Kapil
Mohan Vs. The Commissioner of Income Tax, Delhi [1998] INSC 631 (18
December 1998)
S.P.
Bharucha, D.P. Mohapatra. Bharucha, J.
The
following question, referred to the High Court of Delhi under Section 256(1) of
the Income-tax Act, 1961, was answered in the affirmative and in favour of the Revenue
:
"Whether
on the facts and in the circumstances of the case, the Tribunal was justified
in holding that the refund of annuity of Rs. 12,013/- to the assessee as
Executor of the Estate of his late father Padam Shree N.N.Mohan was his income
and assessable in his hands as Executor of the estate of the deceased?"
The annuity referred to in the question was a payment under the Annuity Deposit
Scheme. The Delhi High Court followed its judgment in an earlier case. The
Gujarat High Court had taken a similar view. The High Court of Karnataka and
the High Courts at Bombay and Madras have taken the contrary view.
The
facts, briefly stated, are these : One N. Mohan had deposited the sum of
Rs.1,57,250/- under the Annuity Deposit Scheme framed under Chapter XXII-A of
the Income-Tax Act, 1961. The same was refundable to him in 10 equal instalments
of principal and interest under the provisions of Section 280-D of the Act. The
said Mohan having died on 15th July, 1969, the instalment of principal and
interest in the sum of Rs.12,013/- payable to him under Section 280-D was paid
to the assessee, his son and executor. For the Assessment Year 1970-71 the
Income-Tax Officer treated the sum of Rs. 12,013/- as income in the hands of
the assessee. On appeal, the Appellate Assistant Commissioner held that the
said sum was not taxable in the assessee's hands. The Tribunal reversed the
Appellate Assistant Commissioner and, at the behest of the assessee, referred
the aforestated question to the Delhi High Court.
The
Delhi High Court, by the judgment and order under appeal, held against the assessee.
Section
2(24)(viii) of the Act defines "income" to include "any annuity
due, or commuted value of any annuity paid, under the provisions of Section
280-D". Chapter XXII-A of the Act provides for Annuity Deposits.
"Annuity" is defined by Section 280-B(4) to mean "any annual instalment
of principal and interest thereon payable by the Central Government under the
provisions of Section 280-D".
A
"depositor" is defined by Section 280-B(60 "to mean a person to
whom the provisions of this Chapter apply".
Section
280-C requires an assessee covered by Chapter XXXII-A to make for every
assessment year an annuity deposit with the Central Government at the rate
prescribed in respect of his total income for the previous year. Section 280-D
deals with the repayment thereof and states :
"Subject
to the provision of this Chapter and any scheme framed thereunder, the
Government shall repay to the depositor the annuity deposit made or recovered
in any year in ten annual equated instalments of principal and interest at such
rate as may be notified by the Central Government in the Official
Gazette." (The proviso to Section 280-D does not concern this case.)
Section 280-W empowers the Central Government to frame Annuity Deposit Schemes
and these may, inter-alia, provide for the manner and the intervals at which
the annuities would be paid.
The
Annuity Deposit Scheme, 1964, was framed under Section 280-W and came into force
on 1st October, 1964.
With
effect from 8th
February, 1967,
sub-paragraph 4(a) thereof read : "In the case of a deceased depositor who
has not made a nomination under paragraph 11, the annuity shall be payable to
his legal representative." Paragraph 7 provided for the refund of annuity
deposits but it did not cover the case of a depositor who had died. Paragraph 9
dealt with nominations; it said "A depositor, being an individual, may
nominate in Form No 7, or as near thereto as may be, one or more individuals
who shall be entitled to receive the annuity payable to him in the event or his
death.
The
Delhi High Court, in the judgment under appeal, followed its earlier judgment
in Commissioner of Income-Tax, the assessee was the 'karta' of a Hindu undivided
family.
The assessee
had made annuity deposits under the Annuity Deposit Scheme, 1964, on behalf of
the HUF. Therefore, the HUF was partitioned and the assessee received to his
share repayments against the annuity deposits. The Appellate Tribunal held that,
since the assessee was not the depositor, the repayments would not be taxable
in his hands except to the extent of the interest that was included therein.
