Citation Codes

Equivalent Citations

citation codes

Case Number

D.B Wealth-tax Reference Case No. 41 of 1980

Judges

Mr. Jasraj Chopra
J.S. Verma

Acts

section 27(1) of the Wealth-tax Act, 1957 (for short the Act herein),
section 2(e)(1)(iv) of the Wealth-tax Act,
clause (iv) of section 2(e)

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Smart Summary

Structured Summary of the Opinion (J.R. Chopra, J.)

Factual and Procedural Background

This is a reference under section 27(1) of the Wealth-tax Act, 1957 made by the Revenue to the Court asking two questions of law concerning the tax treatment of a monthly payment of Rs. 1,000 to the assessee, Smt. Hoolas Devi.

The relevant procedural history: the assessee had been assessed to wealth-tax for the assessment years 1965-66 to 1971-72. Assessments earlier finalised were reopened by the Wealth-tax Officer under section 17(1)(a) on three grounds: (a) that the monthly Rs. 1,000 payable from M/s. Mohanlal Sanghi Trust represented the assessee's life interest and therefore constituted "property" within section 2(e); (b) gross undervaluation of jewellery and ornaments; and (c) non-disclosure of assets amounting to Rs. 87,720 representing a life interest in the trust. A notice was issued and contested by the assessee.

The only factual issue determined in this reference is whether the monthly payment of Rs. 1,000 from the trust is commutable and therefore an asset to be included in net wealth; the Court expressly states it is not concerned, for the purposes of this reference, with the other two grounds (undervaluation of jewellery and the larger life interest sum).

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the annuity of Rs. 1,000 per month is not commutable and that it should be left out of account in the calculation of the net wealth?
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that initiation of proceedings under section 17(1)(a) of the Wealth-tax Act was perfectly justified?

Arguments of the Parties

Revenue / Departmental Position

The Rs. 1,000 monthly payment represents the assessee's life interest in the trust and thus constitutes "property" within section 2(e) of the Wealth-tax Act.
The annuity is incommutable, and therefore should be included as an asset for net wealth computation.
The reopening of assessments under section 17(1)(a) was justified on the grounds of undisclosed wealth and undervaluation (including the life interest and jewellery).

Assessee / Departmental Nominee (as described)

The assessee contended the monthly payment of Rs. 1,000 was known to the assessing Income-tax Officer and had been received by her since the inception of the Act; it could not therefore be treated as newly disclosed property escaping assessment.
Before the Appellate Assistant Commissioner the payment was held to be an annuity and not incommutable; before the Tribunal the departmental nominee conceded it was an annuity but argued it was incommutable (and thus property).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CWT v. Hirji Cowasji Jahangir, [1981] 129 ITR 642 (Bombay High Court)	The absence of an express provision preventing commutation does not automatically resolve the question in favour of the Revenue; where there is no express prohibition, an inquiry is required whether preclusion of commutation can be inferred from the terms of the grant.	The Court relied on this to explain that although the will contains no express prohibition on commutation, the terms (fixed sum, payable from income, first charge on income, not charged on capital, not transferable) permit an inference that commutation is precluded.
CWT v. Bhalchamora D. Jokhakar, [1978] 112 ITR 228 (Bombay High Court)	If an annuity's terms preclude commutation (expressly or by implication), it is not included in "assets"; if commutation is not precluded, it may be included as an asset.	The Court applied this principle to conclude that the Rs. 1,000, being a fixed monthly payment made the first charge on income and not connected to capital, is by necessary implication non-commutable and therefore not an asset.
CWT v. Arundhati Balkrishna, [1970] 77 ITR 505 (Supreme Court)	Observation that ordinarily an annuity is a money payment of a fixed sum annually (or periodically) and is a charge personally on the grantor.	The Court used this observation to support characterising the monthly Rs. 1,000 payment as an annuity — a fixed periodic money payment — and noted it was made a first charge on trust income.
Bignold v. Giles, [1859] 4 Drew 345 (quoted in Arundhati Balkrishna)	A judicial exposition of the nature of annuities: a right to receive a fixed sum de anno in annum, given for life or years, sometimes payable out of personal assets but capable of devolution like real estate.	The Court quoted this passage (via the Supreme Court authority) to illustrate the legal character of annuities and to reinforce the classification of the Rs. 1,000 payment as an annuity.
Ahmed G.H. Ariff v. CWT, [1970] 76 ITR 471 (Supreme Court)	The term "annuity" in clause (iv) of section 2(e) must be given its legal/judicial meaning, not merely a popular or dictionary definition.	The Court invoked this authority to emphasise that the legal meaning of "annuity" governs the interpretation of section 2(e)(1)(iv) and to justify treating the Rs. 1,000 payment as an annuity under that clause.

