Kan Singh, J. -
(1.) THE following two questions have been referred to this Court under Section 27(1) of the Wealth Tax Act, hereinafter to be referred as the "Act", by the Income-tax Appellate Tribunal Bombay, Bench 'B' :--
"(1) Whether on a proper construction of the deed of settlement the assessee has any interest in the corpus of the deed of settlement?
(2) Whether in the facts and circumstances of this case, the right of the assessee derived under the deed of settlement is exempt from Wealth-tax by virtue of the provisions of Section 2(e)(iv) of the Wealth-tax Act?"
(2.) THE relevant facts giving rise to this reference may be outlined as follows:--
The assesaee is Her Highness Maharani Gavatri Devi of Jaipur the assessment year for which the assessment of her wealth under the Act was made was the year 1959- 60 and the valuation date of her assets was 31-3-1959. The assessee is the wife of His Highness Maharaja Shri Man Singhji of Jaipur, hereinafter to be referred as the "Maharaja". On 9-9-53. the Maharaja made a settlement in respect of certain War Bonds of the face value of pound 3 lakhs carrying an interest of 3 1/2% for the benefit of his wife, the assessee, and his four sons. Maharaj Kumar Bhawani Singh, Maharaj Kumar Jai Singh, Maharaj Kumar Prithviraj and Maharaj Kumar Jagat Singh.
According to the deed of settlement the Maharaja was a party of the first part and one Sir Harold Augusts Wernher Baronet hereinafter to be referred as the "Trustee", was a party of the other part. The Maharaja made an irrevocable settlement of the War Bonds held by him and accordingly transferred them to the name of the trustee. The trustee was to hold them upon trust for the benefit of the five beneficiaries subject to the powers and provisions contained in the deed of settlement. By Clause 3 of the deed of settlement the trustee was enjoined to divide the trust fund into 30 equal parts and was to remain in possession of such parts and income thereof respectively upon trust subject to the powers and conditions contained in the deed of settlement The relevant clause which defines the interest of the assessee as also the other four sons of the Maharaja was as follows :--
"4(1) The trustee shall stand possessed of fifteen such parts of the Trust Fund upon trust to pay the income thereof to the Wife during her life and after her death shall hold the said fifteen such parts of the Trust Fund and the income thereof upon the same trusts and with and subject to the same powers and provisions as are hereinafter declared and contained concerning the share. in the Trust Fund which is hereinafter directed to be held in trust for the said Maharaj Kumar Jagat Singh or as near thereto as circumstances will admit.
(2) The Trustee shall hold the remaining fifteen such parts of the Trust Fund and the income thereof Upon Trust for the Sons contingently upon their respectively attaining the age of twenty one vears in the shares and proportions following (that is to say):
(i) As to ten such parts for the said Maharaj Kumar Bhawani Singh (hereinafter called "the Eldest Son").
(ii) As to two such parts for the said Maharaj Kumar Jai Singh (hereinafter called "the Second Son").
(iii) As to two such parts for the said Maharaj Kumar Prithvi Rai (hereinafter called "the Third Son"), and
(iv) As to one such part for the said Maharaj Kumar Jagat Singh (hereinafter called "the Fourth Son").
XX XX XX XX"
According to Sub-clause (3) of Clause 4 the share in the trust fund directed to be held in trust for each of the four sons was not to vest absolutely in such son on his at- taining the age of 21 years but was to be retained by the trustee and held by him upon trust and subject to the powers and provisions mentioned in the deed of settlement. Clause 7 is relevant for the purpose and may be reproduced hereunder:--
"7 Notwithstanding the trusts hereinbefore declared the Trustee if he in his absolute discretion thinks fit may at any time by writing under his hand declare that the whole or any part of the share (whether original or accruing) in the Trust Fund to the income whereof any Beneficiary shall then be entitled in possession or any property appropriated in or towards the satisfaction of such share shall thenceforth be held in trust for such Beneficiary absolutely and thereupon the trust hereinbefore declared concerning such share or the part thereof or the property to which such declaration relates shall forthwith determine and the Trustee may at any time thereafter transfer such share or the part thereof or the property to which such declaration relates to such Beneficiary absolutely."
