Commissioner of Wealth Tax vs Ajit Alias Hamid Alikhan

DR. B.P. Saraf, J.—By this reference u/s 27(1) of the Wealth-tax Act, 1957, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the value of the right to receive the annuities in future secured on the annuity policies was not an asset, the value of which was includible in the net wealth of the assessee u/s 2(e) of the Wealth-tax Act, 1957 ?"

This reference pertains to the assessment year 1977-78. The assessee is a professional film artiste. According to the terms of the contract with the film producer, remuneration was payable to the assessee for the services rendered by him in annual installments of specified sums spread over a number of years. The producer took out annuity policies from the Life Insurance Corporation to secure payment of the mutually agreed amounts to the assessee in the stipulated years. Under the terms of the policy, it was agreed that the policy would not be surrendered nor could annuity payable thereunder be commuted for a lump sum. The Wealth-tax Officer included the value of the annuity policy in the net wealth of the assessee. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, relying on the decision of the Special Bench of the Tribunal, directed the Wealth-tax Officer to verify whether the assessee followed the cash system of accounting or the mercantile system and to delete the value of the annuity policy if the method of accounting followed by the assessee was found to be the cash system of accounting. The Revenue appealed to the Tribunal. The Tribunal affirmed the order of the Appellate Assistant Commissioner and held that the value of the right to receive the annuities in future secured on the annuity policies was not an asset the value of which was includible in the net wealth of the assessee u/s 2(e) of the Wealth-tax Act, 1957. Hence, this reference at the instance of the Revenue.

The only question that falls for determination in this case is whether the value of the right of the assessee to receive the annuities in future forms part of his net assets u/s 2(e) of the Wealth-tax Act, 1957, or not. Section 2(e) of the Wealth-tax Act, 1957, as applicable to the assessment years 1957-58 to 1969-70, so far as relevant, read as under :

"2. In this Act, unless the context otherwise requires, -

(e) ''assets'' includes property of every description, movable or immovable, but does not include, -

(1) (iv) a right to any annuity in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant;"

The above definition was modified by the Finance Act of 1975 with effect from 1st April, 1975. As a result, in relation to the assessment years 1975-76 to 1992-93, the definition of "assets", in so far as it related to exclusion of the right to annuity, stood as follows :

"2(e) ''assets'' includes property of every description, movable or immovable but does not include, -

2(ii) a right to any annuity (not being an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee) in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant."

From the above definitions, it is clear that the right to annuity is an "asset" within the meaning of section 2(e) of the Act right from the commencement of the Act. Such right was excluded from the definition of "asset" by virtue of item (iv) of sub-clause (1) of clause (e) in cases where the terms and conditions relating thereto precluded the commutation of any portion thereof into a lump sum grant. If this condition was fulfilled, the right to annuity was excluded from the definition of asset. This exclusion was subjected to a further condition with effect from April 1, 1975, by the Finance Act, 1974, that it is not an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee. Thus, for the assessment years 1975-76 to 1992-93, any annuity whether commutable into lump sum or not, formed part of the "assets" of an assessee within the meaning of section 2(e) of the Act, if such annuity "was purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee". In the instant case, there is no dispute about the fact that the annuity was purchased by the producer in pursuance of a contract with the assessee. That being so, the annuity in question does not fall in the exclusion to item (ii) of sub-clause (2) of clause (e) of section 2 of the Act and hence it is included in the definition of "asset".

So far as the meaning of "annuity" is concerned, it is well-settled that 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 any variation depending upon or on any grant relating to the general income of the fund or estate which is charged for such payment. Payment of annuity thus should not be dependent upon the income of the corpus. In the instant case, the uncontroverted position is that predetermined amounts were payable to the assessee periodically in the stipulated years which, therefore, amounts to annuity. In that view of the matter, it is clear that section 2(e) is attracted and the value of the right of the assessee to receive the annuities in future in such a case is includible in his net wealth. That being so, the Tribunal was not right in holding to the contrary. The question referred to us is, therefore, answered in the negative and in favour of the Revenue.

Under the facts and circumstances of the case, there shall be no order as to costs.