Bombay High Court
Ness N. Wadia vs Income Tax Officer. on 2 August, 1994
Equivalent citations: (1995)51TTJ(MUMBAI)11
ORDER
T.A. BUKTE, J.M. :
This is the appellants appeal against the order of the CIT(A) - XXVI, Bombay dt. 18th Feb., 1994. The CIT(A) confirmed the addition of Rs. 22,39,000 regarding the consideration received on sale of remaindermans reversionary interest held by the appellant in a private trust as causal income under S. 10(3) of the IT Act, 1961. The appellants contention was that the said consideration should have been treated as capital gains under Ss. 45 to 55 of the Act. As the entire consideration of Rs. 22,39,000 was invested in the capital gains bonds and, therefore, the capital gain was exempt under S. 54E of the Act. The Assessing Officer held that the beneficial interest was not a capital asset and hence the capital gains did not arise out of the transfer of the remaindermans reversionary interest. The CIT(A) further held that the appellant did not hold any existing right of interest, being only a remainderman and such right would devolve only on a future date. It was submitted that the appellant held the beneficial interest in the trust and it was only a separate asset forming part of the corpus owned by the trustees which would devolve on a future date. It was argued that the CIT(A) mixed up the beneficial interest under the trust with the asset comprising the corpus although these were separate assets as the right in the corpus of trust and right as residual beneficiary were two different things.
2. We have heard the learned representative Smt. Shobha Jagtiani for the appellant and the learned Departmental Representative Shri N.C. Nair. Their arguments are taken into consideration.
3. It would be better to clarify at this stage only that the hearing of the appeal was completed on 14th July, 1994. The learned Departmental Representative Shri N.C. Nair, presented an application dt. 15th July, 1994 on 18th July, 1994 before us that he learnt that the subject of taxing casual and non-recurring receipts on sale of rights in property was being heard by the Special Bench, ITAT, Bombay, in the case of Cadell Weaving Mills Co. Pvt. Ltd. vs. CIT in ITA No. 7699/Bom/93 and, therefore, he requested to defer till the order of the Special Bench in the aforesaid case comes out. We released the matter without hearing the appellant. Thereafter, the appellants representative Shri D.M. Harish made an application dt. 21st July, 1994 and contended that the issue referred to the Special Bench in the aforesaid case was of taxing of casual or non recurring receipts of sale of right in property by surrendering compensatory or tenancy right and was a different issue. The question being considered in that appeal revolves around the controversy relating to surrender of tenancy rights which has been generated due to the decision of the Allahabad High Court in the case of CIT vs. Gulab Chand (1991) 192 ITR 495 (All). In the instant appeal, the question of capital gains on sale of remaindermans reversionary interest held by the appellant in a private trust was a different issue. The trust in question has corpus and a remainderman is entitled to receive the corpus after the death of beneficiary who has only life interest in the income of the trust. Thus, the remaindermans reversionary rights were definite rights in the corpus of the trust. Thus remaindermans reversionary rights were altogether different from possessing or tenancy rights in a premises. It was submitted that the consideration received for sale of remaindermans reversionary rights cannot be taken as income of casual nature.
4. Having found the substance in the application made on behalf of the appellant and the difference between the issues pending before the Special Bench and in the instant appeal, we recalled the hearing after hearing both the parties on this issue.
5. The only dispute was against the addition of Rs. 22,39,000 as casual income under S. 10(3) of the Act instead of considering its taxability under the head capital gains. This amount was received on transfer of remaindermans reversionary interest in a private trust, namely, Neville Ness Settlement No. 2. Under the said trust, the appellant was entitled to receive part of the assets of the said trust on its termination in accordance with the recitals of the trust deed. The appellant sold his share of remaindermans reversionary interest in the said trust for a consideration of Rs. 22,39,000. The same interest was sold equally to two companies, i.e. (i) Jehreen Investment Ltd. and (ii) Lochness Investment Ltd. What was held by the Assessing Officer and the CIT(A) was that the appellant did not have present rights on the life interest and benefits of which were subject to so many contingencies and which could devolve only on a future day. Therefore, according to the Assessing Officer and the CIT(A), the appellant had no benefits arising out of the same.
6. Secondly, according to them, the said remaindermans reversionary interest in a private trust had no cost to start with. Therefore, the provisions of capital gains were not attracted. Receipt was held as from a chance buyer and according to the Departmental authorities, the same was in the nature of casual income. They further held that the appellants investing the sale proceeds in capital gains bonds did not qualify for the benefit under S. 54E of the Act. Therefore, the Assessing Officer brought the entire amount to tax under the head income from other sources and the CIT(A) agreed to the same.
7. Three propositions were put before the CIT(A) and those propositions were repeated before us at the time of hearing. They are as follows :
(i) Remaindermans reversionary interest was a capital asset in terms of S. 2(14) of the IT Act and any income arising out of transfer of such asset was to be assessed under Ss. 45 to 55 of the IT Act;
(ii) As per the proviso to S. 10(3), capital gains chargeable under S. 45 cannot be taxed as casual and non-recurring income; and
(iii) The appellant would get exemption from capital gains tax in view of re-investment of the sale proceeds in capital gains bonds.