Court's Reasoning and Analysis

The Court proceeded by focusing on the terms of the will (annexure-C), specifically paragraph 20(d)(1), which directs that Rs. 1,000 per mensem be paid to the wife during her lifetime and made the first charge on the income of the trust. From the express terms the Court drew the following analytical steps:

Source of payment: The Rs. 1,000 is payable out of the income generated by the trust's investments (interest/income); it is not charged on the trust principal or payable from capital.
Consequence of source: Because payment is dependent on income, if there is no income there can be no payment; the entitlement is not tied to a specific proportion of income but is a fixed monetary sum.
Nature of the entitlement: A fixed sum payable periodically out of income, especially when not a share of capital income and not charged on capital, is an annuity within the legal meaning of that term (supported by cited authorities).
Commutability: The will contains no express commutation prohibition. However, using the legal tests from cited precedents, the Court examined whether the terms imply that commutation is precluded. The combination of (i) a fixed periodic payment, (ii) payable only from income, (iii) being the first charge on income, and (iv) not transferable or chargeable against capital, led the Court to infer by necessary implication that commutation is ruled out.
Valuation consideration: Section 7(1) requires assets to be saleable and have a market value to be included for wealth-tax valuation. The Court observed the monthly maintenance payment is not saleable and cannot fetch value in the open market; consequently it cannot be valued as an asset under section 7.
Conclusion on first question: On these bases — textual terms of the will, legal definitions and precedents, and valuation principles — the Court held the Rs. 1,000 payment to be a non-commutable annuity and not an asset to be included in net wealth.
Treatment of the second question: The Court found the second question (whether reopening under section 17(1)(a) was justified) did not survive for decision in the present reference. That is because the plea for reopening rested also on two other grounds (undervaluation of jewellery and the Rs. 87,720 life interest) which were not referred for decision. If the reopening was based solely on this annuity, the reference could not have been made (because the grant is held to be an annuity and not an undeclared asset), and it is not a case of concealment of assets to justify reopening under section 17(1)(e).

Holding and Implications

The reference is answered in favour of the assessee and against the Revenue: the Tribunal was justified in holding that the annuity of Rs. 1,000 per month is not commutable and that it should be left out of account in the calculation of the net wealth.

Implications:

Direct effect: The Rs. 1,000 monthly payment is not to be included as an asset for computing the assessee's net wealth for wealth-tax purposes; the Revenue's reference on that point fails.
Reopening of assessment: The Court held that the question of reopening assessments under section 17(1)(a)/(1)(e) does not survive for decision in this reference insofar as it depends solely on this annuity, because it was held to be an annuity and not a concealed asset.
Broader precedent: The opinion applies and relies on existing authorities for the legal characterization of annuities and valuation principles, but the Court did not state any broader novel principle beyond those applications. The direct consequence is limited to the parties; the judgment does not announce a new general rule beyond applying cited precedents and statutory provisions to the facts.

Disposition: Reference answered in favour of the assessee. No costs.

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Commissioner Of Wealth-Tax v. Hoolas Devi

The Judgment of the Court was delivered by

J.R Chopra, J.:— This is a reference under section 27(1) of the Wealth-tax Act, 1957 (for short “the Act” herein), at the instance of the Revenue for answering the following two questions of law, viz.:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct is holding that annuity of Rs. 1,000 per month is not commutable and that it should be left out of account in the calculation of the net wealth?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that initiation of proceedings under section 17(1)(a) of the Act was perfectly justified?”

