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Commissioner Of Wealth-Tax, Madras v. Smt. Martinammal Machado .
Factual and Procedural Background
This opinion arises from a reference under Section 27(1) of the Wealth Tax Act, 1957, concerning the assessment to wealth tax of the assessee for the year 1959–1960. The assessee made a return showing net wealth of Rs. 4,95,977 as on valuation date 31-3-1959 and did not include any value for a leasehold interest in certain salt pans. By an agreement dated 7-5-1942 the Central Government granted a lease to the assessee of a number of salt pans in Milavittan Village near Tuticorin for a nominal term of twenty-five years. The Wealth Tax Officer valued the leasehold interest at Rs. 1,25,000 (calculated at five times the annual rent) and included it in the assets. The Department confirmed that inclusion on appeal, but on further appeal the Appellate Tribunal held that the leasehold interest could not be regarded as an asset because it was not available to the assessee for a period exceeding six years. The Tribunal's conclusion rested on a clause in the lease which permitted either party to determine the lease at the close of the salt manufacturing season by notice in writing, with immediate effect but allowing six months for removal of salt.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the leasehold interest of the assessee in the salt pans is an asset within the meaning of section 2(e)(v) of the Wealth Tax Act, 1957 and whether its value is includible in the net wealth of the assessee.
Arguments of the Parties
Appellate Tribunal / Assessee's Position
- The Appellate Tribunal concluded that the assessee's interest in the salt pans was not an asset for wealth-tax purposes because the lease was terminable by either party on notice at the close of each salt manufacturing season, and therefore the interest was not available to the assessee for a period exceeding six years.
Department's Arguments
- Learned counsel for the Department contended that the lease was granted for a period of twenty-five years and therefore should be regarded as an interest available for more than six years. The Department argued that because the lessor had not in fact exercised the power of termination within six years from the date of the lease, the interest could not be treated as one available for six years or less.
- In support of that contention the Department relied on the decision in Dewarkhand Cement Co. Ltd. v. Secy. of State (ILR (1939) Bom 320; AIR 1939 Bom 215), where a lease containing a power of termination by six months' notice was held not to be a lease for a fixed period for the purposes of section 25 of the Indian Stamp Act. The Department urged that section 2(e)(v) should be read as referring to the category (i.e., the stated term) rather than the substance (i.e., the practical availability) of the transaction.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dewarkhand Cement Co. Ltd. v. Secy. of State, ILR (1939) Bom 320; AIR 1939 Bom 215 | Held that a lease containing a power for the parties to terminate by six months' notice could not be regarded as a lease for a fixed period for the purposes of section 25 of the Indian Stamp Act. | The Court explained that the decision concerned the applicability of section 25 of the Stamp Act and did not lay down a general proposition that a lease with an option to terminate must always be treated as a lease for the originally specified period. The Court found the precedent inapposite to the interpretation of section 2(e)(v) of the Wealth Tax Act for the present purpose and therefore did not adopt it as controlling here. |
Court's Reasoning and Analysis
The Court proceeded by construing the statutory scheme of the Wealth Tax Act and the terms of the grant. It identified the charging provision and relevant definitions:
- The Wealth Tax is an annual tax on property (a tax on capital) and section 3 charges net wealth computed on the valuation date.
- "Net wealth" is defined in section 2(m) as the aggregate value of all assets belonging to the assessee on the valuation date less debts.
- "Assets" are defined in section 2(e) to include property of every description but exclude certain classes of property; clause (v) to section 2(e) excludes "Any interest in property where the interest is available to an assessee for a period not exceeding six years."
The Court explained the effect of clause (v): interests which can only last for six years or less are excluded from computation of assets. It recognized that a leasehold interest is an interest in property, but focused on whether the interest before the Court was "available" to the assessee for a period exceeding six years.
