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PETITIONER: KAPIL MOHAN

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, DELHI.

DATE OF JUDGMENT:       18/12/1998

BENCH: S.P. BHARUCHA, D.P. MOHAPATRA.

ACT:

HEADNOTE:

JUDGMENT: J U D G M E N T Bharucha, J. The  following  question, referred to the High Court of Delhi under Section 256(1) of the Income-tax  Act,  1961, was answered in the affirmative and in favour of the Revenue :         "Whether on the facts and in  the         circumstances  of  the  case, the Tribunal         was justified in holding that  the  refund         of annuity of Rs. 12,013/- to the assessee         as  Executor  of  the  Estate  of his late         father  Padam  Shree  N.N.Mohan  was   his         income  and  assessable  in  his  hands as         Executor of the estate of the deceased?" The  annuity referred to in the question was a payment under the Annuity Deposit Scheme.  The Delhi High  Court  followed its judgment in an earlier case.  The Gujarat High Court had taken a  similar  view.  The High Court of Karnataka and the High Courts at Bombay and Madras  have  taken  the  contrary view. The facts, briefly stated,  are  these  :    One  N. Mohan  had  deposited  the  sum  of  Rs.1,57,250/- under the Annuity Deposit Scheme framed under Chapter  XXII-A  of  the Income-Tax Act,  1961.  The same was refundable to him in 10 equal  instalments  of  principal  and  interest  under  the provisions of  Section  280-D  of  the  Act.  The said Mohan having died on 15th July, 1969, the instalment of  principal and  interest in the sum of Rs.12,013/- payable to him under Section  280-D  was  paid  to  the  assessee,  his  son  and executor.   For  the  Assessment Year 1970-71 the Income-Tax Officer treated the sum of Rs.  12,013/- as  income  in  the hands of  the  assessee.  On appeal, the Appellate Assistant Commissioner held that the said sum was not taxable  in  the assessee’s hands.    The  Tribunal  reversed  the  Appellate Assistant Commissioner and, at the behest of  the  assessee, referred  the  aforestated question to the Delhi High Court. The Delhi High  Court,  by  the  judgment  and  order  under appeal, held against the assessee. Section 2(24)(viii) of the Act defines  "income"  to include  "any  annuity due, or commuted value of any annuity

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paid, under the  provisions  of  Section  280-D".    Chapter XXII-A of  the Act provides for Annuity Deposits.  "Annuity" is  defined  by  Section  280-B(4)  to  mean   "any   annual instalment  of principal and interest thereon payable by the Central Government under the provisions of  Section  280-D". A  "depositor"  is  defined  by  Section 280-B(60 "to mean a person to  whom  the  provisions  of  this  Chapter  apply". Section  280-C  requires  an  assessee  covered  by  Chapter XXXII-A to make for every assessment year an annuity deposit with the  Central  Government  at  the  rate  prescribed  in respect of  his total income for the previous year.  Section 280-D deals with the repayment thereof and states :         "Subject to the provision of this         Chapter and any scheme framed  thereunder,         the   Government   shall   repay   to  the         depositor  the  annuity  deposit  made  or         recovered   in  any  year  in  ten  annual         equated  instalments  of   principal   and         interest  at  such rate as may be notified         by the Central Government in the  Official         Gazette." (The proviso to Section 280-D does not concern  this  case.) Section  280-W  empowers  the  Central  Government  to frame Annuity Deposit Schemes and these may,  inter-alia,  provide for  the  manner  and  the  intervals at which the annuities would be paid. The Annuity Deposit Scheme, 1964, was  framed  under Section  280-W  and  came  into  force on 1st October, 1964. With effect from  8th  February,  1967,  sub-paragraph  4(a) thereof read :  "In the case of a deceased depositor who has not  made a nomination under paragraph 11, the annuity shall be  payable  to  his  legal  representative."  Paragraph   7 provided  for  the refund of annuity deposits but it did not cover the case of a depositor who had  died.    Paragraph  9 dealt  with  nominations;  it  said  "A  depositor, being an individual, may nominate in Form No 7, or as near thereto as may be, one or more individuals who  shall  be  entitled  to receive  the  annuity  payable  to  him  in the event or his death. The Delhi High Court, in the judgment under  appeal, followed its earlier judgment in Commissioner of Income-Tax, Delhi-II Vs.  O.N.   Talwar 123 ITR 80.  This was case where the assessee was the ’karta’ of a  Hindu  undivided  family. The  assessee  had  made  annuity deposits under the Annuity Deposit Scheme, 1964, on behalf of the HUF.  Therefore,  the HUF  was  partitioned and the assessee received to his share repayments against the  annuity  deposits.    The  Appellate Tribunal   held   that,  since  the  assessee  was  not  the depositor, the repayments would not be taxable in his  hands except  to  the  extent  of  the  interest that was included therein.  The Delhi High Court answered  the  question  that was  referred  to  it  in  this  behalf against the assessee holding that not only the  interest  element  but  also  the principal element of the annuity, to the extent of the share of  the assessee in the annuity deposits, was taxable in his hands.  It said that the annual repayment was deemed  to  be income and, whether received by the depositor himself or the nominee  or  the legal representative, it would be subjected to tax only when the total income exceeded the  maximum  not chargeable to  tax.    It  could not be the intention of the Legislature that it would necessarily be taxed on receipt or taxed at the same rate at which the  annuity  deposit  would have  been  liable  to tax had it not been deducted from the total income in the year of deposit.  The only idea was that since the amount of deposit  was  excluded  from  the  total

