1. Where the annual Installment of principal and interest payable in respect of an annuity deposit made under Chap. XXII-A of the I.T. Act, 1961, is received by a person other than the one who actually made the deposit, would the whole or any part of the annual Installment received be liable to income-tax That is the question raised in this income-tax reference.
2. Shri O. N. Talwar, the respondent-assessed, was the karta of a Hindu undivided family (HUF) known as O. N Talwar & Sons. The family was disrupted with effect from July 16, 1966, by a partition deed dated July 22, 1966. Thereafter, O. N. Talwar was assessed as am individual for the assessment year 1967-68 and 1968-69 for which the previous years were the financial year 1966-67 and 1967-68, respectively. These two assessment years from the subject-matter of the two references now before us.
3. Prior to its disruption, the family had made certain deposits under the Annuity Deposit Scheme formulated in Chap. XXII-A of the I.T. Act, 1961. The Deposits in question were made under the annuity deposits scheme of 1964. What happened in respect of these annuity deposits on the partition has been differently stated by the different authorities. The ITO says :
'The assessed was allotted an amount of Rs. 14,742 which was share in the annuity deposit made by the Hindu undivided family. A reading of the partition deed, particularly articles 1 and 7, shows that the assesses would be entitled to a share in the commuted value as the HUF ceased to exist on the date.'
4. The AAC, however, observed :
'... the deposits (which) were out of the assets to be partitioned among the persons entitled to share on partition of the erstwhile Hindu undivided family. In allocating the assets among the various person in satisfaction of their shares, it was decided to allot, inter alia....., annuity deposits to O. N. Talwar.'
5. The Tribunal's order and statement of the case, however, put the position thus :
'By the partition deed some of the deposits fell to the shares of Shri O. N. Talwar. During the years under consideration, Shri O. N. Talwar received repayment against the annuity deposit.'
6. In this state of affairs, the ITO assessed Rs. 398 and Rs. 151 representing the 'commuted value of the annuity' as income in the hands of the individual, O. N. Talwar.
7. The AAC could that the depositor was the HUF while the repayment was received by the assessed who was not the depositor. He referred to r. 10 of the Annuity Deposit Scheme of 1964 as covering the situation. He was of opinion that, as specified in the rule, 'only a moiety of the annuity equal to the share of each such person who received a share on partition will be assessable in his name'. He directed the officer to look into the matter and determine the position of the annuity falling to the assessed's share and include the same in the total income of the assessed.
8. The Tribunal referred to s. 2(24)(viii) of the I.T. Act and r. 10 of the Scheme rules and pointed out that as the assessed was not the depositor, the repayment could not be treated as income. So, the Tribunal observed, the repayment would not be taxable 'except to the extent of interest include in the repayments'.
9. The CIT, dissatisfied with the partial relief granted to the assessed, has obtained a reference of the following question of law to this court for its decision in respect of each of the two assessment year :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in bifurcating the refund of annuity deposit into principal and interest and then holding that the refund of annuity deposit so far as it related to the principal amount is not taxable in the hands of the assessed, a disrupted member of HUF, which had made the deposit ?'
10. The Annuity Deposit Scheme was introduced as a measure to curb inflation. Broadly speaking, the scheme envisages every assessed to deposit a particular percentage of his/its total income with the Govt., failing which he will have to pay an additional income-tax. The amount so deposited is allowed as a deduction in the computation of total income for the assessment for the year to which the deposit relates. The amount deposited, however, is returned by the Govt. together with interest thereon in ten equal annual Installments. Presumably, the interest would be taxable in any even but, since the amount of deposit had been allowed to be deducted, the principal element in the repayment is also brought to tax by deeming the entire amount of repayment (whether made annually or whether commuted in accordance with the provision therefore) to be 'income'.
11. Now we can turn to the statutory provisions relevant in this connection. Chapter XXII-A covering ss. 280A to 280X was introduced by the Finance Act, 1964, with effect from April 1, 1964.
12. Section 280A provides that the provisions of the Chapter shall apply to every person, being - (i) an individual, (ii) a Hindu undivided family, (iii) an unregistered firm, (iv) an association of persons or a body of individuals whether incorporated or not (other than a company or a co-operative society), and (v) an artificial juridical person (other than a corporation)
13. Provided that such person is a resident.
14. Section 280B, inter alia, defines the following expressions, 'unless the context otherwise requires' as follows :
'(4) 'annuity' means any annual Installment of principal and interest thereon payable by the Central Government under the provision of section 280D'.
'(6) 'depositor' means a person to whom the provisions of this Chapter apply.'