The Court rejected the Department's contention that the stated 25-year term alone sufficed to make the interest available for more than six years. It distinguished cases addressing the characterization of a lease for a different statutory purpose (e.g., the Stamp Act decision relied upon by the Department) and declined to extend that reasoning to the interpretation of section 2(e)(v).
The Court then examined the scheme of revocable transfers under the Wealth Tax Act. It noted that revocable transfers are treated as belonging to the transferor for wealth-tax purposes: section 4(1)(a)(iv) requires inclusion only of assets transferred "otherwise than under an irrevocable transfer," and section 4(5) together with the Explanation treats transfers that are not revocable for a period exceeding six years as irrevocable for the purpose of the section. The Court also cited section 16(1)(c) of the Income Tax Act as an analogous rule treating income under a revocable transfer as taxable as if it remained with the transferor.
Applying these principles, the Court reasoned that where a transfer (or grant of a lease) contains a power of revocation in the transferor, the property is to be deemed, for wealth-tax purposes, to be the property of the transferor rather than the transferee. Because the lease in this case was terminable by the lessor (and thereby revocable within the six-year period), it could not be said to be an interest available to the lessee as of right for a period exceeding six years.
The Court therefore concluded that the leasehold interest obtained by the assessee was not an asset within the meaning of section 2(e)(v) and thus not includible in her net wealth.
Holding and Implications
Holding: The Court answered the referred question in the negative. In other words, the Court held that the leasehold interest in the salt pans was not an asset within the meaning of section 2(e)(v) of the Wealth Tax Act, 1957, and its value was not includible in the net wealth of the assessee.
Implications:
- Direct effect on the parties: The leasehold interest must be excluded from the assessee's net wealth for the assessment year in question. The assessee was awarded her costs, including advocate's fee of Rs. 250.
- Broader implications: The Court's decision rests on the construction of section 2(e)(v) and the statutory scheme treating revocable transfers as belonging to the transferor for wealth-tax purposes. The opinion distinguishes a precedent relied upon by the Department as addressing a different statutory provision (the Stamp Act) and does not adopt it as a general rule for the Wealth Tax Act. The opinion does not expressly purport to lay down a novel, binding principle of broad application beyond the statutory interpretation employed; its direct effect is the exclusion of the specific revocable leasehold interest from the assessee's net wealth.
Order: The Court answered the question in favour of the assessee and ordered payment of costs as specified.
S. Ramachandra Iyer, C.J:— The following question, which arose in the course of the assessment to Wealth Tax of the Assessee for the year 1959–1960, has been referred for our opinion under Section 27(1) of the Wealth Tax Act, 1957:
“Whether in the circumstances and on the facts of the case, the leasehold interest of the assessee in the salt pans is an asset within the meaning of section 2(e)(v) of the Wealth Tax Act, 1957 and its value includible in the not wealth of the assessee?”
2. For the assessment year in question, the assessee made a return that on the valuation dated 31-3-1959, her not wealth was Rs. 4,95,977/-. In making that return, she did not put any value on the leasehold interest she possessed in certain salt pans. By an agreement dated 7-5-1942 the Central Government had granted a lease in favour of the assessee in respect of a number of salt pans in Milavittan Village, near Tutieorin. The lease was to enure for a period of twentyfive years. The Wealth Tax Officer valued that property at Rupees 1,25,000/-, at five times the annual rent, and included the same in the total asset. Although this was confirmed, on appeal, by the Department, the Appellate Tribunal on further appeal held that the interest of the assessee in the salt pans could not be regarded as an asset, it being not available to the assessee for a period exceeding six years. This conclusion was reached on a construction of clause (1) of the lease deed which gave an option to the Government to put an end to the lease by giving six months' notice ending with the salt manufacturing season every year. That clause stated:
“The lease shall be for a period of 25 years commencing from the 9th July, 1942 provided always that the lessor or the lessee shall be at liberty to determine the lease on giving the other of them notice in writing at the close of the salt manufacturing season. Such notice will have effect at once but six months from date of notice will be allowed for removal of salt belonging to the lessee. All salt not removed within that period will be forfeited to the lessor”.
