Commissioner of Wealth Tax, Lucknow Vs.
P. K. Banerjee [1980] INSC 174 (9 September 1980)
VENKATARAMIAH, E.S. (J) VENKATARAMIAH, E.S.
(J) BHAGWATI, P.N.
CITATION: 1981 AIR 401 1981 SCR (1) 657 1981
SCC (1) 63
CITATOR INFO:
D 1987 SC 522 (45)
ACT:
Wealth Tax Act, 1957, Section 2(e)(iv), scope
of- Annuity-Nature of the amount to fall under the annuity, to claim exemption
under the Wealth Tax Act, explained. C
HEADNOTE:
The respondent assessee, under a deed of
trust dated October 26, 1937 executed by his father Pyarey Lal Banerji which
was modified by another trust deed dated April 28, 1950, received "the net
income of the trust funds" after the death of his father. The assessee
treated this amount as an annuity and claimed exemption under section 2(e)(iv)
of the Wealth Tax Act, 1957. The claim for exemption was negatived by all the
authorities including the Appellate Tribunal, Allahabad Bench. The Tribunal,
however, holding that the inclusion of the entire value of the corpus in the
computation of net wealth was not correct as the assessee had merely a life
interest in it, directed the Wealth Tax Officer to modify the assessments
valuing the life interest of the assessee according to recognised principles of
valuation. On a reference, at the instance of the assesee, the High Court held
the interest of the assessee in the trust fund amounted to an annuity exempt
under section (e)(iv) of the Wealth Tax Act. E Allowing the appeal by special
leave and answering against the assessee, the Court ^
HELD: (I) In order to claim that an item of
property should not be treated as an asset for purposes of the Wealth Tax Act,
by virtue of subclause (iv) of section 2(e)(1), it has to be established (a)
that it is an annuity and (b) that commutation of any portion thereof into a
lumpsum grant is precluded by the terms and conditions thereto. [663 C] (2) It
is true that the word "annuity" is not defined in the Act. In order
to constitute an annuity, the payment to be made periodically should be a fixed
or pre-determined one and it should not be liable to any variation depending
upon or any ground relating to the general income of the fund or estate which
is charged for such payment. The intention of the settlor must be seen, whether
he wanted that the assessee should get a pre-determined sum every year or
whether the assessee should get the whole net income of the trust fund. [665 C,
671 G] In the instant case, since the interest of the settlor was that the
whole net income of the trust fund should go to the assessee, the right of the
assessee cannot be treated as an annuity. The fact that under the trust deed
the trustee had been given the power to reinvest the proceeds of the Government
securities leads to the possibility of variation of the income and Consequently
of the amount to be received by the assessee. make it clear that it was not an
annuity.
The fact that no such reinvestment had taken
place during the relevant year is immaterial. [671 H-672 B] 658 Ahmed G.H.
Ariff & Ors. v. Commissioner of Wealth-tax, Calcutta, (1970) 76 I.T.R. 471;
Commissioner of Wealth-tax, Gujarat II v. Mrs. Arundhati Balkrishna, (1968) 70
I.T.R.
203, explained and applied.
Commissioner of Wealth-tax, Rajasthan v. Her
Highness Maharani Gayatri Devi of Jaipur (1971) 82 I.T.R. 699, followed.
Commissioner of Wealth-tax, A.P. v. Nawab
Fareed Nawaz Jung & ors. (1970) 77 I.T.R. 180, overruled.
In re Duke of Norfolk: Public Trustee v.
Inland Revenue Commissioners (1950) Ch 467 distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1163 - 1167 of 1973.
Appeal by Special Leave from the Judgment and
order, dated 15-3-1971 of the Allahabad High Court in Wealth Tax Reference No.
232 of 1964.
S. T. Desai and Miss A. Subhashini for the
Appellant.
S. N. Kacker, V. K. Pandita and E. C.
Agarwala for the Respondent.
VENKATARAMIAH, J.-These appeals by special
leave under Article 136 of the Constitution are directed against the judgment,
dated March 15, 1971 of the Allahabad High Court in Wealth Tax Reference No.
232 of 1964.
