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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: MR. MANZUR QADIR
P L D 1971 Supreme Court 351
P L D 1971 Supreme Court 351
Present : Hamoodur Rahman, C. J., Sajjad Ahmad, M. R. Khan and Waheeduddin Ahmad, JJ
THE COMMISSIONER OF INCOME-TAX, NORTH ZONE, WEST PAKISTAN-Appellant
versus
MR. .MANZUR QADIR-Respondent
Civil Appeal No. 55 of 1968, decided on 26th April 1971.
(On appeal from the judgment and order of the High Court of West Pakistan, Lahore, dated the 3rd January 1966, in Civil Reference No. 1 of 1962/Civil Miscellaneous No. 359-S of 1966).
Income-tax Act (XI of 1922), Ss. 4(1)(a) & 23 read with Contract Act (IX of 1872), S. 182 and Trusts Act (11 of 1882), Ss. 56 & 61-Assessee, a senior practising Advocate, instead of receiving his professional fees in lump sum, asking his clients to pay amounts of fees, payable by them, to an Assurance Company for purchase of annuity bonds payable in instalments spread over a guaranteed period of 20 years-Legal relationship between Assur ance Company and assessee, that of a trustee and a beneficiary Word "annuity"-Construction-Annuity bond, held, not "money's worth" for entire amount of professional fees payable to assessee.
The true legal relationship between the Assurance company and the assesse was, that of a trustee and a beneficiary. The obligation that was annexed to the ownership of the money paid by the purchaser for the annuity bond was in the nature of trust accepted by the Assurance Company for the benefit of the annuitant or the beneficiary. This obligation the beneficiary could enforce either under section 56 or under section 61 of the Trust Act, 1882.
The receipts in the hands of the assessee, it is true, could either take the shape of money paid in cash or money received through an agent or something received as money's worth. It was not paid in cash and, it was not received through an agent. But was the annuity money's worth? In its widest sense it "is a right to receive de anno in annum a certain sum of money". It generally involves the purchase of an income or a change of capital into income, payable annually over a number of years but "the mere fact that a sum of money which is payable annually is designated an annuity is not conclusive, but that the real nature of the transaction must be looked at."
It would thus appear that no rule of general application can be laid down for the construction of the word "annuity" but what can be gathered from the definitions is that an annuity may be purchased for a variety of purposes but this does not include annual instalments of a debt or of the purchase price of property.
There can be no manner of doubt, that "the annuity bonds are not saleable or transferable nor can they be subjected to commercial transactions. No loan can be raised on the security of the bonds", and the bonds are neither redeemable nor have they any surrender value. In the circumstances, all that the annuitant or the beneficiary could receive under the bond was the annual annuity. Thus if the bond was money's worth, it was money's worth only to the extent of the annual annuity payable in each year. It was certainly not money's worth for the entire amount of the professional fees payable to the respondent. It is not possible, therefore, to accept the contention that the bond was money's worth for the entire amount, for which it was ,.purchased. It lacked all the characteristics of a payment in kind. It could perhaps more appropriately be described as being, "in no sense", a payment by the client to the respondent in respect of his professional fees. The client merely gave him a document possessing certain legal attributes in the same way as he might have given the respondent a number of post-dated cheques payable in 20 years or a number of promissory notes, each payable in a particular year, extending over a period of 20 years. If payments in such form could not be considered to be money's worth, it is difficult to accept that payment in the form adopted in the present case was money's worth. Alternatively it may be said that payment under the annuity bonds was not payment received for professional fees but by virtue of a bargain struck between the respondent and his client.
The legal position, thus is that if at all the bond can be treated as money's worth, it is money's worth to the extent of the payment made under it any particular year of charge and no more. It is not money s worth of the entire amount for which the bond was purchased.
Commissioner of income-tax, Bombay presidency v. Bombay trust Corporation and others v. Chittar Mal A 1 K ly31 All. 3 /L distinguished.
