SANKAR PRASAD MITRA J. - This is reference under section 66(I) of the Indian Income-tax Act, 1922. The assessment year in 1957-1958. The corresponding accounting year is the calendar year 1956. The assessee, E. S. Olpadvala, was the sole proprietor of a business in the manufacture and sale of aerated and miner water carried n by him under the name and style of Byron & Co. at No,. 5, Chowringhee Place, Calcutta. The premises were owned by the assessee, who transferred it by a deep dated December 30, 1955, to 4 several persons, being his sister, brothers and nephew. The consideration for the transfer was the payment of an annuity of Rs. 6,000 per annum to the assessees wife The market value of the property is said to have been Rs. 2,30,000 but in the deed to conveyance, for the purposes of stamp duty, the property was valued under section 25(c) of the Indian Stamp Act at 12 times the annuity recited in the document. I shall discuss the relevant clauses of this document later in this judgment. Before the Income-tax Officer, the assssee claimed that this annuity was not his income but it belonged to his wife. The Income-tax Officer held that section 16(3)(a)(iii) was attracted by the Appellate Assistant Commissioner.
The Appellate Tribunal held that : (I) Where the owner of an estate had exchanged a capital asset for a life annuity, it was an income; (2) in the present case, the assessee, the owner of the house property, transferred the asset to his relations, but freely or as a gift, but in consideration of the vendees undertaking to pay the annuity to the vendors wife; (3) instead of receiving the annuity, which he was entitled to receive, he had provided for its being received by his wife as an annuity; (4) the payment of the annuity remained a charge upon the property transferred; (5) but for this transfer, the assessees wife would not have got the annuity; (6) it was a transfer of an asset indirectly to the wife to enable her obtain an annuity during the course of her life; and (7) the transaction is hit by the provisions of section 16(3)(a)(iii), and the income-tax Officer was right in his assessment.
On these facts, the question of law referred to us is as follows :
'Whether, on the facts and in the circumstances of the case, the inclusion of the annuity of Rs. 6,000 in the total income of the assessee under the provisions of section 16(3)(a)(iii) of the Indian Income-tax Act is correct ?'
Mr. Sampat Iyengar, learned counsel for the applicant, urged in his opening that there were 4 ingredients of the section 16(3)(a)(iii) of the Income-tax Act. There must be : (1) a transfer, (2) of an asset, (3) by the husband to the wife, directly or indirectly, and (4) income arising therefrom, directly and strictly construed, and relied on a number of well-known authorities for his position. Since learned counsel for the respondent did not dispute any of the points made by Mr. Iyengar in his opening, it is unnecessary for us to deal with them elaborately in this judgment.
We should first consider some of the provisions of the document, which is the subject-matter of this reference, at pages 7 to 11 of the paper-book. The parties to this document are : (1) the assessee, (2) his relations, and (3) his wife. In other words, it is a tripartite agreement, to which the annuitant is party. The consideration for the transfer of premises no. 5, Chowringhee Place, is the annuity to the wife. Clause 2 of this document provides that 'the purchasers do and (the separate covenants) each of them doth hereby convent with the vendor and the annuitant and each of them that they the purchasers and every of them (their) and every of their heirs, executors, administrators and assigns will pay to the annuitant an annual sum of rupees six thousand(Rs. 6,000) during the life of the annuitant such annual sum to be paid by equal monthly payments of rupees five hundred (Rs. 500) each on the tenth day of every month the first of such payment s to be made on the tenth day of February, 1956'.
In clause 3, the purchasers undertook to pay the rates, taxes, etc., and to keep the buildings in good and substantial repair and insured against damage by fire, rebellion, riots or civil commotion.
Clause 4 proscribes that 'the purchasers do and each of them doth hereby charge the said premises hereinbefore expressed to be hereby granted in favour of the annuitant with the payment to the annuitant of the said annuity for the purpose of better securing the same.'
Clause 6 of this document is important. It says that 'the purchasers may at any time hereafter purchase from any public insurance company approved by the annuitant or in the event of the life insurance business being by law nationalised, from the Government or any corporation, body or authority authorised by law to carry on such business on behalf of the Government an annuity in the name for the life of the annuitant of like amount to the annuity hereinbefore covenanted to be paid and so that the first payment of such purchased annuity shall be received by the annuitant within the one month of the last full monthly payment of annuity hereby covenanted to be paid and upon such purchase being completed hereinbefore covenanted to be paid and so that the first payment of such purchased annuity shall be received by the annuitant within one month of the last full monthly payment of the annuity hereby covenanted to be paid and upon such purchase being completed to the satisfaction of the annuitant the purchasers shall be released from their covenant hereinbefore contained in respect of future payments of the said annuity and the annuitant shall accept such purchased annuity in full satisfaction for the annuity hereby convenanted to be paid and shall at the request and cost of the purchasers discharge the said premises hereinbefore expressed to be hereby granted from the charge hereinbefore contained'.