The facts of the case may be briefly stated
thus: The Income tax Appellate Tribunal, Allahabad Bench, Allahabad referred
under section 27 (1) of the Wealth-tax Act, 1957 (hereinafter referred to as
`the Act') to the High Court of Allahabad for its opinion the following
question of law arising out of the assessment orders made under the Act in
respect of the assessment years 1957-58 to 1961-62:
Whether the interest of the assessee in the
trust fund amounted to an annuity exempt under section 2 (e) (iv) of the Wealth-tax
Act?" The assessee concerned in this case is Shri P. K.
Banerji. Under a deed of trust, dated October
26, 1937 executed by his father, Shri Pyarey Lal Banerji (hereinafter referred
to as `the settlor') the assessee became entitled to receive the income arising
out of the trust fund during his (assessee's) life-time after the death of the
settlor subject to the liability to pay out of such income certain specified
sums periodically as mentioned in the deed to two other persons. After the
death of the assessee, the income of the trust fund was directed to be paid in
equal shares to the two other persons referred to above and if either of them
should die before the death of the asessee then the whole of such income had to
be paid 659 to the survivor of them during his or her life. There were certain
other directions in the trust deed with regard to the disposal of the income
arising out of the trust fund with which we are not concerned in this case. The
trust fund consisted of certain India Government loan bonds or securities
issued from time to time under which certain specified interest was payable.
The total face value of such bonds amounted to Rs. 10 lacs. The Imperial Bank
of India, Calcutta (hereinafter referred to as `the trustee') was appointed as
the trustee under the trust deed and the Government loan bonds or securities
referred to above were transferred and endorsed in favour of the trustee with a
direction to discharge the obligations referred to in the trust deed. Under
clause (1) of the trust deed, the settlor directed the trustee to retain with
it the said Government loan bonds or securities and upon redemption of any of
them to invest the proceeds thereof in the purchase of three and a half per
cent Government promissory notes (old issue) or if this was not practicable in
any other security of the Government of India or if this too was not
practicable then in any other securities authorised for the investment of trust
funds by the Indian Trusts Act, 1882 or any statutory modification thereof and
to hold and stand possessed of the Government loan bonds or securities referred
to above or any other investments representing the same as the trust fund to be
used in accordance with the directions contained in the deed. The following are
the relevant recitals of the trust deed, dated October 26, 1937 containing
directions regarding the manner in which the income arising from the trust fund
should be appropriated or spent:- "(a) The Bank shall pay the net income
of the Trust Fund to the settlor during his life and may instead of paying the
same to him direct, credit the same to the current account of the settlor with
the Bank, so long as there shall be any such current account.
(b) From and after the death of the settlor,
the Bank shall pay the net income of the trust fund to the settlor's son Pranab
Kumar Banerji during his life, if he should survive the settlor subject to the
payment there out every six months on the thirtieth day of April and thirty
first day of October in every year of a sum of Rupees Nine hundred to the
settlor's son Sunab Kumar Banerji and a sum of Rupees six hundred to the
settlor's daughter-in-law Purnima Banerji during his or her life, if he or she
shall survive the settlor.
(c) If the said Pranab Kumar Banerji shall
predecease the settlor or if he should die after having survived the settlor,
then 660 in the former case on and from the death of the settlor and in the
latter case on and from the death of the said Pranab Kumar Banerji, the income
of the trust fund shall be paid in equal shares to the said Sunab Kumar Banerji
and Purnima Banerji (if he or she should be then alive) or the whole of such
income to the survivor of them during his or her life.