The schedule to the deed of settlement mentions the property covered by the deed of settlement as 3 1/2 per cent War Loans of the face value of pound 3 lakhs For the assessment year in question the assessee filed originally a return declaring a total wealth of Rs. 42,22,293/-, but the same was revised and the total wealth was declared as Rs. 28,22,000/-. About the difference it was claimed that a sum of Rupees fifteen lakhs seventy-five thousand six hundred and ninety four was in respect of the shares of interest of the assessee in U. K. Trust relating to the settlement of the War Loans and according to the assessee, the same was exempt from Wealth-tax. It was contended on behalf of the assessee before the Wealth-tax Officer that 15 out of 30 shares, the income of which was conferred on the assessee, were exempt as the assessee did not have any absolute interest in the corpus of the trust fund but had only an interest for life. The Wealth-tax Officer did not accept the contention and observed that the word "property" was "a term of widest import and signified every possible interest which a person can acquire, hold or enjoy."
Therefore, he came to the conclusion that the interest of the assessee in the trust fund was her property which could be included in her wealth for the purpose of assessment under the Act. In the words of the Wealth-tax Officer his conclusion was as follows:
"The assessee is one of the beneficiaries having 1/3 share in the Trust created by His Highness the Maharaja of Jaipur on 9-9-53, in United Kingdom The assessee has been allotted 15 shares out of the 30 shares of the said trust and the remaining 15 shares are in favour of 4 sons of His Highness. It has been claimed on behalf of the assessee that the shares are exempt as the interest created in the said trust is only life interest and not the absolute interest.
The word "property" is a term of widest import and it signifies every possible interest which a person can acquire hold or enjoy. An interest in property may be an interest accompanied by present possession such as, a life estate granted to a living person or an interest in expectancy such as remainder or reversion. Both these would be "assets" within the meaning of Clause 'E' of Section 3 of the Wealth-tax Act. The interest may be any limited interest, such as, that of mortgagee or of a lessee or of a life tenant or of a tenant pur autre vie (for another's life). It would also include interest in foreign property in case of Resident and Ordinarily Resident and Citizen of India, the property and interest outside India is also taxable. Accordingly, the assessee's interest in U. K. Trust amounting to Rs. 15,75,694 plus income-tax reserve thereon Rs. 1,75,401/- will also be included in the assessee's total wealth."
The assessee then went up in appeal to the Appellate Assistant Commissioner. It was contended on her behalf that as the assessee was not the owner of the corpus and was entitled only to receive her share in the income of the trust, she was not liable to pay wealth-tax in respect of her interest in the trust fund. It was also urged on her behalf that the interest of the assessee was in the nature of a right to an annuity which, according to the terms of the settlement was not capable of commutation and was, therefore, exempt from wealth-tax under Section 2(e) (iv) of the Act. The Appellate Assistant Commissioner did not accept the assessee's contentions. He came to the conclusion that the income that the assessee was receiving was not an annuity. The Appellate Assistant Commissioner also held that according to the provisions of Section 21 (2) of the Act, the Wealth-tax Officer had the option to assess the trustee or the beneficiary on whose behalf the settled assets were held by the assessee.
The assessee then went up in further appeal to the Income-tax Appellate Tribunal It was reiterated by the assessee before the Appellate Tribunal that what she was receiving was only 15/30 of the income of the trust fund and the same was in the nature of an annuity. This, annuity, according to the assessee, could not be commuted and in this regard. Clause 7 of the deed of settlement, it was claimed, did not cover the case of the assessee as the assessee could not claim any commutation of the annuity as of right. In the alternative it was urged that even if the assessee's interest was not an annuity, still the assessee could not be held to be the full owner of the 15/30 parts of the trust fund as she had only a life interest therein. On this basis it was alleged that the value of her life interest could be computed under the well-known method of valuation like the Jelicose Formula which the Department had been adopting in such cases. It was pointed out that according to this Jelicose Formula the market value of the assessee's rights in the trust fund in the war stock could not be more than half of the face value of the trust fund of the War Bonds. On the other hand, it was contended by the Department that the interest of the assessee in the trust fund could not be held to be an annuity and she was beneficial owner of the corpus of the trust fund.
