Madras High Court
Commissioner Of Income-Tax vs Rajalakshmi Venkatakrishnan on 17 November, 1994
Equivalent citations: [1995]215ITR596(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT Thanikkachalam, J.
1. At the instance of the Department, the Tribunal referred the following question for our opinion under section 256(1) of the Income-tax Act, 1961 :
"1. Whether, on the facts and in the circumstances of the case, the Appellant Tribunal was right in holding that the annual payment made by the Royal Insurance Company to the assessee is not liable to be treated as income in the hands of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that the allowance made by the Royal Insurance Company of the U.K. to the widow of Sri Venkatakrishnan is a gift and, therefore, no assessable as income in her hands in sustainable in law.
2. The assessee is an individual. Her husband, Sri Venkatakrishnan, was an employee of Royal Insurance Company of the United Kingdom. On January 1, 1973, the business of Royal Insurance Company was taken over by the General Insurance Company, a Government of India undertaking. The husband of the assessee became an employee of the General Insurance Company after leaving the service of Royal Insurance Company. After the death of the assessee's husband, the Royal Insurance Company granted an allowance at the rate of Pounds 1,638-48 per annum to the assessee in recognition of the assessee's husband's faithful and diligent service with the Royal Insurance Company from November 15, 1943. The above allowance was granted to the assessee for her lifetime. For the assessment years 1976-77 and 1977-78, for which the corresponding accounting years ended on 31st March of the respective accounting years, the assessee received sums of Rs. 22,320 and Rs. 25,512, respectively, in pursuance of the above allowance. While making the assessments for the above two assessment years, the Income-tax Officer sought to bring to tax the above sums. The assessee contended that the above payment by the Royal Insurance Company was made gratuitously and at the discretion of the said company. It was pointed out that the receipt was causal and, therefore, exempt from income-tax. The Income-tax Officer held that it was an annuity received by her and taxed the above two sums under the head "Other sources". On appeal, the Appellant Assistant Commissioner held that the amount received by the assessee from the royal Insurance Company represented income in her hands and assessable under the head "Other sources". On further appeal, the Appellate Tribunal held that the receipt of Rs. 22,320 and Rs. 25,512 for the assessment years 1976-77 and 1977-78, respectively, is not taxable in the hands of the assessee since the annual payments were made not in respect of any employment or office but by the kind past employer of the late husband of the assessee and the payment was made entirely at its decoration, is continuance being uncertain and made dependent upon the existence of certain facilities referred to in the letter written by the Royal Insurance Company.
3. Before us, learned standing counsel appearing for the Department submitted as under :
In the letter written by the Royal Insurance Company, it is clearly stated that the amounts were paid in recognition of the faithful services rendered by the husband of the assessee from the date of his employment till the date of taking over of the Royal Insurance Company by the General Insurance Company. Therefore, according to learned counsel, the income derived by the assessee is not casual in nature. Learned standing counsel pointed out that the source of income is definite and the receipt of income is periodical, and since it is not a bounty, it would chargeable as income under the Income-tax Act. The annuities were paid be for the past services rendered by the husband of the assessee. Therefor, this is the consideration for the payment of annuities by the Royal Insurance Company. According to learned standing counsel, even if the amounts paid were considered to be a gift, it is connected with the employment and, therefore, it is income in the hands of the assessee. Even if the payment made by the royal Insurance Company is voluntary, it is liable to income-tax. Therefore, according to learned counsel, since the payment is having direct connection with the employment of the husband of the assessee, the payment made by the Royal Insurance Company annually is chargeable in the hands of the assessee as income.
