Gujarat High Court
Commissioner Of Income-Tax vs Nandkishore Sakarlal (Indl.) And ... on 13 March, 1993
Equivalent citations: [1994]208ITR14(GUJ)
JUDGMENT G.T. Nanavati, J.
1. All these three references have been made by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue. As the questions are, in substance, the same they are disposed of by this common judgment. However, in order to avoid any confusion, we set out the questions referred in each of these references respectively.
2. Income-tax Reference No. 445 of 1980 :
"1. Whether the amount of Rs. 26,221 being 1/3rd of the sum of Rs. 78,663 paid to the Life Insurance Corporation by Sarangpur Mills for purchase of deferred annuity policy is includible in the hands of the assessee as income chargeable under the head 'Salaries'?
2. Whether, on the facts, circumstances and the evidence on record, the Income-tax Appellate Tribunal was right in law in coming to the conclusion that the amount of Rs. 26,221 utilised by Sarangpur Mills towards purchase of single premium for obtaining the deferred annuity policy did not form part of remuneration payable to the assessee for the calendar year 1972 relevant to the assessment year 1973-74 in question ?"
3. Income-tax Reference No. 212 of 1982 :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that an amount of Rs. 90,000 being the value of life insurance policy taken by Sarangpur Cotton Mfg. Co. Ltd., on the assessee who was its managing director was not exigible to tax in the hands of the assessee ?"
4. Income-tax Reference No. 213 of 1982 :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that an amount of Rs. 90,000 being the value of life insurance policy taken by Sarangpur Mfg. Co. Ltd., on the assessee who was its managing director, was not exigible to tax in the hands of the assessee ?"
5. The assessee in Income-tax References Nos. 445 of 1980 and 212 of 1982 is Nandkishore Sakarlal. The assessee in Income-tax Reference No. 213 of 1982 is Navnitlal Sakarlal. Both are brothers and at the relevant time, they were managing directors of Sarangpur Cotton Mfg. Co. Ltd. There were in all three managing directors and the total remuneration payable to them was 10 per cent. of the profits of the mills. In the year relevant to the assessment year 1973-74, the total remuneration worked out to Rs. 2,19,335. Out of this amount, Rs. 90,000 were paid to the three directors; Rs. 50,673, related to perquisites allowable to them and the balance amount of Rs. 78,662, which would have been otherwise paid to the three directors, was, because of the resolution passed by the board of directors, not paid to them, but was paid to the Life Insurance corporation for purchasing deferred annuity policies. The share of the assessee being one-third in the said amount, during the assessment proceedings a question arose whether Rs. 26,221 being the value of the Life Insurance Corporation taken out by the Sarangpur Mills for the benefit of the assessee was includible as income of the assessee, Nandkishore. In the year relevant to the assessment year 1974-75, the mills company had spent Rs. 90,000 for the purpose of single premium deferred annuity policy for the benefit of the assessee, Nandkishore Sakarlal, and a similar policy of equal amount for the benefit of the assessee, Navnitlal Sakaral. During the assessment proceedings of both the assessees for the assessment year 1974-75, a similar question arose as to whether the amount of Rs. 90,000 should be treated as income of the concerned assessee. In respect of the amount of commission payable to the managing directors for the calendar year 1972, the board of directors and passed a resolution on April 12, 1973, whereby it was resolved to purchase single premium deferred annuity policies for the concerned managing directors. Instead of paying the commission payable for the relevant year, it was resolved by the board of directors to provide for the payment of annuity to each of them for his life and upon his death to his dependents. Such payments were to commence for the date of his retirement as managing director of the company or such other date as was mutually agreed upon between the company and the concerned managing director or from the date of his death whichever was earlier. But in the said resolution, it was further provided that "no benefit shall occur to any of the said managing directors or his dependents, as the case may be, nor shall any of the said managing directors have any right, lien or interest in any of the aforesaid policies until the date of the first payment of annuity and the balance-sheet and profit and loss account of the company for the year 1972 be prepared accordingly." Similar resolution for the remuneration payable for the calendar year 1973 was passed on December 20, 1973.
