Tax exemption attached to the payment under a trust arrangement and continued after transfer of the beneficial interest.
A payment received under a release deed was treated as income because it replaced periodic beneficial payments originally payable under the trust arrangement. The transfer of the beneficial interest did not alter the character of the receipt, which remained assessable as income in the hands of the recipient. However, the tax exemption created by the 8 October 1949 agreement was construed as attaching to the payment itself, not solely to Princess Niloufer personally. As the agreement did not confine the exemption to her alone, the benefit continued when the assignee stepped into her position, so the payment remained exempt from tax.
Issues: (i) Whether the sum of Rs. 1,00,000 received by the assessee under the release deed constituted income liable to tax. (ii) Whether the exemption from tax contained in the agreement dated 8 October 1949 was confined to Princess Niloufer or extended to the assessee after the transfer of her beneficial interest.
Issue (i): Whether the sum of Rs. 1,00,000 received by the assessee under the release deed constituted income liable to tax.
Analysis: The amount received pursuant to the release deed was received by the assessee in substitution of the beneficial payments earlier payable to Princess Niloufer. Its character as income was not altered by the transfer of the beneficial interest under the trust arrangement. The receipt remained a periodic monetary benefit arising under the trust machinery and was assessable as income in the hands of the assessee.
Conclusion: The receipt of Rs. 1,00,000 was income liable to tax.
Issue (ii): Whether the exemption from tax contained in the agreement dated 8 October 1949 was confined to Princess Niloufer or extended to the assessee after the transfer of her beneficial interest.
Analysis: The agreement was construed as a comprehensive arrangement under which the Government of India accepted the deposit of Rs. 30,00,000 and, in return, undertook that the annual payment of Rs. 1,00,000 would be free from income-tax and other taxes. The exemption was linked to the payment itself and to the settled arrangement among the settlor, trustees, and beneficiary, not to the personal identity of Princess Niloufer alone. Since the assessee stepped into the beneficiary's position under the release deed, and since the agreement did not confine the tax exemption to her exclusively, the benefit of exemption continued to attach to the payment in the assessee's hands.
Conclusion: The exemption under the agreement extended to the assessee.
Final Conclusion: Although the amount was income, the contractual exemption protected it from tax; the appeals therefore failed.
Ratio Decidendi: Where a tax exemption is granted by agreement in respect of a defined payment arising from a trust arrangement, the exemption attaches to the payment according to the terms of the bargain and is not confined to the original beneficiary if the agreement does not so limit it.