Commissioner of Wealth-tax, Bombay City Ii Vs. Vatsalabai Chandavarkar - Court Judgment

V.S. Desai, J.

1. This is a reference under section 27(1) of the Wealth-tax Act, 1957, arising out of the wealth-tax assessments of the assessee for the assessment years 1959-60 and 1960-61, for which the corresponding valuation dates were March 31, 1959, and March 31, 1960, respectively.

2. The dispute involved in the reference relates to whether the right of the assessee to receive a certain payment of Rs. 1,500 per month for her life, excepting certain circumstances, is exempt from the payment of wealth-tax under section 5(1)(vii) of the Wealth-tax Act.

3. The husband of the assessee, Sir Vithal Chandavarkar, was the managing director of Messrs. N. Sirur & Co., Private Ltd, for a number of years under agreements, which were renewed from time to time. The last agreement was of the 18th April, 1957, for a period of five years. Messrs. N. Sirur & Company Pvt. Ltd. were the managing agents of three textile mills, viz., the Mysore Spinning & ., the Minerva Mills Ltd. and the Modern Mills Ltd. Under clause 14 of the agreement referred to above, between Messrs. N. Sirur & Co. Pvt. Ltd. and Sir Vithal Chandavarkar, it was provided as follows :

'14.(i). In the event of the death of the managing director occurring during the currency of this agreement the company shall pay to the widow of the managing director, if she be alive at the death but not otherwise, the under-mentioned sums in consideration of the long and faithful services rendered by the managing director of the company :

(a) A sum of Rs. 36,000 (thirty-six thousand).

(b) In addition to the above, one half of the sum equivalent to two annas in the rupee of the net profits of the company for the completed financial year of the company immediately preceding the date of death of the managing director; and such net profits shall be calculated in the manner laid down in clause 8 of this agreement.

(c) In addition to the sums specified in sub-clauses (a) and (b) above, a sum of Rs. 1,500 per month will be paid to the widow of the managing director so long as she shall be alive; provided that the company shall be at liberty to discontinue such monthly payment of Rs. 1,500 in the event of the company ceasing for any reason whatsoever to act as managing agents or secretaries and treasurers of the Mysore Spg. & Mfg. Co. Ltd., Minerva Mills Ltd. and the Modern Mills Ltd. or any of them.'

