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Seth Ramnath K. Daga Vs. Commissioner of Wealth-tax, Bombay City-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberWealth-tax Reference No. 11 of 1969
Judge
Reported in[1981]127ITR371(Bom); [1980]4TAXMAN240(Bom)
ActsWealth Tax Act, 1957 - Sections 2(e), 4, 4(5) and 27(1)
AppellantSeth Ramnath K. Daga
RespondentCommissioner of Wealth-tax, Bombay City-ii
Excerpt:
- - this, according to the tribunal, cast of the lessor an obligation to renew the lease, and, therefore, an interest was clearly available to the assessee for a period far exceeding six years on each of the relevant valuation dates. ' 14. these observations clearly lay down the proposition that a mere right to renewal of the lessee is not an interest in the property......from its net wealth the value of its interest in the company for the last five years of the lease-period on the ground that its interest in the company was not an asset within the definition of s. 2(e)(v) of the act since the said interest was available to the assessee for a period not exceeding six years.7. the wto, however, did not accept the assessee's claim because, according to him, it was the total period of the lease which should be taken into consideration for determining whether the exemption granted under the said s. 2(e)(v) applied. he further held that the said exemption was not available also because the lease was renewable for a further period of 30 years at the option of the lessee and it was obligatory on the part of the lessor to renew the lease. he, therefore,.....
Judgment:

Sawant, J.

1. This is a reference made by the Appellate Tribunal under s. 27(1) of the W.T. Act, 1957 (hereinafter referred to as 'the Act'). The questions referred are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the value of the assessee's interest in the firm of M/s. Chirimiri Colliery Company could be treated as an asset exempted from wealth-tax under the provisions of section 2(e)(v) of the Wealth-tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the properties and assets standing in the name of Smt. Surajbai could be included in the net wealth of the assessee for the assessment years in question ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not considering the contention relating to the sum of Rs. 4,83,438 being the share of the assessee in the credit balance in the partner's current account with the firm of Chirimiri Colliery Company as on the valuation date ?'

2. Out of the aforesaid three questions, only the first two questions are pressed before us.

3. The assessee is a HUF having share in a firm doing business in the name and style of Chirimiri Colliery Co. The assessment years in question are the years 1957-58 to 1962-63 (both inclusive) and the relevant valuation dates were November 2, 1956, October 23, 1957, November 12, 1958, October 31, 1959, October 20, 1960, and November 8, 1961.

4. The facts relevant to answering the first question are as follows :

5. The asset in dispute is the interest of the assessee in Chirimiri Colliery Co., (hereinafter referred to as 'the company'). The business of the company was to exploit certain leases which it took over for exploitation, in the course of a family settlement in 1955. The original lease agreement was entered into on the February 2, 1931, between the Raja of Keria State in the Central Provinces and Sir Manekji Dadabhoy. The lease came subsequently to be assigned to the Daga family and in course of time as a result of the family settlement in the Daga family the lease became the property of the firm in which the assessee was a partner. According to the recital in Part I of the lease agreement, the lease was for a period of 30 years. According to clause 2 of Part VIII thereof, the lessee was entitled to a renewal of the lease for another period of 30 years, subject to a condition. The condition was that the lessor had a right to enhance the rent by an amount not exceeding twice the rent originally reserved, and charge such royalties as might by prescribed by the Government of India. The other terms and conditions of the original lease were, however, to remain the same.

6. The original lease was to expire on the December 23, 1960. The assessee excluded from its net wealth the value of its interest in the company for the last five years of the lease-period on the ground that its interest in the company was not an asset within the definition of s. 2(e)(v) of the Act since the said interest was available to the assessee for a period not exceeding six years.