6. So far as the amount of Rs. 26,221 is concerned, the Income-tax Officer, considering the past practice and construing the resolutions, held that the amount of remuneration which had become due was to be paid to the Life Insurance Corporation for purchasing the deferred annuity policy and, therefore, even though the said amount was not paid to the assessee, it was includible in his total income. The same view was taken with respect to the amount of Rs. 90,000 with which the deferred annuity policy was purchased in the subsequent year.
7. In the appeals filed by the assessee, the Appellate Assistant Commissioner confirmed the finding of the Income-tax Officer that the remuneration did in fact accrue to the assessees and as the remuneration had become due, it became chargeable under section 15 of the Act even though the same was not paid to the assessees but was invested in their insurance policies. The Appellate Assistant Commissioner, therefore, dismissed the appeals of the assessee on this point.
8. The assessees then preferred separate appeals to the Tribunal. The Tribunal first referred to clause 6(e) of the articles of agreement which empowered the directors to resolve that the managing director should not be paid any remuneration as was specified in sub-clause (a) of sub-clause (b), or perquisites mentioned in sub-clause (e) for that year, or that he should be paid such less remuneration or benefits, as they thought fit. It then took note of the resolution passed by the board of directors whereby a portion of remuneration (commission) payable to each of the managing directors was decided to be expended in the purchase of single premium deferred policies. It also considered the circumstance that in the audited accounts of the company, a sum of Rs. 78,662 relating to all the three managing directors, was shown as the amount paid to the Life Insurance Corporation for purchasing deferred annuity policies. Thus, taking note of the articles of agreement, the power of the board of directors as regards payment of remuneration and the actual provision made in the account books of the mill company the Tribunal held that the directors of the mills had decided not to pay a portion of the remuneration to the assessee and the other managing directors and in fact had not paid that amount to them and instead the amount which would have otherwise become payable was spent for the purpose of purchasing deferred annuity policies. It further held that the amount utilised towards single premium deferred annuity policies did not form part of the remuneration payable to the assessees. Following the decisions of the Bombay bench of the Tribunal, the Tribunal held that the said amounts were not includible in the total income of the assessees. It, therefore, allowed the appeals of the assessees so far as this point was concerned.
9. The Revenue, feeling aggrieved by this view of the Tribunal, moved the Tribunal for referring the above stated questions to this court.
10. Learned counsel appearing for the Revenue submitted that on a true interpretation of the resolution, it should have been held that the amounts which were spent for purchasing the deferred annuity policies had really become due to the assessees and, therefore, the said amounts did form part of the total income of the assessees. He submitted that the assessees got a vested right in the benefits, which were to follow from the deferred annuity policies and even though the annuity was to become payable after ten years, the amounts spent for purchasing the policies did become the income of the assessees for the relevant years. In the alternative, he submitted that, in any case, the sums paid by the mills company to effect a contract for any annuity became perquisites and for that reason also those sums were includible in the total income of the assessees. He lastly submitted that, in any case, so far as the assessee, Nandkishore, is concerned, the amount of Rs. 26,221 had already become payable to him for the calendar year 1972. It had become due to him before the passing of the resolution on April 12, 1973 and, therefore, at least for the assessment year 1973-74 it should have been held that the said amount was includible in his total income. Relying upon the decision of the Supreme Court in CIT v. L. W. Russel [1964] 53 ITR 91, he submitted that except in cases where vested interest does not accrue to an employee, the contributions made by an employer to provide pensionary or deferred annuity benefits to employees cannot be taxed in the hands of the employees. In that case it has been held that the contributions made by an employer to provide pensionary or deferred annuity benefits to employees cannot be taxed in the hands of the employee under section 7(1) of the Indian Income-tax Act, 1922, unless a vested interest therein accrued to the employees. He submitted that in that case, in view of the facts of that case, it was found by the court that the employee had not acquired any vested right in the contributions made by the employer and the right to receive the benefit was to vest in him only when he attained the age of superannuation. Till that date the amount vested in the trustees and it was to be administered in accordance with the Scheme and the Rules framed in that behalf. Interpreting section 7(1) (a) and clause (v) of Explanation 1, the Supreme Court held that (at page 96) :
"............... if a sum of money is allowed to the employee by or is due to him from or is paid to enable the latter to effect an insurance on his life, the said sum would be a perquisite within the meaning of section 7(1) of the Act and, therefore, would be exigible to tax. But before such sum becomes so exigible, it shall either be paid to the employee or allowed to him by or due to him for the employer. So far as the expression 'paid' is concerned, there is no difficulty, for it takes in very receipt by the employee from the employer whether it was due to him or not. The expression 'due' followed by the qualifying clause 'whether paid or not' shows that there shall be an obligation on the part of the employer to pay that amount and a right on the of a wider connotation and any credit made in the employer's account employee to claim the same. The expression 'allowed', it is said, is of a wider connotation and any credit made in the employer's account is covered thereby. The word 'allowed' was introduced in the section by the Finance Act of 1955. The said expression in the legal terminology is equivalent to 'fixed, taken into account, set apart, granted'. It takes in perquisites given in cash or in kind or in money or money's worth and also amenities which are not convertible into money............"
