TULZAPURKAR J. - The question that has been referred to us for our determination in this referred under section 27(1) of the Wealth-tax Act, 1957, runs as under :
'Whether, on the facts and in the circumstances of the case, the annuity of Rs. 1,000 per month arising to assessee under annexure C was exempt under section 2(e)(iv) of the Wealth-tax Act, 1957 ?'
The question relates to wealth-tax assessment year 1962-63 and 1963-64, the relevant valuation dates being March 31, 1962,and March 31, 1963, respectively. Original assessee, Manu Subedar, since deceased (his executors have been brought on record), was a well-known economist and financial adviser. Under an agreement of lease dated November 1, 1943, made between the original assessee and the Government of India a plot of land situate in Marine Lines locality was obtained on lease by the original assessee for a period of 999 year on an annual rent of Re.1 and for consideration of approximately Rs. 3,60,000. It appears that this plot of land was obtained by the original assessee for the purpose of constructing a cinema theatre thereon, which he could not do. On January 6, 1947, the original entered into an agreement with one Habib Hussein was granted a licence to enter upon the land and erect thereon a cinema theatre and other buildings, etc., and in consideration for the licence so granted Habib Hussein agreed to pay compensation to the original assessee at the rate of Rs. 4, 200 per month. The original assessee had agreed to grant a sub-lease of the plot for a term of 999 year as and when he got a regular lease from the Government of India. In October, 1949, after getting a regular lease from the Government of India the original assessee granted a sub-lease to Habib Hussein. It further appear that for the purpose of erection of a theatre and starting the business of running a cinema house Habib Hussein requested the original assessee to render him all the matter of getting necessary plans prepared as also procuring necessary finance. The original assessee was also requested to render various other services in connection with the construction of the theatre. On June 4, 1948, the original assessee entered into an agreement with Habib Hussein under which the original assessee became entitled to receive for gross annual income earned by Habib Hussein in the cinema business. The construction of the theatre and the buildings appurtenant thereto was completed on and from that date. It appears that some time later Habib Hussein desired certain variation in the agreement dated June 4, 1948, and the original assessee by his latter dated March 17, 1950, information Habib Hussein that he would be agreeable to variations proposed covered by Hussein would buy out for a capital sum the annual payment covered by agreement dated June 4, 1948. The capital payment was arrived at by mutual agreement as at Rs. 3,30,000. Thereafter, a fresh agreement dated July 10, 1950, was entered into by and between the parties, which fresh agreement was really in the nature of mortgage of the building for the purpose of securing the payment of Rs. 3,30,000. It appears that the capital of Rs. 3,30,000 was payable within a period of 5 year by quarterly instalment of Rs. 16,500 each. Admittedly, up to May, 1958, a sum of Rs. 1,90,000 had been paid, leaving a balance sum of Rs. 1,40,000. On May 20, 1958, a fresh agreement (being annexure 'C' referred to in the question) was entered into between the original assessee and Habib Hussein with reference to the payment of balance amount of Rs. 1,40,000. Under this document Habib Hussein undertook to pay a sum of Rs. 1,000 per month to the original assessee for his lifetime, the payment commencing from April 1, 1958. It was also agreed that if a default was made in payment of any two instalments for any two months, then, the original assessee would be entitled to recover from Habib Hussein payment at enhanced rate of Rs. 1,500 per month with interest at 9% per annum in respect of each month of defult. It is this last agreement dated May 20,1958, which has a material bearing on the question referred to us for our determination.
In the wealth-tax assessment of the original assessee for for the assessment year 1962-63 and 1963-64, valuation of life interest arising under the agreement dated May 20,1958, on the relevant valuation dates, i.e., March 31, 1962, and March 31, 1963, respectively, came up for consideration and the Wealth-tax Officer held that life interest had to be valued at Rs. 51000 as on March 31, 1962, and at Rs. 48,960 as on March 31, 1963. In appeals proffered before the Appellate Assistance Commissioner by the original assessee it was claimed on the original assessee that life interest which he had under the agreement dated May 20, 1958, fell under section 2(e)(iv) of the Wealth-tax Act, 1957, and as such no charge of wealth-tax was leviable as the same could not be regarded as an asset. The Appellate Assistant Commissioner rejected the assessees claim holding that these were not annuities falling within section 2(e)(iv), in the sense that the terms and conditions pertaining thereto did not preclude commutation of life interest and as such the exemption claimed under section 2(e)(iv) could not be availed of. In further appeals that were carried to the Appellate Tribunal the self-same contentions were urged on behalf of the original assessee and after referring to the material provision contained in section 2(e)(iv) of the Wealth-tax Act, 1957, and after referring to the provisions of agreement dated May 20, 1958, and the decision of the Gujarat High Court in the case of Commissioner of Wealth-tax v. Dr. E.D. Anklesaria : 53ITR393(Guj) , the Tribunal accepted the contentions of the original assessee. It held that though the case before the Gujarat High Court was one dealing with the bequest made in testamentary disposition, yet the principle was equally applicable to a case arising under a contract, which was case before it and that under the terms of the contract dated May 20, 1958, it was a case of simple grant of annuity and the intention was clear that the same was precluded from being commuted into any lump sum payment. The Tribunal, therefore, took the view that the annuity arising to the assessee under the terms of the agreement dated May 20, 1958, was one covered by the exemption under section 2(e)(iv) of the Wealth-tax Act, 1957. At the instance of the Commissioner of Weath-tax, Bombay City I, Bombay, the question set out at the commencement of the judgment has been referred to us for our determination .