Scoble v. Secretary of State (1903) 1 K B 494 ; Oxford English Dictionary, Vol. I; Halsbury's Laws of England (3rd Edn.), Vol. 20, p. 249 ; Raghunandan Prasad Singh and another v. Commissioner of Income-tax, Bihar and Orissa A I R 1933 P C 101 and Hawkins (Inspector of Taxes) v. Leahy (1952) 2 A E R 759 ref.
Sh. Abdul Haque, Senior Advocate Supreme Court (K. B. Mushtaq Hussain Khan, Advocate Supreme Court with him) instructed 'by Iftikharuddin Ahmad, Advocate-on-Record for Appellant.
M. Anwar, Senior Advocate Supreme Court instructed by M. A. Rahman, Advocate-on-Record for Respondent.
Dates of hearing : 28th and 29th October 1970:
JUDGMENT
HAMOODUR RAHMAN, C. J.-This is a certificated appeal at the instance of the Commissioner of Income-tax, North Zone, Lahore, which arises out of a judgment of a Division Bench of the erstwhile High Court of West Pakistan in a Reference under section 66 (1) of the Income-tax Act. The certificate was granted under subsection (2) of section 66-A of the said Act read with Order XLV, rule 2 of the Code of Civil Procedure on the 22nd of June 1967. The appeal was admitted on the 5th of December 1967, and then records were transmitted to this Court.
The circumstances in which the reference came to be made to the High Court, may be briefly stated as follows :-
The respondent, who was at the relevant time a senior practising Advocate at Lahore with an extensive practice, declared a professional income of Rs. 1,13,100 for the assessment year 1958-59 (accounting year 1957-58) and along with his return sent a letter stating that the declared gross receipts do not include the following fees :- Rs.
(a) Kohinoor Textile Mills
41,500.00
(b) Mr. Moin Khan
12,000.00
(c) Nawab . Amir Muhammad Khan of Hoti
23,650.00
(d) Mr. Jalal Malik
90,000 00
(e) Mr. Khizar Hayat
90,000 00
Total
1,16,150.00
The reason given for not declaring these items was,, in the respondent's own words, as given in this letter; as follows :-
"Last year it occurred to me that since it is the installment received in a given financial year which alone forms my income for that financial year why could I not make an arrangement with some of my clients that they should pay the fee in instalments spread over several years rather than in a lump sum in any one or two financial years. In this way all the income would be fixed but over a longer period thus affording me some present relief and enabling me to do more work now when I have capacity, and increasing the level of my income in later years when I may not be able to undertake the same amount of work .........
In implementation of this scheme the respondent, during the relevant year, asked the clients mentioned at (a) to (e) above to pay the amounts of the fees payable by them to the Prudential Assurance Company Limited for the purchase of annuity bonds payable in instalments spread over a guaranteed period of 20 years.
This arrangement was agreed to by Mr. Moin Khan and Mr. Jalal Malik representing Malik Diesels, The Mall, Lahore, before their briefs were accepted, by Kohinoor Textile Mills before submission of the fee bill and by Mr. Amir Muhammad Khan of Hoti before actual payment. In the case of Malik Khizar Hayat the arrangement did not materialise, as no fees were intended to be received by the respondent from him.
The relevant portion of the annuity bond, issued by the Prudential Assurance Company Limited, in so far as it is material for the purposes of this appeal, is set out below :-
"Whereas the Prudential Assurance Company Limited (hereinafer called "the company") have agreed with . . . . . . . . (name of client) . . . . . . . . . . .. . (hereinafter called "the purchaser") for the grant to Mr.Manzur Qadir (hereinafter called "the Annuitant") of such Annuity as is hereinafter mentioned upon the terms hereinafter appearing and upon the basis of a proposal bearing-------
Now this agreement witness that in consideration of the sum of Rupees . .. . . . . . . . now paid to the Company by the Purchaser the company hereby covenant with the Purchaser and also with the Annuitant that during the period of 20 years commencing on the------day of------and if the annuitant shall survive the said period then during the remainder of the life of the annuitant the Company will except as herein after provided pay to him or to his executors, administrators or assigns an annuity or yearly sum of Rs.---. . . . . . . . And it is hereby provided as follows
lstly . 2ndly .. 3rdly . 4thly.
