Income Tax Appellate Tribunal - Mumbai
Sushilaben A. Mafatlal vs Wealth-Tax Officer on 13 May, 1986
Equivalent citations: [1986]18ITD189(MUM)
ORDER
B.S. Ahuja, Judicial Member
1. The appeal by Smt. Sushilaben A. Mafatlal, WT Appeal No. 1795 (Bom.) of 1982, was referred to the Special Bench for deciding the following question :
Whether the amount of Rs. 78,820 lying in the CDS account of the assessee constituted an asset under Section 2(e) of the Wealth-tax Act, 1957, and, therefore, includible in the net wealth of the assessee ?
The remaining parties before us are interveners. The reference to the Special Bench became necessary because of conflict of decision between the various Benches of the Tribunal and the Bench hearing the appeal under question was of the opinion that the second decision of the Delhi Bench in the case of WTO v. S.D. Nargolwala [1983] 5 ITD 690 requires reconsideration, because the nature of deposit in the Compulsory Deposit Scheme is some sort of a fixed deposit and it is very difficult to infer that such a fixed deposit does not constitute an asset under Section 2(e) of the Wealth-tax Act, 1957 ('the Act').
2. We have heard the learned counsel for the assessee, the learned departmental representative and the counsels for the interveners who appeared before us. The learned counsel for the assessee first contended that a deposit in the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 ('the CDS Act'), is not an asset under Section 2(e)(2)(ii). He also contended that it was an annuity and was accordingly exempt both because it was not purchased by the assessee and also because the terms and conditions relating thereto preclude commutation of any portion thereof into a lump sum grant. The learned counsel took us through the CDS Act, the Annuity Deposit Scheme, 1964 and Chapter XXIIA of the Income-tax Act, 1961 ('the 1961 Act') relating to the annuity deposits. He also referred to the definition of the 'Annuity' in Section 280B(4) of the 1961 Act which reads as follows :
4 'Annuity' means any annual instalment of principal and interest thereon payable by the Central Government under the provisions of Section 280D;
He also referred to the provisions of Section 280D of the 1961 Act relating to the repayment of annuity deposits in ten annual equated instalments of principal and interest at such rate as may be notified by the Central Government in the Official Gazette. The proviso laid down that the authority empowered to make such payment would be entitled to pay the commuted value of the annuity deposit if it is satisfied that genuine hardship will be caused if such payment is not made. As against this it was pointed out that the corresponding proviso in Section 8 of the CDS Act makes a similar provision but only if the ITO is satisfied that extreme hardship will be caused unless such repayment is made. It is urged that extreme hardship would be a more onerous condition than the genuine hardship and, therefore, it should be held that the Compulsory Deposit Scheme was an annuity which was not commutable.
3. It was pointed out that Section 7A was introduced in the CDS Act by the Finance (No. 2) Act, 1974, with retrospective effect from 1-4-1975 and it provided that for the purpose of exemption under Section 5 of the Act, the amount of compulsory deposit shall be deemed to be a deposit with a banking company to which the Banking Regulation Act, 1949 applies. It is, however, urged that under Section 5(1 )(xxvi) this would only apply to deposits in the bank for more than six months and the entire deposit in the Compulsory Deposit Scheme would not be exempt. That apart, this exemption was subject to overall limit under Section 5(1 A), which was then a sum of Rs. 1.5 lakhs.
4. It was then urged that the CDS Act followed the Annuity Deposit Scheme which it replaced and it was urged that the provisions of the Annuity Deposit Scheme and the CDS Act were in pari materia so that when the deposit under the Annuity Deposit Scheme was an annuity for the purposes of the Act then the deposit in the Compulsory Deposit Scheme was also an annuity. It was further urged that the definition of an annuity in Section 280B(4) would apply also to the meaning of'annuity' under the CDS Act. The learned counsel further took us through the various rulings to explain as to what was the meaning of an 'annuity'. For this he relied mainly on the Supreme Court ruling in CWT v. P.K. Banerjee [1980] 125 ITR 641. It was pointed out that the rate of interest on the compulsory deposits under the CDS Act was subject to change and had in fact been changed from time to time so that the amount payable every year regarding principal repayable in five instalments may be fixed but the amount of interest payable would be a variable sum. The learned counsel did not dispute that this was indeed so but he pointed out that even under the Annuity Deposit Scheme, the interest was payable at such rate as may be notified in Section 280D and it was urged that the power to fix the rate of interest includes the power to vary the rate under Section 21 of the General Clauses Act, 1897, and, therefore, even the fact that the rate of interest under the CDS Act was variable, did not affect the claim that the instalments repayable under the CDS Act were an annuity.
