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Rajendra Kumar Tuli Vs. Eighth Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1982)1ITD213(Mum.)
AppellantRajendra Kumar Tuli
RespondentEighth Wealth-tax Officer
Excerpt:
1. the main dispute arising in the appeal of the assessee also arises in the case of the interveners in their separate appeals on more or less identical facts and circumstances. the separate appeals of the inferveners will be disposed of by regular benches in conformity with the decision of the special bench on this point. as the facts are identical, we shall take up the facts in the assessee's case for the relevant year.2. the assessee is a professional film artiste and remuneration was due to him from several film producers and, under almost identical contracts with them, the remuneration was stipulated to be payable in several annual instalments to start from specified years. the amounts involved in this appeal, in respect of which the inclusion is made in the assessment, fell all.....
Judgment:
1. The main dispute arising in the appeal of the assessee also arises in the case of the interveners in their separate appeals on more or less identical facts and circumstances. The separate appeals of the inferveners will be disposed of by regular Benches in conformity with the decision of the Special Bench on this point. As the facts are identical, we shall take up the facts in the assessee's case for the relevant year.

2. The assessee is a professional film artiste and remuneration was due to him from several film producers and, under almost identical contracts with them, the remuneration was stipulated to be payable in several annual instalments to start from specified years. The amounts involved in this appeal, in respect of which the inclusion is made in the assessment, fell all along after the valuation date, which is 31-3-1975, material for the year 1975-76. In respect of the remuneration stipulated to be paid under the agreements, the producers concerned undertook to give the assessee certain guarantee acceptable to him for the payment of the amounts stipulated on the various dates.

To illustrate the nature of the agreement and the remuneration payable thereunder, we shall take up the terms of the agreement with the producer, Sagar Art (International) Films (P.) Ltd. entered into by the assessee. Sagar Art (International) Films (P.) Ltd. engaged the assessee for playing the leading role in a picture entitled "Lulkar".

According to the contract of employment, the assessee was entitled in consideration of his services rendered or required to be rendered, as stated in the letter of the producer dated 15-9-1970, the remuneration payable as under :Amount When payableRs.25,000 On signing of the letter of arrangement66,500 In the year 199566,500 In the year 199666,500 In the year 199766,500 In the year 199866,500 In the year 199966,500 In the year 200066,500 In the year 200166,500 In the year 200266,500 In the year 200366,500 In the year 200466,500 In the year 200566,500 In the year 200666,500 In the year 200766,500 In the year 200866,500 In the year 200966,500 In the year 201066,500 In the year 201166,500 In the year 201266,500 In the year 201366,500 In the year 2014 The further stipulation contained in the letter is that the aforesaid amounts shall accrue and become due to the assessee only on the (latex specified above and the time for the payment of each amount shall be the essence of the arrangement and as a security to him for the due payment of the remuneration as above by the producer, the producer undertook to give him such guarantee either through any Scheduled Bank, recognised Insurance or other Government agencies acceptable to the assessee.

3. In pursuance of the above arrangement, the producer took out annuity policies from the Life Insurance Corporation of India (LIC) to secure payment to the assessee in the stipulated years of the amounts agreed, as stated above. Under the terms of the policy, it was declared and agreed that the policy cannot be surrendered nor can the annuity payable thereunder be computed for a lump sum and no loan also will be granted on security of the policy. Under the policy, the producer Sagar Art (International) Films (P.) Ltd., is the proposer and the first instalment is due for payment on 1-9-1995 and similar instalments are to be paid as on 1st of September every year for a period of 20 years.

4. The assessee maintains accounts in respect of his professional earnings on cash basis, i.e., under cash system of accounting. In the assessment for the year 1975-76, the WTO, inter alia, included a sum of Rs. 3 lakhs as outstanding remuneration not received by the assessee and another sum of Rs. 28,07,700 as the present value of future annuities secured in respect of the remuneration due to the assessee from various producers secured by way of annuity policies. In the appeal preferred by the assessee, the Commissioner (Appeals) in regard to the inclusion of Rs. 3 lakhs held, that in view of the fact that the financial position of Movie Mughals from whom the amount was due and considered outstanding as a debt, was positively bad, evaluation of this debt is called for. Following similar orders in other cases he directed the WTO to take the valuation of the debt at nil provided the assessee wrote a letter to the producer concerned saying that in view of the precarious financial position, and for commercial consideration, the assessee is not filing a suit for recovery, but otherwise the entire sum of Rs. 3 lakhs should be included.