In order to support his contentious, learned counsel appearing of the Department relied upon the decision in C. Lakshmi Rajyam v. CIT [1960] 40 ITR 340 (Mad). According to the facts arising in that decision, the assessee, an actress, acted the part of the heroine in a motion picture produced by a partnership. She was paid all that was due to her under the contract of service. The picture was released for public exhibition with great success. One of the partners, voluntarily and gratuitously excited a document in her favour agreeing to pay her a fourth of his share of the realisations from the picture in consideration of the wholehearted help, co-operation, and valuable services rendered by her in respect of the production and completion of the picture by way of special remuneration in addition in addition to the fixed remuneration paid by the partnership for her services. By virtue of this agreement, the assessee received the sums of Rs. 63,258 and Rs. 10,362 in the years of account relevant to the assessment years. The question was whether these amounts were the assessee's taxable income. On these facts, this court held (headnote), "an emolument, or perquisite of an employee may be paid to him under a contract; it is also possible to conceive of cases, where there may be customary presents attached to an employment. An employer may also remunerate the services of an employee by a voluntary gifts either because there are no emoluments attached to the employment, or because he wants to give him something over and above his contractual remuneration. In all such cases, the amounts received will be the income of the profession or vocation of the employee. It is also possible that an employee may get a gift from his master, without it being intended as additional remuneration to the employee, though it might be that what induced the gift was the loyal services of the latter. It cannot be said that, in such a case, what was given was remuneration for the service. A gift made on personal grounds cannot amount of payment for service, although the services might have provided a motive or reason for making the gift. There is no reason why a purely personal gift cannot comprise a right to obtain a recurring payment. The mere fact that a gift or payment was made by a person other than an employer will not be decisive of the question whether it was intended as a remuneration or a present. In order to determine the character of a voluntary payment to the assessee it has to be seen whether, from the point of view of the assessee, the amount received accrued to him by virtue of his employment. That is a matter of evidence."
Learned counsel also placed reliance upon a decision reported in H. H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT [1963] 49 ITR 594 (Bom). According to the facts arising in that decision, the ruler of a native State abdicated in favour of his son in January, 1948. From April 1949 onwards his on paid him a monthly allowance. The allowance was not paid under any custom or usage. The allowance could no be regarded also as maintenance allowance, since the assessee possessed a large fortune. On these facts, the question raised was whether what the Maharaja received from his son would constitute income in his hands assessable under the Income-tax Act. While answering this question, the Bombay High Court held that (At page 604) : "there is no doubt that under the Indian Income-tax act, 1922, even payments, which are voluntarily made may constitute 'income' of the person receiving them. It is not necessary that order that the payments may constitute 'income', they must proceed from a legal source, in that, if the payments are not made the enforcement of the payments could be sought by the payee in a court of law. It does not, however, mean that every voluntary payment will constitute 'income'. Thus, voluntary and gratuitous payments, which are connected with the office, profession, vocation or occupation may constitute 'income' although if the payments were not made the enforcement thereof cannot be insisted upon. These payments constitute 'income' because they are referable to a definite source, which is the office, profession, vocation or occupation. It could, therefore, be said that such a voluntary payment is taxable as having an organ in the office, profession or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian Income-tax Act in income from every source (barring the exceptions provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of 'income', which is taxable under the Act. Where, however, a voluntary payment is made entirely without consideration and is not traceable to any source, which a practical man may regard as a real source of his income, but depends entirely on the whim of the donor, it cannot fall in the category of 'income'. What we have to see, therefore, in the present case, is whether the payment made by the son Maharja to the father Maharaja, though voluntary, could be regarded as having an origin in what might be called the real source of income. On the facts found in the present case, we cannot stay that the payments would be referable to any such source. The department has not been able to show any material on record, from which such a conclusion can be drawn." Ultimately, the Bombay High Court came to the conclusion that (headnote) : "as the payments were commenced long after the ruler had abdicated, they were not made under a legal or contractual obligation. As the allowances were not also made under a customs or usage or as a maintenance allowance, they were not assessable."