2. The facts necessary to be noticed for the disposal of this reference briefly stated are: that the assessee, Smt. Hoolas Devi, was assessed to wealth-tax for the assessment years 1965-66 to 1971-72 for different amounts of wealth pertaining to each assessment year. Those cases which were completed and finalised were reopened by the Wealth-tax Officer under section 17(1)(a) of the Act on the following grounds:

(a) that the assessee has been made entitled to receive a monthly payment of Rs. 1,000 from M/s. Mohanlal Sanghi Trust created by her husband, late Shri Mohanlal Sanghi. The receipt of this amount represented her life interest in the said trust and thus it constituted “property” within the definition of “assets” as per section 2(e) of the Act, (b) that the assessee had grossly undervalued the value of jewellery and ornaments possessed by her and, therefore, the increase in the value has escaped assessment within the meaning of section 17(1)(a) of the Act, and (c) that wealth amounting to Rs. 87,720 which represented the assessee's life interest in the trust has escaped assessment.

3. A notice was given to the assessee and the assessee’ contested that notice. It was contended on behalf of the assessee that she was entitled to receive a monthly payment of Rs. 1,000 from M/s. Mohanlal Sanghi Trust and this fact was in the knowledge of the assessing Income-tax Officer. It was also submitted that the assessee has been taking this amount since the inception of the Act and this fact, on the basis of which the inference of the alleged life interest was drawn by the Wealth-tax Officer, was known to him from the very beginning. For answering these questions, we are not concerned with the assessee's life interest in the trust amounting to Rs. 87,720 as also the gross undervaluation of the jewellery and ornaments. We are only concerned with the monthly payment of Rs. 1,000 to the assessee from M/s. Mohanlal Sanghi Trust. According to the Revenue, this is an asset constituting property because the annuity is incommutable. The departmental nominee has frankly conceded before the Tribunal that it is an annuity. This fact was earlier disputed before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner held that it is an annuity and it is not incommutable but before the Tribunal the departmental nominee conceded that although the payment of Rs. 1,000 monthly to the assessee is an annuity but as it is immutable, it becomes “property” as per section 2(e) of the Act. To find out whether such an annuity is computable, it will be proper to refer to the intent of the testator which has been expressed in the will (annexure-C). This particular payment finds place in para. 20(d)(1) of the will which reads as under:

“20. I hereby appoint my brother, Seth Motilal Ji Sanghi and Seth Sohanlal Ji Sanghi, as joint trustees of the trust and direct the said trustees as under;…….

(d) The income from Government Securities and the instalments, as expressed in (b) of this para from Sanghi Brothers, Jodhpur, which would be in liquidation of my capital invested with them, and also would be in full settlement of all my rights in the joint business with my brothers as enumerated in para. 2 above, all these sums are to be deposited in the Imperial Bank of India or Government Post Offices or any other Scheduled Bank and this income only is to be disbursed as under:

(1) To pay Rs. 1,000 (Rupees one thousand only) per mensem to my wife, Smt. Hoolas Devi, during her lifetime and this shall be the first charge on the income of this trust.”

4. It is clear from para. 20(d)(1) of the will that this amount of Rs. 1000 is payable from the income of interest.. It has not been made payable from the property of the trust and, therefore, if there is no income, there cannot be any payment of this sum because it has not been charged on the principal and, as such, it does not create any life interest and even if it does, it is nowhere provided that it is commutable. This payment has no relation to any specific proportion of the income from any property. When such a proportion is not specified for the payment of this monthly maintenance grant and the entitlement is of a fixed sum only and is not payable from out of the capital, then such an entitlement is an annuity which is exempted under section 2(e)(1)(iv) of the Act. It is not the case of the Department that this annuity has been converted |into a lump sum grant. No such provision has been made in the will that this annuity can be converted into a lump sum grant. Our attention was invited to a decision of the Bombay High Court in CWT v. Hirji Cowasji Jahangir, [1981] 129 ITR 642, wherein a Division Bench of the Bombay High Court has held that the question whether in the case of an annuity the value thereof could not be included in the net wealth of an assessee under section 2(e)(1)(iv) of the Wealth-tax Act, does not necessarily get answered in favour of the Revenue merely because; the terms and conditions of the grant of the annuity do not contain any positive provision which prevents commutation of the annuity into a lump sum. It is when there is no express provision which prevents commutation of annuity into a lump sum grant that a further enquiry becomes necessary in that direction and such an enquiry must necessarily be directed at finding out whether the preclusion of such a right can be inferred from the terms and conditions of the grant. It is true that even in this will (annexure-C), there is no express provision prohibiting commutation, but the contents of the will show that it being a fixed sum and not being a particular portion of profit, is only-payable out of the income of the capital investment and that payment is only to be made during her lifetime. This right to get a monthly maintenance grant is neither transferable nor saleable. It is also not chargeable to any part of the capital investment and, therefore, it can very well be inferred that it is not commutable.