After having heard Mr. Joshi, counsel for the revenue, we are of the view that the question referred to us will have to be decided having regard to the relevant provisions of the Wealth-tax Act and it is really unnecessary for us to go unto any general principle said to have been enunciated by the Gujarat High Court in Commissioner of Wealth-tax v. Dr. E.D. Anklesaria : 53ITR393(Guj) .
The material provision of the Wealth-tax Act, 1957, is to found in section 2(e)(iv) of the Act and the said provision for the relevant years ran thus :
'2. (e) assets included property of every description, movable or immovable, but does not include - ...
(iv) 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 grant.'
The above definition of the expression 'assets' as given in section 2(e)(iv) brings out two thing very clearly. If the annuity is such that by the terms and conditions thereof commutation of any part thereof into a lump sum grant is not precluded, it will be included in the expression 'assets' Conversely, in the case of any annuity where the terms and conditions relating thereto preclude commutation thereof into a lump sum grant, it will not be included in the expression 'assets', and the question would be whether having regard to the terms and conditions of the agreement dated May 20, 1958, and the surrounding circumstances the annuity payable to the original in the sum of Rs. 1,000 per month is such that commutation of any payment thereof into a lump sum grant has been precluded or not. It is also clear that such preclusion may be by express terms of the contract or may arise by implication. A copy of the agreement dated May20, 1958, has been annexed as annexure 'C' to the statement of case and two or three aspects emerge very clearly on consideration of the relevant recitals that are to be found in the deed as well as from the terms and conditions which are to be found operative part of the deed. In the history as to the circumstances under which this agreement came to be executed between the original assessee on the one hand and Habib Hussein on the other has been clearly indicated in the recitals of the deed and it will appear clear from the recitals that actually under the earlier agreement dated June 4, 1984, Habib Hussein was under an obligation to pay to the original assessee a liquidated sum Rs. 3,30,000 payable by quarterly instalments of Rs. 16,500 within a period of 5 years and admittedly out of the said capital amount thus payable by about May, 1958, a sum of Rs. 1,90,000 had been paid and the balance of Rs. 1,40,000 had remained to be paid and it was for the express purpose of getting rid of liability to make a lump sum payment of Rs. 1,40,000 that Habob Hussein agreed with the original assesses that an annuity for the lifetime of the original assessee would be paid to him at the monthly amount of Rs. 1,000. The operative part of the deed contains two principal terms : under the first term Habib Hussein agreed to pay to the original assessee the sum of Rs. 1,000. The operative part of the deed contains two principal terms : under the first tern Habib Hussein agreed to pay to the original assessee the sum of Rs. 1,000 per mensem for life-time of the latter commencing from April 1, 1958, and thereafter on the first of every month, and under the second term it was agreed that if any default payment of monthly amount for any two months was committed, the original assessee was entitled to recover from Habib Hussein an amount at the enhanced rate of Rs. 1,500 per month together with interest at 9% in respect of each month of default and term No. 3 is quite explicit that in consideration of this annuity at the rate of Rs. 1,000 per month the original assessee gave up and released Habib Hussein from the debt (principal and interest) remaining due under the deed od mortgage and the original assessee agreed to receive the property separately. The operative part of the deed far from indicating that any part of the annuity could be commuted into a lump sum payment clearly suggests that there was no such right of commutation to the original assessee : on the other hand the operative part clearly suggests that it was by way of liquidating the entire liability under which Habib Hussein was under the deed of mortgage that the grant of annuity was agreed to be made by Habib Hussein to the original assesee. These aspects taken with the aspect which emerges from the recitals of the deed. viz., that actually the lump sum was exchanged for grant of annuity clearly go to show that there was an implied preclusion from commuting the annuity into a lump sum grant. In our view, therefore, the Tribunal was right in coming to the conclusion that the contract was one of simple grant of annuity, that was a case where a lump sum due has actually been exchanged for an annuity and the intention clearly was that commutation of any part of payment into a lump sum was clearly ruled out altogether unless, of course, the parties by subsequent deed chose to alter the contract, which there was no evidence whatsoever. In the circumstances, we feel that the provisions of section 2(e)(iv) of the Wealth-tax Act, 1957, are clearly attracted and the question referred to us is, therefore, answered in the affirmative, in favour of the assessee.
The revenue will pay the costs of the reference to the assessee.