4. Reliance was also placed upon a decision of the Gujarat High Court in the case of Smt. Dhirajben R. Amin v. CIT [1968] 70 ITR 194. According to the facts arising in that case, the assessee was a member of a family which had a substantial interest in Alembic Chemical Works Ltd. and allied concerns. Resolutions were passed by the board of directors of two of the companies, where by the assessee was to be paid Rs. 1,000 per month by one of the companies and 20 per cent. of the profits of another company for services to be rendered by her. The amounts were disallowed as expenditure in the assessments of the two companies. The Revenue authorities and the Appellate Tribunal found that no services had been rendered by the assessee and the payments were gratuitous and the amounts were assessed in her hands. On a reference before the High Court, the assessee contended that inasmuch as the payment had been held to be gratuitous, they did no constitute income and in the alternative the payments constituted "salary" and she was entitled to the exemption under Notification No. 878-F and earned income relief in respect of them. While considering the contentions raised by the assessee, the Gujarat High Court held that though no services had been rendered by the assessee to the companies, the payments were received periodically and arose from a definite source. Hence, the amounts received were income. This decision was rendered by the Gujarat High Court following the decision of the Bombay High Court in Maharani Vijaykuverba Sahib of Morvi (H.H.) v. CIT [1963] 49 ITR 594.
5. In view of the abovesaid decision, learned standing counsel for the Department submitted that, in the present case, the source of income is definite and the assessee was receiving the annuities regularly every year and, therefore, the allowance received by the assessee is chargeable as income under the Income-tax Act.
6. Non appeared on behalf of the assessee.
7. We have heard learned standing counsel of the Department and also perused the records carefully.
8. As already stated, Rajalakshmi Venkatakrishnan was paid by the Royal Insurance Company annually Pounds 1,638-48 in view of the service rendered by her husband to the said company before it was notionalised. The Royal Insurance Company wrote a letter to the assessee dated April 28, 975. In the said letter, it is stated that she had been granted a widow pension allowance as from January 1, 1975, in recognition of her late husband's faithful and diligent services with the group from November 15, 1943, till the business was nationalised with effect from January 1, 1973. It is further stated that the allowance at the rate of Pounds 1,638-48 per annum will be paid into the Indian Bank count in quarterly instalments in arrears throughout her lifetime against a proper discharge. It is further stated that these arrangements are in conformity with the U.K. regulations and are dependent on the continuance of existing facilities. In the said letter, ultimately, it is stated that the allowance has been granted entirely at the discretion of the directors and not other form of benefit will be afforded by the group. In pursuance of the said letter the assessee had received the amounts which were brought to tax in the assessment years under consideration. The abovesaid amounts were paid solely out of the discretion of the directors of the company had not in pursuance of any agreement or understanding. The allowance was not made to their employee, Venkatakrishnan, but it was paid to his wife after his health.
9. The first point that arises for consideration is whether the amounts paid by the Royal Insurance Company to the widow of its employee can be treated gift pure and simple. The allowance was granted voluntarily and without any request made by the assessee. After the Royal Insurance Company was nationalised, the General Insurance Company took over the assets and liabilities of the Royal Insurance Company as it stood on the date. Thereafter, on the date of retirement of Sri. Venkatakrishnan, the General Insurance Company would have paid all amounts due to a retired employee. After the taking over, the Royal Insurance Company has nothing to do with Venkatakrishnan. Therefore, the allowance granted by the Royal Insurance Company to the widow of Venkatakrishnan cannot be considered in recognition of any services rendered by Venkatakrishnan throughout his employment with the company. The General Insurance Company would have paid all the amounts due to him on his retirement. While so, it cannot be said that the notice for payment of annuities by the Royal Insurance Company was the services rendered by Venkatakrishnan before notionalisation, that cannot have any nexus to the services rendered by Venkatakrishnan to the Royal Insurance Company. The promise made by the Royal Insurance Company to the assessee is also not supported by any consideration. The services rendered by Venkatakrishnan cannot be considered as consideration for payment of annuities to his wife after his death since the retirement benefits in view of the services rendered by Venkatakrishnan were already paid out to him on the date of his retirement. While Venkatakrishnan was alive, no promise was made by the Royal Insurance Company to pay any allowance to his issue after his death. Therefore, the annuities paid by the Royal Insurance Company to the widow of Venkatakrishnan can only be considered as gratuitous. Gratuitous payment can be termed as gift in view of the provisions contained under section 5(xiii) of the Gift-tax Act. According to the abovesaid provision of the Gift-tax Act, where an employer makes a gift by way of bonus, gratuity or pension to the employee or to the dependants of the deceased employee, then such a gift would be exempt from gift-tax. As already stated, the motive for payment of annuities is the services rendered by Venkatakrishnan to the Royal Insurance Company. If that is so, the annuities paid by the Royal Insurance Company to the widow of Venkatakrishnan is a gift supported by consideration.
