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Commissioner of Wealth-tax Vs. Mrs. Ida L. Chambers (Decd.) (Administrator-general as Legal Representative) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 96 of 1965 (Reference No. 32 of 1965)
Judge
Reported in[1972]85ITR637(Mad)
ActsWealth Tax Act, 1957 - Sections 2 and 2(1); Transfer of Property Act - Sections 6; Income Tax Act
AppellantCommissioner of Wealth-tax
RespondentMrs. Ida L. Chambers (Decd.) (Administrator-general as Legal Representative)
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateT.V. Natarajan, Adv.
Cases ReferredAhmed G. H. Ariff v. Commissioner of Wealth
Excerpt:
.....for valuation adopted by wealth-tax officer was correct - as right to receive dividends is property within definition of assets under section 2 (e) and not annuity covered under exemption provided in section 2 (e) (1) (iv) - tribunal directed to consider question of valuation afresh. -..........amount and, therefore, such basis of valuation cannot be adopted for evaluating the assessee's life right in the dividends.9. the two questions that have been referred to us by the tribunal at the instance of the revenue are : '1. whether, on the facts and in the circumstances of the case, the right of the assessee to receive dividends declared by the chrome leather company (private) ltd. was a taxable asset in the hands of the assessee under the wealth-tax act, 1957 and 2. whether, on the facts and in the circumstances of the case, the basis for valuation adopted by the wealth-tax officer was correct?' 10. before dealing with the main question as to whether the right to receive dividends during the assessee's lifetime was a taxable asset, we have to point out that the tribunal has.....
Judgment:

Ramanujam, J.

1. One G. A. Chambers died on November 16, 1937, leaving a will dated December 18, 1930, and a codicil dated May 28, 1931. Under the said will the testator devised and bequeathed all his real and personal properties to three trustees, one of whom was the assessee, with a direction to pay to the assessee during her lifetime the income from his estate subject to the condition that she should maintain the testator's minor son by name Roy Edwin Medcalfe Chambers, and after her death, to hold the properties in trust for the benefit of his son until the latter attained the age of 25 and to make over the estate to the minor son on his attaining the said age for his absolute benefit. The will also provided that, in the event of the minor son predeceasing the assessee, the estate has to be distributed in the particular manner specified therein.

2. After the death of the testator the trustee entered upon the trust and carried on the testator's business which had been carried on under the name and style of 'Chambers and Company' and 'The Chrome Leather Company.' The assessee who was also one of the trustees appointed under the will was getting a maintenance of Rs. 600 per month which was increased from time to time having regard to the increase in the^cost of living, but at no time the entire income was paid out to her as per the direction contained in the will. The assessee therefore filed a suit C.S. No. 165 of 1942 before this court claiming that the entire income due to herunder the will should be paid. The said suit ended in a compromise, and the compromise decree dated April 2, 1943, provided that 50% of the profits of the business from the date of the testator's death up to March 31, 1943, is payable to the assessee and the balance 50% was to be added to the capital of the estate, and that the trustees should form a private limited company for taking over the testator's business subject to the stipulation that the full amount of dividends declared and payable by that private limited company should belong to the assessee during her lifetime. In pursuance of the direction contained in the compromise decree, the trustees formed the 'Chrome Leather Company (Private) Ltd.' on December 7, 1943, hereinafter referred to as the company, and it took over the testator's business hitherto carried on by the trustees. The capital of the company was Rs. 7,00,000 divided into 5,000 ordinary shares of Rs. 100 each and 2,000 preference shares of Rs. 100 each. After incorporation of the company the dividends declared by the company in respect of all the shares were paid to the assessee pursuant to tne orders of the court in C. S. No. 165 of 1942. In some years, however, no payments were made as there were no dividends declared.

