Karnataka High Court
Commissioner Of Income-Tax vs D.C. Davis on 16 April, 1986
Equivalent citations: ILR1986KAR1120, [1986]161ITR518(KAR), [1986]161ITR518(KARN)
JUDGMENT Puttaswamy, J.
1. In these separate but identical references made under section 256 of the Income-tax Act, 1961 ("the Act"), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore ("the Tribunal"), at the instance of the Revenue has referred the following questions of law for the opinion of this court for 11 assessment years of the assessee :
"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the annuity of Rs. 1,500 per mensem received by the assessee in terms of the will of her late husband cannot be assessed in the hands of the assessee for the assessment years in which the trust has been directly assessed ?
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that section 165 of the income-tax Act, 1961, is to be applied ?"
2. In order to appreciate these questions, it is necessary to notice the facts as found by the Tribunal.
3. One Arthur John Davis of Pollibetta, Coorg District, who was the owner of two coffee estates situated in the District of Coorg and other properties, executed a will on November 24, 1950, bequeathing his properties to various persons set out in that will. In the said will, the testator appointed the assessee, who is his wife, and three others as the executors of his will and the trustees of his properties. Clause (5) of the said will, on the construction of which the question hinges, inter alia, provided for payment of a sum of Rs. 1,500 per month or a sum of Rs. 18,000 per annum as annuity to the assessee. That clause which is material reads thus :
"I direct that my trustees should pay my wife, Dorothy Constance Davis (nee Adie), and her issue, if any, as subsistence money monthly of rupees one thousand five hundred (Rs. 1,500) free of all taxes until her death or remarriage and the Grove Bungalow with garden and godowns and servants' quarters with three servants' allowances, also one motor driver and, fi necessary, a mechanic shall be supplied from the estate free of charge to her and the upkeep of bungalow, garden, godowns, servants' quarters, garages and machinery attached thereto shall be at the cost of the estate and free of all costs to her and shall be kept ready for her occupation so long as she may live provided she does not remarry after my death."
4. On the death of the testator, which date cannot be gathered from the statement of the cases or the orders, the executors applied for probate before this court and completed their assignment as executors of the will, at any rate well before March 31, 1961.
5. In conformity with the directions contained in clause (5) of the will, the trustees paid the annuity of Rs. 18,000 per annum to the assessee for the assessment years 1961-62 to 1965-66 and 1967-68 to 1972-73 corresponding to the previous years ending on every 31st March of that year.
6. For the assessment years 1961-62 to 1965-66 and 1967-68 to 1972-73, the assessee filed her returns before the Income-tax Officer, Assessment-7 Circle-II, Bangalore, disclosing the receipts of the aforesaid sums, however, claiming that the same was not chargeable to tax under the Act which was initially accepted by the Income-tax Officer.
7. But in exercise of the powers conferred by section 147 of the Act, the Income-tax Officer re-opened the assessments for the aforesaid years and by his orders made on December 4, 1976, brought the said amounts to tax under the Act. Aggrieved by the said orders of the Income-tax Officer, the assessee filed appeals before the Appellate Assistant Commissioner of Income-tax, Bangalore Range-II, Bangalore, who by his common order made on October 7, 1977, dismissed them. Aggrieved by the said orders of the Appellate Assistant Commissioner and the Income-tax Officer, the assessee filed second appeals before the Tribunal which, by its common order made on July 10, 1978, has allowed them and cancelled the said assessments. Hence, these references.
Re : Question No. 1 :
Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department appearing for the Revenue, has urged that the compulsory payments made by the trustees to the assessee were not exempted payments under the very will of the testator and were chargeable to tax under the Act.
Sri G. Sarangan, learned counsel for the assessee, has contended that the payments made to his client were by the trust as one of its beneficiaries from out of its income, which was either exempted from payment of tax as agricultural income or had already suffered tax under the Act for which reasons there was no justification whatsoever to subject them to tax at the hands of the assessee.
8. The reasons for bringing the amounts to tax have been set out by the Income-tax Officer in his order dated March 29, 1976, for the assessment year 1961-62 which has been adopted by him for all other years in these words.