10. According to the department, even though the payments were made ex gratia, but yet in the hands of the assessee, the amount constituted her income because the payment of allowance was regular, recurring and expected. Before the Tribunal, the Department railed upon a decision of this court in CIT v. P. N. Nagaraj [1976] 102 ITR 83. In that case the assessee received the amount under consideration as remuneration for the services rendered by him as a professional. It was also found that the assessee utilised the services of Nagaraj Bros. proved his intimate connection in bringing about the sale and, therefore, from the point of view of the company it was a payment for the services rendered. Hence, it was held that the receipt of the sum of Rs. 12,333 received by Nagaraj and Bros. arose from the exercise of his profession and, therefore, taxable as his income. But the facts arising in the present case are different. The assessee was no an employee under the Royal Insurance Company. The annuities were aid by the Royal Insurance Company as gratuitous for the best services rendered by the husband of the assessee and not in respect of any services rendered by her. Therefore, the decision in CIT v. P. N. Nagaraj would not be applicable to this case.
11. It is the contention of the Department that since the annuities received were periodical and arose from a definite source, the amounts received became the income of the assessee. Reliance was placed upon the decision in Dhirajben Amin (R.) v. CIT [1968] 70 ITR 194 (Guj). In that case, the payment promised was in respect of future services to be rendered by the assessee. The High Court held that though the payments were made voluntarily and gratuitously and the enforcement thereof cannot be insisted upon, yet the payments constituted income because they ewer referable to a definite source, viz., office, profession, vocation or occupation. There was no question of any payment made to the heir of the deceased who rendered service and that too long after his death. But according to the fact arising in this case, the payments were made to heir of the deceased. Therefore, this decision would not be applicable to the facts of this case.
12. Reliance was also placed upon a decision in Mahesh Anantrai Pattani v. CIT [1961] 41 ITR 481, wherein the Supreme Court held that the payment of a lump sum of Rs. 5 lakhs made to the assessee, who was ex-Diwan of Bavanagar State, is a gift made for the personal qualities of the assessee and as a token of personal esteem. But, in the present case, the annuities were paid by the company for the services rendered by the husband of the assessee even though the company was not liable to pay any amount to the husband of the assessee. In such a case, the payment cannot be considered as a token of personal esteem.
13. The Tribunal also relied upon a decision of the King's Bench Division in Beynon v. Thorpe [1928] 14 TC 1, wherein it was held that (at page 14) "the payment was nothing but a gift moved by the remembrance of past services already efficiently remunerated as services in themselves, that it was merely a gift moved by that sort of gratitude or that sort of moral obligation, that whether the gifts are large or small they are exactly on the same footing as gifts which are made to a child or gifts which are made to any other person whom the giver thinks he ought to supply with funds for one reason or another. Such gifts did not fall under the category of profits and gains which could be the subject-matter of taxation."
14. Reliance was also placed upon another decision of the King's Bench Division in Stedeford v. Beloe [1930] 16 TC 505, wherein it was held that "the payment was only an annuity, i.e., a sum being paid every year, that it might be a gift which is paid every year, that it is just the same as an allowance and that there was no basis for annual profits or gain when there was no employment and no office. It was held that it was merely a contribution by kind person every time although it may be uncertain that they will continue to do it." In the present case, the annuities were paid by the Royal Insurance Company on a gratuitous basis which is in the nature of gift supported by consideration. Hence, it will not come under the definition of "income" as contemplated under section 2(24) of the Income-tax Act, 1961. Accordingly, we see no infirmity in the order passed by the Tribunal in holding that the annuities received by the assessee are not taxable as income.
15. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs. Counsel's fee is fixed at Rs. 1,000.