1. In this reference at the instance of the revenue the following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the instalment of annuity deposit received by the karta of the assessee as nominee/ legal representative of the deceased depositor was liable to be assessed as income of the assessee ?'
2. The relevant assessment years are 1969-70 and 1970-71. The assessee herein is the heir and legal representative and nominee of one Subhadraben K. Nawab who was the original depositor of certain amounts under the Annuity Deposit Scheme set out in Chapter XXII-A of the Income-tax Act, 1961. Subhadraben, the original depositor, had made a nomination in the regular form under the Scheme in favour of the assessee and by her will, she had bequeathed the right to receive the annual instalments in respect of the relevant annuity deposit certificates to the assessee. For the year of account relevant to the assessment year 1969-70, an amount of Rs. 4,800 was received by way of instalments and for the year of account relevant to the assessment year 1970-71, an amount of Rs. 3,306 was received by the assessee as instalments in respect of these different annuity deposit certificates. The assessee contended that these two amounts did not constitute his income and should be treated as receipt of capital by him. His contention before the income-tax authorities and at subsequent stages of appeal was that these items of receipts could not be included, in law, in the income of the nominee or the legal heir after the death of the depositor because under the relevant provisions of law, the amount of the annuity was due to the depositor only. The Income-tax Officer rejected the contention of the assessee and the appeal filed by the assessee before the Appellate Assistant Commissioner failed. Thereafter, the matter was taken in further appeal before the Income-tax Appellate Tribunal and the Tribunal followed the decision of the Supreme court in Commissioner of Income-tax v. Hukumchand Mohanlal and also the decision of the Bombay Bench of the Tribunal in I. T. A. No. 2784 (Bombay) 1970-71, dated July 7, 1972. The Tribunal accepted the contention of the assessee because, according to the Tribunal, the 'depositor' would mean the person who has made the deposit in pursuance of section 280C of the Act and would not include the legal representative of the depositor. According to the Tribunal the repayments to the assessee were not under section 280D within the meaning of section 2(24)(viii) of the Act and since the payments were received by the assessee not because he was the administrator under section 280D but it was only because he was the nominee legal representative of the deceased that he received the payment as part of the estate of the deceased. These repayments were part of the receipts in his hands and they do not constitute income in the hands of the depositor within the extended meaning assigned to it by section 2(24) of the Act. The Tribunal therefore, allowed the appeals of the assessee. Thereafter, at the instance of the revenue, the above question has been referred to us for our opinion.
3. In order to appreciate the contentions raised in this case, it is necessary to refer to a few provisions of the Income-tax Act, 1961, and the Annuity Deposit Scheme framed under the provisions of the Act. Clause (viii) of section 2(24) was inserted by section 4 of the Finance Act, 1964, with effect from April 1, 1964. According to this definition of section 2(24)(viii) 'income' includes any annuity due, or commuted value of any annuity paid, under the provisions of section 280B. By another section of Finance Act, 1964, with effect from April 1, 1964, a wholly new Chapter, namely, Chapter XXII-A, dealing with annuity deposits was inserted in the Income-tax Act, 1961, and this Chapter XXII-A runs from section 280A to section 280X. Section 280B, sub-section (4), defines 'annuity' as follows :
''annuity' means any annual instalment of principal and interest thereon payable by the Central Government under the provisions of section 280D.'
4. Under sub-section (6) of section 280B, a 'depositor' means a person to whom the provisions of this Chapter apply. Section 280D provides for repayment of annuity deposits and is in these terms :
'Subject to the provisions of this Chapter and any scheme framed thereunder, the Central Government shall repay to the depositor the annuity deposit made or recovered in any year in ten annual equated instalments of principal and interest at such rate as may be notified by the Central Government in the Official Gazette.'
5. The proviso to section 280D deals with payment of commuted value of the annuity deposit and is not relevant for the purposes of this judgment. Under section 280-O notwithstanding anything to the contrary contained in the provisions of the Act relating to the computation of income chargeable under any head of income, the annuity deposit required to be made under the Chapter shall, subject to the provisions of sub-section (2), 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. Under section 280X if a depositor does not make the annuity deposit during the financial year immediately preceding such assessment year or such further period as may be allowed by the Income-tax Officer under the proviso to clause (ii) of sub-section (2) of section 280C, or the amount of annuity deposit made by him during the financial year or further period aforesaid falls short of the annuity deposit required to be made, he shall, in addition to the income-tax payable by him for that assessment year, be liable to a further amount of income-tax calculated in the manner specified in sub-section (2) of section 280X. Section 280W, sub-section (1), provides that the Central Government shall, by notification in the Official Gazette, frame one or more scheme or schemes to be called Annuity Deposit Scheme or Schemes in relation to deposits under Chapter XXII-A Under sub-section (2) a scheme under sub-section (1) may provide for, inter alia :
'the nomination of any person to receive the annuity or any other sum due under this Chapter to any depositor in the event of his death and the cancellation of change of such nomination.'