(d) If the said Pranab Kumar Banerji, Sunab
Kumar Banerji and Purnima Banerji shall predecease the settlor or if they or
any one or more of them shall die after having survived the settlor then in the
former case on and from the death of the settlor and in the latter case on and
from the death of the survivor of the said Pranab Kumar Banerji, Sunab Kumar
Banerji and Purnima Banerji, the Bank shall stand possessed of the trust fund
and the income thereof UPON SUCH TRUSTS as the said Pranab Kumar Banerji by any
deed or deed with or without power of revocation may appoint or by will or
codicil shall at any time or times appoint AND IN DEFAULT of and so far as any
such appointment shall not extend IN TRUST for the settlor's nephew Manoj Kumar
Banerji and the settlor's niece Jhuni Banerji (now minors), if they are both
alive, or such one of the two as may be alive and in default of both for the
person or persons who under the law relating to intestate succession would on
the death of the settlor have been entitled thereto, if the settlor had died
possessed thereof and intestate." In exercise of the power that he had
reserved to himself under the trust deed, dated October 26, 1937 to modify the
terms thereof, the settlor executed another trust deed, dated April 28, 1950 by
which clauses (b) and (c) of the trust deed, dated October 26, 1937 extracted
above were substituted by the following clauses:
(b) From and after the death of the settlor
the Bank shall pay the net income of the trust funds to the settlor's son
Pranab Kumar Banerji during his life time, if he should survive the settlor.
(c) If the said Pranab Kumar Banerji shall
predecease the testator or if he should die after having survived the settlor
then in the former case on and from the death of the settlor and in the latter
case on and from the death of the said Pranab Kumar Banerji, the income of the
trust funds should be paid in equal shares to my son Sunab Kumar Banerji and my
daughter-in-law Shakuntala Banerji (if he or she should be then alive) or the
whole of such income to the survivor of them during his or her life." 661
The name 'Purnima Banerji' occurring in clause (d) of the trust deed, dated
October 26, 1937 was substituted by the name 'Shakuntala Banerji' by the trust
deed, dated April 28, 1950. The resulting position was that the trustee was
obliged to pay the net income of the trust fund to the settlor during his life
time and after his death the trustee had to pay the net income of the trust fund
to the assessee during his life time if he should survive the settlor. If the
assessee should pre-decease the settlor then on and from the death of the
settlor and if the assessee should die after the settlor on and from the death
of the assessee, the income of the trust fund had to be paid in equal shares to
Sunab Kumar Banerji, the other son of the settlor and Shakuntala Banerji, the
daugther-in-law of the settlor (if he or she should be then alive) and the
whole of such income had to be paid to the survivor of them during his or her
life. We are concerned in this case principally with the character of the
benefit conferred on the assessee by clause (b) of the trust deed as
substituted by the trust deed dated April 28, 1950. The settlor died sometime
in 1952 and since then the assessee was receiving the net income from the trust
fund in accordance with the said clause as the sole beneficiary.
During the assessment proceedings under the
Act relating to the assessment years in question, the assessee contended before
the Wealth-tax Officer, Allahabad that since the corpus of the trust fund was
vested in the trustee and not in him, the value of the trust fund should not be
included in his total wealth and that in any event as he had only the right to
receive an annuity under the trust deed, the trust fund should not be taken
into account by reason of section 2 (e) (iv) of the Act. The Wealth-tax Officer
rejected the contentions of the assessee and included the full market value of
the trust fund in the total wealth of the assessee in all the five assessment
orders passed by him. The appeals filed by the assessee before the Appellate
Assistant Commissioner of Wealth-tax, Allahabad were dismissed. On further
appeal, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad confirmed
the orders passed by the Wealth-tax Officer and the Appellate Assistant
Commissioner of Wealth-tax in so far as the question of non- applicability of
section 2 (e) (iv) of the Act was concerned but it held that the inclusion of
the entire value of the corpus in the computation of net wealth was not correct
as the assessee had merely a life interest in it. Accordingly it directed the
Wealth-tax Officer to modify the assessments valuing the life interest of the
assessee according to recognised principal of valuation. Thereafter at the
instance of the assessee the common question of law set out above was referred
to the High 662 Court of Allahabad under section 27 (1) of the Act. All the
five references relating to the five assessment years were heard together by
the High Court in the year 1970. Since the High Court was of the view that it
was necessary to direct the Income-tax Appellate Tribunal to submit a
supplementary statement of the case on the following questions:
"(1) Whether the right of the assessee
to receive the amounts in terms of the deeds of trust, referred to above is an
annuity" within the meaning of section 2 (e) (iv) of the Act? (2) if so,
whether the terms and conditions relating to such annuity preclude the commutation
of any portion thereof into a lump sum grant?" it directed the Tribunal by
its order, dated February 27, 1970 to submit a supplementary statement of the
case on the above questions. In accordance with the directions of the High
Court, the Tribunal submitted a supplementary statement of the case in August,
1970 stating that the asset in question was not an annuity referred to in
section 2 (e) (iv) of the Act. The cases were there after heard by the High
Court. By its judgment, dated March 15, 1971, the High Court answered the
common question of law referred to it in the affirmative in favour of the
assessee, holding that the interest of the assessee in the trust fund amounted
to an annuity exempt under section 2 (e) (iv) of the Act.
