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Petitioner: COMMISSIONER OF WEALTH-TAX, GUJARAT VS Respondent: DR. E. D. ANKLESARIAHonorable Justice P. N. BHAGWATIJ. M. Thakore Advocate-General,K. H. Kaji
1965 P T D 95
1965 P T D 95
[Gujarat (India)]
Before J. M. Shelat, C. J. and P. N. Bhagwati, J
COMMISSIONER OF WEALTH-TAX, GUJARAT
Versus
DR. E. D. ANKLESARIA
Wealth-tax Reference No. 5 of 1962, decided' on 26th September 1963.
Wealth-tax-Computation of net wealth-Annuity-Annuity paid out of net income of trust-Continuing annuity with gift over to children-Value of annuity whether to be excluded from net wealth-Wealth-tax Act, 1957, S. 2 (e)(iv).
The assessee was the recipient of an annuity granted under a testamentary disposition. The annuity was payable to him for life and thereafter to all his children equally among themselves. Under the terms of the deed the annuity was to be paid out of the net income of the trust fund and after paying the other annuitants the balance of the net income of the fund was to be utilised for charitable purposes and in no event was the corpus of the fund to be touched. On the death of the assessee the annuity to him would cease and no part of the corpus of the trust fund would pass to his heirs. The assessee claimed that the value of the annuity was entitled to exemption under section 2 (e) (iv). The Wealth-tax Officer rejected the claim and included the value of the annuity in his net wealth and his order was upheld by the Appellate Assistant Commissioner. The Tribunal reversed the decision of the Appellate Assistant Commissioner and on a reference:
Held, neither section 174 of the Indian Succession Act nor any rule of English law applied to the facts of the case so as to entitle the assessee to call upon the trustee to commute the annuity into a lump sum grant. The terms and conditions relating to the annuity precluded the commutation of the annuity into a lump sum grant and as such the value of the annuity was entitled to exemption under the provisions of section 2 (e) (iv).
[Cases-referred to.]
STATEMENT OF CASE
By this application, the Commissioner of Wealth-tax, Gujarat, Ahmedabad requires the Appellate Tribunal to refer to the High Court a question of law, which is said to arise out of the Tribunal's order in W. T. A. No. 853 of 1959-60. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Gujarat at Ahmedabad, under section 27 (1) of the Wealth-tax Act.
2. Dr. Anklesaria died on April 27, 1944, leaving a last will dated April 25, 1944, supplemental to the first will dated May 8, 1934, copy whereof is annexed hereunto as annexure "A" and forms part of the case. In this will there is a reference to a draft trust deed of the same date which has since been accepted by the Bombay High Court as efficacious as a testamentary paper. A copy of this draft trust deed is annexed hereunto as annexure "B" and forms part of the case. The judgment of the High Court dated February 10, 1958, (per Modi, J.) is annexed hereto as annexure "C" and forms part of the case. Under the terms of this draft trust deed an annuity of Rs. 6,000 per annum became payable to the assessee during his natural life and thereafter to all his children equally among themselves. There were dispositions to the other children of the testator. After the death of all his grand-children the corpus was directed to be applied in a certain manner which is of no interest in this appeal.
3. The value of the above annuity at approved rates is Rs. 55,770. In the wealth-tax assessment of 1958-59 for the valuation dated March 1958, the assessee contended that the annuity is one specifically exempted by section (2) (e) (iv), which is as follows:
"(2) (e) `assets' includes property of every description moveable or immovable, but does not include- . . .
(iv) 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."
4. The Wealth-tax Officer rejected this contention in the following words reproduced from his order:
" . . . The fact that the annuity is a single, continuing annuity enuring for the benefit of the children of the present beneficiaries is no possible argument against the assessee's right to commutation, for the beneficial interest vested in the children of the beneficiaries is subservient to the present beneficiaries' right to commutation. Since there is no specific prohibition under the terms and conditions of the trust regarding the right to commutation, I hold the capitalised value of the annuity of Rs. 6,000 as taxable and would tax it accordingly."