The Delhi High Court answered the question that was referred to it in this
behalf against the assessee holding that not only the interest element but also
the principal element of the annuity, to the extent of the share of the assessee
in the annuity deposits, was taxable in his hands. It said that the annual
repayment was deemed to be income and, whether received by the depositor
himself or the nominee or the legal representative, it would be subjected to
tax only when the total income exceeded the maximum not chargeable to tax. It
could not be the intention of the Legislature that it would necessarily be
taxed on receipt or taxed at the same rate at which the annuity deposit would
have been liable to tax had it not been deducted from the total income in the
year of deposit. The only idea was that since the amount of deposit was
excluded from the total income at that time, the annual payments should be
included in the total as and when received. The deposit having been made under
the Scheme, the repayment had been obtained thereunder. The Delhi High Court
assumed that even when there was no specific provision under the Act or the
Rules for repayment, it would still be possible for the legal representatives
of a depositor to obtain repayment of the deposit made by the deceased by
recourse to legal action but the repayment in the case before it had not been
made in any such manner. It was repayment made ostensibly and purportedly under
the Act and the Scheme and, hence, it should be treated as a payment made under
the Scheme and so under the provisions of the Act. The Delhi High Court
approved of the view taken by the Gujarat High Court in Nawab 102 ITR 455.
The
Gujarat High Court in Nawab's case (aforementioned) was required to answer this
question :
"Whether,
on the facts and in the circumstances of the case, the instalment of annuity
deposit received by the karta of the assessee as nominee/legal representative
of the deceased depositor was liable to be assessed as income of the assessee?"
There was no dispute that under the provisions of the Act and the Scheme, so
far as the depositor himself was concerned, the payments or instalments which
he received were income in his hands. The question was : did it make any
difference when the amount of the annuity was received by the nominee or the
legal representative of the depositor? Section 280-D opened with the words
"Subject to the provisions of this Chapter and any scheme framed thereunder".
Under the Scheme the annuity was payable to the depositor's legal
representative or, if he had made a nomination, to the nominee. It was,
therefore, clear that under the Scheme the nominee or legal representative of
the original depositor was a person to whom the amount of annuity became due
under the Scheme and it could not be said that only the provisions of Section
280-D which provided for repayment to the depositor should be looked at. The
provisions of Section 280-D were subject to the provisions of any Scheme and
under the Scheme, in the event of the death of the original depositor, the
amount of the annuity became due to the legal representative, in case there was
no nomination, or the nominee, if there was one. Counsel for the assessee
contended that under the general law what the legal representative received was
not an annuity but the return of capital and what he would be receiving was an instalment
of that capital. The Gujarat high Court did not agree. It held:
"In
the instant case we find that a portion of the income of the original depositor
which had been withheld as a measure to prevent inflation and was thus
impounded, is being released over a period of ten years and since the money was
made available to the Government some amount of interest was also included with
the amount so repaid by ten equal instalments.
Ordinarily,
the word "instalment" is associated with return of capital. but in
this particular case what we find is that the Government which had impounded
the income in the particular year in which the deposit was made, returns the
same amount with some amount of interest in ten equal instalments. For having
deposited that particular amount in the year in which the deposit was made, the
depositor got certain relief in his own income-tax assessment and was not
subjected to the extra amount of income-tax which he was liable to pay under
section 280X for failure to make the deposit under the provisions of Chapter
XXII-A and the Annuity Deposit Scheme framed thereunder.
Under
these circumstances, even if the question were to be considered from the larger
point of view as Mr. Patel wanted us to consider, we come to the conclusion
that in the instant case when the amount is being returned, it is not the
return of capital but the return of the original item of income which is now
spread over a period of ten years. Under these is not possible to accept Mr.
Patel's contention that this was a return of capital and not a return of
income. Moreover, that which would have been income in the hands of the
original depositor does not cease to be so by the mere circumstance that the
depositor died and the money is being received by the legal representative or
by the nominee. That which was otherwise income retains its character of income
notwithstanding the fact the original depositor died in the meanwhile.
Under
these circumstances, considered from either point of view, namely, from the
point of view of the provisions of the Act and the paragraphs of the Annuity
Deposit Scheme, taken together, or considered from the point of view of general
law, the result would be the same, namely, that these annuity payments which
are a creature of statute and statutory powers, are income in the hands of the
nominee, legal representatives of the original depositor." The Karnataka
High Court in the K.Bhoomiamma & Anr. vs. Controller of Estate Duty, Mysore, Bangalore 115 ITR 703, was
concerned with several questions, of which the first two are relevant :
"(1)
Whether, on the facts and in the circumstances of the case, the Tribunal was
justified in holding that a sum os Rs.48,777/- on account of annuity deposits
was rightly included in the principal value of the estate of the deceased?