What is the effect of claues 2, 4 and 6 of the deed of sale dated December 30, 1955 It appears that convents had been entered into by the purchasers with the vendor and the annuitant for payment of annuity regularly and every month at the specified rate. There is the personal agreement of the purchasers to discharge this liability; and a charge has been created on the property in favour of the annuitant. In other words, a substantial right has been conferred on the annuitant to receive Rs. 500 per month on the 10th day of every month. Should the purchasers at any time purchase from a public insurance company approved by the annuitant or in the event of life insurance business being nationalised, from the Government, or any corporation, or body or authority authorised to carry on such business, an annuity in the name and for the life of the annuitant such purchase must be completed to the satisfaction of the annuitant. The cumulative effect of the convenants in the deed of sale dated December 30, 1955, is that central consideration is the annuity to be paid to the vendors wife. By this document, it is clear, an income-bearing asset has been created in favour of the assessees wife.
(1) (1935) 3 I.T.R. 237 (P.C.).
Reference may usefully be made in this connection to the decision of the Judicial Committee in Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax. The appellant in this case was the owner of an estate in British India. He had a daughter who was married. By an indenture, dated March 29, 1940, and made between the appellant and a lady who was the appellats son-in-laws mother, the appellant conveyed the greater portion of his estate to the lady for the valuable consideration therein appearing. The indenture recites, among other facts, that the appellant was the absolute owner of the estate and that for purposes of discharging certain of his debts and of obtaining for himself an adequate income, he had agreed with the lady for the absolute sale and transfer to her of a portion of his estate described in the first schedule in consideration of the lady convenanting to pay the appellants specified debts and to pay to him a sum of money in cash to meet the expenses of his daughters marriage and other urgent necessities and further convenanting to pay to him annual sums during his lifetime of Rs. 2.40,000 in the manner therein appearing, such payment being secured by a charge upon the property thereby transferred. By the operative part of the indenture it was witnessed that in pursuance of the said agreement and in consideration of the said sum paid to the appellant and in further consideration of the covenant by the lady for payment to the appellant during his lifetime of the annual sum of Rs. 2,40,000 by six installments, and also in consideration of the covenant to pay and indemnify the appellant in respect of the said debts the appellate assigned the hereditaments therein described 'unto' the lady absolutely. The indenture contained a convenant by the lady with the appellant for payment to him during his lifetime, of the yearly sum of Rs. 2,40,000 by six instalment, with interest at 12% per annum on any over-due instalment, and to pay the said debts and to keep the appellant indemnified against all suits, actions and proceedings whatsoever in respect of the said debts or any of them. The indenture does not itself contain any charge on the estate of the annual sums convenanted to be paid; but their Lordships of the Judicial Committee were informed and the case proceeded upon the footing that the stipulated security had been given by a separate document. Their Lordships held : (i) that the annual payment was not agricultural income as it was not rent or revenue derived from land, but money payable under a contract imposing a personal liability on the convenantor, the discharge of which was secured by a charge on land; (ii) that this was clearly a case where the owner of an estate (the assessee) had exchanged a capital asset for (inter alia) a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments; and (iii) that this income was taxable under the Income-tax Act even though the annuity did not constitute or provide a profit or gain to the assessee. Their Lordship have pointed out that the word 'income' is not limited by the words 'profits and gains' and anything which can properly be described as income is taxable under the Act unless expressly exempted. At page 241, Lord Russell of Killowen observed :
(1) (1935) 3 I.T.R. 237 (P.C.)
'What he does, and what he states in the document he wishes to do, is to part with the estate in order to get rid of his debts, and to obtain for himself an adequate income. He accordingly transfers the estate to the Rani and obtains from her in exchange : (1) a covenant to pay the debts in the second schedule, (2) a sum of cash to meet the expenses of his daughters marriage, and (3) a covenant to pay him a life annuity. This is clearly no ordinary bargain and sale by a vendor and purchaser at arms length, for the money consideration bears no relation to the actual value of the property. The amount ultimately payable by the purchase depends upon the life of the vendor. It is, their Lordships think, clearly a case where the owner of the estate has exchanged a capital asset of (inter alia) a life annuity which a income in his hands. It is not a case in which he has exchanged his estate for a capital sum payable in instalments.'
So far as the present reference is concerned, the vital observations of Lord Russell of Killowen appear at page 242. These are as follows :
'Here the source of the life annuity is the convenant. The life annuity is the produce of one of the items (viz., the convenant which the appellant has taken in exchange for the estate.'