5. In the appeal that followed to the Appellate Assistant Commissioner, the assessee relied upon a passage in Halsbury's Laws of England and commentaries on the Indian Succession Act after consideration of all of which the Appellate Assistant Commissioner concluded that though the trustees who pay the annuity could not, in law, pay the assessee the capital value of the annuity, the annuity was such as could be commuted into a lump sum grant by outsiders, like insurance companies and, therefore, it did not come within the category of annuities exempted under the above section. A copy of his order is annexed hereunto as annexure "D" and forms part of the case.
6. The assessee thereupon appealed to the Tribunal. The Tribunal held in paragraphs 5, 6 and 7 of its order, copy whereof is annexed hereto as annexure "E" and forms part of the case reproduced below, that the assessee is entitled to exemption:
"(5) The meaning of the two words `preclude' and `commute', important for the decision, is set out below according to the Concise Oxford Dictionary:
`preclude'-Exclude, prevent, make impracticable.
`commute'-Interchange (two things), buy off (one obligation) by (for, into) another . . . . ."
6. In order that an annuity earns exemption, applying the meaning of the above words, there must be some terms and conditions relating to such annuity which would prevent or make it impossible to interchange it for a lump sum grant. The impossibility may arise out of a specific prohibition by the testator, or inherently from the terms and conditions of the grant or out of a prohibition in law. Further the impossibility is for the commutation or interchange and not a commutation which is where the Appellate Assistant Commissioner went wrong in his reasoning. It is no doubt true that every annuity, whatever may be the conditions, must have a market value ; it is just a question of an actuarial valuation and assessment of all the risks involved. If the Appellate Assistant Commissioner's interpretation is right, there can be no exempted annuity at all and section 2 (e) (iv) will become totally nugatory.
7. The question here is not one of ascertainability of the present value of the annuity, but of the legal power of the assessee to exchange the annuity for a lump sum grant. As the terms and conditions involve a continuing annuity of a gift-over, as held in the case of Roper v. Roper ((1876) 3 Ch. D. 714, 721) referred to in paragraph 348 on page 191 of Halsbury's Laws of England, volume 28, 2nd edition, the assessee is, in our opinion, prevented from receiving the cash value of the annuity from the trustees and accordingly entitled to claim exemption for its capitalised value in the assessment."
7. On the above facts, the Commissioner of Wealth-tax wants the following question being referred, viz.:
"Whether, on the facts and in the circumstances of the case, in the absence of a specific prohibition in the terms and conditions of the grant precluding the commutation of the right to receive the annuity into a lump sum grant, the Tribunal was justified in taking into consideration other factors and directing the deletion of the capitalized value of such annuity, holding that the requirements of section 2 (e) (iv) of the Wealth-tax Act were satisfied."
8. From out of the aforesaid facts, the only question of law that arises is
"Whether the aforesaid right to the annuity is an asset exempted by section 2 (e) (iv) of the Wealth-tax Act ?"
9. The departmental representative wants the question as framed in the application and given in paragraph 7 above being referred. In our opinion, the question as framed by us brings out the point in controversy. We, therefore, refer the above question.