11. However, the Supreme Court made it clear that one cannot be said to allow a perquisite to an employee if the employee has no right to the same. The Supreme court has also observed that it cannot apply to contingent payments to which the employee has no right till the contingency occurs. The Supreme Court then observed that in short the employee must have a vested right therein.
12. Whether an employee can be said to have a vested right would depend upon what is meant by a vested right, and upon the nature of the transaction. It was submitted that an interest was created in favour of the assessee even though it was to take effect at a future date, but on the happening of an event, which was bound to happen and, therefore, it did amount to vested interest in terms of section 19 of the Transfer of Property Act. He also referred to the Explanation to section 19, which provides that an intention that an interest shall not be vested is not to be inferred merely from a provision whereby the enjoyment thereof is postponed, or whereby a prior interest in the same property is given or reserved to some other person, or whereby income arising from the property is directed to be accumulated until the time of enjoyment arrives, or from a provision that if a particular event shall happen the interest shall pass to another person. In our opinion, reliance placed upon the Explanation is misconceived. The Explanation would apply to a case where it becomes necessary, in the absence of any definite material, to known what was the intention of the parties. As section 19 itself has provided, if a contrary intention appears from the terms of the transfer, then even though an interest is created in favour of a person, such interest is not to be regarded as vested interest. In this case, the nature of the transaction and the intention of the parties is reflected in the resolutions passed by the board of directors. If we turn to the resolutions, it becomes quite clear that the intention was not to create any benefit either in favour of the managing director or his dependent or to create any right, lien or interest in the policy until the date of the first payment of annuity. As stated earlier, the payments of the annuity were to commence from the date of retirement of the managing director or from the date of his death whichever accord earlier. Therefore even though the deferred annuity policies which were taken were single premium deferred annuity policies, and even though they were taken out for the benefit of the managing director and in lieu of commission payable to them, it was clearly intended by the board of directors that the managing directors should not have any vested right in the policies. If we turn to the policies, it further becomes clear that the same were taken pursuant to the resolutions passed by the board of directors and the terms thereof clearly reflected the intention of the board of directors as contained in those resolutions. In those policies, Sarangpur Cotton Mfg. Co., Ltd., is shown as a proposer and the assessees are shown as annuitants. The first policy was taken out on July 1, 1973, and therein the date on which the annuity was to vest is shown as July 1, 1983. With respect to the date when the annuity was to become payable, it is stated : "On the stipulated due date of the first annuity instalment and mostly thereafter." With respect to whom the annuity or death benefits were to be payable to, it is stated, "To proposer". Though the proposer had not right to surrender the policy nor could the policy be assigned to anyone else, it becomes clear that no vested right in favour of the assessee was created by that policy. Again for all these reasons, it cannot be said that the sums in question with which the deferred annuity policies were purchased amounted to "perquisites", as contemplated by section 17(2)(v) of the Act.
13. It was, however, urged by learned counsel for the Revenue that passing the resolutions in that manner and not creating any vested right in favour of the assessees was a device adopted by the mills company and the assessees for the purpose of avoiding payment of tax. We should, therefore, not construe the resolutions as not creating a right in favour of the assessees even though clear words were used in those resolutions for that purpose. In support of this contention, he relied upon the decision of the Supreme Court in McDowell and Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148. Therein, the Supreme Court has observed as under (headnote) :
"Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation............."
