Commissioner of Wealth-tax vs Rusi P. Contractor

Rajesh Balia, J.—The Income Tax Appellate Tribunal, Ahmedabad Bench "A", at the instance of the Commissioner of Wealth-tax, Vadodara, referred the following question of law for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law, in coming to the conclusion that only half and not the whole of the capitalised value of the interest of the assessee in the immovable properties of trust property was liable to be assessed to wealth-tax under the provisions of the Wealth-tax Act, 1957 ?"

The reference concerns the assessment of wealth-tax for the assessment year 1965-66. Shri Pestanji Contractor, the father of Pirojshah, left a will dated June 4, 1941, and a codicil dated July 23, 1941. Clause 17 of the will executed by Pestanji Contractor, reads as follows :

"17. All the property, excluding those gifted above, or any of the property mentioned in this will, whose disposition is considered to be illegal due to legal interpretation, should be considered to be residual property and the incpme from all such property should be allotted equally to my wife, Jerbai, and my son, Pirojshah, till they survive. After the death of my wife, Jerbai, the entire income from such property should be given to Pirojshah for lifetime. In case, Pirojshah dies before, Jerbai should utilise half the income for her lifetime and the rest half of the income should be given to Smt. Shaheram, wife of Pirojshah, and the benefit of the children of Pirojshah (children include sons and daughters) and Shaheram should keep an account of it. After the death of Jerbai and Pirojshah the remaining movable or immovable property which I have at present or any property I may earn hereafter or get in inheritance or that which reverts to me as provided in paragraphs 13, 14 and 15 of this will or any property mentioned in this will whose disposition is considered illegal and/or any property which is life (sic) be mentioned in this will, all such property should be divided in three equal parts and allotted with ownership rights to the children of Pirojshah, Nadirshah and Manekshah; respectively. In case Manekshah and Nadirshah both of them have no children then my entire residual movable as well as immovable property should go to the children of Pirojshah, with ownership rights, and that should be divided among the sons and daughters equally. If only either Manekshah or Nadirshah had children then the entire residual property should be equally divided in two parts and one part should go to the children of Pirojshah and another part should go to the children of either Nadirshah or Manekshah, whoever has children, as the case may be. The division of the property among the children should be equal and such division should be carried out when the last of the children of Pirojshah becomes 18 years of age."

Smt. Jerbai died on April 6, 1961, and as per the aforesaid clause, Pirojshah, since deceased and now represented by legal heirs, became. entitled to the whole of the income of the estate. By the deed of assignment dated December 6, 1951, Pirojshah assigned to his children Mani, Fali and Rusi moiety of half share of the net rents, profits and income which had accrued to him since April 6, 1951, the date of death of Jerbai. The assignment was for the lifetime of Pirojshah. The resultant position was that after the assessee became entitled to full income under the will dated June 4, 1941, arising from the properties left by Pestanji, he transferred half of his lifetime interest in favour of his three children for the remainder of his. life. As the assessee had divested himself of a moiety of the life interest under the will by the deed of assignment, he claimed that he is entitled to only half of the life interest in the trust property left by Pestanji and, therefore, for the purpose of wealth-tax, the capitalised value of his life interest should be computed as half of the capitalised value of the interest of the whole of the capitalised value of the assessee and that the petitioner is not the owner of the whole property, but is entitled to only half of the income derived from the properties in question and, therefore, the capitalised value of the interest of the assessee should be computed on the basis of half of the income derived from the said trust property.

The Income Tax Officer rejected the contention of the assessee and brought the capitalised value of the interest of the assessee with respect to the aforesaid property by computing the same with reference to the entire income of the trust property. In appeal, the Appellate Assistant Commissioner upheld the claim of the assessee following the decision of the Tribunal in Income Tax Appeals Nos. 120, 149, 150/(Ahd) of 1975-76 decided on August 28, 1976, and held that only half of the capitalised value of the interest in the immovable property was includible in the net wealth of the assessee and not the whole value. The Tribunal upheld the order of the Appellate Assistant Commissioner while rejecting the appeal and directed the Wealth-tax Officer to include half of the capitalised value of the interest in the immovable properties. In the aforesaid facts and circumstances, the Tribunal has made this reference.

From a perusal of Clause 17 referred to above, it appears to us that no interest in the corpus came to be vested in the assessee, but he was only entitled to the income derived from the trust property under the will for life. During the lifetime of Jerbai, the assessee was entitled to only half of the interest and on the death of Jerbai, he became entitled to the whole income. After the assessee became entitled to the full income, he assigned a moiety of his income in favour of his children for the remainder of his life thus divesting himself of a moiety of the interest which had accrued to him. The effect of the assignment of the interest of the assessee came to be examined by this court in the case of Commissioner of Income Tax Vs. P.P. Contractor, . The question had arisen about the interpretation and effect of Clause 17 in relation to Income Tax. While the Department has sought to include the entire income derived from the property vested by Pestanji in the assessment of the assessee on the ground that the deed of assignment would only result in addition of income of the assessee and did not create overriding title to such income in favour of the assignee, the assessee claimed that since he has assigned his entire interest vested in him pursuant to the will to the extent of a moiety only and he is entitled to only half of the income derived out of the properties of Pestanji under the will, only, to that extent the income is includible in the capitalised value of the interest of the assessee. This court, while deciding the contention, observed as under (at page 265) :

"It is clear from the aforesaid clause that the assessee and Jerbai were entitled to the income derived from the residuary property in equal shares during the lifetime of both and after the death of Jerbai, the assessee was entitled to receive the entire income from the said residuary property. After the death of Jerbai on April 6, 1951, the assessee became entitled to the entire income derived from the residuary property. The assessee had the right to receive this income during his lifetime. In other words, he had a right and interest in the residuary property. The assessee had, therefore, a right to transfer or assign this asset or portion thereof. There is no legal provision which prohibited the assessee from transferring or assigning his right to receive income from the residuary property during his lifetime. There is nothing in the will also which prevented the assessee from assigning his right to receive income. The assessee was, therefore, within his right in executing the deed of assignment on December 6, 1951, transferring or assigning his right, title and interest in half of the income of the residuary property in favour of his children."

The aforesaid conclusion of this court clinches the issue in favour of the assessee, The assessee has only the right to receive income during his lifetime and that right was construed to be his property. By assigning the right to receive a moiety of the income in favour of the three children of the assessee for the remainder of his life, he has divested himself of the right and interest of receiving income from the property to the extent of the moiety and, consequently, he remained the owner of the income of the property, namely, right to receive half of the income of the property left by Pestanji for the assessee during his lifetime. In view of the aforesaid conclusion, the necessary consequence is that for the purpose of wealth-tax also, the assessee can be considered as the owner of only a moiety in the residuary property left by Pestanji. For the purpose of the capitalised value of the interest of the assessee in the trust property the value of his right to receive income from the property can only be half of the capitalised value of the interest in the trust property. We are, therefore, of the opinion that the Tribunal was justified in concluding that only half and not the whole of the capitalised value of the interest of the assessee in the immovable properties of the trust was liable to be assessed to wealth-tax under the provisions of the Wealth-tax Act, 1957. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the Revenue with no order as to costs.