Undoubtedly, the appellant would gain absolute ownership over the trust assets only at a future point of time, the present remaindermans reversionary interest was not an asset. According to the Departmental authorities, making valuation of the reversionary life interest getting the payment from the purchaser would not absolve the appellant. The appellants contention was that what was sold was an asset only and as the sale proceeds were invested in the capital gains bonds, the income from capital gains was exempt under S. 54E of IT Act.
8. There is no doubt that the appellant has a reversionary life interest in the assets of the private trust. If the right of reversionary life interest is there, then the value of such right also must be there. The only question is whether the value of the reversionary life interest is to be taken as an asset or not. Mr. N.C. Nair, the learned Departmental Representative submitted that the reversionary life interest in a private trust cannot be treated as an asset. The Departmental authorities did not consider from where to start with the acquisition cost of an asset because according to them, the reversionary life interest cannot be considered as an asset. The provisions of S. 49 in this respect are quite clear and unambiguous. It refers to the cost with reference to certain modes of acquisition. Under S. 49(1)(iv) reference is made to the cost of acquisition of the asset. According to the said section, the cost of acquisition of the asset shall be deemed to be the cost of which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Thus, it would be crystal clear that to start with the cost would be the cost of acquisition of the previous owner. To clarify further, the cost incurred by the previous owner of the property in settling the trust would be the cost to start with the computation of capital gains. Therefore, we do not agree with the Departmental authorities that there is nothing to start with the cost of acquisition.
9. If the right to reversionary interest of life of a remainderman is there, then, as per the S. 49, the asset is also there. If the cost of the said asset would be the cost of the previous owner, then the capital gain can be computed. We do not agree that the right of the appellant in the beneficial interest of the trust would devolve only on a future day. The right of remaindermans reversionary interest comes into existence on the date when he acquires this right. It does not appear correct to say that reversionary life interest would come into existence only on the contingency date when all the present beneficial life interests would cease to exist. It would be incorrect to say that the appellant does not hold any existing right on the interest. Sec. 2(14) further clarifies as to what is the meaning of "capital asset". In accordance with the said section, "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession but this section neither includes the kind of remaindermans reversionary interest nor exclude the same. Remaindermans reversionary interest is nothing but a right and the right has a character of capital asset coming within the purview of S. 2(14). Therefore, it was contended that as it was a capital asset, the value of the remaindermans reversionary interest was rightly made. If it was not a capital asset and if there was no value of such asset, in that event, no body would have purchased the remaindermans reversionary interest. It was further submitted that any financial benefit arising out of the transfer of such interest should be considered as capital gains assessable under Ss. 45 to 55 of the Act. It would be incorrect to say that even after assuming the taxability of the consideration under capital gains would not be correct as the asset had no value to start with or there were no costs to the assets. At the cost of repetition, the cost of the previous owner would be the cost of the asset. Therefore, it would not be correct to say that the receipt on sale of remaindermans reversionary interest was only a chance receipt because it arose out of sale of a right which was only a possibility but had not become reality. The second proviso to S. 10(3) is as under :
"Provided further that this clause shall not apply to -
(i) Capital gains chargeable under the provisions of S. 45; or..."
We have pointed out what is an asset. We have also pointed out the value of the said asset and how it should be brought to tax. As per second proviso to S. 10(3), the capital gains have arisen out of the transfer of remaindermans reversionary interest and, therefore, the capital gains should be brought to tax. It cannot be assessed under the head income from other sources because it does not assume the character of a casual receipt or of a chance buying. Casual receipts are chance buying and are some time different from the value of an asset and its transfer.
10. During the course of hearing, the learned representative for the appellant relied on the decision of the Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). That decision is in respect of goodwill generated out of a reputation and name. In the instant appeal, the asset is not of self-generated and, therefore, that decision of the Supreme Court will not apply.
11. We are unable to confirm the view that the receipt on sale of remaindermans reversionary interest was only a chance receipt. According to the CIT(A) himself, as observed by him in the last portion of paragraph 6 on page 5 of his order that this receipt arose out of sale of right. His further view was that this sale of a right was only a possibility but had not become a reality. The right was sold and the value came into existence which has been reflected as capital gains. Therefore, the said right cannot only be a possibility but it had become a reality. It was a case of capital gains arising out of sale of capital asset and it had not been covered under the second proviso to S. 10(3) of the Act.
12. As this right of remaindermans reversionary interest was a capital asset and it was tried to be submitted relying on the decisions of the Supreme Court in the case of United Commercial Bank Ltd. vs. CIT (1957) 32 ITR 688 (SC) and in the case of CIT vs. Chugandas (1965) 55 ITR 721 (SC) wherein, the Supreme Court held in those decisions that the income which was specifically made chargeable under a distinct head cannot be brought to charge under a different head. In fact, these decisions support the appellants contention that the capital gains arose out of the sale of a right. If remaindermans reversionary interest can be charged as per S. 49, it is capital gain only and it cannot be charged under a different head. It was rightly submitted that the income from a transfer of a capital asset has to be considered under the head capital gains only.