5. The learned counsel for the assessee took us through the first decision of the Tribunal in the case of WTO v. S.D. Nargolwala [1982] 2 ITD 396, wherein the Delhi Bench of the Tribunal held following the Supreme Court ruling in P.K. Banerjee's case (supra) that the deposit in the Compulsory Deposit Scheme was not an annuity. The Tribunal held that the repayment under the Compulsory Deposit Scheme was a variable amount both as regards the interest and the repayment components. It was also held that it could not be an annuity since it was purchased by the assessee himself. This order was recalled by the Tribunal and was decided afresh in S.D. Nargolwala's case (supra). In this order, the Tribunal came to a contrary decision, again following the Supreme Court ruling in P.K. Banerjee's case (supra) that the payment of a fixed or predetermined sum was to be made periodically to the assessee under the CDS Act. Such payment was not liable to variation depending upon the general income of the fund charged with such payment which was Consolidated Fund of India. Further, the deposit made by the assessee had not been purchased by him since it was made under the statutory obligation. Therefore, it amounted to an annuity which was exempt.
6. The definitions of the word 'annuity' in various rulings and dictionaries were referred to which are on pages 57, 58 and 59 of the paper book.
7. The learned counsel appearing for the assessee Smt. Sushilaben A. Mafatlal, did not press the point that if the Compulsory Deposit Scheme was not exempt as an annuity then not its face value but its discounted value should be included in the net wealth of the assessee.
8. Shri Ajay Thakore, appearing for the intervener Shri P.P. Mehta, in WT Appeal No. 2536 (Bom.) of 1984, adopted all the arguments of Shri S.P. Mehta for the main appellant but contended relying on the Supreme Court ruling in Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97, that the value of the deposit would have to be discounted since the amount was not immediately payable even though interest was payable on the amount deposited. In that case, the value of compensation on abolition of zamindari in the shape of bonds was discounted at 65 per cent on the ground that interest on the bonds was very low. In fact the WTO had included only 75 per cent of the compensation in the net wealth of the assessee and since part of the compensation had been adjusted against the Government dues and the assessee was deemed to have received full value of the bonds to that extent and the market value of the bonds was only 50 per cent, the Tribunal had reduced the value of the bonds to 65 per cent which the Supreme Court upheld. The learned counsel claimed that in the estate duty cases and land acquisition cases also the value of compensation has been discounted and for this he relied upon Mrs. Khorshed Shapoor Chenai v. ACED [1980] 122 ITR 21 (SC). In that case, however, the discounting was directed to be done primarily in view of the hazard of litigation looking large at the relevant data because the compensation awarded by the Collector and enhanced by the civil court would be subject to challenge in appeals. The other interveners were not represented at the hearing.
9. As against this the learned departmental representative, Shri Kamat placed reliance on the reasons given by the Bombay Bench 'D' in the case of B.D. Garware[WT Appeal No. 209 (Bom.) of 1981, dated 11-2-1982] to the effect that the amount of deposit under the Compulsory Deposit Scheme is includible in the wealth of the assessee but its value had to be discounted. The learned departmental representative did not rely on this order so far as the second proposition is concerned. The learned departmental representative strongly relied upon the first order of the Tribunal in the case of S.D. Nargolwala (supra). He then referred to the meaning of 'annuity' as given in CWT v. Mrs. Dorothy Martin [1968] 69 ITR 586 at 592 (Cal.). This ruling had been approved by the Supreme Court in the case of CWT v. Arundhati Balkrishna [1970] 77 ITR 505. For the meaning of annuity he also relied on the illustrations in Section 173 of the Indian Succession Act, 1956.