5. With regard to the inclusion of the present value of the future annuities, he considered this issue with reference to the facts for the assessment year 1971-72, but as it arose for all the years up to 1975-76, all of which were heard together, his finding on this issue with reference to the facts for the year 1971-72 would apply to the identical issue arising for the assessment year 1975-76 also. He rejected the assessee's claim that since the assessee follows the cash basis, the amount cannot be included in the assessee's wealth on the ground that the nature of accounting is not relevant for the purpose of finding what is an asset though it is relevant for preparation of balance sheet. He held that inasmuch as "assets" include property of every description, it is manifest that in respect of the terms of the contract with the producer, in pursuance of which the annuity policies were taken, there is an asset in terms of the provisions which has to be included in the assessee's wealth. He. however, slightly modified the basis of valuation. In a separate order passed under Section 35 of the Wealth-tax Act ("the Act")' he considered and accepted the alternative submission of the assessee based on the definition of "asset" in Section 2(e) of the Act according to which the right to an annuity where the terms and conditions relating thereto preclude its commutation of any portion thereof into a lump sum is excluded from the definition for the years up to 1974-75 but not for subsequent years, as there was an amendment to this definition effective from the assessment year 1975-76 with the result that so far as the assessment year 1975-76 is concerned his finding that the present value of the annuity policies requires to be included stands.

8. The assessee being aggrieved by the order of the Commissioner (Appeals) is in further appeal before us both with regard to his finding of the inclusion of Rs. 3 laths and with regard to the inclusion of the present value of future annuities.

7. Before dealing with the main ground common in the appeals of the assessee and the intervenes in regard to annuity, we may dispose of the objection of the assessee relating to the inclusion of the sum of Rs. 3 lakhs as outstanding remuneration. So far as this sum of Rs. 3 lakhs is concerned, the short facts as found in the orders of the departmental authorities pertaining to the same are that the assessee was entitled to receive professional fees in respect of the film "Aan Ban", which was released some time between 1-4-1972 and 31-8-1972, in two forms, namely, Rs. 1,01,001 plus annuity of Rs. 40,000 each for ten years.

Before the release of the film the amount of Rs. 1,01,001 was paid and what had not been received by the assessee was the annuity of Rs. 40,000 which was to commence from 1-1-1976. According to the finding of the WTO, the producer Movie Mughals had debited the amount of Rs. 3 lakhs to the cost of the picture and credited to the assessee's account in their accounts for the year ended 31-8-1972 and he had also obtained a deduction of this amount in his income-tax assessment. The amount has also been disclosed by the producer as an outstanding liability in the balance sheets as at 31-8-1972, 31-8-1973 and 31-8-1974. The assessee, however, claimed that as the film was a flop, he had waived his claim to receive the annuity starting from 1-1-1976 and, therefore, there was no professional fees outstanding for the assessment years 1972-73 to 1975-76. The WTO, finding that the producer was continuing to show the amount as outstanding to the assessee, included the amount as an asset in the assessee's net wealth. We have already indicated the order of the Commissioner (Appeals) in the appeal preferred by the assessee.

8. The dispute with regard to the inclusion of this amount need not engage our attention for long, because irrespective of the question whether and, if so, when, the assessee had waived his right to the annuities or whether or not the producer had continued to show the amount as a liability in his balance sheet, the issue has to be decided in favour of the assessee on the basis of the principles and ratio of our decision in the case of N.M. Shah v. Second WTO.9. The question as to whether in the case of professional assessees keeping accounts under the cash system any dues as outstanding for services rendered are required to be included in the net wealth of the assessee or not is subject-matter of our decision in a separate Special Bench order in the case of N.M. Shah (supra) wherein it is held that no such inclusion is required or warranted. As undisputedly in this case the assessee maintains accounts on cash basis and the outstanding remuneration of Rs. 3 lakhs has not been received by the assessee, it follows that conformably to the view taken in the Special Bench order mentioned above, the amount cannot be included.