(2) If
the answer to the first question is in the affirmative, whether, on the facts
and in the circumstances of the case, the Tribunal was right in holding that no
deduction should be made out of the value of the annuity deposits on account of
income-tax payable by the legal heirs of the deceased on the instalments of
annuity deposits receivable by them?"
No
argument was addressed to the High Court on the first question and the High
Court said that it was clear that the beneficial interest in the annuity
deposits made by the deceased and the right to recover them passed on the death
of the deceased to his heirs and they, therefore, came within the definition
and ambit of the expression "property passing on the death of the
deceased". The second question arose out of the contention raised on
behalf of the accountable person that the valuation of the annuity deposit
without taking into consideration the income-tax payable by the heirs of the
deceased when the annuity deposits were realised from time to time was wrong. The
Karnataka High Court held that the income-tax which the accountable person was
likely to pay had no relevance to the valuation of the annuity deposits at the
time of death of the deceased. The value of the estate of the deceased had to
be determined on the death of the deceased and it was not the value of estate
in the hands of the accountable person subsequently.
The
decision of the Bombay High Court in Commissioner of Income-Tax vs. Dr. Rodhan
H. Shroff 207 ITR 957, is squarely in favour of the assessee. The questions to
be answered read thus :
"(1)
Whether, on the facts and in the circumstances of the case, the Tribunal was
justified in holding that there was no provision in the Income-Tax Act whereby
the repayment of annuity deposit made to a legal heir could be deemed to be the
income in the hands of the legal heir?
(2)
Whether, on the facts and in the circumstances of the case, the repayment of
annuity deposits can properly be taxed in the hands of the assessee, who is a
nominee of the depositor, under the provisions of section 2(240(viii) read with
section 280D of the Income-tax Act, 1961, since the repayment of annuity
deposit is actually received by the assessee?" The Bombay High Court said
that the annuity deposit or any amount under the Annuity Deposit Scheme which
was paid to a nominee on the death of the depositor was not covered in the
definition of income under Section 2(24)(viii). This Section included in the
definition of income only the amount paid under Section 280-D to a depositor.
Hence, the Court said, "we do not see how a payment which is made to a
nominee upon the death of the depositor, in respect of the annuity deposits
made by the depositor, would fall within the definition of income under Section
2(24)(viii) of the Income-tax Act, 1961". The Bombay High Court relied
upon the judgment of the Madras High Court in CIT vs. M.M.Muthiah 109 ITR 463,
where it had been held that there was a fictional inclusion of the annuity
referred to in Section 280-D in the income of the depositor. It was only in the
circumstances set out in Section 280-D and by a statutory fiction that the
annuity repaid in instalments could be income in the hands of the depositor.
There was no such statutory provision which would cover the receipt of such an instalment
in the hands of the nominee, as income of the nominee. Unless the charging
section was expressive and clear it was not possible to include all amounts
received by the assessee as his income only on the contention that it would be
equitable to do so. Reliance was laid on this Court's judgment in CIT vs. Hukumchand
Mohanlal 82 ITR 624, where it had been held that if the Income-tax Act did not
contain any provision making a successor in business or the legal
representative of an assessee liable to pay tax on the deemed profits of the
original assessee, the legal representative could not be so taxed. The
reasoning of the Madras High Court in the case of M.M. Mutbiah was followed by
it in the subsequent decision in CIT vs. S.M. Ebrahim 134 ITR 599. The Bombay High
Court agreed with the reasoning and conclusions of the Madras High Court. It
disagreed with the view taken in Nawab's case because, in its view the Gujarat
High Court had failed to take into account the express provisions of Section
2(24)(viii) wherein the repayment received only by the depositor were deemed to
be his income. The Bombay High Court also considered the decision of the Delhi
High Court in Talwar's case and held that it was inapplicable to a case like
the one before it where the deposit had not been received by the depositor in
any sense of the term. Section 280-D in terms referred only to repayment to the
depositor. All that it said was that such repayment to a depositor would be
subject to other provisions in the Scheme. Section 280-D did not cover any
payment either to a nominee or to a legal representative of a deceased
depositor. Therefore, the definition of income under Section 2(240(viii) did
not cover a repayment of annuity deposit received by a nominee or a legal
representative.