5. A Division Bench of the Bombay High Court in CWT v. Bhalchamora D. Jokhakar, [1978] 112 ITR 228, has held that if an annuity is such that by its terms and conditions, commutation of any part thereof into a lump sum grant is not precluded, it will be included in the expression “assets”. Conversely, in the case of any annuity where the terms and conditions relating thereto preclude commutation thereof into a lump sum grant, it will not be included in the expression “assets Such preclusion may be by the express terms of the contract or may arise by implication. In this case, the amount of Rs. 1,000 has been made payable monthly out of the income and and it has been made the first charge on the income of the trust. Thus, by necessary implication, it is very clear that the amount has to be paid only month by month and this payment will be the first charge on the income of the capital investment made by the trust, and thus, by necessary implication, its commutation is ruled out.

6. In CWT v. Arundhati Balkrishna, [1970] 77 ITR 505, their Lordships of the Supreme Court have been pleased to observe as follows (at page 509):

“Ordinarily, an annuity is a money payment of a fixed sum annually made and is a charge personally on the grantor.”

7. Here also, the payment of money is fixed and it is made the first charge on the income of the trust.

8. In CWT v. Arundhati Balkrishna, [1970] 77 ITR 505 (SC), it was quoted with approval the observations made by Kindersley V.C in Bignold v. Giles, ([1859] 4 Drew-345; 113 Revised Reports 390) which are as follows (at page 509):

“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.”

9. Here in the case before us, a certain sum has been made payable out of the income of the assets of the trust.

10. It has been held by their Lordships of the Supreme Court in Ahmed G.H Ariff v. CWT, [1970] 76 ITR 471, that the word “annuity” in clause (iv) of section 2(e) must be given the signification which it has assumed as a legal term owing to judicial interpretation and not its popular and dictionary meaning.

11. Section 7 of the act provides as to how the valuation of the assets should be determined. Sub-section (1) of section 7 of the Act lays down that subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. Thus, it is clear that the assets must be saleable and it must have a market value. Judged from that angle, this monthly payment of maintenance is not saleable and it cannot fetch any value in the open market and, therefore, it is an annuity and not an asset. In this view of the matter, we hold that in the facts and circumstances of the case, the Tribunal was correct in holding that the annuity of Rs. 1000 per month is not commutable and that it should be left out of account in calculation of the net wealth. So far as the second question referred to us by the Tribunal is concerned, it’ does not survive for decision because, firstly, it was a plea based on three grounds, two others being undervaluation of the jewellery and ornaments and non-disclosure of assets amounting to Rs. 87,720 to which the assessee has been made entitled in the will. Both these questions have not been referred for the decision of this court. If this plea is based only on this particular ground then, of course, the reference could not have been made because this grant has been held to be an annuity. It is not a case of concealment of any assets and, therefore, no occasion for reopening the assessment under section 17(1)(e) of the Act arose.

12. Consequently, the reference is answered in favour of the assessee and against the Revenue as under:

“The Tribunal was justified in holding that the annuity of Rs. 1000 per month is not commutable and that it should be left out of account in the calculation of the net wealth.”

13. The reference is answered accordingly. No costs.

Commissioner Of Wealth-Tax v. Hoolas Devi

Structured Summary of the Opinion (J.R. Chopra, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue / Departmental Position

Assessee / Departmental Nominee (as described)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Wealth-Tax v. Hoolas Devi

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