15. Sub-section (1) of this section also contains a definition of the expression 'adjusted total income'. It makes reference to a case-clause (a)(ii) - where the depositor is a partner of an unregistered firm and a case-clause (a)(iii) - where a partner is a 'member of an association of person or body of individuals (other than a Hindu undivided family or a firm)'. Section 280C requires every person to whom the chapter applies to make, for ever assessment year, an annuity deposit with the Central Govt. calculated by applying the prescribed rates to his adjusted total income. Section 280-O provides that the annuity deposit required to be made shall be allowed as a deduction in computing the total income assessable for the assessment year in respect of which the annuity deposit is required to be made. Section 280D is the provision for repayment :
'Subject to the provisions of this Chapter and any scheme framed there under, the Central Government shall repay to the depositor the annuity deposit made or recovered in any year in ten annual equated Installments of principal and interest at such rate as may be notified by the Central Government in the Official Gazette :
Provided that nothing in this section shall prevent the payment of any annuity at such commuted value thereof as may be provided in a scheme framed under section 280W, in any case in which the authority empowered to make such payment is satisfied that genuine hardship will be caused unless such payment is made.'
16. One other relevant section is s. 2(24) which defines 'income' as including the items mentioned in cls. (i) to (vii), to which the Finance Act, 1964, added item (viii) reading as follows :
'(viii) any annuity due, or commuted value of any annuity paid, under the provision of section 280D.'
17. Two schemes were framed, pursuant to the provisions of the above chapter, one of 1964 and the other of 1966. We are concerned in this case with the provisions of the 1964 scheme, some of the rules of which need to be referred to. Rule 4 requires every person making a deposit to fill in an application form for the purpose in Form No. 1; para. 3 of this application refers to a deposit on behalf of HUF and requires a declaration by the depositor who signs in :
'The depositor is made by me as karta of... a Hindu undivided family.'
18. Similarly, in Form No. 2, which is an application for the issue of annuity deposit certificates, para. 3 requires a declaration that 'the amount has been recorded/set off towards annuity deposit required to be made by... a Hindu undivided family of which I am the karta'. The person who signs these forms in space requiring the 'signature of the depositor' is the karta of the family. There is no such special column in respect of firms and associations of persons in which case the applications are signed by any member but a footnote to Forms Nos. 1 and 2 reads :
'In the case of a firm, an association of person (other than a society registered under the Societies Registration Act, 1860) or a body of individuals, the application should be accompanied by a declaration in respect of its constitution in Form No. 3. In the case of a society registered under the Societies Registration Act, 1860, the application should be accompanied by a true copy of certificate of registration, a true copy of its bye-laws, rules and regulations and a copy of resolution (certified to be true by its principal officer) specifying the designations and names of the officials who shall be entitled to receive annuity on behalf of the society.'
19. The requirements of this footnote are a reproduction of the contents of rr. 4(2) and 4(3). Rule 4(4) specifies the person to sign the application in Form No. 1. These are :
(a) in the case of an individual, the individual himself (or his guardian, if need be);
(b) the karta, in the case of a HUF, failing whom any adult male member;
(c) in the case of an unregistered firm, any adult partner;
(d) in the case of any other association or body of individuals, by any member or principal officer; and
(e) in the case of any other person, by that person or some one competent to act on his behalf.
20. Form No. 3, applicable in the case of firms/association of persons/body of individuals requires a declaration containing the names of all the partners/members and the specimen signatures of each 'for the firm/association of persons/body of individuals' attested by a banker, ITO, Treasury Officer, Magistrate or Justice of the Peace. Rule 10 runs as follows :
'Where any firm or association of persons or body of individuals which had made an annuity deposit in respect of any assessment year is dissolved before the receipt of all the yearly Installments in respect of such deposit, the annuity shall be paid to the persons who were its partners or members immediately before its dissolution in such proportion as the Income-tax Officer may, having regard to the proportion in which they were entitled to share the profits in the previous year in which the dissolution took place, direct.'
21. Rule 11 provides for an individual depositor nominating another to receive the annuity in the event of his death. In 1967, some of the rules in the 1964 scheme were modified in certain respects which are not relevant for the purposes of the present case. The scheme promulgated in 1966 contained almost the same rules as were contained in the earlier scheme except for an addition in r. 7 that where an individual depositor dies without making a nomination, the annuity should be paid to his legal representatives.
