The main legal point established in the judgment is that the term 'income' under the Income-tax Act, 1922 is not limited by the words 'profits' and 'gains', and anything properly described as income is taxable unless expressly exempted.

Lord Russell of Killowen:-

The appellant appeals from a judgment of the High Court of Judicature at Patna on a reference under S. 66 (2), Income-tax Act, 1922 (hereinafter referred to as the Act). The question for decision may be stated to be whether the appellant is assessable to income-tax and super tax in respect of an annual sum of Rupees 2,40,000 payable to him during his life pursuant to a covenant contained in the indenture hereinafter mentioned. The appellant was the owner of an estate in British India known as the Nine Annas Tekari Raj. He had a daughter who had married a son of Rani Bhubaneshwari Kuar (hereinafter referred to as the Rani). By an indenture, dated 29th March 1930, and made between the appellant of the one part and the Rani of the other part, the appellant conveyed the greater portion of his said estate to the Rani for the valuable consideration therein appearing. The indenture recites among other facts that the appellant was absolute owner of the estate, and that, for the purpose of discharging certain of his debts and of obtaining for himself an adequate income, he had agreed with the Rani for the absolute sale and transfer to her of that portion of his said estate described in Sch. 1, in consideration of the Rani covenanting to pay the said debts (which amounted in fact to a sum of over Rs. 10,00,000) and to pay to him a sum of Rs. 4,73,063 in cash to meet the expenses of his daughter's marriage and other urgent necessities, and further covenanting to pay him annual sums during his lifetime of Rs. 2,40,000 in manner thereinafter appearing, such payment being secured by a charge upon the property thereby transferred. By the operative part of the indenture it was witnessed that in pursuance of the said agreement and in consideration of the sum of Rs. 4,73,063, paid to the appellant, and in further consideration of the covenant by the Rani for payment to the appellant during his lifetime of the annual sum of Rs. 2,40,000 by six instalments, and also in consideration of the covenant to pay and indemnify the appellant in respect of the said debts, the appellant assigned the hereditaments therein described unto the Rani absolutely. The indenture contained a covenant by the Rani with the appellant for payment to him, during his lifetime, of the yearly sum of Rs. 2,40,000 by six equal instalments, with interest at 12 per cent per annum on any overdue instalment, and to pay the said debts and to keep the appellant indemnified against all suits, actions and proceedings whatsoever in respect of the said debts or any of them.

This indenture does not itself contain any charge on the estate of the annual sums covenanted to be paid; but their Lordships were informed, and the case proceeded upon the footing that the stipulated security had been given by a separate document. The taxing authorities in assessing the appellant in respect of the year 1931-1932 included in his assessable income the following item: "Other sources, annuity, Rs. 2,40,000," being the sum received by him in pursuance of the Rani's covenant. The appellant contends that no part of this receipt should be included : (1) because, being merely an instalment of the purchase price payable on the sale of his estate, it is not an annuity but a capital sum; alternatively (2) because even if it be an annuity it is not taxable, because it does not fall within the description of what is taxable under the Act; and in the further alternative; (3) because even if it would otherwise fall within such description, it is “agricultural income" and as such specifically excepted from the operation of the Act. The relevant provisions of the Act are the following:

2. In this Act unless there is anything repugnant in the subject or context,-(1) "agricultural income" means-(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land-revenue in British India or subject to a local rate assessed and collected by Officers of