4. The further part of this clause provided for what was to happen if Lady Chandavarkar did not survive him and the effect of the said provisions was that in that event the first two sums mentioned in sub-clauses (a) and (b) would be paid to his heirs, executors and administrators in consideration of the long and faithful services rendered by him to the company. Sir Vithal died on the 23rd January, 1959, and in the wealth-tax assessment of the present assessee for the assessment years 1959-60 and 1960-61, the Wealth-tax Officer included the capitalised value of the right of the assessee under sub-clause (c) of clause 14(1) of the agreement in the computation of her net wealth and subjected it to wealth-tax. Against the assessment order made by the Wealth-tax Officer, the assessee appealed to the Appellate Assistant Commissioner and contended before him that the right of the assessee was dependent on many contingencies and, consequently, it was not possible to capitalise the value of the said right and include the capitalised amount in the net wealth of the assessee. Secondly, it was contended that the right was exempted from the payment of wealth-tax and from inclusion in the computation of the net wealth under section 5(1)(vii) since it was a right to receive a pension or other life annuity in respect of past services under an employer. The Appellate Assistant Commissioner did not accept the first contention raised on behalf of the assessee. He pointed out that the contingencies pointed out were not only not certain to occur, but on the other hand were such that they were not likely to occur at all. There was, therefore, no risk of the right or the payments in respect thereof being terminated in the near future or before the end of the assessee's life. The right, therefore, was an asset, which was capable of being valued on the basis of its capitalisation. He, however, accepted the second contention because, in his opinion, the right of the assessee under sub-clause (c) of clause 14(i) of the agreement fell within the terms of section 5(1)(vii) of the Wealth-tax Act. He, therefore, allowed the assessee's appeal for the two assessment years and directed the Wealth-tax Officer to exclude the life interest as it was exempt under section 5(1)(vii) of the Wealth-tax Act. Against the appellate decision the department appealed to the Income-tax Appellate Tribunal and raised two contentions before it. Firstly, that the annuity contemplated under subclause (c) of clause 14(i) of the agreement was a term annuity and not a life annuity and, consequently, was outside the ambit of section 5(1)(vii). Secondly, it was contended that the right contemplated under section 5(1)(vii) was the right of the employee himself and of no one else. Since the assessee herself was not the employee, nor had she rendered any past services to Messrs. N. Sirur & Co., the right to receive the payment which she got under subclause (c) of clause 14(i) was not a right which fell under section 5(1)(vii). It was argued before the Tribunal that before the assessee could take advantage of the exemption it was necessary that the past services in lieu of which the life annuity was being paid must have been rendered by the assessee and not by any other person. On behalf of the assessee it was contended that the right bring contingent was not capable of being valued as an asset at any rate, the value of the asset, if any, on the facts and circumstances of the case would be very small and negligible. Moreover, the payment could not be treated as an asset in view of section 2(e)(iv) under which the term 'as set' did not include a right to any annuity, in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum payment. The argument of the assessee was that under sub-clause (c) the assessee could not have asked for a commutation of the life annuity and the right, therefore, was of the kind mentioned in section 2(e)(iv) and consequently not an asset. It was also contended on behalf of the assessee that the right was exempted under section 5(1)(vii).

5. The Tribunal rejected both the contentions which were urged on behalf of the department and it also rejected the other contentions, which were raised on behalf of the assessee except the one which claimed exemption under section 5(1)(vii). The Tribunal accordingly dismissed the appeals of the department and confirmed the decision of the Appellate Assistant Commissioner. The department applies under section 27(1) and asked for a reference of the question of exemption of the right under section 5(1)(vii). The assessee in her reply to the department's application for making a reference raised questions with regard to its other contentions, which were rejected by the Tribunal. The Tribunal accordingly drew up a statement of the case and referred to this court the following three questions :

'1. Whether, on the facts and in the circumstances of the case, the assessee's right to receive the sum of Rs. 1,500 per month from Messrs. N. Sirur and Co. Private Ltd. and any value and was an asset for the purposes of the Wealth-tax Act

2. If the answer to question (1) is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee was entitled to the exemption provided under section 5(1)(vii) of the Wealth-tax Act in respect of the capitalised value of the assessee's right to receive a sum of Rs. 1,500 per month from Messrs. N. Sirur & Co. Private Ltd.

3. If the answer to the second question is in the negative, whether, on the facts and in the circumstances of the case, the capitalised value of the assessee's right was not an asset includible in her net wealth in view of section 2(e)(iv) of the Wealth-tax Act ?'

6. Question No. 2, it may be mentioned, is raised at the instance of the department and questions Nos. 1 and 3 are raised at the instance of the assessee. If the second question, which is raised at the instance of the department, is answered against it, the first and the third questions need not be answered. In our opinion, the second question must be answered in favour of the assessee and against the department. We will, therefore, deal with that question and not proceed to answer the other two questions as it would be unnecessary to answer them in view of our answer to question No. 2.

7. Now the provision of section 5(1)(vii) of the Wealth-tax Act, is as follows :

'5. (1) Wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee -....

(vii) the right of the assessee to receive a pension or other life annuity in respect of past services under an employer;..'

8. What is required to be considered is whether under sub-clause (c) of clause 14(i) of the agreement dated 18th April, 1957, between Sir Vithal Chandavarkar and Messrs. N. Sirur and Co. Pvt. Ltd, there is in the first place, a right created in favour of the assessee. In the second place, if any such right is created, whether the said right is to receive a pension of other life annuity and in the third place whether the pension of other life annuity is in respect of past services under an employer.