6. In exercise of the powers conferred by section 280W of the Income-tax Act, the Central Government made the scheme called the Annuity Deposit Scheme, 1966, and it was notified on December 30, 1966. Clause 7 of the Scheme provides for payment of annuity and says that the deposit office at which the annuity deposit certificate is enfaced for payment shall pay to the depositor the annuity. Under sub-section (2), in the case of a deceased depositor who has not made a nomination under paragraph 13, the annuity shall be payable to his legal representative. Under clause 13, of the scheme, provision is made for nominations and it provides that a depositor, being an individual, may nominate in Form J, or as near thereto as may be, one or more individuals who shall be entitled to receive the annuity payable to him in the event of his death. Form 'J' of the Forms annexed to the scheme is the Form of Nomination and it is common ground in the case before us that Subhadraben, the original depositor, had made a nomination in favour of the present assessee and she had also be her will bequeathed these annuity deposit certificates to the assessee.
7. The question that we have to consider is whether receipt of these annuity payments by the assessee both as the nominee as well as the legal representative of the original depositor amounts to 'income' in his hands. Before proceeding to answer this question, we must appreciate the back-ground against which these provisions relating to annuity deposits were inserted in the Income-tax Act, 1961. For the first several years Parliament has been trying different measures to curb inflation and as a policy of curbing inflaction, attempts are being made to curtail the amounts of money available for purchasing goods and services in the general economic life of the country. As part of these measures at one stage a compulsory deposit scheme was introduced before the present annuity deposit scheme was introduced, and this annuity deposit scheme under the Income-tax Act was part of this policy. As is evident from the provisions that we have set out hereinabove, the deposit has to be made by the depositor from his income for a particular year under consideration and if he does not so deposit, then additional income-tax is to paid for the failure to make the deposit under the Annuity Deposit Scheme and under the scheme what was deposited out of the income of the particular year is subsequently returned to him with interest by ten equal instalments. Considered from this broader point of view, the income of the depositor for one particular year comes back to him spread over a number of years and so far as the depositor is concerned, therefore, there cannot be any disputed that what he receives back is both under the provisions of the Act as well as under general principles of law 'income' in his hands. The character of the receipt, namely, income which was originally received by him does not change by reason of the fact that instead of being received in a particular year, it is received in ten equal instalments in subsequent years. There is no disput before us that even under the provisions of the scheme itself and under the provisions of the different section of the Act, so far as the depositor himself is concerned, the payments or instalments which he receives under this scheme are 'income' in his hands. The words insection 2(24)(viii) namely, 'any annuity due' clearly indicate that the annual instalment of principal and interest payable by the Central government under the provisions of principal and interest payable by the Central Government under the provisions of section 280D is 'income' in the hands of the depositor because under section 280D the Central Government has to repay the depositor the annuity deposit made or recovered in any year in ten annual equated instalments of principal and interest. That annuity as defined in section 280B, sub-section (4), is, by virtue of section 2(24)(viii), 'income' and must be included in the income of the depositor in the year in which the particular amount of instalment of principal and interest is received.
8. The next question, therefore, is : Does it make any difference whether in respect of the original depositor, the amount of annuity, namely, the annual instalment of principal and interest is received by the nominee or the legal representative of the depositor Now, section 280D opens with the words 'subject to the provisions of this Chapter and any scheme framed thereunder'. Under the scheme framed by virtue of the powers conferred by section 280W(2)(f), under paragraph 7 of the Scheme, the deposit office at which the annuity deposit certificate is enfaced for payment shall pay to the depositor the annuity. Under sub-section (2) in the case of a deceased depositor who has not made a nomination under paragraph 13, the annuity shall be payable to his legal representative, and in case the nomination has been made, the annuity payable to a particular depositor who has made his nomination in Form J, the annuity payable to him has to be paid to the nominee, in the event of the death of the depositor. It is, therefore, clear that under the scheme the depositor, the nominee and the legal representative of the original depositor are all persons to whom the amount of annuity becomes due under the scheme and it cannot be said that we should look only to section 280D which provides for payment to the depositor alone; the provisions of section 280D are subject to the provisions of any scheme and under the scheme, in the event of death of the original depositor, the amount of the annuity becomes due to the legal representative in case there is no nomination or to the nominee in whose favour nomination in From J has been made by the original depositor. Thus, under the provisions of the sections of the Act and the Annuity Deposit Scheme, it is obvious that the amount of annuity falls due to the depositor if the depositor if the depositor is alive or, in case he dies, it becomes due to his legal representative in case there is no nomination or to his nominee in case a nomination has been made.