10. As regards the inclusion of the estimated present value of future annuities secured by the policies taken by the producer, it is common ground that if the payments contemplated by the policies can be regarded as remuneration for services rendered, then our decision in regard to inclusion of outstanding remuneration will clearly govern the question and since according to our decision in the Special Bench order mentioned above, outstanding remuneration in the case of a professional assessee maintaining accounts regularly under the cash system cannot be included in the computation of net wealth, it follows that no inclusion is possible in respect of the payments under the annuity policies. The controversy between the assessee and the revenue, which requires consideration and decision in this appeal is, however, as to whether the payments secured under the policies by way of annuity can be regarded as remuneration for services rendered or the payment arises by virtue of a totally different contract of insurance for securing annuity payments. The stand of the assessee, as contended by the counsels on behalf of the assessee as well as the interveners, is that the payments under the policies continue to bear the character of remuneration for services rendered due from the producers and the mode or method adopted by the producers for securing the payments to the assessee of the amounts guaranteed by them by securing annuity policies does not alter its character as remuneration for services rendered. The revenue's stand on the other hand is that once the producer took out the policies in favour of the assessee and the insurance company undertook to pay the assessee the amounts of instalments as stipulated, the producer's obligation in respect of the remuneration to the assessee was fully discharged and the payments due from the insurance corporation to the assessee no longer bore the character of outstanding remuneration.

11. The assessee's next alternative submission is that since the annuity is not commutable under the conditions of the policy taken, no amount in respect thereof can be included in the computation of net wealth, because the right to receive the annuity does not fall within the description of "asset" under Section 2(e). In any event, it is argued on behalf of the assessee, even if the right to receive the annuity can be regarded as an asset, it is specifically exempted under Section 5(1)(v/) of the Act, according to which the right or interest of the assessee in any policy of interest before the money covered by the policies become due and payable to the assessee is not liable to inclusion in the assessee's net wealth and is not taxable. Reliance in this connection is placed on the decision of the Punjab High Court in CWT v. Yuvraj Amrinder Singh [1974] 96 ITR 101. It was particularly emphasised by the assessee that it would be an anomaly to hold that the amounts of annuities payable in future years or the right to receive them would constitute asset for the purpose of computation of the net wealth of the assessee even though those amounts of instalments will not be available in the near future for payment of wealth-tax which may be raised as a result of its inclusion. In the course of the hearing, counsel Shri S.E. Dastur, appearing for one of the interveners, emphasised the point that the amounts payable under the annuity policies in annual instalments bear the same characteristic as "remuneration" originally agreed by the producer to be paid to the artist and continue to be the professional remuneration of the assessee. The payment under the policy of insurance was, it was urged, only a particular manner or method of discharging the liability of the producer. A separate treatment contemplated in respect of an annuity can apply only to a case where a right is secured by an assessee for payment of annuity or annual instalments by payment of a lump sum amount into an asset, which is not the case here. In this connection, a reference is made to the instructions by way of a letter dated 26-2-1980, addressed by the CBDT as Instruction No. 1319 to all the Commissioners, a copy of which has been made available in the paper books filed on behalf of one of the interveners, Mrs. Mala Sinha, as supporting the assessee's contention. It was, therefore, submitted by him that whatever decision would apply to the question of outstanding remuneration in the case of professionals maintaining accounts under the cash system which came up for consideration in the other Special Bench case would equally govern the question of inclusion of any amount in respect of the annuities. The arguments advanced by him in the other Special Bench case were adopted by him in respect of the inclusion.

Shri V.H. Patil, counsel for another intervener, also highlighted the point that the remuneration agreed to be paid by the producer was itself to be paid in instalments as stipulated in the contract and they do not become due until and before the due dates and on the respective due dates, instead of the employer directly paying the amounts, he secured payment thereof through the annuity policies which was, therefore, only another method or mode of payment not affecting the character or nature of payment which continued to be outstanding professional remuneration of the assessee. It was further urged that if it is held that the contract of employment was replaced by the annuity policy then the ratio of the decision in Yuvraj Amrinder Singh's case (supra) granting exemption under Section 5(1)(v/) would apply. Lastly, it was the assessee's contention also that in the event any inclusion is called for in respect of the outstanding remuneration or annuity, then a suitable and appropriate valuation thereof is called for so as to take into consideration the inherent tax liabilities attached thereto.

12. The revenue's stand, as we have already stated, is that once the policy was taken for securing the payment of the professional remuneration as stipulated, then the right to receive the amounts on instalments is referable to the policies of insurance and not to the services under the contract of employment with the producer. As regards the claim of the assessee for exemption under Section 5(1)(vi), it was submitted that the annuity policy is not an insurance policy so as to fall within the purview of Section 5(1)(vi).