This agreement is made in respect of the Ordi nary Branch of the Company and the Ordinary Branch Fund together with the Capital Stock of the Company shall alone be answerable for any claims hereunder in accord ance with the Articles of Association from time to time of the Company."
There is no dispute that the respondent-assessee maintained his accounts on the "cash system" or that the respondent had not concealed any material fact from the Taxing Department. The contention of the respondent, however, was that since under the cash system he can only be taxed "on what he actually receives in the course of a given financial year" and "not on what he would receive in future in consequence of certain arrangements made" he could legitimately adopt such a scheme to reduce the - burden of taxation. The respondent maintained that there was no legal bar to the making of such an arrangement with his clients to reduce the burden of his tax and that no just exception could be taken to the scheme evolved by him.
The Income-tax Officer, by his order of the 19th of May 1958, rejected this contention and included this amount of Rs. 1.16,150 in the income of the respondent for the accounting year 1957-58. The reason given by the Income-tax Officer for rejecting the respondent's claim was to the following effect :-
"Undoubtedly the system of accounts followed by the assessee is cash but the purchase of annuity policies spread over a number of years for the stipulated amount of fees by his clients at his direction does not entitle him to exemption from income-tax. The moment a policy was purchased the amount which was paid for it became a `receipt' in his hands. The mere fact that he will recover it in 20 instalments does not in any way alter its nature. In the circumstances, I hold that these amounts became receipts of the assessee as soon as his clients purchased annuity policies at his direction and will accordingly be assessed along with his other income."
The respondent went up in appeal. The appellate Assistant Commissioner of Income-tax not only upheld the decision of the Income-tax Officer but went further to the extent of holding that under section 4 (1) (a) of the Income-tax Act the respondent was liable on the "accrue or arise" basis, even though he admittedly maintained his account on the "cash system" and not the "Mercantile system". According to the Appellate Assistant Commissioner since an "annuity is an annual payment in return for a capital investment", what the respondent had achieved by his scheme was to be regarded first as a receipt of professional fees and then the conversion thereof into a capital investment. He was of the opinion that the moment the clients parted with the money at the behest of the respondent, the respondent must be deemed to have received the amounts in question in full. A remuneration or a professional earning, according to him, "can never be capitalised unless it has first borne tax." Hence since the purchase of the annuity amounted to capitalisation of professional fees, this could only be done after the amount in question had been considered as a receipt in the hands of the respondent and brought under assessment.
The respondent then went up in further appeal to the Income- tax Appellate Tribunal. The. latter disagreed with the Appellate Assistant Commissioner that the respondent assessee, who was admittedly maintaining his accounts under -the cash system of accounting, could be assessed on the "accrual basis". The Tribunal, relying on the opinions of the Judicial Committee in the cases of the Commissioner of Income-tax, Bihar & Orissa v. Maharaja Dhiraja Kameshwar Singh of Darbhanga ((1933) 1 I T R 108), Raja Raghunandan Prasad Singh and another v. Commissioner of Income tax, Bihar and Orissa ((1933) 1 I T R 113) and Maharaja Kamakhya Narain Singh v. Commissioner of Income-tax, Bihar & Orissa ((1942) 10 1 T R 177) came to the conclusion that "under the cash system of accounting income attracts tax only when it is received, and would be chargeable only when received".
The Tribunal was further of the opinion that since the respondent had not, in the present case, attempted to change his method of accounting, he was only chargeable for what he had actually received in a particular year. It also found nothing objectionable in the scheme evolved by the respondent-assessee, Because, it was in law open to the respondent-assessee to determine in what manner he would receive his fees, whether in cash or kind or in instalments. What arrangements the -client made for discharging his own liability was, in the Tribunal's opinion, wholly immaterial for the purpose of deciding as to what the respondent received in a particular year for the professional services rendered by him. The client could equally well have deposited the money in a bank with a direction to pay a particular amount out of it every year to the respondent. Instead of doing that the client had, in the present case, purchased an annuity, paid the stipulated or billed amount of the respondent's fees to the Assurance Company and the latter, on its part, undertook to pay to the respondent, who became the annuitant or the beneficiary under the annuity bond, a particular sum of money every year as long as he was alive and to his executors, administrators or assigns if he died before the payments were completed.
