Full Judgment Text
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PETITIONER:
COMMISSIONER OF WEALTH TAX, LUCKNOW
Vs.
RESPONDENT:
P. K. BANERJEE (DEAD) BY LRS.
DATE OF JUDGMENT09/09/1980
BENCH:
VENKATARAMIAH, E.S. (J)
BENCH:
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
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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.
JUDGMENT:
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
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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
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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
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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
subclauses (i) to (iii) thereof. In section 2 (e) of the
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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
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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
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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
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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
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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
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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 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
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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
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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."
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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
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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.
673