13. On a careful consideration of the facts of the case and submission of the parties, we arc satisfied that the department has no case for inclusion of the disputed amounts on account of outstanding remuneration as part of the assets in the computation of net wealth for the year concerned. Undisputedly the assessee is a professional film artiste and is maintaining accounts regularly in respect of his professional earnings under the cash system of accounts which is a well recognised method of accounts. In our order in the Special Bench case of N.M. Shah (supra), we have elaborately dealt with the various aspects of the question arising for consideration, such as for instance, whether the outstandings for services rendered due to an assessee engaged in a profession and maintaining accounts under the cash system constitutes an asset required to be included in the balance sheet maintained under that system and consequently when such an asset is omitted in the balance sheet whether it is required to be included by the WTO in the computation of net wealth by way of adjustments contemplated under Rule 2C of the Wealth-tax Rules and whether even otherwise it is an asset required to be included as an asset under Section 7(1) of the Act and our finding is in favour of the contentions of the assessee. In that order, after examining the cash system of accounting in some detail, we have held that the outstanding of a professional cannot constitute an asset to be included in the balance sheet maintained under the cash system of accounting and consequently the WTO cannot include it by way of adjustment contemplated under Section 7(2)(a). We have also held that the provisions of Section 7(2)(a) being special provisions applicable to assets of business where accounts regularly maintained, there is no scope for inclusion of any asset relating to such business not required to be disclosed in the balance sheet under the system of accounts followed by resort to Section 7(1). Following that order we must hold in this case also that the outstanding remuneration of the assessee is not liable to inclusion in the net wealth. We shall presently examine the nature of the payments by way of annual instalments from the annuity policies referred to earlier, by which the producer secured payment of the remuneration agreed to by him on the basis of the controversy raised by the parties, but suffice it to say at this juncture that if they bore or continue to bear the character of remuneration outstanding from the producer, then on the ratio of the earlier Special Bench order, no amount can be included in the computation of the assessee's net wealth as forming part of his assets.

14. With regard to the controversy as to whether the annual instalments due .and payable to the assessee under the policies continue to bear the character of remuneration or they bear a different character having ceased to be remuneration payable by the producer, it is necessary to highlight certain relevant facts material for determining the question.

In the first place it is to be noticed that according to the terms of the contract with the producer the remuneration is payable for services rendered in annual instalments of the specified sums spread over number of years commencing from 1995 and ending with 2014 and they do not accrue or become due to the assessee except on the specified dates. In particular, it is stipulated that the time for payment of each amount shall be the essence of the arrangement. The only amount that had become due if at all is the initial payment of Rs. 25,000 agreed to be paid on the signing of the letter of arrangement. All that the producer has agreed further is the assurance and undertaking given to the assessee to secure the due payment of the remuneration as agreed to by him on the respective dates in a manner and method acceptable to the assessee. The contention of the revenue that the producer's obligation were fully discharged as soon as they purchased the annuities for the payment of the amounts of instalments from the HC in favour of the assessee and that therefore it was no longer a case of outstanding remuneration, apparently and superficially sound somewhat convincing, but a careful consideration of the terms of the assessee's contract with the producers in terms of which the annuities have been purchased by the producers and the terms and conditions of the annuities clearly show that the assessee was to receive his remuneration in a number of years in instalments, It is not as if the assessee has received something in cash or in kind by accepting the annuities. What has happened is that the said obligation of the producers have been taken over by the LIC, and what will be paid ultimately by the LIC will continue to be nothing but the outstanding remuneration agreed to be paid by the producers according to the terms of the agreement. In other words, the change has only been that there is an assurance of the security for the discharging of the obligations of the producers in a way acceptable to the assessee. Nonetheless, the character of the payments which is by way of remuneration to the assessee for services rendered does not get altered or changed merely because the person making the payment is different from the producer. In making the payment to the assessee under the annuity, the LIC is merely discharging the liabilities and obligations of the producer under the contract between the assessee and the producer and nothing else. We are, therefore, satisfied that there is no merit in the department's contention that merely because the producer has adopted or framed a scheme or device for discharging his obligation of paying the remuneration to the assessee as stipulated in the terms of the agreement, the payments made to the assessee in pursuance of the scheme or plan adopted by him undergo any change from being remuneration for services rendered.

15. It is also necessary at this stage to refer to the letter of the CBDT by way of Instruction No. 1319 dated 26-2-1980. We may as well reproduce an extract of this letter : The Board have been considering for some time past the question whether a film artiste, who adopts cash system of accounting for his professional income and who gets remuneration from a film producer in the form of annuity, should be taxed on the entire amount paid by the producer for purchasing the annuity policy in the year of purchase or on the annuity inslalment(s) paid under the annuity policy during a particular year.