10. The learned departmental representative then pointed out that the intention of the Parliament in enacting the CDS Act was only to treat the amount as a deposit and not as an annuity. This was clear from the name of the Act which was the CDS Act. On the contrary, while the Annuity Deposit Scheme used the nomenclature 'annuity' itself, the deposit under the CDS Act was credited in a pass book in the name of the depositor in the bank and the repayment was made specifically of the instalment and of the accrued interest both the amounts being separately worked out but paid together. The rate of interest was also variable from time to time and it was notified and gazetted every year under the Annuity Deposit Scheme. There was no provision in the Annuity Deposit Scheme as. in the CDS Act to credit a deposit to the name of the depositor. Section 17 clearly mentions the words 'standing to the credit of any depositor, while there was no credit in the name of the depositor under the Annuity Deposit Scheme. The deposit under the Compulsory Deposit Scheme was clearly a deposit, pure and simple. Since the interest rate was variable it could never be an annuity because each year the rate of interest could be changed and was in fact changed from time to time so that only one component of the refund, i.e., one-fifth of the instalments could be said to be fixed but not the interest component.
11. It was then urged that if the deposit under the CDS Act was exempt as an annuity then it would have been unnecessary to add Section 7A retrospectively with effect from 1-4-1975 to treat the deposits under the Act as bank deposits for the purposes of exemption under Section 5. For this, he referred to the notes on clauses when this provision was introduced in CIT v. Vishnudayal Dwarkadas [1980] 123 ITR 140 (Bom.). If the interpretation now canvassed was the correct interpretation then introduction of Section 7A was unnecessary.
12. Section 8 was further amended by adding the new Sub- section (2) to enable the depositors under the CDS Act not to withdraw a deposit when it falls due and it would still be treated as a deposit and would continue to earn interest. Such a provision, it was urged, was totally foreign to the concept of 'annuity'. It was further pointed out that the instalment of the Compulsory Deposit Scheme falling due on 1-4-1985 was postponed by the Parliament for one year and this too could not have been done if it was an annuity.
13. Alternatively it was contended that even if it is held to be an annuity, it could still not be treated as exempt, firstly because it could be commuted, though in the cases of extreme hardship only. It was, however, urged that this power would be used by the ITO judicially and not capriciously and would, therefore, be justiciable. Secondly, it was urged, that the annuity was purchased by the assessee meaning thereby that he paid for it and there is no requirement that the purchase must be voluntary under the Act where the words used in respect of 'annuity' under Section 2(e)(ii) are 'purchased' by the assessee. The plain meaning of the word 'purchase' is contrary to a 'gratuitous receipt'. If the assessee has obtained this annuity at his expense then it is purchased but if it is received under a will then it could not be said to be purchased by the assessee. Relying on CIT v. T.N. Arvinda Reddy [1979] 120 ITR 46 (SC) it was urged that the meaning to be given to the terms used should be the meaning as commonly understood. In that case T.N. Arvinda Reddy (supra) the Supreme Court held that the word 'purchase' used in Section 54(1) of the 1961 Act had to be given a common meaning, i.e., buy for a price or equivalent of a price.
14. I t was then urged that what was repayable under the Compulsory Deposit Scheme was instalment and interest and the assessee had to fill in Form 'N' for withdrawal of both the instalment and interest due thereon. This was clear from Section 10(4) of the CDS Act. An assessee could not claim to withdraw the principal and not the interest. Since the composite sum is repayable under Section 8(1) and the interest component thereof is a variable sum it could not be treated as an 'annuity' at all.
15. The learned counsel for the appellant, in reply, reiterated that the CDS Act and the Annuity Deposit Scheme were both in pari materia, that Section 7A was based on the Parliament's assumption and did not mean that the assessee's claim that it was an annuity should be rejected out of hand. Section 8(2) did not decide the character of the deposit but only laid down that if the assessee does not withdraw the instalment repayable, then it would assume the character of the deposit. He contended that 'acquire' is a wider term than 'purchase'.