According to the Tribunal, the annuity bond purchased by ' the client in such a case did not even constitute money's worth in the hands of the assessee, for, the assessee had no power under the bond to readily sell or transfer the same, or to realise the full amount thereof in any manner other than the one specified in the bond itself. The only right that the respondent had under the bond was, it was said, to receive certain amounts annually up to a particular point of time. He could not, in any manner, convert the bond into money. Even in the event of liquidation of the Assurance Company, the Tribunal thought, the unpaid amount
would have to be refunded to the purchaser of the bond and would not pass to the annuitant.
To quote the Tribunal :-
"The assessee is just a beneficiary. Therefore, in substance the whole transaction amounts to an arrangement by which the clients, instead of paying the amounts due in one lump sum in the relevant year, have chosen to pay to the appellant through, the insurance companies, in instalments spread over a number of years subject to certain limitations. They have chosen to place in the hands of the assessee the particular documents under which he is entitled to receive annual sums. To ensure such payments the words of the clients were not considered enough; some-sort of security was required. The bonds, besides securing the payments, confer additional benefits on the assessee. What the cumulative benefits are, we have already explained earlier, but they do not go beyond payments of specified amounts at stated periods extending to a certain point of time."
The assesseg's appeal was, accordingly, allowed on the 15th of December 1958, and it was held that no part of the amount of Rs. 1,16,150 was assessable in the hands of the respondent in the relevant year. .
The Income-tax Commissioner thereupon moved the Tribunal to make a .reference to the High .Court under section 66 (1) of the Income-tax Act and the Tribunal referred the following question of law :- ,
"Whether in the facts and circumstances of the case the amounts covered by the annuity bonds or part thereof were assessable to tax in the hands of the assessee in the assessment year 1958-59?"
It may be mentioned here that during the pendency of the appeal before the Tribunal the respondent was appointed a Minister of the Central Government of Pakistan and had to suspend his practice for about four years. The appeal came up for hearing during this period and learned counsel representing the respondent before the Tribunal was instructed to state, as the respondent himself while arguing his own case before the Income- tax Officer and the Appellate Assistant Commissioner had done, that it was not possible for him to get anything from the Assurance Company except the payment of the annual installment. While he was Minister of the Central Government some efforts were made on his behalf to enquire if it was possible for him to obtain any refund of the amount paid for the purchase of the annuities in order to meet his income-tax demands. Since the clients, who were the actual purchasers of the bonds, agreed to this fresh proposal the Prudential Assurance Company Limited by its letter of the 31st of December 1958, also expressed willingness to return 95 % of the purchase money of the bonds after deducting the annuity payments already made. The respondent claims that he was not aware of this letter at that time but as soon as he came to know of it, he forwarded a copy there of along with a covering letter dated the 9th of June 1959, addressed to the Central Board of Revenue, Pakistan, because, he felt, to quote his own words,- that "this information now destroys one of the points on which I following effect
"Manzur Qadir, Esquire, 3, Bath Island, Karachi.
Re : Your Annuities
Dear Sir,
Further to our letter of the 25th November 1958, sent to your Lahore address, we have pleasure in informing you that we are prepared to return 95 % of the purchase money paid by you in respect of your annuities. Of course from this amount the annuity payments already made to your bankers will have to be deducted.
We enclose herewith a list showing the amount refundable to you and we shall be glad if you will let us know at your earliest convenience your final decision in the matter. Yours faithfully,
(Sd.) Resident Secretary."
The High Court relying on a decision of the Bombay High Court in the case of Industrial Development and Investment Company Ltd. v. Commissioner, Excess Profits Tax, Bombay ((1957) 311 T R 699) did not take this letter into consideration, because, in its view, the High court could not "take into consideration facts which were not before the Tribunal when it passed the appellate order".
As regards the merits of the case, however, the High Court substantially agreed with the Tribunal and formulated the following principles for the decision of the question referred to it :-,
'`(a) For assessing the income of an assessee who maintains his account. on the cash system the basis of assessment has always to be the actual receipts in a particular year.