9. It is contended by Mr. Joshi, the learned counsel for the revenue, that in the first place under sub-clause (c) of 14(i) of the agreement, there is no right created in favour of the assessee. Clause 14 of the agreement contemplates not the creation of any right but the payment of certain sums to the assessee in the event of a certain thing happening, i.e., the death of Sir Vithal during the continuance of the agreement. Sub-clause (c) contemplates the payment of one of such sums and merely provides for the manner in which the sum will be paid to the assessee. It, therefore, does not create any right in favour of the assessee. His next argument is that assuming a right is created in favour of the assessee under the said clause, it is not a right which can be termed to be a right to pension or life annuity. It is not a right to pension because the word 'pension' contemplates the payment to an ex-employee. It is not a right to a life annuity because, in the first place, the payment contemplated by the said sub-clause cannot be termed an annuity because it is a payment contemplated to be made per month and not per year. Moreover, it can not be regarded as a life annuity because it is not certain to extend for the duration of the life of the assessee. Mr. Joshi says that the right of the assessee to receive a pension or other life annuity in respect of past services under an employer can only mean a right of the employee himself, who has rendered the past services to the employer.

10. As to the first contention Mr. Joshi's argument is that under sub-clause (c) of clause 14(i) of the agreement, Messrs. N. Sirur and Co. Pvt. Ltd. has undertaken to pay one of the sums which it has agreed to pay under sub-clause (i) of the said clause in consideration for the past services rendered by Sir Vithal and the mode in which the payment is to be made is that it would be paid to his widow on his death in monthly instalments of Rs. 1,500 for the duration of her life except in the event of certain specified contingencies occurring the payment would be for a shorter duration. The clause, therefore, does not give rise to a right of the kind spoken of by section 5(1)(vii) in favour of the widow for the right contemplated by the said provision is the right of the assessee and not of any one else. We may point out that in the first place although the consideration for the payment of sums mentioned in clause 14 is the long and faithful services rendered by Sir Vithal in the past, no payment is contemplated to be made to Sir Vithal under the said clause. The agreement, it must be remembered, is an agreement of service between Messrs. N. Sirur & Co. Ltd. and Sir Vithal for the duration of five years and Sir Vithal receives under the agreement what is provided in clause 5 and 7 of the agreement. If the agreement runs for the period of five years for which it is executed, nothing more is to be received by Sir Vithal. Clause 14 provides for the event of the contract not running for its full period by reason of the death of Sir Vithal and the provision is that in that event the widow of Sir Vithal will be entitled to certain payments as specified in clause 14. The payments contemplated by the said clause are not the payments to be made Sir Vithal nor would Sir Vithal have the right to receive the same under the agreement. The payments are to be made to the widow, who alone had the right to receive them. The right, which clause 14 gives rise to, is, therefore a right, which belongs to the widow and is, therefore, the right of the assessee in the present case and of no one else.