16. We have considered the rival submissions. The first question to be considered is whether the deposit in the Compulsory Deposit Scheme is an annuity, not purchased by the assessee and is, therefore, exempt because on the face of it unless exemption can be claimed as an annuity under Section 2(e)(2)(ii) it would clearly be includible in the net wealth of the assessee for the simple reason that it is a deposit in the name. of the assessee in a bank with only the restriction on the right of withdrawal thereof for two years absolutely and, thereafter, the right to withdraw one-fifth thereof for the next five years. Interest runs on the amount in deposit at more or less higher bank rate of interest. It has all the attributes of deposit in a bank because the assessee when he makes a deposit gets a pass book in which an entry is made as is made in the case of any other deposit in a bank. Interest is calculated on the balance due every year by the bank and credited in the pass book. The assessee has a right of withdrawing it subject to restrictions noted earlier.
17. Coming now to the question whether or not it is an annuity, various definitions of annuity have been given at pages 57 and 58 of the paper book. Annuity is generally a fixed sum of money payable periodically and not subject to variation. However, on page 57, at No. 4, the meaning of annuity is given as follows :
An annuity cannot be related to a fixed proportion of capital.
It would clearly show that when the assessee receives one-fifth of the amount deposited by him in each year for a period of five years, after the lapse of two years of deposit, it cannot be treated as an annuity because it is related to a fixed proportion of capital. The concept of annuity was first discussed at length by the Calcutta High Court in the case of Mrs. Dorothy Martin (supra). This ruling of the Calcutta High Court was approved by the Supreme Court in the case of Arundhati Balakrishna (supra). Their Lordships observed in this ruling that annuity is a well-known legal term. Instances of annuity appear in the illustration to Section 173 of the Indian Succession Act and it is interesting to note that in each case a specified sum is mentioned. Thus, it is possible to hold that the word 'annuity' a well-known legal term, has been used in the Act in its well-known legal meaning, namely, a fixed sum of money payable annually or periodically. In Arundhati Balkrishna's case (supra), the Supreme Court held that ordinarily an annuity is a money payment of a fixed sum annually made and is charged personally on the granter.
18. In P.K. Banerjee's case (supra), again the question of what is meant by an annuity fell for consideration before the Supreme Court. In that case the settlor had created a trust of the Government securities bearing interest at a fixed rate with power to the trustees to reinvest the proceeds upon redemption in other Government and other securities. After the death of the settlor, the assessee became entitled to receive under the trust, the net income of the trust for his lifetime. The question was whether the interest of the assessee in the trust fund amounted to an annuity exempt under Section 2(e)(iv). Their Lordships held as follows :
Held, reversing decision of the High Court, that the right of the assessee in the trust fund was not an 'annuity' and was not exempt from wealth-tax under Section 2(e)(iv). In order to constitute an 'annuity' the payment to be made periodically should be a fixed or predetermined one and it should not be liable to variation depending upon or on any ground relating to the general income of the fund or estate which was charged for such payment. What the Court had to see was the intention of the settlor, whether he wanted that the assessee should get a predetermined sum every year or whether the assessee should get the whole net income of the trust fund. Since, in this case, the intention of the settlor was the latter, the right of the assessee could not be treated as an annuity. Further, under the trust deed, the trustees had been given the power to reinvest the proceeds of the Government securities which lead to the possibility of variation of the income and consequently of the amount to be received by the assessee. The fact that no such reinvestment had taken place during the relevant years was immaterial. (p. 642) A careful reading of this ruling would show that the claim that a deposit in the Compulsory Deposit Scheme is an annuity is totally misconceived and unsustainable because in the case of Compulsory Deposit Scheme the rate of interest is fixed every year and not only that there is a right to vary the rate of interest but also as a fact the rate of interest has been varied from year to year. Therefore, the only fixed part of the Compulsory Deposit Scheme repayment is the one-fifth of the deposits actually made by the assessee and that is not variable though the interest part is variable sum and is actually varied from year to year. Therefore, on the ratio of this ruling the deposit in Compulsory Deposit Scheme cannot be called an annuity.