Then it was urged that even if the assessee's interest were taken to be an annuity, according to Clause 7 of the deed of settlement that annuity was commutable, with the result that the same would be outside the exemption contemplated by Section 2 (e) (iv) of the Act. The Department also urged that under Section 21 (2) of the Act, the Wealth-tax Officer had the option to assess either the trustee or the beneficiary for whose benefit the settled properties were held The Appellate Tribunal took into consideration Clauses (3) and (4) of the deed of settlement and held that the assessee was only entitled to be paid during her life time the income of 15/30 of the trust fund
The Tribunal next considered the question whether the assessee was the beneficial owner of 15/30 of the corpus of the trust fund as contended by the Department, or the assessee had only an interest for life. The Tribunal noted that according to Clause 4 of the deed of settlement, which we have already set out above, what the assessee got was only a right to an annual payment which was more or less of a fixed sum. The Tribunal observed that though the source from which the payment was made was earmarked, the direction to the trustee was only to pay her the income therefrom This payment, therefore according to the Tribunal, was in the nature of an annuity. The Tribunal further noted that there was no definition of the term "annuity" in the Act and. therefore, it considered a passage occurring at page 169 of Halsburv's Laws of England, Second Edition Vol 98. which was to the followinp effect:
"312. The right created by an instrument (whether deed, will, codicil, or statute) to receive a definite annual sum of money is an interest which may be, strictly speaking, either a "rent charge" or an "annuity" ... If, the only source from which the money was directed to be paid was personal estate, other than leaseholds, the interest was an annuity and in the nature of personal estate.''
The Tribunal also observed that the assessee did not even have a life interest in the corpus either. As the War Bonds vested in the trustee, the assessee was held entitled only to the income arising therefrom. Then the Tribunal considered whether the annuity could be commuted. It considered the observations made in Roper v. Roper, 1876, 3 Ch. D. 714 at p. 721 and held that as there was a gift over in respect of the corpus in favour of Mahara.i Kumar Jagat Singh as per Clause 4 of the deed of settlement, the assessee could not insist on any commutation of her annuity. The Tribunal also examined Clause 7 of the deed of settlement on which reliance was placed by the Department for showing that commutation of the annual payment was not precluded, but it rejected the contention holding that this power, if at all could be exercised only bv the trustee in his absolute discretion.
Accordingly, the Tribunal reached the conclusion that the value of 15/30 parts of the trust fund could not be included in the wealth of the assessee for the purposes of assessing wealth-tax under the Act. The Tribunal, however, made a reservation that in case the view taken by it is found to be unsustainable then, according to it, the value of assessee's interest in the trust fund should be calculated according to the well-known principles of valuation. By this the Tribunal perhaps meant the Jelicosp Formula.
The Commissioner of Wealth-tax, Delhi and Rajasthan then moved the Appellate Tribunal for referring three questions of law to this court but the Tribunal thought fit to compress them into two questions, which we have set out above, and referred them to this Court together with an agreed statement of the case.
It will be convenient to refer to the relevant provisions of the Act for proper appreciation of the points canvassed at the bar.