"The contentions put forth by the power of attorney holder of the assessee are not correct as discussed below :
(i) The trust, A. J. Davis Trust, was formed as per the will of late Mr. A. J. Davis. The will among others appointed Mrs. D. C. Davis, as one of the executors and trustees.
(ii) The testator directs that the trustees shall pay my wife, Mrs. D. C. Davis, and her issue, if any, as subsistence money monthly of Rs. 1,500 free of all taxes until her death or re-marriage and the Grove Bungalow with garden and godowns and servants' quarters with three servants allowances, also one motor driver and, if necessary, a mechanic shall be supplied from the estate free of charge to her and the upkeep of bungalow, garden, godowns, servants' quarters, garages and machinery attached thereto shall be at the cost of the estate and free of all costs to her and shall be kept ready for her occupation so long as she may live provided she does not remarry after my death (para 5 of the will).
(iii) The income and other benefits arise to the assessee directly as a result of the will as annuity and has nothing to do with the corpus of the trust.
(iv) Provisions of section 165 of the Income-tax Act do not apply to the assessee's case as she gets her income directly as a result of the will and this has nothing to do with the income of the estate or the nature of the income of the estate.
I, therefore, hold that the allowance and other benefits received by the assessee in the nature of annuity are clearly taxable."
9. The Appellate Assistant Commissioner substantially agreed with these reasons of the Income-tax Officer. But the Tribunal, in differing from the Appellate Assistant Commissioner and the Income-tax Officer, had, inter alia, held (1) that the executors had completed their job and the trustees had taken over their job (vide para 5 of the order); (2) that the direction contained in clause 5 of the will was to the trustees who had made payments to the assessee as a beneficiary and were not chargeable to tax under the Act.
10. We are of the view that the finding of the Tribunal disagreeing with the contrary findings of the Appellate Assistant Commissioner and the Income-tax Officer that the executors had completed their job well before 1961-62 and the trustees had taken over the same is essentially on a question of fact, which it was entitled to record in exercise of its appellate jurisdiction under the Act. We are also of the view that the finding of fact recorded by the Tribunal, which does not suffer from any legal principle is based on an appreciation of all the facts and circumstances and does not suffer any infirmity. But, this concurrence of ours with the Tribunal does not solve the problem, in particular question No. 1, that is crucial to both sides.
11. We have earlier set out clause 5 of the will in its entirety. Clause 5 directs the trustees first to pay the annuity to the assessee. The annuity must be paid to the assessee whether the trust gets income from the trust property or not. The payment of annuity to the assessee is a compulsory payment and cannot be avoided by the trustees. When the trust does not make income, the trustees are required to make payment of annuity to the assessee either from borrowing or from the sale of the trust properties. The payment of annuity to the assessee in a loose sense is the first and foremost charge on the income and the trust property. If this is the true position of the nature of the payment made to the assessee, then it is difficult to hold that it is a payment from the trust income to a beneficiary of the trust. On this conclusion, the annuity paid to the assessee, without an iota of doubt, will be income in her hands chargeable to tax under the Act.
12. Clause 5 of the will directs the trustees to pay annuity to the assessee free of all taxes. But, that stipulation cannot affect the nature of the income in the hands of the assessee and its chargeability to tax under the Act. At the most, the assessee can compel the trust to pay the taxes or reimburse the taxes that are paid by her from out of the trust funds. Whatever may be her claim for the same against the trust, she cannot set up that as a defence to avoid the taxes under the Act.
13. On the foregoing discussion, it follows that we must necessarily answer question No. 1 referred to us in the negative, in favour of the Revenue and against the assessee though not for the reasons stated either by the Tribunal or the Appellate Assistant Commissioner and the Income-tax Officer.
Re. Question No. 2 :
Our answer to question No. 1 and the reasons on which the same is founded really makes this question academic and unnecessary to examine. We, therefore, decline to examine this question and furnish our answer.
14. In the light of our above discussion, we furnish our answers to the questions referred to us as hereunder :
Questions : Answers :
Question No. 1 In the negative, in favour of the
Revenue and against the assessee.
Question No. 2 Decline to answer the question.
15. But, in the circumstances of the cases, we direct the parties to bear their own costs.