7. The WTO, however, did not accept the assessee's claim because, according to him, it was the total period of the lease which should be taken into consideration for determining whether the exemption granted under the said s. 2(e)(v) applied. He further held that the said exemption was not available also because the lease was renewable for a further period of 30 years at the option of the lessee and it was obligatory on the part of the lessor to renew the lease. He, therefore, included the said share of the assessee in the net wealth for all the said years. The assessee thereafter appealed to the AAC. The AAC took the same view as the WTO and confirmed his finding. In the appeal before the Tribunal, the Tribunal held that before the amendment of 1964, the said s. 2(e)(v) excluded from the category of taxable assets any interest in property where the interest was available to the assessee for a period not exceeding six years from the relevant valuation date. The Tribunal, therefore, took the view that since for the said assessment years the interest in the property was not available to the assessee for a period exceeding six years on the relevant valuation dates, the leasehold interest of the assessee in the property was entitled to be excluded. The Tribunal, however, found that clause 2 of Part of VIII of the lease agreement had given an option to the lessee to renew the lease for a further period of 30 years. This, according to the Tribunal, cast of the lessor an obligation to renew the lease, and, therefore, an interest was clearly available to the assessee for a period far exceeding six years on each of the relevant valuation dates. The Tribunal, therefore, held that the wealth-tax authorities were entitled to include the value of this interest in the net wealth of the assessee for the first five years, namely, 1957-58 to 1961-62.

8. There are, therefore, two aspects of the question that fall for our consideration, viz., whether the interest in the lease should be valued with reference to the date of valuation or with reference to the total period of the lease, and, secondly, whether it can be said that the right to renewal of the lease was an interest in property, and, therefore, an asset within the meaning of the said Act.

9. As regards the first question, the relevant s. 2(e)(v) as it stood prior to its amendment, was as follows :

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

'(v) any interest in property where the interest is available to an assessee for a period not exceeding six years.'

9. It was amended in 1964, and after the amendment the clause reads as follows :

'(v) any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee.'

10. We are concerned with the said clause prior to its said amendment which came into force with effect from April 1, 1965. There is no doubt that the clause as it stood then did not mention the period of six years with reference to any particular date. It was, therefore, possible to argue that the interest in property meant interest calculated from the date of commencement of such interest and, therefore, it was the total period of the interest and not its unexpired period on the date of valuation which should be taken into consideration. We were, therefore, prima facie impressed also with the argument advanced on behalf of the revenue that the amendment of 1964 merely made explicit what was otherwise implicit in the said provisions, prior to the amendment. However, on behalf of the assessee we were referred to a decision of the Supreme Court in CWT v. Smt. R. A. Muthukrishna Ammal : [1969]72ITR801(SC) , where the Supreme Court has in terms held that the interest in the property that was contemplated by the said provision prior to its amendment was an interest available to the assessee on the relevant valuation date. In this connection, the court has observed as follows (p. 805) :

'If any assets are held under an irrevocable transfer, i.e., under a transfer which is not revocable for a period exceeding six years or during the lifetime of the transferee, the assets are liable to be included in the net wealth of the transferor. It is implicit in sub-section (5) of section 4 that if an asset is held under a transfer which is revocable before the expiry of six years, the interest of the holder in the asset shall be included in the wealth of the transferor. If the transaction of lease in the present case was between a private individual and the respondent, evidently by virtue of section 4(5) the interest of the assessee under the lease would have been liable to be included in the net wealth of the transferor. We see no reason to hold that because the transferor is the Government, any different rule will apply.'

11. Dealing with the argument that the amendment had merely made explicit what was otherwise implicit, the court held as follows (p. 806) :

'We do not think that any such intention appears from the terms of the clause. Assuming that the exception in respect of interest in property which is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee is only to apply after the date of the amendment by the Wealth-tax (Amendment) Act, 1964, that clause has no application and the terms of the section must be interpreted as they stood at the valuation date which crystallized the charge of wealth-tax for the appropriate assessment year............ We are of the view that interest in property which is available to the taxpayer for a period not exceeding six years from the valuation date is not an asset within the meaning of section 2(e) and the value thereof cannot be included in the net wealth of the assessee for the financial year relevant to the valuation date.'

12. This decision of the Supreme Court, therefore, negatives the contention advanced on behalf of the revenue, and supports the view taken by the Tribunal.