3. Originally, the assessee's wealth-tax assessment for the assessment year 1957-58 was completed on January 31, 1958, on a total wealth of Rs. 6,09,482 as on the valuation date, March 31, 1957. However, proceedings under Section 17 of the Wealth-tax Act were initiated on the ground that the assessee's right to get dividends from the company during her lieftime has been omitted to be valued and included. The Wealth-tax Officer held that the right of the assessee to get the dividends from the company during her lifetime came under the definition of the term 'property' and that, therefore, it had to be evaluated and included in the assets of the assessee. He proceeded to evaluate the interest by adopting the interest late at 5% and taking the average of dividends which she had earned for the preceding 3 years by adopting multiple of 5.29, taking the assessee's age as 67 on the valuation date. By this method he evaluated the right to get dividend during her lifetime at Rs. 5,94,920 and added this amount to her wealth determined as per the original assessment. The total wealth thus determined came to Rs. 12,04,402.

4. Similarly, for the assessment year 1958-59 the Wealth-tax Officer evaluated the assessee's right to get dividends at Rs. 11,56,285 and added this amount to the wealth of Rs. 9,50,880 already determined, and fixed the total wealth of the assessee at Rs. 21,07,165.

5. For the assessment year 1959-60 the assessee's right to get dividend was evaluated at Rs. 13,39,650 and was added to the wealth of Rs. 8,91,870 already returned by the assessee, the total wealth thus being determined at Rs. 22,31,520. For the assessment year 1960-61 the assessee's life interestin the dividends was evaluated at Rs. 15,22,098 and added to the wealth of Rs. 7,95,127 returned by the assessee, the total wealth thus being determined at Rs. 21,17,225. Finally, for the assessment year 1961-62 the life interest of the assessee in the dividends was evaluated at Rs. 8,82,663 and added to the wealth of Rs. 7,19,103 returned by the assessee, the total wealth thus determined being Rs. 16,01,766.

6. The assessee preferred appeals before the Appellate Assistant Commissioner against the orders of the Wealth-tax Officer evaluating her life interest and including it in her wealth in respect of the assessment years 1958-59 to 1961-62. It was contended by the assessee that her interest in the estate could not be evaluated since it was a contingent interest subject to several conditions such as the company making profits, the board of directors declaring the dividend, etc. It was further contended that the assessee's life interest in the income from the shares of the company should be treated as an annuity and that, in any event, such an interest acquired by way of bequest under a will could not be attributed to any capital quid pro quo. The Appellate Assistant Commissioner, however, negatived the above contentions and held that the right to get dividends whether flowing from a testamentary disposition or from the orders of the High Court was a valuable asset and as such was liable to be included in the assessee's net wealth for the purpose of assessment to wealth-tax. He also held that the entire beneficial interest in the shares of the company vested in the assessee and that the declaration of the dividends was also within her de facto control.

7. The assessee took the matter before the Tribunal and urged that her right to receive dividends during her lifetime was not a right to property, and that the right to receive the dividends is of a revenue nature and as such could not be capitalised for wealth-tax purposes. The assessee also questioned the basis adopted by the department for evaluating the life interest. According to the assessee the method of evaluation of an annuity cannot be applied to the assessee's right to get divdends from the company during her lifetime.

8. The Tribunal referred to the provisions of the will of G. A. Chambers and also the orders passed by this court an April 2, 1943, in C. S. No. 165 of 1942 particularly to the following clause :

'that the full amount of the dividends declared and payable by the private limited company to be formed do belong to the plantiff during her lifetime.'

and held that though the assessee's right to receive dividends from the company is a valuable right, it cannot come within the definition of the term 'property', that it is merely a right to future maintenance which has expressly been excluded from the category of property undersection 6(dd) of the Transfer of Property Act, that the assessee has no power to transfer her right to receive dividends and, as such, it has no market value even if it is to be treated as property, and that the right to receive dividends was contingent upon so many factors such as the company earning profits, the declaration of dividends by the company, etc. According to the Tribunal, as the corpus, that is, the entirety of the shares, was intended to go to the benefit of the minor son of the testator, the assessee had no beneficial interest in the shares as such except the right to receive dividends in relation thereto and that, therefore, her right to receive dividend cannot be treated as 'property' and evaluated for the purpose of bringing it to tax. The Tribunal was also of the view that there is no analogy between annuity and the assessee's right to receive dividends in the matter of valuation. In its view the value of the annuity is worked out on the basis of the actual valuation as the payment of annuity is always on the basis of a fixed capital amount and, therefore, such basis of valuation cannot be adopted for evaluating the assessee's life right in the dividends.

