1942 (2) TMI 22 - HC - Income Tax

Court deems surplus income from trusts as agricultural income under Income-tax Act, preserving its character.

Syed Mohammad Isa Versus Commissioner of Income-tax

Syed Mohammad Isa Versus Commissioner of Income-tax - [1942] 10 ITR 267 (Allahabad) Issues Involved:1. Whether 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 Indian Income-tax Act.Issue-Wise Detailed Analysis:1. Nature of Income from Trusts:The primary issue is whether the income received by the assessee from the trusts, either as remuneration for services rendered as a trustee or as a beneficiary, retains its character as agricultural income under Section 2(1) of the Indian Income-tax Act.The court examined the trust deeds dated 7th September 1886 and 17th April 1906, which involved both agricultural and non-agricultural properties. The income from these properties, after fulfilling the trust's obligations, was appropriated by the mutawallis (trustees) for their personal expenses or in lieu of their services.2. Character of Agricultural Income:The court emphasized that Section 4(3)(viii) of the Act exempts agricultural income from being included in the total income of the person receiving it. The key question was whether the income, after passing through the hands of the mutawalli and being appropriated by him as a beneficiary, retained its character as agricultural income.The court referred to several precedents, including:- Zamindarini of Tiruvarur v. Commissioner of Income-tax: Held that a pecuniary legacy paid out of agricultural income does not make the legacy agricultural income.- Sundrabai Saheb v. Commissioner of Income-tax, Bombay: Held that an allowance paid out of agricultural income is liable to income-tax.- Commissioner of Income-tax, Central and United Provinces v. Rani Saltanat Begam: Held that an annuity derived from a compromise was not agricultural income.3. Income Passing Through Mutawalli:The court noted that the mutawalli was a channel through which the income passed to the beneficiary. The court held that the income retained its character as agricultural income even after being appropriated by the mutawalli in his capacity as a beneficiary.4. Composite Fund of Agricultural and Non-Agricultural Income:The court addressed the issue of a composite fund containing both agricultural and non-agricultural income. It was noted that the Act does not provide for such a scenario, and an equitable method must be evolved. The court proposed that the residue in the hands of the assessee should be treated as composed of agricultural and non-agricultural income in the same ratio as the total of these two classes of income bore to each other at the time they passed into the common fund.5. Apportionment Method:The court suggested an apportionment method, where the prior charges on the mixed income fund should be apportioned between the component parts rateably, and the surplus should be attributed to agricultural and non-agricultural income in the same proportions. This method was deemed fair and consistent with established principles of law and equity.Conclusion:The court concluded that the sums received by the applicant, representing his share of surplus income under the waqf-namas dated 7th September 1886 and 17th April 1906, should be regarded as agricultural income to the extent that they represent the proportion of agricultural income in the total income of the waqf properties. The court's judgment emphasized that the income retained its character as agricultural income even after being appropriated by the mutawalli as a beneficiary.Order:The court answered the reference by stating that the sums received by the applicant, representing his share of surplus income, should be regarded as agricultural income within the meaning of Section 2(1) of the Income-tax Act, in proportion to the agricultural income of the waqf properties. The assessee was entitled to the cost of the reference, and the judgment also applied to the reference in respect of Syed Mohammad Umar.