the present case in which a mere surplus of the same income that was receivable by the assessee as mutawalli was retained by him as beneficiary, there has been no such change in it as can have altered its essential character. It was in my view, still "agricultural income" when it reached the hands of the assessee as beneficiary. In a case in our own Court (In re Makund Sarup [1928] 50 All. 495), three learned Judges considered whether a mortgagee, who was a professional money-lender and who, having taken a usufructuary mortgage of property had at once l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and cannot afterwards recover it, because it is practically impossible to disentagle it again. Mr. Justice Panckridge, though the point did not actually arise, drew attention in the Calcutta case to which I have already referred to this difficulty which might arise where the income fund was mixed for the purpose of satisfying the prior trusts. He says:- "Although it is admitted that the properties of the waqf are entirely agricultural, yet there may be cases where the waqf properties consist both of agricultural properties and of waqf properties. Again, I cannot think that the mutawalli in such a case could escape tax by electing to take his remuneration from the rents of the agricultural properties alone, nor do I think that the law can contemplate any sub-division of his remuneration according to the proportion which the agricultural income of the waqf bears to the non-agricultural income." I agree with the learned Judge that this does present a difficulty. It is obviously impossible that it should be left to the beneficiary himself to elect to discharge the prior trusts out of that part of the mixed income fund which attracts tax and to appropriate the part which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have resumed its original elements. This is the foundation of the well known principle of Ackroyd v. Smithson [1780] 1 Bro. C. C. 503. And an apportionment of the outgoings between the two elements of mixed fund is equally consistent with established equitable principles where charges have to be met out of a mixed mass of pure and impure personality the residue of which is deemed subsequently to devote in its original form. (See Curtis v. Hutton [1808] 14 Ves. 537 ; Roberts v. Walker [1830] 1 Russ. & M. 752 ; and Jessopp v. Watson [1883] 1 My. & K 665; White & Tudor's Leading Cases in Equity Edn. 8, Vol. 1, p. 400) . I can see no reason why the same principles should not be applicable in the present case and why the expenses, cost of litigation and the charitable and other outgoings, should not be deemed to have been discharged rateably out of the agricultural and non-agricultural income leaving the residue to resume its normal character in the same proportions. This involves in all cases a calculation which is both possible and easy over any given period and produces a result which is eminently just. I venture to think that this is the proper solution in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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