9. The two questions that have been referred to us by the Tribunal at the instance of the revenue are :

'1. Whether, on the facts and in the circumstances of the case, the right of the assessee to receive dividends declared by the Chrome Leather Company (Private) Ltd. was a taxable asset in the hands of the assessee under the Wealth-tax Act, 1957 and

2. Whether, on the facts and in the circumstances of the case, the basis for valuation adopted by the Wealth-tax Officer was correct?'

10. Before dealing with the main question as to whether the right to receive dividends during the assessee's lifetime was a taxable asset, we have to point out that the Tribunal has erred in taking the view that the assessee is entitled only to 50% of the dividends declared. It is clear from the orders of this court in the various proceedings referred to above that the assessee became entitled to the entirety of the dividends to be declared by the company during her lifetime. Clause 3(1) of the will directs the trustees to pay the income to arise from the testator's estate to his wife, the assessee, during her lifetime for her benefit provided always that she should be bound throughout to provide for such reasonable maintenance and education of his infant son as the trustees in their discretion may decide. But when the will came up for consideration before this court in C.S. No. 165 of 1942 at the instance of the assessee, it was declared that as regards the past profits from the business of the testator up to March 31, 1943, it is to be subject to the rule of equitable apportionment, that 50% of the net profits be apportioned to the assessee as income of the estate due to her under the testator's will and the remaining 50% is to be addedto the corpus of the estate which belongs to the minor son of the testator. But as regards the future, this court directed the trustees to form a private limited company under the name of 'Chambers & Co. Ltd.' or 'The Chrome Leather Company Ltd.', and to take over the testator's entire business with all its assets and liabilities in return for shares in the company credited as fully paid, and to pay the full amount of the dividends declared and payable by the private limited company to be formed to the assessee during her lifetime. The Tribunal has, however, taken the provisions made by this court in Clauses 1 and 2 of the order dated April 2, 1943, in C.S. No. 165 of 1942, relating to the interim period between November 16, 1937, to March 31, 1943, as final arrangement while in fact the court specifically directed in Clause 6 that the full amount of dividends declared and payable by the private limited company should belong to the assessee during her lifetime. Therefore, we have to proceed on the basis that the assessee is entitled to receive the entirety of the dividends declared and payable by the Chrome Leather Company Ltd., which has been formed in pursuance of the directions of this court in the above order.

11. Section 3 of the Wealth-tax Act brings to charge the net wealth of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule to that Act. Section 2(m) defines 'net wealth' as the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets belonging to the assessee in excess of the aggregate value of the debts. The word 'assets' has been defined under Section 2(e) of the Act as including property of every description, movable or immovable. But, certain items of properties have been specifically excluded from the definition of 'assets' under Clauses (1) and (2). Sub-clause (iv) of Clause (1) of Section 2(e) excludes 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 from the definition of 'assets'. The assessee claims that her right to get dividends during her lifetime is an annuity coming within the exceptions contained in the above Sub-clause (iv).

12. Though the said Sub-clause (iv) of Section 2(e)(1) refers to annuity, the term 'annuity' has not been defined in the Act. Hence, the term 'annuity' has to be given either its ordinary and popular meaning or the meaning which bas been attributed to it by the judicial pronouncements following the well-known principle of construction that where the legislature uses in an Act a legal term which has received judicial interpretation, it must be assumed that the term is used in the sense in which it has been judicially interpreted. In Ahmed G.H. Ariff v. Commissioner of Wealth-tax, : [1966]59ITR230(Cal) .a question arose as to whether the right of an assessee to receive a specified share of the net income from a wakf estate is an asset within the meaning of the Wealth-tax Act and whether the capital value of such a right is assessable to wealth-tax. It was held that it is not an annuity, that it is not excluded from the definition of 'assets' by reason of Clause (iv) of Section 2(e)(1) of the Act, and that the fact that the assessee had no right to transfer or sell her interest in the open market did not indicate that it had no value. While dealing with the question as to what an annuity is, the court stated :

'So far as the English law is concerned 'an annuity is a right to receive de anno, in annum, a certain sum that may be given for life, or for a series of years ; it may be given during any particular period, or in perpetuity'.'