22. CIT v. Narottamdas K. Nawab : 102ITR455(Guj) , the Gujarat High Court had to consider whether the annual Installments, received by the nominee of an individual depositor, was assessable to tax and the question was answered in the affirmative. The court pointed out that, reading s. 2(24)(viii), s. 280D and the rules of the 1966 scheme framed under s. 280W, it was obvious that the annuity falls due to the depositor if alive or in case he died, to his nominee and, failing a nomination, to his legal representatives. The court also repelled, after examining the scheme of the new chapter, a broader argument that, on general principles, the annuity payments were not in the nature of income but merely amounted to return of capital and held that what was otherwise income would retain its character of income, notwithstanding the fact that the original depositor died in the meanwhile.
23. The Andhra Pradesh High Court had occasion to consider the same question that has arisen for decision in the present case in Addl. CIT v. Sreerama Murthy : 116ITR431(AP) . The High Court held that the assessments in the hands of the three erstwhile members of a HUF of their respective shares in the annuities, received by the former karta and apportioned among them, in respect of deposits made by the family during its existence were correct and justified. The court held :
'When one partition is effected, the coparceners can demand their shares from the karta. In the instant case, by the time annuity was returned, the family was no more in existence. However, the share of coparceners having been fixed, the annuity returned would constitute income under s. 2(24)(vii) of the I.T. Act, 1961, in the hands of each coparcener, notwithstanding the fact that s. 280D of the Act as well as the Annuity Deposit Scheme are silent in this behalf.'
24. A contention was raised on behalf of the assessed that the repayment should have been taxed in the hands of the erstwhile karta but this was rejected because, in fact, the karta had himself divided the repayment among all the three erstwhile coparceners and such an assessment on the erstwhile karta would be without jurisdiction under the I.T. Act.
25. The learned standing counsel for the department relies on the above two decisions and also tries to contend that the provisions of r. 10 of the Scheme are attracted to the present case. On the other hand, Shri Bishamber Lal, appearing for the respondent invites our attention to the decision of the Madras High Court in CIT v. Muthiah : 109ITR463(Mad) , which has dissented from the Gujarat decision. This was also a case where the annual Installment was received by the nominee of the depositor who had died. The court was of opinion that there was no charging section which would bring to tax the Installment received by a nominee. In coming to this conclusion, the court thought that s. 2(24)(viii) had been introduced by the Finance Act, 1962, and observed (p. 465) :
'notwithstanding the fact that the annuity deposit scheme is said to have been framed subsequently, no change in the definition of 'income' has been made so far.'
26. The learned judges were of opinion that, just as in the case of s. 41(1) of the Act which was considered by the Supreme Court in CIT v. Hukumchand Mohanlal : 82ITR624(SC) , there was no statutory provision to bring the annuities to charge in the hands of a 'nominee'. Though the annuity would be income in the hands of the depositor, it is in the hands of the nominee, in effect, a gift and cannot retain the badge of income, unless specifically so provided in the statute. The court differed from the conclusion of the Gujarat High Court which, it was observed, had decided the case on a broader view. It was observed that the stand pleaded for by the revenue would lead to certain anomalous situations.
27. The situation in the present case is more analogous to that in the case before the Andhra Pradesh High Court rather than with the situation considered by the Gujarat and Madras cases. As we shall presently point out, this case can be decided even on the narrow basis that the annuity Installments would be taxable only in the hands of the depositor. But it seems to us that the effect of the statutory provision is wider. Section 2(24)(viii) was introduced by the Finance Act, 1964, simultaneously with the introduction of Chap. XXII-A and not in 1962 (as mentioned by the Madras High Court). Its whole purpose was to bring to tax the annuity repayments and the commuted value of the annuity. It is significant to note that this clause is carefully worded; it does not say that the annuity due or commuted value of the annuity paid would be taxable in the hands of the depositor. It says that these annuity would be chargeable as income when due or paid 'under the provisions of s. 280D.' Turning to s. 280D, this section no doubt contemplates the repayments normally to be made to the depositor but this is subject to the provisions of the chapter and to the provisions of the Scheme to be framed there under. In other words, a payment to a nominee under r. 11 to the erstwhile members of a firm, association of persons or body of individuals under r. 10-so far as the 1964 Scheme is concerned-and a payment to the legal representative of a deceased depositor under r. 7(2) of the 1966 scheme would all be payments under the provisions of s. 280D. We are, thereforee, in agreement with the view expressed by the Gujarat and Andhra Pradesh High Court and find ourselves unable, with respect, to concur with the opinion of the Madras High Court on this matter. It also appears to us that no anomalies follow from this view, as suggested by the Madras High Court. The annual repayment is only deemed to be income and, whether received by the depositor himself, or the nominee or the legal representative or other person, it would be actually subjected to tax only where the total income exceeds the maximum not chargeable to tax. It is not the intention of the legislature that it should be necessarily taxed on receipt or taxed at the same rate at which the annuity deposit would have been liable to tax had it not been deducted from the total income in the year of deposit. The only idea was that since the amount of deposit was exclude from the total income at that time, the annual payments should be included in the total as and when received.