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income  at that time, the annual payments should be included in the total as and when received.  The deposit having  been made  under  the  Scheme,  the  repayment  had been obtained thereunder.  The Delhi High Court  assumed  that  even  when there  was  no specific provision under the Act or the Rules for repayment, it would still  be  possible  for  the  legal representatives  of  a  depositor to obtain repayment of the deposit made by the deceased by recourse to legal action but the repayment in the case before it had not been made in any such manner.    It  was  repayment   made   ostensibly   and purportedly  under  the  Act  and  the Scheme and, hence, it should be treated as a payment made under the Scheme and  so under the  provisions  of  the  Act.    The Delhi High Court approved of the view taken by  the  Gujarat  High  Court  in Commissioner of  Income-Tax, Gujarat-III Vs.  Narottamdas K. Nawab 102 ITR 455. The    Gujarat    High   Court   in   Nawab’s   case (aforementioned) was required to answer this question :         "Whether, on the facts and in the         circumstances of the case, the  instalment         of  annuity  deposit received by the karta         of   the   assessee    as    nominee/legal         representative  of  the deceased depositor         was liable to be assessed as income of the         assessee?" There  was  no  dispute that under the provisions of the Act and  the  Scheme,  so  far  as  the  depositor  himself  was concerned,  the  payments  or  instalments which he received were income in his hands.  The question was :  did  it  make any  difference  when the amount of the annuity was received by the nominee or the legal representative of the depositor? Section  280-D  opened  with  the  words  "Subject  to   the provisions   of   this   Chapter   and   any  scheme  framed thereunder".  Under the Scheme the annuity  was  payable  to the  depositor’s  legal  representative or, if he had made a nomination, to the nominee.  It was, therefore,  clear  that under  the Scheme the nominee or legal representative of the original depositor was  a  person  to  whom  the  amount  of annuity became due under the Scheme and it could not be said that only the provisions of Section 280-D which provided for repayment to  the  depositor  should  be  looked  at.    The provisions of Section 280-D were subject to  the  provisions of  any  Scheme  and  under  the Scheme, in the event of the death of the original depositor, the amount of  the  annuity became due to the legal representative, in case there was no nomination, or  the  nominee, if there was one.  Counsel for the assessee contended that under the general law  what  the legal  representative  received  was  not an annuity but the return of capital and what he  would  be  receiving  was  an instalment of  that capital.  The Gujarat high Court did not agree.  It held :         "In  the  instant  case  we  find  that  a         portion  of  the  income  of  the original         depositor which had  been  withheld  as  a         measure  to prevent inflation and was thus         impounded, is being released over a period         of ten years and since the money was  made         available to the Government some amount of         interest was also included with the amount         so   repaid   by  ten  equal  instalments.         Ordinarily,  the  word   "instalment"   is         associated with return of capital.  but in         this  particular case what we find is that         the Government  which  had  impounded  the         income in the particular year in which the