Dissatisfied with the judgment of the High
Court, the Department has come up in appeal to this Court.
There is no dispute that in the case of
assets chargeable to tax under the Act which are held by a trustee under a duly
executed instrument in writing whether testamentary or otherwise, wealth tax
can be directly levied upon and is recoverable from the person on whose behalf
the assets are held. Section 3 of the Act creates the said charge in respect of
the net wealth on the corresponding valuation date of every individual, Hindu
undivided family and Company at the rate or rates specified in Schedule I to
the Act. 'Net wealth' according to section 2 (m) of the Act means the amount by
which the aggregate value computed in accordance with the provisions of the Act
of all the assets, wherever located, belonging to the assessee on the valuation
date, including assets required to be included in his net wealth as on that
date under the Act, is in excess of the aggregate value of all the debts owed
by the assessee on the valuation date other than those debts referred to in sub-clauses
(i) to (iii) thereof. In section 2 (e) of the Act, the expression
"assets" is defined as including property of every description, 663
movable or immovable but not including in relation to the assessment year commencing
on the 1st April, 1969 or any earlier assessment year those items which are
mentioned in sub-clauses (i) to (v) of section 2 (e) (1). Sub-clause (iv) of
section 2 (e) (1) of the Act which is relevant for the purpose of this case
excludes from the definition of the word 'assets' a right to an annuity in any
case where the terms and conditions relating thereto preclude the commutation
of any portion thereof into a lump sum grant. In order to claim that an item of
property should not be treated as an asset for purposes of the Act by virtue of
sub-clause (iv) of section 2 (e) (1), it has to be established (i) that it is
an annuity and (ii) that commutation of any portion thereof into a lump sum
grant is precluded by the terms and conditions relating thereto.
The property in question is the right of the
assessee to receive the net income of the trust funds during his life-time. The
primary facts that emerge from the orders of the Tribunal are (1) that under
the trust deed, the settlor intended that after the settlor's death, the
assesee should be the sole beneficiary of the net income from the trust fund
during his (assessee's) life-time (2) that the assessee had been treating
himself as the owner of the trust fund for purposes of income tax payable by him
and had been declaring the income of the trust as his own income and claiming
in his own income-tax returns deduction for tax paid at source by the trust;
(3) that in fact the assessee was the sole beneficiary of the net income
derived from trust fund; (4) that he had under the trust deed the right of
appointment of his successors under certain circumstances and (5) that the
trustees had the power to invest the proceeds of the Government loan bonds or
securities which constituted the trust fund upon their redemption as provided
in the deed and that therefore the net income realisable from the trust fund
was subject to variation. One of the significant features of the trust deed,
dated October 26, 1937 is that what was payable to the assessee was not a periodical
payment of a definite predetermined sum of money but only the net income of the
trust funds, although it was possible to predicate at any given point of time
such income with some certainty having regard to the fact that the trust fund
in the instant case consisted of Government loan bonds or securities, the
proceeds of which on redemption were liable to be invested in other securities
as indicated in the trust deed, dated October 26, 1937.