11. The next argument of Mr. Joshi is that the right of the assessee, if any, is not to receive a pension or a life annuity, but a right to receive a monthly sum. It is no doubt true that clause 14(i) of the agreement does not use the word 'pension' or the expression 'life annuity' and speaks of the payments as of payments as of sums. But the non-mention of the term pension or 'life annuity' will not have the effect of making the payments as not payments of pension or life annuity. Now, neither the word 'pension' nor the expression 'life annuity is defined in the Wealth-tax Act and taking the ordinary dictionary meaning of the word 'pension' it is periodical (usually annual) payment made especially by Government, company or employer in consideration of past services or relinquishment of rights, etc. (see concise Oxford Dictionary, fourth edition). Periodical payments made by the employer in consideration of past services of the employee will, therefore, be governed by the word 'pension'. Mr. Joshi says that a periodical payment to the employee himself in consideration of his past services would be a pension, but not when it is made to some one else though in consideration of the past services of the employee. Although normally the pension may be paid to the employee after his retirement in consideration of his past services, we do not see why the service contract may not provide for pension to be paid to the widow or other dependants, such as mother of the employee in the event of the employee dying during the course of his service in consideration of the past services rendered by the employee while he was alive. There are such provisions made in the case of several service rules or contracts and pensions are paid to the widows of the employees during their lives or for shorter periods. In the present case clause 14 in clear terms states that the payments contemplated thereunder are in consideration of the past services of the employee. The items specified in sub-clauses (a) and (b) are not periodical payments and cannot, therefore, be considered as pension payments, but the payment contemplated by sub-clause (e) is a periodical payment and it is in consideration of past services rendered by Sir Vithal and would clearly come within the meaning of 'pension'. Mr. Joshi's argument that the payments is not of life annuity is twofold : In the first place says that the payment is monthly and not annually and, therefore, cannot be called an annuity. Secondly, he says, it is not a life annuity, since the payment may not continue for the life of the assessee in the event of certain contingencies having occurred. According to him, the annuity in the present case is a term annuity and not a life annuity and, therefore, cannot come in for exemption under section 5(1)(vii).

12. We are not inclined to accept either of the arguments advanced by the learned counsel. Annuity, as we have already pointed out, is not defined in the Wealth-tax Act. The dictionary meaning of the word 'annuity' is a sum payable in respect of a particular year or yearly grant. As stated in Halsbury's Laws of England, volume 32, 3rd edition, page 529, paragraph 888, the right created by an instrument (whether deed, will, codicil or statute) to receive a definite annual sum of money is an interest which may be either a 'rent-charge' or an 'annuity'. If the annual sum is charged on and payable exclusively out of land, the interest is a rent charge, but, if there is no charge or the annual sum is charged on personal property, not being leasehold land, or on a mixed fund, then the interest is an annuity. Again at page 534, paragraph 899 in the same volume it is stated :

'An annuity is a certain sum of money payable yearly either as a personal obligation of the grantor or out of property not consisting exclusively of land..'

13. In Jarman on Wills, 8th edition, page 1113 (2nd volume), 'annuity' has been defined as follows :

'An annuity is a right to receive de anno in annum a certain sum; that may be given for life, or for a series of years; it may be given during any particular period, or in perpetuity; and there is also this singularity about annuities, that, although payable out of the personal assets, they are capable of being given for the purpose of devolution, as real estate; they may be given to a man and his heirs, and may go to the heir as real estate.'

14. Annuity, therefore, is a right to receive a yearly sum. In the present case there is a right created in favour of the assessee to receive a monthly payment of Rs. 1,500 for the duration of her life except in certain contingencies. If the payments per month, which the assessee has a right to receive, would constitute a certain yearly sum or, as stated in the definition given by Jarman, a right to receive de anno de annum a certain sum; it would be an annuity. In our opinion the right, which is created in favour of the assessee, is to receive a yearly sum of the assessee, is to receive a yearly sum of Rs. 18,000 payable in monthly instalments of Rs. 1,500 each, during the twelve months of the year. It is not necessary that in order to constitute an annuity, payment must be made once a year only and not monthly or for instance quarterly. What is necessary is that the payments made must constitute a certain sum payable yearly to the annuitant. In section 173 of the Indian Succession Act, which deals with annuities created by wills, illustration (2) which speaks of an annuity is in these terms :

'A bequeaths to B the sum of 500 rupees monthly. B is entitled during his life to receive the sum of Rs. 500 every month.'

15. The circumstance that the payment is to be made per month and not per year does not make the bequest cease to be an annuity.