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       deposit  was made, returns the same amount         with some amount of interest in ten  equal         instalments.   For  having  deposited that         particular amount in the year in which the         deposit  was  made,  the   depositor   got         certain   relief  in  his  own  income-tax         assessment and was not  subjected  to  the         extra  amount  of  income-tax which he was         liable  to  pay  under  section  280X  for         failure  to  make  the  deposit  under the         provisions  of  Chapter  XXII-A  and   the         Annuity  Deposit Scheme framed thereunder.         Under these  circumstances,  even  if  the         question  were  to  be considered from the         larger point of view as Mr.  Patel  wanted         us  to consider, we come to the conclusion         that in the instant case when  the  amount         is being returned, it is not the return of         capital  but  the  return  of the original         item of income which is now spread over  a         period of  ten  years.  Under these is not         possible to accept Mr.  Patel’s contention         that this was a return of capital and  not         a return  of income.  Moreover, that which         would have been income in the hands of the         original depositor does not cease to be so         by  the   mere   circumstance   that   the         depositor  died  and  the  money  is being         received by the legal representative or by         the nominee.   That  which  was  otherwise         income  retains  its  character  of income         notwithstanding  the  fact  the   original         depositor died in the meanwhile.         Under     these    circumstances,         considered  from  either  point  of  view,         namely,  from  the  point  of  view of the         provisions of the Act and  the  paragraphs         of   the  Annuity  Deposit  Scheme,  taken         together, or considered from the point  of         view  of  general law, the result would be         the  same,  namely,  that  these   annuity         payments  which  are a creature of statute         and statutory powers, are  income  in  the         hands     of     the     nominee,    legal         representatives    of     the     original         depositor." The Karnataka High Court in the K.Bhoomiamma &  Anr. vs.   Controller  of  Estate Duty, Mysore, Bangalore 115 ITR 703, was concerned with  several  questions,  of  which  the first two are relevant :         "(1) Whether, on the facts and in         the   circumstances   of   the  case,  the         Tribunal was justified in holding  that  a         sum  os  Rs.48,777/- on account of annuity         deposits  was  rightly  included  in   the         principal  value  of  the  estate  of  the         deceased?         (2) If the answer  to  the  first         question  is  in the affirmative, whether,         on the facts and in the  circumstances  of         the   case,  the  Tribunal  was  right  in         holding that no deduction should  be  made         out  of  the value of the annuity deposits         on account of income-tax  payable  by  the         legal   heirs   of  the  deceased  on  the