The principal reason given by the High Court
to arrive at the conclusion that the property in question was an annuity is set
out in its judgment thus:
664 "In the case before us the property
settled under the trust deed consists of Government securities, and it is
apparent from the schedule appended to the deed that they bear interest at a
fixed and determined rates. The settlor conferred upon the trustee the power to
redeem the government securities and to invest the proceeds in the purchase of
3 1/2% Government promissory notes (old issue) or in any other securities of
the Government of India, or that if that was not practicable then in any other
securities authorised for the investment of the trust fund by the Indian Trusts
Act. There is nothing on the record before us to show that the original
securities comprising the trust property were converted or replaced by
securities not bearing a fixed rate of interest and returning a fixed and
definite income. Proceeding, therefore, on the basis that a definite and
certain income is yielded by the securities, we have no hesitation in holding
that what the assessee received was an amount which did not depend upon or was
related to the general income of the estate in the sense that it fluctuated
with a fluctuating income. Having regard to the character and nature of the
property settled under the trust, no question arises of a rise or fall in the
amount of income produced by the trust property and, therefore, in a real sense
what the assessee is entitled to is a definite and certain sum. Also, having
regard to the terms of the trust deed it is not possible to say that the
interest of the assessee constitutes an interest in the capital of the trust
fund. Therefore, upon the test laid down by Jenkins L. J. in Duke of Norfolk:
In re: Public Trustee v. Inland Revenue Commissioner (1950) 1 Ch. 467, it
cannot be described as a life interest. We are fortified in the view we are
taking by the decision, on somewhat comparable faces of the Andhra Pradesh High
Court in Commissioner of Wealth-tax v. Nawab Fareed Nawaz Jung & Ors.,
(1970) 77 I.T.R. 180.
It is true that the assessee is entitled to
the net income only and that because the trustee has the right to deduct from
the gross income its remuneration, its annual income fee and the expenses in
managing the trust estate, the net income may vary from year to year. Yet even
here the remuneration and the annual income fee can be charged by the trustee
at a fixed rate only, and any variation in the net income may be attributed to
the varying expenses from year to year in managing the trust estate. We have
already pointed out that freedom from variation is not an absolute test
determining the character of an annuity. We are of opinion that where it varies
merely because 665 of the charges and expenses payable on account of the
administration of the trust it does not lose its character as an annuity.
Upon the aforesaid consideration, it seems to
us that the right of the assessee to the net income from the trust property under
the trust deed can be described in law as a right to an annuity." The High
Court appears to have felt that the facts of the case were distinguishable from
the facts in Ahmed G. H. Ariff & Ors. v. Commissioner of Wealth-tax
Calcutta(1) and the facts in Commissioner of Wealth-tax, Gujarat II v. Mrs. Arundhati
Balkrishna(2). We shall presently deal with these two cases.
The word 'annuity' is not defined in the Act.
In one of the earliest legal compilations of the English law, the term
'annuity' has been explained as an yearly payment of a certain sum of money
granted to another in fee or for life or for a term of years either payable
under a personal obligation of the grantor or charged upon his pure
personality, although it may be made a charge upon his freehold or leasehold
lend in which latter case it is commonly called a rent-charge (See Co. Litt
144b). In Halsbury's Laws of England, Third Edition (Vol. 32, page 534 para
899), the meaning of the said expression is given as a certain sum of money payable
yearly either as a personal obligation of the grantor or out of property not
consisting exclusively of land; it differs from a rent-charge in that a
rent-charge issues out of land. In Bignold v. Giles.(3) 'annuity' is described
thus:
"An annuity is a right to receive de
anno in annum a certain sum; that may be given for life, or for a series of
years it may be given during any particular period, or in perpetuity; and there
is also this singularity about annuities, that although payable out of the personal
assets, they are capable of being given for the purpose of devolution, as real
estate; they may be given to a man and his heirs, and may go to the heir as
real estate; so an annuity may be given to a man and the heirs of his body;
that does not, it is true, constitute an estate tail, but that is by reason of
the Statute De Donis, which contains only the word 'tenements' and an annuity,
though a hereditament, is not a tenement; and an annuity so given is a base
fee." 666 It is further observed in the above decision thus:
"But this appears to me at least clear,
that if the gift of what is called an annuity is so made, that, on the face of
the will itself, the testator shows his intention to give a certain portion of
the dividends of a fund, that is a very different thing; and most of the cases
proceed on that footing. The ground is, that the court construes the intention
of the testator to be, not merely to give an annuity, but to give an aliquot
portion of the income arising from a certain capital fund".