16. In the Encyclopaedia of Forms and Precedents, 3rd edition, where forms od annuities created by deeds are given, there are several forms in which the payment is directed to be made quarterly or even monthly. It is not, therefore, necessary, in our opinion, as has been contended by Mr. Joshi, that in order that the right should be a right to an annuity, the payment receivable under that tight must be only capable of being received once a year and not half yearly, quarterly or monthly. In our opinion, therefore, the right of the assessee under clause 14(i)(c) cannot be said to be a right not of an annuity because the payment receivable under the said right is a payment per month.

17. As to the other contention of Mr. Joshi that the payment in the present case is a term annuity and not a life annuity, we may point our that the contingencies specified, under which the payment is to cease before the end of the assessee's life, are uncertain events, which may or may not happen. As has been pointed our by the Appellate Assistant Commissioner, the contingencies are so remote that there was hardly any risk whatsoever for the payment of annuity to stop before the end of the year. If the contingencies specified were of events which were certain and bound to take place at the end of a definite period, the position perhaps might have been different. In the present case, however, the payment contemplated under clause 14(i)(c) is the payment to be made for the life of the assessee and the contingencies mentioned have not the effect of making the right to receive the said payment not a life annuity.

18. Mr. Joshi has then argued that even if it is held that the right created under clause 14(i)(c) is the right of the assessee and that too a right to receive a pension or a life annuity, it will still not fall under section 5(1)(vii) of the Wealth-tax Act because the right to receive a pension or life annuity contemplated by the said provision is the right of the employee himself to receive a pension or life annuity in consideration of his past services under the employer. Mr. Joshi's argument is that since the assessee was not the employee herself and had not rendered any past services to Messrs. N. Sirur & Co. Pvt. Ltd., the right, which has been created in her favour, could not be said to be a right to receive a pension or life annuity in consideration of the past services under an employer. This argument was advanced before the Appellate Assistant Commissioner as also before the Tribunal, and has not been accepted by them and rightly so in our opinion. What is required under section 5(1)(vii), firstly, is that the assessee must have a right to receive a pension or other life annuity. It is no doubt true that what is contemplated is that the right must belong to the assessee and it would not do if the assessee gets it by assignment or transfer from someone else, if such an assignment or transfer is at all possible. Secondly, the right of the assessee to receive the pension or life annuity must spring up as in consideration of the past services under an employer. In other words, it must be in consideration of the past services rendered by an employee to an employer that a right must have been created in the assessee concerned to receive a pension or a life annuity. Normally, such a tight to receive a pension or life annuity will be created in favour of the person, who has been in employment and has rendered past services, but as we have pointed our earlier, there is nothing to prevent for the past services rendered by an employee A to create a right in favour of some other person connected with A, as for instance his widow or mother, to receive a pension or a life annuity from the employer. There is nothing in the language used in section 5(1)(vii) of the Wealth-tax Act, which excludes the right to receive a pension or other life annuity created in favour of a person other than an employee from the ambit of the provision. As has been pointed our by the Tribunal, to restrict the construction of this provision to the employee himself would require some more words to be read into the provision which are not there. All the necessary requirements for the application of the said provision are, in our opinion, satisfied in the present case. As we have already pointed out, the right is of the assessee inasmuch as clause 14(i)(c) gives a right to her. The right is to receive a pension or a life annuity within the meaning of these terms. Creation of the right has for its consideration, as stated in clause 14 of the agreement, the past services rendered by the employee under an employer. In our opinion, therefore, the view taken by the Appellate Assistant Commissioner and the Tribunal that the right of the assessee to receive the payment specified in clause 14(i)(c) of the agreement was exempt from the payment of wealth-tax and not liable to be included in the net wealth of the assessee under section 5(1)(vii) of the Wealth-tax Act.

19. Our answer, therefore, to the second question, which has been framed at the instance of the department, is in the affirmative. In view of our answer to this question, the other two questions, which are framed at the instance of the assessee, are not required to be considered or answered. We, therefore, do not consider the said questions and accordingly give no answer to them.

20. The Commissioner to pay the costs of assessee.