J. M. Thakore Advocate-General for the Commissioner.
K. H. Kaji for the Assessee.
JUDGMENT
P. N. BHAGWATI, J.-A short but interesting question of law arises on this reference made at the instance of the Commissioner of Wealth-tax under section 27 (1) of the Wealth-tax Act. The question is whether the annuity granted to the assessee by his deceased father by testamentary disposition is an annuity which is exempt from computation of net wealth under section 2 (e) (iv) of the Act. Dr. Anklesaria, the deceased father of the assessee, died on 27th April 1954, having duly made testamentary disposition contained in three testamentary papers, one a will dated 8th May 1934, the other a draft deed of trust which did not bear any date but appeared to have been prepared in 1944 and the third a will dated 25th April 1944. Dr. Anklesaria had also executed during his lifetime a deed of trust dated 24th June 1937, under which a sum of Rs. 1,00,000 had been transferred by him to the trustees for various purposes including giving of certain annuities to his sons, daughters and grand-children. Dr. Anklesaria had also executed a supplementary deed of trust dated 2nd December 1938, making certain alterations in the dispositions made under the deed of trust dated 24th June 1937, in exercise of the power reserved to him under the latter deed. The draft deed of trust purported to make certain further alterations in the dispositions effected under the deed of trust dated 24th June 1937, but it was not executed by Dr. Anklesaria nor were the formalities of law complied with which would make it an effective deed of trust. It remained a draft until the death of Dr. Anklesaria, but by the will dated 25th April 1944, the draft deed of trust was given the effect of a testamentary paper and the provisions contained in the draft deed of trust together with will dated the 25th April 1944, declared various testamentary dispositions of Dr. Anklesaria. The draft deed of trust was also, therefore, probated along with the two wills dated 8th May 1934, and 25th April 1944. By reason of the draft deed of trust and the will dated 25th April 1944, a further sum of Rs. 8,00,000 was added to the funds forming part of the deed of trust dated 24th June 1937, and certain alterations were effected in the dispositions effected under the deed of trust dated 24th June 1937. Out of the total amount of Rs. 9,00,000 made up of Rs. 1,00,000 being the original fund forming the subject-matter of the deed of trust dated 24th June 1937, and Rs. 8,00,000 added by the draft deed of trust read with the Will dated 25th April 1944, a sum of Rs. 2,00,000 was to be applied for the purpose of a Pharmacy College whereas the remaining sum of Rs. 7,00,000 was to be held on the trusts contained in the deed of trust dated 24th June 1937, as altered by the draft deed of trust and the will dated 25th April 1944. Clause 5 of the deed of trust dated 24th June 1937, as altered by the draft deed of trust and the will dated 25th April 1944, was, when translated in English, in the following terms:
"(5) The trustees shall as from the 1st day of January 1945, utilise only the net income arising out of the trust property for the purposes mentioned in clause 7 hereof."
Clause 7 of the deed of trust dated 24th June 1937, was also altered by the draft deed of trust as a testamentary disposition and so altered, it read in its English translation:
"(7) The trustees shall as from the day of 1944 utilise the net income arising out of the trust property for the following purposes:
(a) A sum of Rs. 6,000 shall be paid every year to the settlor, Dr. Dhanjisha Edalji Anklesaria, during his lifetime.
(b) A sum of Rs. 3,600 shall be paid every year to each of my sons, namely, Jehangir D. Anklesaria, Rustomji D. Anklesaria and Edalji D. Anklesaria, during their respective lives and after their respective lifetimes, the said sums shall be paid to their respective children every year to be divided equally between them.
(c) Upon the marriage of my sons, the said Rustomji and Edalji respectively, a sum of Rs. 15,000 shall be paid to each of them to enable them to meet with their marriage expenses.
(d) A sum of Rs. 2,400 shall be paid every year to my daughter, Shirinbai Dungaji Daruwala, during her lifetime and after her death the said sum shall be paid every year to her children to be divided equally between them.
(e) A sum of Rs. 600 shall be paid every year to each of my sons and daughters who may be the managing trustees hereof so long only as they shall act as such managing trustees.
(f) A sum of Rs. 200 shall be paid every year to each of the trustees hereof other than managing trustee or trustees so long as they shall act as such trustees.
The above annuities shall be paid by either monthly or quarterly instalments, the first of which shall be payable after one year from the date of execution hereof.
The trustees shall hold the balance of the income of the trust property after payment of the above sums upon trust to utilise the same as and when they may think advisable for the following objects
(a) To provide help for poor and deserving Zorastrian Parsees, by giving them free scholarships or loans at 4 per cent. per annum, in obtaining primary, secondary or higher education in India, or scientific, technical or professional education in India or in foreign countries, or in obtaining any industrial training.
(b) To provide help for poor Zorastrian Parsees by giving them medical help, food, clothes, etc.
(c) To provide help for Parsee orphanages by giving scholarships or otherwise.
(d) To provide help for the victims of any natural calamity such as fire, flood, famine, etc., or other calamities such as war, riots, etc., irrespective of the caste, creed or religion of the objects to be benefited
(e) For such other charitable objects as the trustees may select, irrespective of the caste, creed or religion of the objects to be benefited.