The Act was passed in the year 1957. Section 3 of the Act, which is the charging section, provides that 'subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957. the tax, hereinafter referred to as the "wealth-tax", in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. It is, therefore, obvious that what is brought to tax is the net wealth of a person. The term "net wealth" is defined in Clause (m) of Section 2 and is as follows:
"Section 2(m). "Net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than,--
(i) debts which under Section 6 arc not to be taken into account;
(ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act; and
(iii) the amount of the tax penalty or interest payable in consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act. 1953, the Expenditure-tax Act, 1957, or the Gift-tax Act, 1958, --
(a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him, or
(b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date;"
It will be seen that the basis of taxation under the Act is the net wealth as contemplated in the above definition. It takes in all assets of a person wherever located. This means that even the assets located outside India are liable to tax under the Act. The important ingredient of net wealth is the term "assets" which has been defined in Clause (e) of Section 2 of the Act, and is as follows:-
"2(e). "assets" includes property of every description, movable or immovable, but does not include- (i) agricultural land and growing crops, grass or standing trees on such land; (ii) any building owned or occupied by a cultivator or receiver of rent or revenue out of agricultural land:
Provided that the building is on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent or revenue by reason of his connection with the land requires as a dwelling-house or a store-house or an outhouse:
(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: (v) any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee;"
The term "assets" has been defined to include property of every description, but does not include the properties enumerated in Sub-clauses (i) to (v) of the above Sub-section. The term "assets" will thus comprise property of every description. As is well ksown. the term "propertv" connotes not merely physical or concrete things, but also the various types of rights or interests in the thing, such as the right to possess, the right to enjoy the produce, the right to alienation etc. One may have full dominium or absolute ownership in the property, or one's interest may fall short of full ownership, yet that will be covered by the term "assets".
Therefore, normally the interest of the assessee in the trust fund when she had been given the right to enjoy the income of 15/30 parts of the trust fund will be her assets within the meaning of the enacting part of Section 2(e) of the Act. But Clauses (i) to (v) thereof exclude certain interests from the ambit of that wide definition and the sole point for determination is whether in the present case the right of the assessee to the income of the trust fund was in the nature of an annuity and whether the terms and conditions relating thereto precluded the commutation of any portion thereof into a lump sum grant so that such interest could fall outside the purview of the term "assets" as used in Section 2 (e) of the Act.
(3.) MR. Lodha, appearing for the Department, has strenuously, contested the stand that the interest of the assessee could be regarded as an annuity. He maintains that 15 parts out of 30 parts in the War Bonds were the assets belonging to the assessee. He further submitted that in any case Clause 7 of the deed of settlement permitted commutation of annuity is a lump sum grant. In elaboration of his arguments about the assessee's interest being not an annuity, MR. Lodha submitted, that the deed did not make any provision for making any annual payments and secondly, no definite sum was payable as the same could vary from time to time according tn the investment that the trustee will be making in exercise of his powers under the deed of settlement. According to MR. Lodha, the assessee had definitely a life interest in the trust fund and the same could be valued according to Jelicose Formula and regarded as her assets for the purposes of assessment under the Act
Mr. H. P. Gupta, appearing for the assessee, controverted the stand taken by Mr. Lodha and while supporting the view that prevailed with the Appellate Tribunal he submitted that it was the trustee who stood possessed of the settled property and it was the trustee who held it. He was required to pay only the income of 15/30 parts to the assessee and the same was to be held by him for the benefit of Maharaj Kumar Jagat Singh also who was to receive it intact on the death of the assessee. Mr. Gupta contended that the assessee had no interest in the corpus of the propertv. but was only entitled to receive the income thereof which was in the nature of annuity. Mr. Gupta pointed out that it was not necessary that the income should be received annually. Even though it was not received annually, it was according to him. an annuity and as the interest for the War Loans was fixed, the income was a fixed one.
Mr. Gupta further urged that the contigency of the trustee changing the form of investment has not come and the matter should be examined on the basis of the situation obtaining on the relevant date of valuation. He also submitted that in the very nature of things the annuity was not commutable to a lump sum as it would militate against the interests of Maharaj Kumar Jagat Singh in whose favour there was a gift over and in terms of the settlement he was to receive 15/30 parts in tact.