13. The above decision was affirmed by the Supreme Court in Ahmed G. H. Ariff v. Commissioner of Wealth-tax, : [1970]76ITR471(SC) . There the Supreme Court held that the term 'property' is of the widest import and signi0es every possible interest which a person can clearly hold and enjoy, and that the word 'annuity' in Clause (iv) of Section 2(e)(1) must be given the signification which it has assumed as a legal term owing to judicial interpretation and not its popular and dictionary meaning. The Supreme Court in that case held that the right of the beneficiary to receive an aliquot share of the net income of the properties comprised in a wakf is not a mere annuity but it is a property covered by the definition of 'assets' in the Act, and that the capitalised value of that right is assessable to wealth-tax. In Commissioner of Wealth-tax v. Arundhati Balkriskna, : [1970]77ITR505(SC) the Supreme Court expressed that ordinarily an annuity is a mon'y 'payment of a fixed sum annually made and is a charge personally on the grantor, that the life interest of an assessee in the trust funds created by the father under two deeds of trust wherein certain shares were set apart in trust for the benefit of the assessee and her two brothers was not an annuity within the meaning of Section 2(e)(1)(iv) of the Act and that, therefore, the assessee was not entitled to exemption from payment of wealth-tax in relation to such a right. In this case the Supreme Court referred to with approval the decision of the Calcutta High Court in Commissioner of Wealth-tax v. Mrs. Dorothy Martin, : [1968]69ITR586(Cal) , wherein it was held that an assessee's right to receive for her life the annual interest accruing upon her share in the residuary trust fund created under the will of her father was not an annuity so as to entitle the assessee to exclude the same from the computation of her net wealth. In Commissioner of Wealth-tax v. Her Highness Maharani Gayatri Devi, : [1971]82ITR699(SC) .the Supreme Court again considered the scope ofthe word 'annuity' occurring in Section 2(e)(1)(iv) of the Wealth-tax Act. In that case the assessee was one of the beneficiaries under a trust, and she was to be paid during her lifetime 50% of the income from the trust fund. The question was whether the assessee had a life interest in the corpus of the trust and her interest was, therefore, an asset liable to wealth-tax or whether the assessee had only a right to an annuity and as such her right was exempt from wealth-tax under Section 2(e)(1)(iv). The Supreme Court took the view that since neither the trust fund nor the amount payable to the assessee was fixed and the only thing certain was that she was entitled to 50% of the income of the trust fund, what the assessee was entitled to was not an annuity but an aliquot share in the income of the trust fund. It also held that the fact that there was no change in the trust fund will not make the income from that fund an annuity and that the question whether a particular amount was an annuity or not will not depend on the amount received in a particular year but would depend upon the fact whether the assessee is entitled to a predetermined sum every year as per the trust deed.

