Commissioner of Wealth-tax Vs. Jayalalitha - Court Judgment

R. Jayasimha Babu, J.

1. The question referred to us has referred to the wrong statutory provision. The provision with which we are really concerned with is Section 2(e)(2)(ii) of the Wealth-tax Act, 1957. That provision reads as under :

'2. (e) 'assets' includes property of every description, movable or immovable, but does not include,--...

(2) in relation to the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year but before the 1st day of April, 1993--. ...

(ii) a right to any annuity (not being an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee) in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant;'

2. The words in brackets in the provision were introduced by the Finance Act, 1974, with effect from April 1, 1975.

3. The assessment years with respect to which the question has arisen and the references have been made are 1976-77, 1977-78, 1978-79 and 1979-80. The annuity policy under which the assessee received payment during these years and the amounts so received was Rs. 2,70,000 in the previous year relevant to the assessment year 1976-77 and lesser sums for subsequent years were received pursuant to a policy taken out by a (film producer Vijaya International, which produced the film 'Nam Naadu' inwhich the assessee had acted, the assessee at that time having been a filmactress. The policy was taken out pursuant to an agreement between thefirm 'Natyakalaniketen' of which the assessee and her mother were partners and the film producer. The policy provided for annual paymentsfrom April 1, 1974, to April 1, 1980. The payments were to be made to thefirm and not to the assessee. However, well before 1974, the firm came tobe dissolved on the death of the assessee's mother in the year 1971, Underthe will left by her mother, the assessee became entitled to the, interest ofher mother in the firm, and the annuity payments which were otherwisepayable to the firm became payable to her.

4. It is undisputed that the contract under which the annuity was received by the assessee had not been entered into between the Life Insurance Corporation and the assessee as an individual. The contract had also not been entered into during any of the previous years relevant to the assessment years. In terms of the policy, the payments were required to be made not to the assessee, but to the firm. The right of the assessee to receive the payments accrued only after the death of her mother, which resulted in the dissolution of the partnership and vesting of her mother's right in the firm, in her, by reason of the will left behind by her mother.

5. At the time the annuity policy Was taken out, the relevant provision of the Act did not include these words 'not being an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee'. There was, therefore, no doubt whatsoever at the time of the purchase of the annuity, that annuity was riot one which could be regarded as an asset of the assessee for the purpose of the Wealth-tax Act. The firm itself not being assessee the question of treating it as part of the assessable wealth of the firm did not arise.

6. The policy under which the annuity was payable provided that it shall not be assigned, transferred or dealt with in any manner and the policy shall not be commutable for cash during the currency of the policy.

7. For these assessment years, the amount of annuity received by the assessee was treated as part of her wealth for the purpose of assessment under the Wealth-tax Act by the Wealth tax Officer. The assessee's appeals against these orders were dismissed by the Commissioner of Income-tax (Appeals). The assessee filed further appeals to the Tribunal. The Tribunal set aside the orders of the authorities below and held that the annuity payments were not includible in her net wealth for the purposes of assessment. The Tribunal also held that the annuity was the asset of the firm; that it devolved on the assessee by reason of the will of her mother ; that the assesses had not entered into any contract with the Life Insurance Corporation and that the annuities could not be regarded as assets at all.

8. At the instance of the Revenue, the following question has been referred to us :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the right of annuity became the assessee's property only by succession and was not purchased by any other person in pursuance of a contract with the assessee and, therefore, not an 'asset' within the meaning of Section 2(e)(i)(iv) of the Wealth-tax Act, 1957, and not includible in the net wealth of the assessee ?'

9. As already observed the statutory provision relevant for these assessment years is 2(e)(2)(ii) and not the one mentioned in the order of reference. The correct provision of law is required to be and is treated as having been mentioned in the order of reference.

10. Learned senior counsel for the Revenue submitted that the payments received by the assessee during these years were amounts received pursuant to an annuity policy which had been obtained by a person with whom the assessee had entered into a contract for that purpose and, therefore, though the amounts were not to be regarded as includible in her wealth for the years prior to the date of the amendment of Section 2(e)(2)(ii), for the years subsequent to the amendment they were required to be included and have properly been included. Counsel submitted that the absence of any reference to a firm in the relevant provision does not in any way disentitle the Revenue from treating these payments as part of the assets of the assessee as the firm is not a legal entity, but is a compendious name given to the partners and a partner has to be regarded as a party to each and every contract to which the firm is a party.

11. Counsel in this context referred to the decision of the Supreme Court in the case of Addauki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , wherein it was observed by the Supreme Court that (page 1303) 'since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own.'

12. Reliance was also placed by counsel on the decision rendered in the case of CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) , wherein the apex court observed that (headnote) 'A firm is not a legal person even though it has some attributes of personality. In income-tax law, a firm is a unit of assessment by special provisions, but is not a full person. Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners.'

13. Counsel submitted that the Tribunal was wrong in holding that the payments received by the assessee under the annuity policy were not to be treated as her assets for the purpose of levy of wealth-tax.

14. Learned senior counsel for the assessee, on the other hand, submitted that in a taxing statute it is a well established rule of construction that it is only words used in the statute that are to be taken note of and construed, and nothing is to be regarded as implied and nothing is required to be read into the statute. If the express words used in the statute as understood in their natural sense do not take within their fold something, the court should not ordinarily stretch the statutory language to cover a situation not explicitly covered by the provision. Even if the intendment of the statute could be said to be one which was not capable of being achieved without stretching the language of the statutory provision, the rule of construction to be adopted would still be one of strict construction. Counsel in this context referred to the observation of the apex court in the case of CIT v. R.M. Chidambaram Pillai : [1977]10ITR292(SC) , wherein it was observed thus :

'If the intendment of a legislation misfires in court, competency being granted, the answer is amendment, not more litigation.'