2. In the cases of the Him artistes which the Board had an occasion to consider over a period, the following features were noticed : b. the agreement in regard to the payment of remuneration by the producer provided for the payment or remuneration either wholly or partly through annuity, as stipulated amount for a certain number of years ; d. in cases where the producers were the annuitants, either the policies were later irrevocably and absolutely assigned in favour of the artiste or absolute and irrevocable power of attorney to collect the annuity amount as and when due was given to him ; e. according to the terms of these annuity policies, neither was the surrender value thereof nor were the annuities payable thereunder commutable ; and the annuity and/or interest of whatsoever nature in the policy were not assignable in favour of any person by the artiste either during or after the determinant period.

3. This question was examined in consultation with the Ministry of Law. The Board have been advised that in case of a film artiste who follows the cash system of accounting for professional income and who is paid remuneration either wholly or partly through an annuity policy (policies) as per the agreement/contract, only the particular amount of the annuity instalment(s) as is paid in a year is to be included in the total income of the said year provided the annuity policy incorporation with all the features mentioned in para 2 above.

It is common ground that in the present case the conditions mentioned in Clauses (i) to (vi) are present and the assessments to income-tax are made in accordance with the instructions contained in this letter.

The department, thus, accepted the position that one of the methods of payment of remuneration to film artistes by the producers is through annuity of stipulated amounts for a certain number of years and in cases where the artistes are maintaining their accounts on cash system, what is required to be included in their income is only the amount of annuity instalments as is paid in a year. The implication apparently is that the artistes have no right to receive the balance of the amounts until the due dates of the payment. We are, therefore, clearly of the view that the instruction further strengthens our conclusion that the annual payments received by the artistes from the insurance company is nothing but remuneration for services rendered. It, therefore, follows that no part of the various amounts payable to the assessee in the different years under the policies having not even become due for payment, not to speak of their having been received, there can be no inclusion of any sum in respect of the same, particularly when the assessee is maintaining accounts under the cash system and in which there is no scope for including it as asset in the balance sheet as being outstanding remuneration which has not been received.

16. The above finding renders unnecessary consideration and decision of the alternative contentions of the assessee, but to completely dispose of the appeal on all the aspects, as the matter is not likely to rest at this stage, we proceed to deal with those contentions and decide the question accordingly.

17. One alternative submission, of the assessee was that even assuming that the payments due under the policy are by way of annuity not bearing the character of remuneration, then no amount can be included in respect of the same as the annuity is not commutable because the definition of ' asset" does not take in any right in such an annuity.

We have already seen that the terms of the annuity policy taken by the producer precludes computation of the annuity payments for any lump sum. The assessee is not, however, correct in his contention because in the definition in Section 2(c) of assets it is not the right of every annuity where the terms and conditions relating thereto preclude the computation of any portion thereof into a lump sum grant, that it is excepted or saved from the purview of the definition. Right to receive an annuity which is purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee does not get excluded from the definition of "assets" in respect of the assessments from 1970-71 onwards. The assessee's contention may have some merit only in relation to any assessment year falling prior to the assessment year 1970-71. With regard to the claim for exemption based on Section 5(1)(vi), here also we think that the assessee is not totally correct as the contention fails to take note of the proviso to the clause inserted by the Finance Act, 1974, effective from 1-4-1975.

According to this proviso, what is excludible in respect of the right or interest of the assessee in the policy of insurance before the moneys under the same become due and payable, provided it is limited, in the case of a policy of insurance, to the premium or other payment whereon is payable during a period of less than 10 years (sic). In such a case what is excludible is the sum that bears to the value of the right or interest of the assessee in the policy the same proportion as the number of years during which the premium or other payment under the policy is payable bears to ten. In the present case it appears, the payment to secure the annuity was made by way of a single premium in one year and consequently all that can be excluded by virtue of this clause is only one-tenth of the value of right or interest of the assessee in the policy.

18. However, our finding in the alternative contentions of the assessee does not impinge on the relief granted on the basis of our decision on the main dispute of appeal. We must also hold in regard to yet another claim of the assessee that if any sum is required to be included in respect of the payments due under the policy then the value thereof should be reduced, that there is no merit in the assessee's claim for considering any inherent income-tax liability attached to it, for the identical reasons on which we have rejected a similar contention in the other Special Bench case in the case of N.M. Shah (supra), but as no proper valuation of right or interest, apart from this question, appears to have been considered at the lower stage, we would have remitted the question of valuation to the departmental authorities for determination afresh after considering all the objections of the assessee had we not decided the matter in favour of the assessee on the main dispute. As, however, we have resolved the main dispute in favour of the assessee, the necessity of sending the question of valuation to the departmental authorities does not arise.


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