Both the learned Counsel relied on a number of cases which we propose to notice in the course of discussion that follows. It may be observed that for answering the two questions referred to us, we have to consider : (1) Whether the deed of settlement creates any interest in favour of the asses-see in the corpus; (2) Whether the income that the assessee was receiving was in the nature of an annuity: and (3) Whether the commutation of the annuity into a lump sum grant was precluded from the terms of the deed of settlement
The deed of settlement recites that the Maharaja was making an irrevocable settlement in respect of the War Bonds held by him and which were specified in the schedule of the deed of settlement, for the benefit of the assessee and his four sons and accordingly he has transferred the scheduled property in the name of the trustee. According to Clause 2, it was the trustee who stood possessed of the scheduled property. Again, it was the trustee who had been given the discretion to convert into money whole or any part of the settled property and to invest. the same in any other manner. According to Clause 3 of the deed, the trustee was to divide the trust fund into 30 equal parts. According to Clause 4, again It was the trustee who was to stand possessed of the 15 out of these 30 parts and to pay the income thereof to the assessee during her life time and after the death of the assessee it was the trustee who was to hold them for the benefit of Maharaj Kumar Jagat Singh. This leaves no doubt in our mind that the assessee was not given any interest in the corpus of the property.
The next question is whether the income of the 15 parts, that the assessee was to get during her life time, was annuity. Now the term "annuity" has not been defined by the Act and, therefore, we have to take it in the sense it has been taken in judicial pronouncements and in standard books
Williams on 'Executors and Administrators' observed at page 503. 12th Edition, that annuity is an yearly payment of a certain fixed sum of money granted for life or for years charging the person of the grantor only. According to the observations made in Lady Foley v. Fletcher, (1858) 157 E R 678 'where an income is purchased with the sum of money the capital has gone and ceased to have existence the principal is converted into an annuity'. In other words, it is the sinking of a capital sum in getting back an income in return for that sum. This definition of annuity has been followed and applied in a number of later decisions, such as, Coltness Iron Company v. Black, 1881 1 TC 287, Chadwick v. Pearl Life Insurance Co., 1905 2 KB 507. Gould v. Curtis, (1913) 6 Tax Cas. 293 and William John Jones v. Comrs. of Inland Revenue, 1920 7 TC 310. The various hall-marks of "annuity" are: (i) it is a money payment; (ii) it is made anually; (iii) it is a fixed sum; (iv) usually it is a charge personally on the grantor. Only one case of the Indian High Courts could be brought to our notice and that is Commr. of Wealth-tax, Gujarat v. Dr. E. D. Anklesaria, (1964) 53 ITR 393 : (ATR 1964 Guj 240). Annuity was to be paid in that case out of the net income of a trust. It was a case of a continuing annuity with gift-over to the children of the settler. Bhagwati J., who delivered the judgment, made the following observations about the concept of annuity:
"Now an annuity is a right to receive de anno in annum a certain sum; it may be given for life, or for a series of years, or during any particular period, or in perpetuity. Ordinarily when an annuity is given to a person, it is prima facie an annuity for life unless a contrary intention is manifest in the instrument granting the annuity. This general rule applies even where the testator, in bequeathing annuities to persons in succession, uses the words "for life" in one part of the bequest, and omits them in another. If for example an annuity is given to A for life, and after his death to B. B will take the annuity for life only, in the absence of any indication that he is to take a different interest. In the present case, the annuity is given to the assessee for his life and thereafter to his children in equal shares. The annuity will, therefore, enure for the life of the assessee and after the death of the assessee it will enure for the respective lives of the children and thereafter it will come to an end. There are diverse ways in which an annuity may be granted. An annuity may be granted which may be payable out of the estate of the testator or a particular fund may be indicated by way of security for payment of the annuity. There is also another way in which an annuity may be given and it is that a bequest mav be given of a sum of money to provide an annuity by purchasing it or a direction may be given to purchase an annuity of a cerain amount. Different considerations will apply in respect of these two modes of granting annuities. We will first examine the latter mode. Where there is a bequest of a sum of money to be laid out for purchasing an annuity, the annuitant is entitled to have the money, because the annuity might at once be sold, and it would be idle to compel the annuitant to have an annuity which he could resell."
In support of his observations the learned Judge referred to In re Mabbett, (1891) 1 Ch 707 (713); Palmer v. Craufurd, (1819) 3 Swan 483, Bayley v. Bishop, 1803 9 Ves. 6, Yates v. Compton, 1795 2 P. Wms. 308 and Barnes v. Rowley, 1797 3 Ves 305.