13. It is also not acceptable that the right to the interest in the remaindermans reversionary interest cannot be called a capital asset. What is capital asset, it has already been pointed out from the provisions of S. 49 of the Act. Considering the same, assessing his income under the head income from other sources cannot hold good. A decision of the Bombay High Court of the Tribunal in the case of Gopaldas T. Aggrawal vs. ITO (1983) 5 ITD 451 (Bom) was cited before the CIT(A). The Bombay Bench held in that case that the sale of beneficial interest under a trust was to be considered under the head capital gains under Ss. 45 to 55 of the IT Act, 1961. It would be incorrect to say that the facts and circumstances of the case of Gopaldas Aggrawal (supra) were different from the facts and circumstances of the present case. We have examined the facts of that case as well as the facts of the instant case. We are of the opinion that there are no distinguishing facts and circumstances between these two cases. The asset sold was existing when monetary benefit attached to the same in the case of Gopaldas Aggrawal (supra) and the asset sold herein in the form of remaindermans reversionary interest in the trust is also identical. We would like to mention here that the identical point arose in the assessee brothers case Mr. Jehangir Nusli Wadia, out of the identical sale of right of remaindermans reversionary interest for the asst. yr. 1992-93. A copy of the assessment order is brought on record. The amount involved therein was the same i.e. Rs. 22,39,000. The Assessing Officer held that the assessees claim of Rs. 22,39,000 being the sale of remaindermans reversionary interest. Neville Ness Settlement No. 2 as exempt was verified and found that the entire sale proceeds of Rs. 22,39,000 have been invested in units of UTI under capital gains Unit Scheme (CGS 83) under S. 54E of the IT Act. The documentary evidence in support of this claim was produced and the same was verified. Therefore, the Assessing Officer did not bring the said amount to tax.
14. When in the assessee brothers own case, the Assessing Officer accepted the exemption, it would be incorrect to tax it here as income from other sources, there should not be any disparity between the identical claims of two brothers. Such disparity from the Department cannot be allowed.
15. Few more facts narrated at the time of hearing of this appeal require to be considered hereinunder :
Mr. Nusserwanjee Nowrosjee Wadia created a trust on 30th Jan., 1947 as a settlor for the benefits of Neville Wadia. Mr. Nusli Wadia and Miss. Diana Clara were son and daughter of Mr. Neville Wadia. Mr. Neville Wadia released his interest in favour of Mr. Nusli Wadia and Miss. Diana Clara on 30th March, 1957. Diana Clara was 51 years old in 1991. She could not adopt any body under Zoroastrian Law. She had interests in M/s. Lochness Investments Ltd. and M/s. Jehreen Investments Ltd. She sold her life interests in favour of Mr. Nusli Wadia for Rs. 30 lakhs. Remaindermans reversionary interests came to Mr. Nusli Wadia and Mr. Jehangir Wadia. The life interest of Miss. Diana Clara came to an end. The corpus of the trust was originally of 1001 shares of Bombay Dyeing. The said original shares of 1001 became 3,11,440 shares of the value of Rs. 1 crore and 35 lakhs. The valuation of the said shares was made and the valuation of remaindermans reversionary life interest was valued at Rs. 22,39,000. The valuation is given on page 20 of the paper book.
16. The appellant claimed the valuation of remaindermans life interest as a valuation of capital asset liable to be charged for capital gains. We are unable to accept the cost of acquisition as Nil. We have already pointed out that the provisions of S. 49 in this respect deal with the costs of the assets to the previous owner and according to the said provisions, the cost of the asset to the previous owner would be the cost of the asset in the hands of the assessee. The question of assessing the capital gains does not arise as the appellant has invested the entire value of remaindermans reversionary interest in the capital bonds of UTI. The amount had been already blocked. We have also considered the provisions S. 2(14) relating to the asset. It was not a business asset.
17. It was submitted by the learned representative for the appellant that the trustees of the trust had been paying the wealth-tax year after year. The appellant was the only beneficiary. The appellant had been paying the wealth-tax on behalf of the beneficiaries. The provisions of S. 21(1) are also considered. Pages 40 and 40A of the paper book throw light in this connection. The appellant is not a chance buyer as held by the ITO. In view of the above discussion, the value of remaindermans reversionary interest cannot become either a casual receipt or a chance receipt. Therefore, the application of S. 10(3) would not be logical.
18. We have examined the facts and statutory legal position of the asset of a chance receipt. The view held by the Assessing Officer and the CIT(A) does not appear corrected and logical. The said view appears to be unreasonable. From the above narrated discussion, we are fortified to come to the conclusion that the value of remaindermans reversionary interest is a capital receipt. The said receipt cannot become a revenue receipt.
19. The learned Departmental Representative, Shri N.C. Nair relied on the provisions of S. 2(4) and on the order of the CIT(A). He contended that the Assessing Officer and the CIT(A) have rightly treated the value of the remaindermans reversionary life interest as casual receipt or revenue receipt. This argument was not acceptable in view of our aforesaid conclusion.
20. In the result, the appellant succeeds and the appeal in allowed.