Provided, however, that with respect to the charities mentioned in sub-clauses (a) and (b) above the trustees shall give preference to the following clauses of objects in the order in which they are hereinafter mentioned
(1) The children and grand-children and other descendants of the settlor and of the settlor's brothers and sisters.
(2) The children and grand-children and other lineal descendants of the brothers and sisters of the settlor's wife, Bai Gulbai.
(3) The children and ! grand-children and other lineal descendants of the settlor's uncles both paternal and maternal.
(4) The children and grand-children and other lineal descendants of the uncles of the settlor's said wife, Bai Gulbai, both paternal and maternal.
(5) Any other Zorastrian Parsees."
Of course since the draft deed of trust became effective as a testamentary disposition only from 27th April 1954, when Dr. Anklesaria died, clauses 5 and 7 in the form set out above became operative as from 27th April 1954, but with this modification that so far as sub-clauses (b) and (d) of clause 7 were concerned, a further change was made by Dr. Anklesaria by the will dated 25th April 1944, and this is what he provided in the will, according to its English translation
"Out of the said sum I have reserved Rs. two lakhs for establishing a Pharmacy College for the public and as for the remaining sum, I have directed the same to be utilised in giving annuities to my children and for certain other charitable purposes in accordance with the aforesaid draft of the trust deed. I have made the following alterations in the annuities which I have directed in the said draft to be given to my children. My three sons shall each be paid Rs. 500 (in words rupees five hundred) per month and my daughter, Shirinbai, shall be paid Rs. 300 (in words three hundred) per month and my other three daughters shall each be paid Rs. 100 (in words rupees one hundred) per month."
After the death of Dr. Anklesaria, a question arose whether the increase of the amount of the annuity given to the sons from Rs. 300 to Rs. 500 also enured for the benefit of the respective children of the sons who were provided with an annuity after the death of the sons. A similar question also arose in regard to the annuity given to Shirinbai, daughter of Dr. Anklesaria. It appears that there were also certain other questions in regard to the administration of the trust which required to be solved and an originating summons was, therefore, taken out for the determination of various questions including the aforesaid two questions relating to the annuities. The originating summons was heard by Mr. Justice N. A. Mody of the High Court of Bombay and by a judgment dated 10th February 1958, the learned Judge held that the increase from Rs. 300 to Rs. 500 in the case of the sons and from Rs. 200 to Rs. 300 in the case of Shirinbai applied not only to the annuities in favour of the sons and Shirinbai respectively but also enured for the benefit of their respective children. The learned Judge observed that there was one single continuing annuity in favour of each of the sons during his lifetime and thereafter in favour of his children and similarly there was a single continuing annuity in favour of Shirinbai and thereafter in favour of her children and that when Dr. Anklesaria increased the amount of the annuity in both the cases, such increase was not only for the benefit of the sons and Shirinbai who were the first takers of the respective annuities granted to them but also for the benefit of their children who were the second takers. We have referred to this decision at this stage because some reliance was placed upon it by the learned Advocate-General appearing on behalf of the Commissioner, presumably with a view to distinguish the present case from the two decisions of the English Courts which were relied upon by the Tribunal in deciding the matter against the Commissioner.
In the course of the assessment of the assessee to wealth-tax for the assessment year 1958-59 for which the valuation date was 31st March 1959, a question arose whether the annuity granted to the assessee under the testamentary dispositions referred to above was exempt under section 2 (e) (iv) of the Act. The assessee contended that the terms and conditions relating to Ale annuity were such that they precluded the commutation thereof into a lump sum grant and that the annuity was, therefore, an annuity which satisfied the description given under section 2 (e) (iv) and was accordingly exempt from wealth-tax. The Wealth-tax Officer, however, rejected this contention of the assessee holding that the assessee had a right to have the annuity commuted into a lump sum grant and that the exemption, therefore, did not apply so as to exclude the annuity from computation of net wealth of the assessee.
The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that it was entirely immaterial whether or not the assessee was entitled to call upon the trustees to commute the annuity into a lump sum grant, for in any view of the matter, the annuity could always be commuted into a lump sum grant by outsiders like insurance companies and that the annuity, therefore, did not come within the category specified in section 2 (e) (iv). The assessee thereupon preferred an appeal to the Tribunal.