9. The decision in Commissioner of Income-tax v. Hukumchand Mohanlal was delivered by the Supreme Court in a different context altogether and, in our opinion, has no application to the case before us. In that particular case, on the death of her husband on February 17, 1960, the assessee succeeded to the business carried on by him. A firm which had recovered certain amounts towards sales tax from the assessee's husband suceeded in an appeal against its sales tax assessment to the extend of Rs. 24,341. The firm refunded that amount to the assessee by a draft which was received on November 9, 1961, during the relevant accounting period. The question was whether the sum of Rs. 24,341 received by the assessee could be assessed in her hands as a deemed profit under section 4(1) of the Income-tax Act, 1961. It was held by the Supreme court that the Income-tax Act did not contain any provision making a successor in business or the legal representative of an assessee to whom an allowance had already been granted, liable to tax under section 41(1) in respect of the amount remitted and received by the successor or the legal representative. Section 41 did not apply to this case because the assessee sought to be taxed was not the assessee contemplated by that section. The assessee within section 41(1), namely, the husband, having died, the revenue could not take advantage of its provisions. Thus, in that particular case, the Supreme court was concerned with the provisions of section 41(1) and under that sub-section where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accuring to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Section 41(1) creates a legal fiction by which that which would not otherwise have been a deemed profit becomes profit in the hands of the assessee. Section 41(1) requires that the very assessee in whose favour an allowance or deduction had been made in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee receives back subsequently, whether in cash or in any other manner, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability, then that amount or the money value of the benefit received by the assessee is deemed to be profit in the hands of the same assessee. Under the scheme of section 41(1) the same assessee who had got the benefit of the allowance or deduction in the earlier year must receive back either in cash or in any other manner, the equivalent of such amount in respect of loss, expenditure or trading liability. The Supreme court pointed out in the case of Commissioner of Income-tax v. Hukumchand Mohanlal that the Act did not contain any provision making a successor in business or the legal representative of an assessee to whom an allowance had already been granted; liable to tax under these deeming provisions of section 41(1). It was because of the lack of any legal provision in that connection that the Supreme Court held in Commissioner of Income-tax v. Hukumchand Mohanlal that there was no liability on the legal representative of the original assessee under the provisions of section 41(1) in respect of the deemed profits of the original assessee. We are unable to see how this decision of the Supreme Court delivered in the context of another and a totally different provision, can help us in interpreting the provisions relating to annuity deposit. As we have emphasized above, under the provision relating to the Annuity Deposit Scheme, 1966, the annuity becomes due either to the original depositor in case he is alive or, in the case of his death, to his legal representative or his nominee and the payment under section 280D has to be made either to the original depositor or under clause 7 to the legal representative if he has died without making any nomination or to his nominee in case nomination has been duly made. To each one of these three persons, an amount of annuity becomes due, being one of the ten equal instalments of principal and interest.
10. A very strenuous effort has been made by Mr. Patel appearing on behalf of the assessee to urge us that under the general law what the heir and legal representative would receive back would not be an annuity as known to the general law but a return of capital and what he would be receiving annually would be an instalment of the original capital. As pointed out by Goddard L. J. in Sothern-Smith v. Clancy :
'The fine distinction payment which is in truth a capital properly so called for tax purposes and an annual payment which is in truth a capital payment, whether in discharge of a pre-existing debt or not, has repeatedly been emphasised, and no sure or simple test has or can be laid down for the solution of this problem. The only principle that I can deduce from the cases is that the court must have regard to the true nature of the transaction from which the annual payment arises and ascertain whether or not it is the purchase of an annual income in return for the surrender of capital. If it is the purchase of an income the annual payment is taxable; if it is a capital payment it is not, though in the latter case if the annual sum represents a payment, or a return, of capital coupled with interest the sum may be dissected and tax charged on so much as represents interest. Now in the case of a whole-life annuity the sum paid in not in truth a return of capital plus interest. The annual payment is calculated on the grantee's expectation of life. He is to receive during his life an annual sum considerably in excess of the normal interest that he would obtain on an investment, while the grantor takes the risk of the life being prolonged beyond a period which will yield a profit to him on the transaction. The grantee retains no interest in the capital once it has been paid; it becomes the property of the grantor.'
11. This legal position, which Goddard L. J. has mentioned is Sothern Smith v. Clancy is deduced from the earlier decisions of the Houses of Lords Smith and the Court of Appeal in England.
12. In Scoble v. Secretary of State for India, the same distinction was pointed out by the House of Lords between an annuity and the return of capital. Similarly, in Perrin v. Dickson, which was in terms referred to by Goddard L. J., this distinction between annuity proerly so called and return of capital was maintained and again in Williamson v. Ough, the House of Lords considered the question of distinction of annuity and return of capital.