The three illustrations given under section
173 of the Indian Succession Act, 1925 dealing with bequests of annuities also
refer to the payment of certain definite sums periodically and they do not
refer to periodical payments of income arising out of any trust fund.
It is against this background that this Court
proceeded to decide the case of Ahmed G. H. Ariff (supra). In that case, the
Court was called upon to determine whether the benefits conferred on the
appellants under a deed creating a wakf-alal-aulad were annuities or not. The
relevant part of the deed, which declared that the ultimate benefit in the case
of complete intestacy of the descendants of the settlor was reserved for poor
Musalmans of Sunni community deserving help, read thus:
"After payment of all necessary
outgoings such as establishment charges, collections charges, revenue taxes,
costs of repairs, law charges and other expenses for the upkeep and management
of the said wakf property, the mutawalli or mutawallis shall apply the net
income of the said wakf property as follows, viz.:
(a) in payment to me during the term of my
life of one-fifth of the said net income by monthly instalments;
(b) in payment to each of my sons during the
respective terms of their lives one-sixth of the said net income by monthly
instalments;
(c) in payment to my wife, Aisha Bibi, during
the term of her life one-tenth of the said net income by monthly instalments.
The moneys payable as aforesaid to such of my
sons as are minors shall until they attain the age of majority be respectively
invested (after defraying the expenses of their maintenance and education) in
proper securities or in landed property in Calcutta and such securities or property
shall be 667 made over to the said sons on their respectively attaining the age
of majority." This Court held that the right of the beneficiary to receive
an aliquot share of the net income of the properties was an asset covered by
the definition of section 2(e) of the Act and not a mere 'annuity' and affirmed
the decision of the Calcutta High Court in Ahmed G. H. Ariff v.
Commissioner of Wealth Tax Calcutta.(1) In
the case of Mrs. Arundhati Balkrishna (supra) to which one of us was a party,
under two trusts created by the father of the assessee and one trust created by
her mother- in-law, she was to be paid annually the net income of each of the
trusts after deducting costs and expenses of administration of the trust. Under
the terms of the trusts, after the life time of the assessee, the corpus of the
trust in each case had to be dealt with as provided in them. Since the assessee
was entitled to the whole residue of the income from the trust funds available
after defraying expenses of the trust and not any specified or pre-determined
amount, the High Court of Gujarat held that the right of the assessee under
each of the trust deeds was not an annuity but only amounted to a life
interest. The decision of the High Court of Gujarat was later affirmed by this
Court in Commissioner of Wealth-tax, Gujarat v. Arundhati Balkrishna(2) in
which it was observed thus:
"On an analysis of the relevant clauses
in the three trust deeds, it is clear the assessee was given thereunder a share
of the income arising from the funds settled on trust. Under those deeds she is
not entitled to any fixed sum of money. Therefore, it is not possible to hold
that the payments that she is entitled to receive under those deeds are
annuities. She has undoubtedly a life interest in those funds. In Ahmed G. H.
Ariff v. Commissioner of Wealth-tax (1966) 59 I.T.R. 230 (Cal.), a Division
Bench of the Calcutta High Court held that the right of a person to receive
under a wakf an aliquot share of the net income of the wakf property is an "asset"
within the meaning of the Wealth-tax Act, 1957, and the capital value of such a
right is assessable to wealth-tax. Therein, the Court repelled the contention
that the right in question was an "annuity". This decision was
approved by this Court in Ahmed G. H. Ariff v. Commissioner of Wealth-tax
(1970) 76 I.T.R. 471 (S.C.) Civil Appeals Nos. 2129-2132 of 1968 decided on 668
August 20, 1969) and the same is binding on us. A similar view was taken by
another Bench of the Calcutta High Court in Commissioner of Wealth-tax v. Mrs. Dorothy
Martin (1968) 69 I.T.R. 586 (Cal.). In that case under the will of the
assessee's father the assessee was entitled to receive for her life the annual
interest accruing upon her share in the residuary trust fund. The Wealth-tax
Officer included the entire value of the said share in the assessable wealth of
the assessee and subjected the same to tax under section 16 (3) of the
Wealth-tax, 1957. That order was confirmed by the Appellate Assistant
Commissioner but the Tribunal in appeal excluded the same in the computation of
the net wealth of the assessee. On a reference made to the High Court, it was
held that, on a construction of the various clauses in the will, the assessee
was entitled to an aliquot share in the general income of the residuary trust
fund and not a fixed sum payable periodically as "annuity" and,
therefore, the value of her share was an asset to be included in computing his
net wealth. These decisions in our view correctly lay down the legal position.