28. Shri Bishamber Lal, however, submits that the petitioner is in a stronger position because while the annuity was paid in the Madras and Gujarat cases under the terms of the Schemes the repayment in the present case is de hors the Scheme, not covered by any of its provisions. We are unable to accept this contention. One way of looking at the matter is that the deposit having been made under the Scheme, the repayment has been obtained only there under. We may assume that even where there is no specific provision under the Act or the Rules for repayment, it would still be possible for the legal representatives of a depositor or the former members of an erstwhile joint family to obtain repayment of the deposit made by the deceased or the family by recourse to legal action. However, in the present case, the repayment has not been obtained in any such manner. It is a repayment made ostensibly and purportedly under the Act and the Scheme and, hence, it should be treated as a payment made under the scheme and so under the provisions of s. 280D.
29. But apart from the above, rather broad, way of looking at it, it appears to us that, on a proper construction of the rules, he assessed, O. N. Talwar, was the 'depositor' to whom the annuity was due to be repaid. We have set out the relevant rules of the Scheme earlier. Though a family as such is a person to whom the provisions of Chap. XXII-A apply and can be, thereforee, said to be a depositor within the meaning of the definition of that expression in the sense that the funds came out of the family's income, it can also be said, without any inconsistency, that the karta of the family is the depositor in the formal and literal sense. He is the person who signs as 'depositor in the applications in Form 1 and 2. The special narration in para. 3 of Form 1 and Form 2 is to the effect that 'I' (i.e., the karta) am depositing the money or making application for the certificate on behalf of the Hindu undivided family'. While, in the case of an unregistered firm, association of persons and body of individuals, these forms are signed by any member on behalf of the said group of persons, the deposit is clearly by all the members as, under the rules, it has to be accompanied by the declaration requiring the names of persons constituting the group and, in case of dissolution of the same, the repayment is to be made in terms of r. 10. There is no such provision in the case of a family. In this case, it is the karta who makes he deposit (and is the depositor) and it is he who is entitled to receive it back. If, in the meantime, the family has disrupted, he may become accountable to the other erstwhile coparceners and, as happened in the Andhra case, he is the depositor, to whom the amount is repayable by name. The repayment of annuity is made by the appropriate deposit office (i.e., bank) based on the terms of the application. There is no enquiry or apportionment or direction by the ITO contemplated in the case of a joint family as there is in the case of a firm, etc. That is how the karta, Talwar, was able to obtain the repayment, i.e., as the depositor himself and he having so obtained it, it is not possible to accept the contention that he has received the repayment de hors the scheme.
30. Verma contended that the repayment can also be traced to the enabling provision contained in r. 10. There will be some strain involved in the application of r. 10 to the case of a joint family. Section 280A which deals with the categories of persons to whom the chapter applies lists a HUF separately from the other groups of persons referred to in r. 10. The expression 'dissolved' is also inappropriate to refer to the case of partition or disruption of a HUF. Further, the question of apportionment among the erstwhile members in the proportion in which they were entitled to share the profits in the previous year in which the dissolution took place would also be difficult as, in a joint family, no member can predicate that he is entitled to a particular share of the income or the property. Section 280B(1)(a)(iii) appears to suggest that a HUF could be included within the expression 'association of persons or body of individuals' but, despite this, it is very difficult, if not impossible, to fit in the case of a joint family within the meaning of r. 10. However, for the reasons already discussed, we are of opinion that the receipt of annuity by a person, as the karta of an erstwhile family, is a receipt by a 'depositor' within the meaning of s. 280D. In either view, it is a repayment due under the provisions of the Act or Scheme that has been received and it is chargeable in it entirety in the hands of such 'depositor' in view of s. 2(24)(viii).
31. However, having regard to the partition that has taken place, it is only the amount referable to the assessed's share on partition that has been assessed here and, hence, he can have no real grievance against the assessment.
32. We are, thereforee, of opinion that the question referred to us should be answered in the negative and by saying that not only the interest element but also the principal element of the annuity to the extent of the share of the assessed in the family deposits was taxable in his hands.
33. We answer the question accordingly. However, in the circumstances, we make no order as to costs.
34. Question answered in the negative.