13. In Halsbury's Laws of England, third edition, volume 32, at page 529, paragraph 888 it is stated :
'The right created by an instrument (whether deed, will, codicil or statute) to receive a definite annual sum of money is an interest which may be either a 'rent charge' or an 'annuity'. If the annual sum is charged on and payable exclusively out of land, the interest is a rent charge, but, if there is no charge or the annual sum is charged on personal property, not being leasehold land, or on a mixed fund, then the interest is an annuity.'
14. Again at page 534, paragraph 899 of the same volume, it has been stated :
'An annuity is a certain sum of money payable yearly either as a personal obligation of the grantor or our of property not consisting exclusively of land; it differs from a rent charge in that a rent charge issues out of land.'
15. And at page 536, paragraph 904, it has been pointed out in Halsbury :
'At the present day there are three modes by which both rent charges and annuities may be created, namely : (1) by deed; (2) by will; (3) by or under statutory powers.'
16. We are in the present case concerned with the creation of an annuity by or under statutory powers.
17. It may also be pointed out that in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar, argument similar to the one presented before us was urged before the Supreme Court. The question arose before the Supreme Court in connection with the consturction of a particular document and it was urged that the particular income on which agricultural income, but was a capital receipt. It was urged that in the past an amount of Rs. 17 lakhs and odd was paid and by instalments this amount was being repaid to the assessee. On a construction of the document, the Supreme Court came to the conclusion that the income was not income from the money-lending and this did not depend upon the character of the recipient. The particular profits were clearly agricultural income being derived from land.
18. In Commissioner of Income-tax v. Kunwar Trivikram Narain Singh, it was urged before the Supreme Court that the particular amount of income received by the assessee by way of an allowance or pension was capital receipt and not taxable income at all. The pension which was the subject-matter of consideration was given to the predecessor-in-title of the assessee for relinquishing his title to certain lands in dispute. reliance in this connection was placed on the observations of Viscount Simon in commissioners of Inland Revenue v. Wesleyan and General Assurance Society :
'It may be well to repeat two propositions which are well established in the application of the law relating to income-tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.'
19. And in the same case Viscount Simon has pointed out that it is possible that by adopting a particular terminology and a particular method, a receipt may escape tax though if another method or another terminology had been used, it would have been subject to tax. The Supreme Court, after considering these passages, observed :
'It seems to us that where an owner of an estate exchanges a capital asset for a perpetual annuity, it is ordinarily taxable income in his hands. The position will be different if he exchanges his estate for a capital sum payable in instalments. The instalments when received would not be taxable income.'
20. In the instant case we find that a portion of the income of the original depositor which had been withheld as a measure to prevent inflation and was thus impounded, is being released over a period of ten years and since the money was made available to the Government some amount of interest was also included with the amount so repaid by ten equal instalments. Ordinarily, the word 'instalment' is associated with return of capital. But in this particular case what we find is that the Government which had impounded the income in the particular year in which the deposit was made, returns the same amount with some amount of interest in ten equal instalments. For having deposited that particular amount in the year in which the deposit was made, the depositor got certain relief in his own income-tax assessment and was not subjected to the extra amount of income-tax assessment and was not subjected to the extra amount of income-tax which he was liable to pay under section 280X for failure to make the deposit under the provisions of Chapter XXII-A and the Annuity Deposit Scheme framed thereunder. Under these circumstances, even if the question were to be considered from the larger point of view as Mr. Patel wanted us to consider, we come to the conclusion that in the instant case when the amount is being returned, it is not the return of capital but the return of the original item of income which is now spread over a period of ten years. Under these circumstances, even considered from the larger point of view, it is not possible to accept Mr. Patel's contention that this was a return of capital and not a return of income. Moreover, that which would have been income in the hands of the original depositor does not cease to be so by the mere circumstance that the depositor died and the money is being received by the legal representative or by the nominee. That which was otherwise income retains its character of income notwithstanding the fact that the original depositor died in the meanwhile.
21. Under these circumstances, considered from either point of view, namely, from the point of view of the provisions of the Act and the paragraphs of the Annuity Deposit Scheme, taken together, or considered from the point of view of general law, the result would be the same, namely, that these annuity payments which are a creature of statute and statutory powers, are income in the hands of the nominee, legal representatives of the original depositor.
22. We, therefore, answer the question referred to us as follows :
'On the facts and in the circumstances of the case, the instalment of annuity deposit received by the karta of the assessee an nominee/legal representatives of the deceased depositor was liable to be assessed as income of the assessee.'
23. The question is, therefore, decided in favour of the revenue, and against the assessee. Since the question was not covered by any decided case, it is in the fitness of things that there should be no order as to costs.