14. In our opinion, the observations made in that case can have no application to the facts of this case. The transactions in question cannot be said to be devices to avoid payment of tax. If we examine the true nature of the transactions, it becomes clear that as a result of these transactions no income accrued to the assessee nor any right was created in favour of the assessees in the sums in question. What happened as a result of passing of these resolutions by the board of directors was to deny the assessees the remuneration which would have become payable in those years and to create a right to receive the same at a future date. The intention of the parties was not to create any present right in favour of the assessees. Thus, the effect of the transactions was to postpone accrual and receipt of income. It deserves to be noted that while making the aforesaid observations, the Supreme Court affirmed the decision of this court in CIT v. Sakarlal Balabhai [1968] 69 ITR 186, wherein it is held as under (at page 200) :
"Tax avoidance postulates that the assessee is in receipt of an amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E of assume diverse other forms....... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability; no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise............" (see CIT v. Sakarlal Balabhai [1972] 86 ITR 2 (SC)).
15. In its subsequent decision in CWT v. Arvind Narottam [1988] 173 ITR 479, the Supreme Court has observed that where the true effect on the construction of the deeds is clear, appeal to discourage tax avoidance is not a relevant consideration. In the present references, on a construction of the resolution, as we have found that the true effect thereof was to deny the income to the assessees and the income, which would have otherwise become due and payable to the assessees was transferred to and vested in some other person. Therefore, these cases cannot be said to be cases where the mill company, or the assessees can be said to have adopted a device with a view to avoid tax liability. It is, therefore, not possible for us to construe that resolutions as contended by learned counsel for the Revenue. As stated earlier, the managing directors' total remuneration was not to exceed ten per cent. of the net profits of the income in view of the provisions of the companies Act and also the articles of agreement made between the mills company and the three managing directors. Moreover, clause 6(e) of the articles of agreement empowered the directors to resolve that managing directories should not be paid any remuneration mentioned in sub-clause (a) or (b) or the perquisites mentioned in the said sub-clause (e) for any year or that they should be paid such lesser remuneration or benefits as were determined by the board of directors. The said sub-clause (e) further provides that if the directors passed such a resolution then the managing directors were to refund that amount which became excess in their hands as a consequence of the resolution.
16. The mills company had adopted the calendar year as its accounting year. Thus, for the calendar year 1972, the accounting year ended on December 31, 1972, and the relevant assessment year for that period was 1973-74. It was, therefore, submitted by learned counsel for the Revenue that in any case in the assessment year 1973-74, it can be said that the amount of Rs. 26,221 had become due to the assessee, Nandkishore, as the year had ended on December 31, 1972, and as per the articles of agreement, he had earned that amount. In our opinion, there is no substance in this contention also. Though the year ended on December 31, 1972, the remuneration to be paid to the managing directors did not become due till it was sanctioned by the company in its general meeting. Moreover, the remuneration that was payable to the managing directors was subject to the right of the directors to decide whether such remuneration should be paid or not or whether lesser remuneration should be paid to them. Before the amount worked out at ten percent of the net profits could be sanctioned by the company in its general meeting, the board of directors had passed a resolution whereby they had resolved not to pay the amount of commission payable to the managing directors and to spend that amount for purchasing the deferred annuity policies for them. In the subsequent year, as stated earlier, such a resolution was passed before December 31. Therefore, it is not possible to accept the contention raised on behalf of the Revenue that the commission payable to the managing directors had become due to them and, therefore, the sums in question in each case should be regarded as income in the hands of the assessees and taxable under the head "Salaries". In our opinion, the tribunal was right in holding that the sums in question were not includible in the total income of the assessees and the assessee were under no obligation to pay tax thereon.
17. In the result, in Income-tax Reference No. 445 of 1980, we answer question No. 1 in the negative and question No. 2 in the affirmative, that is, against the Revenue and in favour of the assessees. In Income-tax Reference Nos. 212 and 213 of 1982, the question is answered in the affirmative, that is, against the Revenue and in favour of the assessees. No order as to costs.