15. Counsel relied on the words used in Section 2(e)(2)(ii) which refers expressly to 'assessee'. Reference was also made to the definition of the term 'assessee' in Section 2(c) which defines 'assessee' to mean a person by whom wealth-tax or any other sum of money is payable under the Act, and includes every person in respect of whom any proceeding under the Act has been taken for the determination of wealth-tax payable by him or by any other person or the amount of refund due to him or such other person. It was pointed out by counsel that the firm though not a 'full person' for all purposes, is nevertheless recognised under the Wealth-tax Act. The charging section does not include the firm. Wealth-tax is chargeable only on the net wealth owned by the individual, Hindu undivided family and company. The word 'assessee' therefore according to counsel, cannot possibly include the firm and that word cannot be construed in such manner as to rope in a contract between the firm and a third party and to which contract the assessee is not a party.

16. Counsel further submitted that the Act itself recognises the existence of a firm and the ownership of assets by the firm, apart from the individuals who are partners in the firm. Rule 2 of the Wealth-tax Rules as it stood prior to its omission with effect from April 1, 1989, dealt with valuation of interest in partnership or association of persons. That rule required the determination of the net wealth of the firm on the valuation date for ascertaining the proportionate interest of the partners in the net wealth of the firm. It was only the value of the partner's interest in the firm so ascertained, that was required to be added to the other assets owned by the assessee for purposes of levy of wealth-tax. Counsel submitted that this mode of valuation of the interest of the partner in the assets of the firm would clearly show that it was not the legislative intendment to regard the assets owned by a firm as assets owned by the partners who are assessees under the Act. If an asset owned by the firm is not treated as asset of the partners, counsel submitted that it would be so in even greater measure in respect of contracts to which the firm is a party. Nothing would have been easier, according to counsel, than to use appropriate language in the statutory provision, if the contract between a firm and third party was also to be regarded as a contract with the assessee.

17. Learned counsel referred us to the decisions of this court and of other High Courts in support of his propositions that an individual partner cannot claim any specific right in relation to specific asset of the firm ; that the interest of the partner in the firm is not the same thing as an interest in the asset owned by the firm, as the ascertainment of the value of the interest of the partners can only be made after taking note of the value of the assets as also the extent of all the liabilities ; that a suit cannot be brought by an individual partner for his or her own benefit in respect of a contract to which the firm is a party that even a suit on behalf of the firm can be brought only by the partners acting together ; and that though the parties to a contract with a firm may be entitled to proceed against the individual partners in respect of the outstanding liabilities of the firm, individual partners do not have a right to enforce a contract between the firm and others by acting on their own. These propositions were properly not disputed by counsel for the Revenue and it is unnecessary to refer to the decisions relied upon.

18. Learned counsel for the Revenue, however, submitted that this court in the case of R. Venkatavaradha Reddiar v. CWT : [1995]214ITR76(Mad) has held that for the purpose of Section 5 of the Wealth-tax Act, the asset owned by the firm is to be regarded as an asset owned by the partner to the extent of the partner's share in the firm, and annuity also being an asset, the asses-see as a partner had a vested right therein.

19. The recognition by the court of the right of an assessee to claim exemption for the purpose of Section 5 with regard to the value of his or her share in the asset of the firm must be confined to that provision. We are required here to construe a different statutory provision and the meaning to be attributed to the words used therein cannot be regarded as having been settled by reason of construction of another term in another statutory provision.

20. The object of Section 2(e)(2)(ii) is to treat as an asset only those annuities which do not preclude the commutation of any portion thereof into a lump sum grant, and those annuities which had been purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee. The words are plain and unambiguous. No question of having to make a choice between two equally plausible constructions arises here. There is no difficulty in identifying the assessee, the assessee being the person whose wealth is sought to be taxed.

21. The annuity was not purchased by the assessee herein. The annuity was not purchased by a third party who had entered into a contract with the assessee. The contract was between the firm and the third party. The possibility of the assessee being regarded as a party to the contract indirectly is not required to be considered for the purpose of this provision. The enquiry that is required to be made, is a limited one. What is required to be ascertained is whether the annuity in question was purchased by the assessee or purchased by another person pursuant to a contract with the assessee. If the assessee is not the purchaser or is not the party to the contract, no further enquiry need be made.

22. We do not find any compelling reason to depart from the normal rule of construing the words of the statute by giving them their plain meaning. There is nothing in the context of the Act and there is no evidence of any contrary legislative intendment which would require ascribing to the words used in Section 2(e)(2)(ii), a meaning different from their plain meaning. Section 2 of the Act occurs in the Chapter dealing with preliminary matters and is the definition Section. Section 2(e) defines 'assets'. It also excludes certain types of property from the category of assets. What is taxable under the Act is the wealth of the assessee and that wealth is made up of all assets less the liabilities as on the valuation date. If the Act at the very threshold chooses to exclude certain types of property from the category of assets, there is no rule of construction which would require that the width of the exclusion should be decreased by stretching the words defined in the definition provision beyond their plain literal meaning. What was intended to be taxed are the assets and what was excluded from the category of assets is not within the purview of the Act. An annuity purchased by a person who had not entered into a contract with the assessee is not an asset for the purpose of the Act, if the other condition, namely, that the terms and conditions of the annuity preclude the commutation of any portion thereof into a lump sum grant is satisfied.

23. The fact that all the partners have an interest in the partnership property does not necessarily lead to the conclusion that for the purpose of the Wealth-tax Act, even in the absence of appropriate language therein, the contract to which the firm is a party, should be treated as a contract with each partner individually.

24. The question referred to us is answered in favour of the assessee and against the Revenue. The assessee shall be entitled to costs in the sum of Rs. 2,000 (rupees two thousand only).