3. The covenant contained in the clause extracted above, while it purports to be a grant of a lease for a term of 25 years, enables either party, by notice, to determine the lease at an earlier time. In other words, the lease, which contains a power or option to determine it in either party, would expire earlier than the stipulated time in accordance with the terms of the option in the lease, provided of course the option is validly exercised. The question that falls for our consideration is, whether a revocable lease of the kind before us, could be treated as an asset ineludible in the total wealth of the assessee. The Wealth Tax Act imposes an annual tax on property owned by a person; in effect, it is a tax on capital. Section 3, the charging section, brings to tax the not wealth of the assessee computed as on the date of the valuation. The term “net wealth” has been defined in section 2(m) as meaning:
“Amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his not wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date.” (The rest of the section omitted as unnecessary).
4. The term “assets” has been defined in S. 2(e) as including property of every description, movable and immovable. But the definition excludes from its ambit certain classes of property specified therein. Clause (v) to section 2(e), which is relevant for our present ??? says:
“Any interest in property where the interest is available to an assessee for a period not exceeding six years”.
5. The effect of this definition is that short term estates (e.g mortgage or leasehold right enuring for 6 years or less) will be excluded in the computation of the assets. If, therefore, an assessee possesses an interest in any property, which could only last for a period of six years, or less such property will have to be excluded in the computation of the not asset.
6. A leasehold interest in immovable property is undoubtedly an interest in property. The Appellate Tribunal expressed the opinion that inasmuch as the lessor had a power of revocation under clause (1) of the lease document, the leasehold interest could not be regarded as available to the assessee for a period of over six years.
7. Learned counsel appearing for the Department has contested the correctness of this view on the ground that in the present case the lease was for a period of twentyfive years. It has also been argued that as the lessor had not in fact terminated the lease by exercising the power vested in it within a period of six years from the date thereof he interest created thereunder in favour of the assessee could not be regarded as one not available to her for a period exceeding six years. This contention, in our opinion, is not supported by the terms of section 2(e)(v) of the Act. Under that provision any interest in property which will not be available to the assessee for a period exceeding six years, would be excluded in the computation of the not assets of the assessee. Can it be said that under the lease deed dated 7-5-1942, the assessee acquired an interest in a property for a period exceeding six years?
8. In a simple case where there is a grant of lease for a term exceeding six years, with no power in the lessor to terminate the lease before the end of the term, the interest assigned under the document can certainly be regarded as an interest in property available to the assessee for a-period of more than six years. The fact that on the date of valuation of such interest the leasehold interest would be subsisting for not less than six years will not affect the question. What has to be seen in all such cases is, whether the interest created in favour of the lessee was one which was or would be available to him for a period exceeding six years. But, where an interest that is created is revocable at the instance of the lessor, the position, in our opinion, will be different. It cannot be said that the transaction is one where the leasehold interest is available to the lessee for more than six years; the simply reason being that the lease could be put an end to by the lessor within the period of six years.
9. Learned counsel for the Department contended that inasmuch as the interest created in favour of the assessee under the grant made by me Government was one for a period of 25 years, it should be regarded as an interest available for more that six years and the mere existence of a power of termination of the lease in the interim, ill either party, could not make it a lesser interest; in other words S. 2(e)(v) referred to the category rather than the substance of the transaction. In support of that contention he referred to the decision in Dewarkhand Cement Co. Ltd. v. Secy. of State, ILR (1939) Bom 320; (AIR 1939 Bom 215). There a question arose as to whether a document was a lease for a definite or indefinite period, for the purpose of applying section 25 of the Indian Stamp Act. No period was fixed in the lease but a power was given to the parties to terminate it by six months' notice in writing. Ranganekar, J., held that the lease deed in question could not be regarded as one for a fixed period so as to render applicable section 25(a) of the Act, which levied Stamp duty on the total amount of rent for the period.