13. As regards, the second aspect, namely, whether the right to renew creates an interest in property, and therefore, is an asset within the meaning of the said Act, we find, on a perusal of the relevant authorities, to which a reference will be made hereafter, that the view taken by the the Tribunal is not sustainable. The unanimous view on this point is that a mere right to renew does not create a contract between the parties, whether such right is burdened with conditions or not. It is only when the said right is exercised by the lessee that a contract is created between the parties resulting in an interest in the property. For this proposition, we may first refer to a decision of the Supreme Court in R. Kempraj v. Burton Son and Co., P., Ltd., : [1970]2SCR140 . It is observed there as follows :

'Where the lease for 10 years provided for an option to the lessee to renew the same for further similar periods as long as desired on the same terms and same rent, without any objection whatsoever from the lessor, clauses containing the option to get the lease renewed on the expiry of each term of 10 years cannot be regarded as creating an interest in property of the nature that would fall within the ambit of s. 14 of the Transfer of Property Act.'

14. These observations clearly lay down the proposition that a mere right to renewal of the lessee is not an interest in the property. It may be mentioned in this connection that in the case with which the Supreme Court was dealing, there were no onerous conditions imposed on the renewal of the lease as is found in our case. In fact, in the said case, the renewal was to be made on the same terms and conditions as were found in the original lease. However, in our case, as had been pointed out earlier, the lessor had the option to increase the rent to the extent of twice the original rent reserved. It may also be mentioned in this connection that the lease was subject to the sanction under the provisions of the Mines and Mineral (Regulation and Development) Act, 1957, which had been enacted in the meanwhile. That Act provides that no mining lease granted in respect of mineral could be renewed except with the previous approval of the Central Government. The Central Government, therefore, had power either to refuse or grant the renewal of such lease. It is, however, immaterial whether in the present case the right was burdened with the conditions as aforesaid, in view of the clear proposition of law that a mere right to renew is not an interest in property. The said additional facts in our case have been stated only to point out that the statement of law made in the aforesaid Supreme Court case will apply to our case with all in the more force. We may also further refer in this connection to an observation made in Weg Motors Ltd. v. Hales [1961] 3 All ER 181 by Lord Evershed M. R., which is as follows :

'But in the present case we are concerned not with a contract, that is a binding agreement, to grant and take a lease, but with an option which might never be exercised and cannot, until exercised, be in any event said, in our judgment, to create a term of years at all.'

15. The aforesaid observation, therefore, bright out the true nature of the right to renewal of the lease and made more than clear that such a right is not an interest in property. In the circumstances, it can hardly be said that the said right of renewal which was available to the assessee in the present case was an asset within the meaning of the said Act.

16. As regards the second question referred by the Tribunal, it appears that the parties had agreed to abide by the final decision relating to the said question in the relevant income-tax references being Income-tax Applications Nos. 40, 41, 43, 45, 46 and 47 of 1961. These references have since been disposed of and are reported in Seth Ramnath Daga v. CIT : [1971]82ITR287(Bom) , and what is held there is that there was material on record to hold that the properties and assets standing in the name of Smt. Surajbai which were acquired or invested out of the amount of Rs. 2,00,000 said to have been accumulated, belonged to the assessee-family; but there was no material on record to hold that the Nagpur property standing in her name belonged to the assessee-family.

17. The third question referred to by the Tribunal has not been pressed before us by the assessee as stated earlier.

18. Our answers to the questions referred to by the Tribunal are, therefore, as follows :

19. Answer to question No. 1 is in the negative and in favour of the assessee.

20. Answer to question No. 2 is in the affirmative to the extent of the properties and assets standing in the name of Smt. Surajbai which were acquired or invested out of the amount of Rs. 2,00,000 and excluding the Nagpur property standing in the name of Smt. Surajbai.

21. Question No. 3 is not answered because it is not pressed.

22. The notice of motion is not pressed. Assessee to get the costs.


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