14. In view of the categorical pronouncements of the Supreme Court in the above cases that annuity is a periodical payment of a predetermined sum, the assessee's right to receive the entire dividends from the company during her lieftime cannot at all be treated as an annuity and excluded from the definition of 'assets' as denned in Section 2(e). Unless the assessee brings her right within Clause (iv) of Section 2(e)(1), her right has to be included in the definition of 'assets' as it includes property of every description, movable or immovable. In this case the right to get dividend has to be treated as a right to property and such a right will be definitely covered by the definition of 'assets' in Section 2(e). Once the application of Clause (iv) of Section 2(e)(1) is ruled out on the ground that the assessee's right to get dividends is not an annuity, the tax liability on the said right cannot be legally questioned by the assessee. The assessee's contention that the right to get dividends will arise only if the dividend has been declared in any particular year and that, therefore, her right is only a contingent right cannot be accepted. For the purpose of ascertaining the net wealth of the assessee, her property of every description has to be taken into account. The fact that the assessee will get dividends only if the dividends are declared by the company will be relevant only to find out the income of the assessee in a particular year under the Income-tax Act, or the method of valuation to be adopted for fixing the valuation of that right under the Wealth-tax Act. But that has no relevance to find out whether it is a property includible in the term 'assets' defined in the Wealth-tax Act. We are, therefore, of the view that the right of the assessee to receive dividends declared by the Chrome Leather Co,Ltd. was a taxable asset in the hands of the assessee under the Wealth-tax Act.

15. Coming to the second question, we find that the Tribunal has not given due consideration to the aspect of valuation. Having held that the right to receive dividends is a right to future maintenance which is personal to the assessee and as such does not come within the definition of 'assets', the Tribunal proceeded to state that the capitalisation method cannot be adopted and that no acceptable basis has been given by the department for working out the value of the right in question. We are, therefore, of the view that the Tribunal has to consider the question of valuation afresh, now that we have held that the right to receive dividends is property coming within the definition of 'assets' under Section 2(e) of the Act and that it is not an annuity coming within the exemption provided in Clause (iv) of Section 2(e)(1). Though the question of valuation has been left to the Tribunal for fresh consideration, we are inclined to make the following observations on the question of valuation as the Tribunal has felt that there is no acceptable basis for working out the value of the asset such as the one in this case.

16. Rule 1B of the Wealth-tax Rules, 1957, provides the method of valuation of a life interest. Sub-rule (1) of that rule provides that for purposes of Section 7(1), the market value of the life interest of an assessee shall be arrived at by multiplying the average annual income that accrued to the assessee from the life interest by applying the formula prescribed therein. Sub-rule (2) of that rule however gives the Wealth-tax Officer the power to vary the valuation arrived at by applying the method provided in Sub-rule (1) suitably having regard to the premium rates which a life insurance company may demand for taking the risk of insuring the assessee's life. That sub-rule also provides that the value of the life interest so determined, shall, in no case, exceed the market value as on the valuation date of the corpus from which the life interest is derived.

17. In his book. The Principles and Practice of Valuations, John A. Parks has given, under chapter 9, the various methods by which the property, which is subject to a life interest of a person, can be valued with the help of mortality tables, expectation of life tables and the years' purchase. In Inland Revenue Commissioners v. Crossman, [1937] A.C. 26 ; 2 E.D.C. 537 (H.L.).the House of Lords had to decide (1) what is the proper basis for valuation for purposes of estate duty of shares in a limited company where the right of transfer is restricted by the articles of association, and (2) whether in determining the value the fact that the share would be of special value for certain trust companies was an element for consideration. It was held in that case that the valueof the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provisions of the articles of association, including those restricting the transfer of shares in the company, and that the value of the shares should not be appreciated by reason of the special value of the shares to certain companies. In the above case, even though there was a restriction on the transfer of shares, it has been held that the market value of the shares should be taken into account. Section 7 of the Wealth-tax Act also contemplates a hypothetical open market in which the right in question could be sold. The Supreme Court also has pointed out in Ahmed G. H. Ariff v. Commissioner of Wealth-tax that the words 'if sold in the open market' in Section 7(1) does not contemplate actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market, and that it is on that basis, the value of an asset has to be found out. The Tribunal's view that the assessee's life interest in the dividends cannot be transferred and as such it has no market value cannot, therefore, be supported.

18. We, therefore, answer the first question in favour of the revenue and against the assessee. The second question is answered technically in favour of the revenue leaving the question of valuation to be considered by the Tribunal afresh after giving the parties an opportunity to put forward their case on the question of valuation. The revenue will have its costs of the reference. Counsel's fee Rs. 250.


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