In this view, it is not necessary to consider whether the income receivable by
the assessee under those deeds, either wholly or in part, is capable of being
commuted into a lump sum grant.
For the reasons mentioned above, we agree
with the High Court that payments to be made to the assessee under the three
trust deeds cannot be considered as annuities, and, hence, she is not entitled
to the benefits of section 2(e) (iv)." It is, however, contended on behalf
of the assessee in this case that since the trust fund consisted of Government
securities which were yielding definite annual income by way of interest and
there was no evidence of the said securities having been converted into other
securities yielding higher or lower income, it should be assumed that the
benefit conferred on the assesee was only an 'annuity' and not a life interest.
This contention has to be rejected for the very reason for which a similar
contention was rejected by this Court in Commissioner of Wealth-tax, Rajasthan
v. Her Highness Maharani Gayatri Devi of Jaipur(1) in the following words:
"From these clauses it is clear that the
intention of the Maharaja was that the assessee should get a half share in the
income of the trust fund. Neither the trust fund was fixed nor the amount
payable to the assessee was fixed. The only thing certain is that she is
entitled to a 15/30 share from out 669 of the income of the trust fund. That
being so, it is evident that what she was entitled to was not an annuity but an
aliquot share in the income of the trust fund.
Mr. Setalvad, learned counsel for the
assessee, contended that during the year with which we are concerned, there was
no change in the trust fund and in view of that fact and as we are considering
the liability to pay wealth-tax, we would be justified in holding that the
amount receivable by the assessee in the year concerned was an annuity. We see
no force in this contention. The question whether a particular income is an
annuity or not does not depend on the amount received in a particular year.
What we have to see is what exactly was the intention of the Maharaja in
creating the trust. Did he intend to give the assessee a pre-determined sum
every year or did he intend to give her an aliquot share in the income of a
fund? On that question, there can be only one answer and that is that he
intended to give her an aliquot share in the income of the trust fund. An
income cannot be annuity in one year and an aliquot share in another year. It
cannot change its character year after year.
From the facts found, it is clear that the
assessee has life interest in the trust fund." The decision of the High
Court of Andhra Pradesh in Commissioner of Wealth-tax, A. P. v. Nawab Fareed
Nawaz Jung &Ors.(1) on which the High Court has relied in this case to the
extent it takes a contrary view must be held to be incorrect.
We may now to consider the decision in re
Duke of Norfolk: Public Trustee v. Inland Revenue Commissioner(2) on which the
High Court relied heavily in arriving at its conclusion. The point which arose
for consideration in the above case was whether, where one continuing annuity
for two or more lives was given to two or more persons in succession and
charged on property, on the death of any annuitant, other than the last to die,
estate duly was payable under section 1 of the Finance Act, 1894 on the footing
that it was the annuity which passed on the annuitant's death. The estate duty
authorities claimed estate duty on the death of an annuitant, who was not the
last of the annuitants to die on the slice of the capital required to produce
the annuity, on the footing that as annuitant, the deceased had an interest on
the capital charged with the annuity and that cesser of that interest gave rise
to a benefit taxable under 670 section 2(1)(b) of the Finance Act, 1894. The
Public Trustee, in whom the estate vested, claimed that estate duty became
payable on the value of a continuing annuity for the life of the annuitant who
succeeded to the annuity on the death of the deceased annitant. Jenkins L.J. in
the course of his judgment in the above case explained the difference between
an annuity and a life interest thus:
"An annuity charged on property is not,
nor is it in any way equivalent to, an interest in a proportion of the capital
of the property charged sufficient to produce its yearly amount. It is nothing
more or less than a right to receive the stipulated yearly sum out of the
income of the whole of the property charged (and in many cases out of the
capital in the event of a deficiency of income). It confers no interest in any
particular part of the property charged, but simply a security extending over
the whole. The annuitant is entitled to receive no less and no more than the
stipulated sum. He neither gains by a rise nor loses by a fall in the amount of
income produced by the property, except in so far as there may be a deficiency
of income in a case in which recourse to capital is excluded.