19. That apart, in the instant case, as we see. the repayment of the instalment due on 1-4-1985, of both principal and interest were postponed by one year by a statute. That indicates that the Parliament did not treat it as an annuity because the very fact that repayment for one year was denied to the recipients would be against the concept of the annuity itself.
20. Further, the introduction of Section 7A in the CDS Act granting exemption under Section 5 of the 1957 Act to the compulsory deposits clearly showed the intention of the Legislature to grant this specific exemption because the deposits under the Compulsory Deposit Scheme would otherwise not have been entitled to any exemption with regard to the wealth-tax. If these deposits could be exempted as an annuity, Section 7A would be rendered redundant. The least we can say is that this shows the intention of the Parliament to give a specific exemption to Compulsory Deposit Scheme deposits which in the opinion of the Parliament were not otherwise exempt.
21. The introduction of Section 8(2) entitling a depositor not to withdraw any amount of instalment or interest which has become repayable and such deposit could continue to carry interest further shows that this is not an annuity because there is no such option available in the case of an annuity. That the instalment falling due would be treated as deposit clearly shows that it was akin to an ordinary deposit and not to an annuity.
22. The reliance placed on definition of 'annuity' in Section 280B(4) has no bearing on the meaning of annuity under the general law because that is a specific definition for the purposes of the Annuity Deposit Scheme. In this definition 'annuity' means instalment of principal and interest thereon payable by the Central Government under the provisions of Section 280D. The need for this definition obviously arose because the annual instalment of principal and interest would not otherwise have been treated as an annuity. That apart, the scheme itself was known as Annuity Deposit Scheme while this scheme is a Compulsory Deposit Scheme which is totally different from the Annuity Deposit Scheme. It is wrong to say that the provisions of two schemes are in pari materia, On the contrary they arc quite different from each other.
23. We, therefore, hold that deposit under the CDS Act is not exempt as an annuity because what is paid every year as instalment of principal and interest is not an annuity in the eye of law.
24. With that finding the question whether or not the annuity was purchased by the assessee and whether or not it is commutable becomes academic. However, we shall briefly deal with those issues also. As regards the question of commutation, there is a clear provision in proviso to Section 8(1) that the ITO can make a payment of the deposit in case of extreme hardship. It is not a provision for commutation because the Parliament did not see it as an annuity but only as a deposit and provided that in cases of extreme hardship the ITO could authorise early repayment. Provision for or against commutation would have been made if it was an annuity. Since a deposit under the CDS Act is not an annuity, no provision for commutation as such was made.
25. Lastly, the question arises as to whether the annuity was purchased by the assessee. The argument on behalf of the assessee is that a purchase of an annuity should be a voluntary act. We fail to see any justification for such a restricted meaning to the word 'purchased' used in this Section. 'Purchased' would obviously mean, in plain English, that the assessee had paid for obtaining this annuity. The concept of compulsion does not enter into the consideration whether it is purchased or not. The Supreme Court has held in T.N. Aravinda Reddy's case (supra) that the word 'purchased' in Section 54(1) of the 1961 Act had to be given its plain meaning, viz., buy for a price or equivalent of price. We are of the opinion that this meaning should also be given to the word 'purchased' to in Section 2(e)(2)(ii). For all these reasons we hold that the deposit in the Compulsory Deposit Scheme is not exempt because it is not an annuity, nor do the terms thereof preclude the commutation and also because it is purchased by the assessee.
26. As regards the question whether the deposit in the Compulsory Deposit Scheme account even if it is to be included in the net wealth of the assessee has to be discounted on account of the restrictions on the withdrawal of the same is concerned, we are of the opinion that when it is a deposit in a bank and it is earning a very high rate of interest which is payable only on long-term deposits and the amount is repayable in instalments of one-fifth of each deposit after a lapse of 2 years, there should be no question of discounting its value at all. Therefore, the face value of the deposit would be included in the net wealth of the assessee.
27. In the result, the assessee's appeal is dismissed.