The Privy Council clearly lays down that by the indenture of March 29, 1930, the Maharajkumar had transferred a capital asset; in exchange for the asset transferred, he obtained another capital asset; and the capital asset he thus obtained was fetching an income taxable under the Act.
Applying these principles to the facts of the instant case, we find that the assessee, by the deep of sale dated December 30, 1955, exchanged promises No. 5, Chowringhee Place, in Calcutta, for a capital asset, namely, the convenant of the purchasers to pay annuities to his wife. The total effect of this document is that an asset, viz., the convenant, was transferred indirectly by the husband to the wife and the wife was to enjoy the income arising out of this asset. Section 16(3)(a)(iii) of the Income-tax Act provide, inter alia, that, in computing the total income of any individual for purposes of assessment, there shall be included, so much of the income of a wife of such individual as arises directly or indirectly from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart. We are of opinion that these provisions are attracted to the facts of this case.
Our attention was drawn to two cases in which it was held that an annuity is income. But it is unnecessary to refer to them in this judgment, as the point is fully covered by the decision of the Judicial Committee cited above.
(1) (19353 I.T.R. 237 (P.C.).
Mr. Sampat Iyengar, counsel for the applicant, urged before us that under the relevant section of the Income-tax Act, it must be found that an asset has been transferred directly or indirectly to the wife by the husband and a 'covenant' to any annuity can never to be an 'asset' within the meaning of this section. He referred to the definition of 'assets' in the Wealth-tax Act of 1957. Section 2(e) of that Act provides, inter alia, that 'assets' include property of every description, movable or immovable, but does not include a right to any annuity in case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant.
I am unable to uphold this contention of Mr. Iyengar. For the purposes of the Wealth-tax Act, the legislature may have taken recourse to what is sometimes called 'a special dictionary'. But I do not see how this definition can be attracted to the Income-tax Act. Moreover, it is interesting that even in the Wealth-tax Act, all rights to annuity are not excluded from the definition of 'assets'. A particular slice has been taken out of the domain of annuity, and that is not an asset in the Wealth-tax Act. A right to an annuity will be an asset under the Wealth-tax if the terms and conditions relating thereto did not preclude the commutation of any portion thereof into a lump sum grant. The Indian Income-tax Act does not give any definition of 'asset'. But there is a definition of 'capital asset' in section 2(4A) of the Indian Income-tax Act, which runs thus :
'Capital asset means property of any kind held by an assessee, whether or not connected with his business, profession or vocation but does not include -
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business, profession or vocation;
(ii) the personal effects that is to say movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him; and
(iii) any land from which the income derived is agricultural income.'
In the absence of a definition of 'asset'in the Indian Income-tax Act, before we go to the Wealth-tax Act, it is only proper that some attention should be devoted to the definition of 'capital asset'in the Income-tax Act itself, and that definition lends support to the view we have taken. To my mind the Judicial Committee had left us in no doubt in Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, that a 'covenant'to pay annuity is an asset. This asset was taken in the case before their Lordships of the Privy Council in exchange for the estate of the Maharaj Kumar and the produce of this asset was the life annuity; in other words it was this asset which was the source of the life annuity. In the premises we cannot but hold that an 'asset'has been indirectly transferred by the husband to the wife in the present reference.
(1) (19353 I.T.R. 237,242.
The next contention of Mr. Sampat Iyengar is that assuming that the 'covenant'is an asset in order to attract the provisions of section 16(3)(a)(iii), it must be shown by learned counsel for the respondent that there are in the deed of sale dated December 30,1955, words of transfer of this asset, namely the covenant by the husband to the wife. He relied on a number of authorities for the proposition that it all depends on the language used in a document whether it attracts income-tax or not. There may be two methods of achieving the same result. By adopting one of the methods the person concerned may be liable to pay tax whereas by adopting the other he may escape taxation. The court cannot re-write the agreement for the parties and introduce terms which are not there. The court cannot also read between the lines for construing a document. The court cannot further go behind the document for purposes of construction. Mr. Iyengar submitted that there was nothing in the deed of sale dated December 30,1955, to suggest that the covenant was transferred by the vendor to his wife.
In Kikabhai Premchand v. Commissioner of Income-tax the Supreme Court has said that it was recognised that in revenue cases regard must be had to the substance of the transaction rather than to the mere form. Earlier in this judgment I have discussed the relevant covenants in the deed of sale of the 30th December, 1955, and the cumulative effect thereof. I am of opinion for reasons already given, that the 'covenant'to pay annuity which is an 'asset'has been transferred in the instant case by the applicant to his wife. I am therefore unable to accept this contention of Mr. Iyengar as well.
In the result, the answer to the question is in the affirmative. The applicant will pay to the respondent the costs of this reference. Certified for counsel.
SEN J. - I agree.
Question answered in the affirmative.