10. The learned Judge further observed that where a lease was not one in perpetuity, or where there was no definite time fixed during which the lease was to subsist, the case could only come under clause (b) of S. 25. We are unable to see how that decision, which was concerned with the applicability of section 25 of the Stamp Act, on its terms, could be regarded as laying down a general proposition tat whenever there is a lease for a fixed or for an indefinite term with an option in either party to terminate the same by notice before the expiry of the term, it could be regarded as a lease for the period originally specified or as one for an indefinite term. It is, however, unnecessary to pursue that matter, as what we arb concerned with in the present case is the interpretation of the exemption clause contained in S. 2(e)(v) of the Act, to find out whether such a lease can he regarded as one available to the assessee for a period exceeding six years, albeit within that time it was possible for the lessor to terminate the same.
11. For a true interpretation of that provision it is but proper first to ascertain the intention of the Legislature underlying that provision. For this purpose it will be permissible for the Court to look into the scheme of the statute. That shows that revocable transfers are not regarded as the assets of the transferee for computation of tax. Sections 4 and 5 of the Act prescribe what has to be included and excluded in computing the not wealth of an individual. Section 4(1)(a)(iv) provides that a person to whom assets have been transferred by another individual “otherwise than under an irrevocable transfer” would be bound to include the value of such an asset in the computation of his not wealth. This is but a recognition of the ordinary principle that when a person parts with his property to another, it ceases to belong to him and becomes the property of the person to whom it is transferred. This rule is given effect to by the section only if the transfer is irrevocable one, the implication being that if the instrument or transfer is a revocable one, the asset should be deemed to belong to the transferor. This is no new principle in taxation laws. Section 16(1)(c) of the Income Tax Act makes income of property transferred under a revocable instrument taxable as if it continued to remain with the transferor.
12. Clause (5) of Section 4, as well as the Explanation thereto, which run, as follows, make this clear:
“The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the not wealth of the transferor ‘as and when the power to revoke arises to him’. (Italics ours (here into ‘’)).
Explanation: For the purpose of this section., an irrevocable transfer includes a transfer of assets which, by the terms of the instrument effecting it, is not revocable for a period exceeding six years or during the lifetime of the transferor.”
13. In other words, if there exists a power of revocation in the transferor, the property, for the purpose of section 4, is deemed to be the property of the transferor for the payment of wealth tax. It cannot be disputed that the same asset cannot belong simultaneously to the transferor and the, transferee. The rule might be different in regard to income in the hands of one if paid to another might also be income in the hands of the latter, where however a transferor is liable to wealth tax, because there vests a power of revocation in him, the transferee should not be made liable again as the capital asset cannot belong to both simultaneously. Let us illustrate this by means of an example. Suppose, A, an assessee to wealth tax, transfers 3 property to B in terms which contain a power of revocation in A. In consequence of the transfer B could only hold the property subject to the power of revocation vested in A.
14. Under the provisions of S., 4, notwithstanding the transfer, the property will be ineludible in the assets of A for the purpose of tax. It follows that it could not be included in the assets of B, in other words, B, although he gets property under the transfer, is not made liable to tax, because under the terms of the transfer there is an outstanding power of revocation in A. That principle is rule of justice recognised under the Act and should be applicable to the present case. We find that the assessee had only a leasehold interest in property which could be terminated at any time by the lessor. That could not, therefore, be said to be an interest in property available to the assessee for a period exceeding six years in the sense that he could claim it as of right for that period so as to 1:6 available to him. We are, therefore, of opinion that the leasehold interest obtained by the assessee could not be regarded as an asset within the meaning of S. 2(e)(v) of the Act and answer the question referred to us in the negative and in favour of the assessee. The assessee will be entitled to her costs: Advocate's fee Rs. 250/-.
KH/CWM/D.V.C
15. Order accordingly.
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