(b) Receipts can be either in the shape of cash, i.e. money or an equivalent of cash which has been turned as money's worth.
(c) For any thing to be called money's worth it is necessary that the same should be capable of being turned into money.
(d) Only that much of money's worth received by an assessee in a particular year can be the subject of assessment in that year as is capable of being turned into money in that period of assessment."
Applying these tests to the facts of the present case the High Court came to these conclusions :-
(1) That the amount of money due to the assessee was not paid to him directly in that year and the same was turned over to the Prudential Assurance Company Limited for the purchase of annuities ;
(2) that it cannot, therefore, be said; that the money had been received directly by the assessee ;
(3) that the Prudential Assurance Company had not received the amount as the agent of the assessee, for, the relationship between the company and the annuitant does not, by any stretch of imagination or law, convert the company into an agent of the annuitant ;
(4) that the company is at best an independent contractor who entered into a contract with the purchaser of the policy, in this case the client, to make certain payments to the annuitant in this case the assessee, on the happening of a specified event or on the particular period of time ;
(5) that the contract under which the Assurance Company undertook to pay a certain sum of money by way of annuities to the assessee, was not money's worth so as to make the entire sum covered by the policy taxable in the year in dispute, as the annuity bonds were not capable of being turned into money, and
(6) that the money's worth of the bonds in any particular year was the amount payable as annuity in that year. ,
One of the learned Judges constituting the Bench hearing the reference while concurring with the views expressed by his colleague, added a note to the following effect :-
"Indeed, I would have found it a little difficult to arrive at the conclusion that the amounts paid by the clients of the assessee to the Assurance Company for purchasing annuities for him was not money's worth but for the statement in the appellate order of the Tribunal at page 31 of the printed paper book that in the event of the liquidation of the Company the unpaid amounts will be refunded to the purchasers and will pass on to the annuitant. 1n other words the purchasers of the annuities had not completely parted with dominion over the amounts paid by them to the Insurance Company."
Learned counsel appearing on behalf of the Commissioner of Income-tax has urged mainly two grounds before us ; namely, (i) that the Prudential Assurance Company Limited received payment of the fees payable by the clients as the agent of the respondent and (ii) that, in any event, the annuity bond was money's worth and, therefore, a receipt of the respondent.
In support of the first contention an application has been filed on the 4th of November 1970, after the hearing of the appeal had concluded, along with an affidavit of the Inspector of Income-tax, Companies Circle 111, Lahore, to the effect that entries in the books of account of Malik Diesels Limited show that on the 10th of February 1958, the company entered in its books of account that it bad paid Rs. 30,000 to the respondent by cheque No. 481364 drawn on the National Bank of India. This is, however, controverted by a counter-affidavit filed by the Advocate-on-Record for the respondent who states, on instructions of the
respondent himself; that the cheque was drawn by Malik Diesels in favour of the Assurance Company and not in favour of the respondent. Certificates to this effect have also been filed along with the latter affidavit from Malik Diesels and the Prudential Assurance Company Limited. In this state of affairs the additional evidence now sought to be produc99d is not of much help. .
We, on our part, are inclined to agree with the Appellate Tribunal that how the client shows the payment in its own books of account does not establish the true nature of the transaction between them, the respondent-assessee and the Assurance Company. It may well be that the system of accounting followed by the client was different. if the client's accounts were being maintained under the mercantile system, it might have raised a debit in its accounts against the respondent in order to claim a deduction in the year in which the liability was incurred, but this would not necessarily prevent the respondent, maintaining his accounts under the cash system, from claiming to be accused in the year in which he actually receives payment and only to the extent of the amount received in that particular year.
Learned counsel further contends that since on the respondent's own shoving the method of payment was determined by him, the person to whom the payment was to be made was choosen by him and the client made payment to that chosen person at the respondent's behest, the person receiving payment received it as the agent of the respondent within the meaning of that term in section 182 of the Contract Act. So far as the client was concealed, he was completely discharged of his liability as he had paid .the fees of the respondent in full at that time when he handed over the cheque for the amount,…
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