Reliance
was placed by the learned Additional Solicitor General on Section 159 of the
Income-tax Act, which says, "Where a person dies, his legal representative
shall be liable to pay any sum which the deceased would have been liable to pay
if he had not died, in the like manner and to the some extent to the
deceased". It was submitted that, in any event, the assessee was liable to
be taxed on the amount of the annuity on this account. The submission can be
disposed of immediately, before we go to the main contention. Section 159
applies to income that had accrued to the deceased when he was alive; it would
not apply to a case such as the present.
The
argument on behalf of the Revenue runs:
Sub-Paragraph
4(a) of the Scheme says that "the annuity shall be payable to his legal
representatives" if the deceased depositor has not made a nomination. It
was, therefore, that the annuity had been paid to the assessee;
it had
been paid under the Scheme. Section 280-D required the Central Government,
subject to the provisions of Chapter XXII-A and any Scheme framed thereunder,
to repay the annuity deposit. The payment to the assessee being under the
Scheme, it is a payment under the provisions of Section 280-D. It is,
therefore, income as defined by Section 2(24)(viii) and taxable as such in the assessee's
hand.
As we
read it, Section 280-D, which has been quoted above, states that the
requirement of repayment to the depositor of the annuity deposit "in ten
annual equated instalments of principal and interest at such rate as may be
notified" is subject to the other provision of Chapter XXII-A and any
Scheme framed thereunder; that is to say that the Scheme may provide for a
different manner of repayment to the depositor. In any event and assuming that
the Scheme can provide that the repayment be made to someone other than the
original depositor and payment is made accordingly; it is payment under the
Scheme and not payment under Section 280-D, Section 280D does not apply to
anyone other than the original depositor. Only to the original depositor is the
annuity paid under the provisions of Section 280-D. It is, therefore, only in
the hands of the original depositor that the annuity is income, by reason of
the inclusive definition in Section 2(24)(viii) and taxable as such.
The amount
of the annuity deposit was income in the hands of the original depositor and
taxable as such. The provisions of the Act the Scheme obliged him to make the
deposit thereof instead of paying income-tax thereon. The annuity deposit, when
made, became capital. When returned, either as a whole or by instalments, it
was not liable to tax as income. For this reason Section 2(24)(viii) was
enacted, whereby the instalment or annuity was treated as income, provided it
was received under Section 280-D; that is to say, the annuity was to be treated
as income if received by the original depositor. On the original depositor's
death the balance of the annuity deposit that he had made became part of his
estate and was liable to tax as such, as the Karnataka High Court rightly held
in Bhoomiamma's case. Becoming a part of his estate, his legal representatives
became entitled to recover it, and they would under the general law be entitled
to recover it in one lump sum, paying no tax on it (except estate duty, should
a statute levying it be on the statute book at the relevant time).
Sub-paragraph 4(a) of the Scheme does no more than recognise that the unpaid
balance of the annuity deposit has to be paid over to the original depositor's
legal representatives, adding only this : that it would be paid in instalments
as annuity. Though so paid in annuity form the repayment is of capital. It
cannot be taxed as income in the hands of the legal representative unless the statute
were expressly to deem it to be income in his hands.
As to
the argument based on equity, it has long been recognised that tax and equity
are strangers. Just as reliance upon equity does not avail an assessee, so it
does not avail the Revenue. The legal representative of a deceased depositor
cannot be made to pay income-tax upon the annuity only because the original
depositor had not been required to pay income-tax on the amount of the annuity
deposit, on the basis that what the Revenue had lost out on then should be
recouped to it now. The original depositor did not voluntarily make the annuity
deposit; he was required by the Act and Scheme to do so. Insofar as he was
concerned, the Act provided that the annuity he received would be taxable as
income. Whether advisedly or otherwise, the Act did not provide that the
annuity would be taxed as income in the hands of his legal representative, and
there it must remain.
The
appeal is allowed. the judgment and order under appeal is set aside. The
question is answered in the negative and in favour of the assessee.
No order
as to cost.
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