On the other hand, a life interest in a share
of the income of property is equivalent to and indeed constitutes, a life
interest in the share of the capital corresponding to the share of income. The
life tenant enjoys the share of income whatever it may amount to, and his
interest, viewed as a life interest in capital, consists of a constant
proportion of the whole property, whether the income is great or small, and
whether the capital value of the property rises or falls. The property which
changes hands on his death (or in other words passed under s. 1) thus clearly
consists of the designated share of capital, which then passes from his
beneficial enjoyment to that of another, an annuity cannot be so related to any
fixed proportion of capital: See De Trafford v. Attorney- General (1935) A. C.
280." Evershed M. R. who delivered a separate judgment agreed with the
observation and stated thus:
"In the case of one who has enjoyed for
his life (say) one fourth of the income of an estate, it seems to me in
accordance with common sense and a natural use of language to say that he
enjoyed for his life, that he was life tenant of, a fourth part of the (corpus
of the) estate; and, accordingly, that upon his death a fourth part of the estate
passed to the next successor.
But no such language can, in my judgment,
appropriately be used in the case of an annuitant. He is in no way concerned
671 with changes in the yield of the estate; his right to his annuity will
continue whatever income the estate may produce or (unless he has a right to
look income only) though the estate produce no income at all." The learned
Master of the Rolls distinguished the cases of In re Northcliffe(1) and
Christie v. Lord Advocate(2) from the case before him thus:
"Both the two last-mentioned cases were
instances of dispositions of aliquot shares of the general income of an estate
to be enjoyed in succession, as distinct from an annuity or yearly sum, which,
even though variable (as in the case of In re Cassel (1927) 2 Ch. 275) is in no
way dependent upon or related to the general income of the estate."
Accordingly the contention of the Crown was rejected.
On going through the above decision
carefully, we do not find any support for the contention urged on behalf of the
assessee in the present case. The decision is quite clear on the point that
when the payment is dependent upon the income of the corpus, it cannot be
called an annuity and that an annuity even though it may be variable as in the
case of In re Cassel(3) can in no way be dependent upon or related to the
general income of the estate. The High Court was, therefore in error in relying
upon the decision in Duke of Norfolk: In re. Public Trustee (supra) for holding
that notwithstanding the existence of the possibility of variation in the
payment to be made in the above case to the assessee depending upon the income
of the fresh securities to be acquired by the trustee on the redemption of any
of the securities transferred at the time of the execution of the trust deed,
the payment would amount to an annuity.
On a consideration of the decisions cited
before us, we feel that in order to constitute an annuity, the payment to be
made periodically should be a fixed or pre-determined one, and it should not be
liable to any variation depending upon or on any ground relating to the general
income of the fund or estate which is charged for such payment. In the instant
case, as observed in the case of Her Highness Maharani Gayatri Devi of Jaipur
(supra) what we have to see is the intention of the settlor, whether he wanted
that the assessee should get a pre-determined sum every year or whether the
assessee 672 should get the whole net income of the trust fund. Since the
intention of the settlor was indisputably the latter one, the right of the
assessee cannot be treated as an annuity.
An additional factor which requires us to
take the same view is that under the trust deed the trustees had been given the
power to reinvest the proceeds of the Government securities which leads to the
possibility of variation of the income and consequently of the amount to be
received by the assessee. The fact that no such reinvestment had taken place
during the relevant years is immaterial.
In view of the foregoing, the appeals are allowed,
the judgment of the High Court is set aside and the question referred to the
High Court under section 27(1) of the Act is answered in the negative and
against the assessee. In the circumstances of the case, the assessee shall pay
the costs of the Department. (Hearing fee one set).
Appeal allowed.
V.D.K.
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