The Tribunal rightly observed that the Appellate Assistant Commissioner had completely fallen into an error in considering the matter from the point of view whether the annuity was one which could be computed in terms of immediate cash by outsiders like insurance companies and that the only question which was required to be considered was whether the assessee was entitled to call upon the trustees to commute the annuity into a lump sum grant and this, observed the Tribunal, the assessee had no right to do and the annuity was, therefore, one which fell within section 2 (e) (iv). The Tribunal held that there was a continuing annuity in favour of the assessee with a gift-over in favour of his children and the assessee was, therefore, prevented from receiving the cash value of the annuity from the trustees. The Tribunal in this view of the matter upheld the assessee's claim to exemption in respect of the value of the annuity. We may point out at this stage that the Wealth-tax Officer when he decided against the assessee computed the value of the annuity at Rs. 55,770 having regard to well-established principles of valuation and the Appellate Assistant Commissioner also confirmed this valuation. This valuation was not challenged by the assessee before the Tribunal but the only challenge was against the inclusion of this valuation in the net wealth of the assessee and the challenge was based on section 2 (e) (iv). It was this challenge based on section 2 (e) (fv) which was upheld by the Tribunal and on this reference made at the instance of the Commissioner of Wealth-tax, the view of the Tribunal upholding this challenge is assailed before us.
The question turns not so much upon the true interpretation as upon the application of section 2 (e) (iv). That section is in the following terms
"(2) In this Act, unless the context otherwise requires,- . . . .
(e) `assets' includes property of every description, movable or immovable, but does not include- . . . .
(iv) 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."
The question which, therefore, arises for consideration is whether it can be said of the annuity in the present case that the terms and conditions relating to the annuity preclude the commutation of any portion thereof into a lump sum grant. Now the annuity is given to the assessee by the deed of trust dated 24th June 1937, as altered by the draft deed of trust read with the will dated 25th April 1944, the effective date of the provisions granting the annuity being the date of the death of Dr. Anklesaria, namely, 27th April 1954. We must, therefore, see what are the terms and conditions relating to the annuity contained in the deed of trust dated 24th June 1937, the draft deed of trust and the will dated 25th April 1944. Is there anything in the terms and conditions which precludes the assessee from requiring the trustees to commute the annuity or any portion thereof into a lump sum grant ? The scheme of the trusts contained in the deed of trust dated 24th June 1937, read with the draft deed of trust and the will dated 25th April 1944, is that a sum of Rs. 9,00,000 is settled on trust out of which Rs. 2,00,000 are to be utilised for establishing a Pharmacy College and the balance of Rs. 7,00,000 is to be held on trust for the objects set out in the amended clause 7 which we have reproduced above. Before we come to clause 7, we may point out that clause 5 in terms declares that the trustees shall utilise only the net income arising out of the trust property for the purposes mentioned in the amended clause 7. Clause 6 of the deed of trust dated 24th June 1937, which did not suffer any change as a result of the draft deed of trust and the will dated 25th April 1944, also provides that the trustees shall utilise only the net income and shall not touch any part of the corpus of the trust fund. Clause 7 then says that the net income from the trust fund shall be utilised for giving certain annuities, one of the annuities being the annuity of Rs. 500 to the assessee and that the balance of the net income shall be utilised by the trustees for charitable objects set out in sub-clauses (a) to (e). The corpus of the trust fund is thus to remain untouched and only the net income is to be utilised by the trustees for giving annuities to sons, daughters and grand-children and the balance of the net income is to be utilised for charitable purposes. It is, therefore, clear that so far as the annuity to the assessee is concerned, it is to be paid only out of the net income of the trust fund and no part of the corpus is at any time to be utilised for the purpose of paying it to the assessee. It is in this context that we have got to see whether the terms and conditions relating to the annuity permit or prevent the commutation of the annuity into a lump sum grant. Now if the assessee were entitled to call upon the trustees to commute the annuity into a lump sum grant, there would obviously be a breach of trust, for the trustees are expressly directed by the provisions contained in the deed of trust dated 24th June 1937, as amended by the draft deed of trust and the will dated…
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