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       instalments of annuity deposits receivable         by them?" No argument was addressed to the High  Court  on  the  first question  and the High Court said that it was clear that the beneficial interest in the  annuity  deposits  made  by  the deceased  and  the right to recover them passed on the death of the deceased to  his  heirs  and  they,  therefore,  came within  the definition and ambit of the expression "property passing on the death of the deceased".  The second  question arose  out  of  the  contention  raised  on  behalf  of  the accountable person that the valuation of the annuity deposit without taking into consideration the income-tax payable  by the  heirs  of  the  deceased when the annuity deposits were realised from time to time was wrong.   The  Karnataka  High Court  held that the income-tax which the accountable person was likely to pay had no relevance to the valuation  of  the annuity deposits  at the time of death of the deceased.  The value of the estate of the deceased had to be determined  on the death of the deceased and it was not the value of estate in the hands of the accountable person subsequently. The   decision   of   the   Bombay   High  Court  in Commissioner of Income-Tax vs.  Dr.  Rodhan H.   Shroff  207 ITR 957,  is  squarely  in  favour  of  the  assessee.   The questions to be answered read thus :         "(1) Whether, on the facts and in         the  circumstances  of   the   case,   the         Tribunal  was  justified  in  holding that         there was no provision in  the  Income-Tax         Act   whereby  the  repayment  of  annuity         deposit made to  a  legal  heir  could  be         deemed  to  be  the income in the hands of         the legal heir?         (2) Whether, on the facts and  in         the   circumstances   of   the  case,  the         repayment of annuity deposits can properly         be taxed in the hands of the assessee, who         is a nominee of the depositor,  under  the         provisions  of  section  2(240(viii)  read         with section 280D of the  Income-tax  Act,         1961,   since  the  repayment  of  annuity         deposit  is  actually  received   by   the         assessee?" The Bombay High Court said that the annuity deposit  or  any amount  under the Annuity Deposit Scheme which was paid to a nominee on the death of the depositor was not covered in the definition of  income  under  Section  2(24)(viii).     This Section included in the definition of income only the amount paid under  Section  280-D to a depositor.  Hence, the Court said, "we do not see how  a  payment  which  is  made  to  a nominee  upon  the death of the depositor, in respect of the annuity deposits made by the depositor,  would  fall  within the  definition  of  income under Section 2(24)(viii) of the Income-tax Act, 1961".  The Bombay High  Court  relied  upon the   judgment   of   the  Madras  High  Court  in  CIT  vs. M.M.Muthiah 109 ITR 463, where it had been held  that  there was  a  fictional  inclusion  of  the annuity referred to in Section 280-D in the income of the depositor.  It  was  only in  the  circumstances  set  out  in  Section 280-D and by a statutory fiction that the  annuity  repaid  in  instalments could be income in the hands of the depositor.  There was no such  statutory  provision  which would cover the receipt of such an instalment in the hands of the nominee, as income of the nominee.  Unless the charging section was expressive and clear it was not possible to include all amounts received by the assessee as his income only on the  contention  that  it

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would be  equitable  to  do  so.   Reliance was laid on this Court’s judgment in CIT vs.  Hukumchand Mohanlal 82 ITR 624, where it had been held that if the Income-tax  Act  did  not contain  any provision making a successor in business or the legal representative of an assessee liable to pay tax on the deemed  profits  of  the  original   assessee,   the   legal representative could  not be so taxed.  The reasoning of the Madras High Court in the case of M.M.  Mutbiah was  followed by it in  the  subsequent decision in CIT vs.  S.M.  Ebrahim 134 ITR  599.    The  Bombay  High  Court  agreed  with  the reasoning and  conclusions  of  the  Madras  High Court.  It disagreed with the view taken in Nawab’s  case  because,  in its  view  the  Gujarat  High  Court had failed to take into account  the  express  provisions  of  Section   2(24)(viii) wherein  the  repayment  received only by the depositor were deemed to be  his  income.    The  Bombay  High  Court  also considered  the decision of the Delhi High Court in Talwar’s case and held that it was inapplicable to a  case  like  the one before it where the deposit had not been received by the depositor in  any sense of the term.  Section 280-D in terms referred only to repayment to the depositor.   All  that  it said was that such repayment to a depositor would be subject to other  provisions  in  the Scheme.  Section 280-D did not cover any  payment  either  to  a  nominee  or  to  a  legal representative of  a  deceased  depositor.    Therefore, the definition of income under Section 2(240(viii) did not cover a repayment of annuity deposit received by a  nominee  or  a legal representative. Reliance   was  placed  by  the  learned  Additional Solicitor General on Section  159  of  the  Income-tax  Act, which  says,  "Where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in  the  like  manner and to  the  some extent to the deceased".  It was submitted that, in any event, the assessee was liable to be  taxed  on the amount  of  the annuity on this account.  The submission can be disposed of immediately, before we  go  to  the  main contention.   Section 159 applies to income that had accrued to the deceased when he was alive; it would not apply  to  a case such as the present. The  argument  on  behalf  of  the   Revenue   runs: Sub-Paragraph  4(a)  of  the  Scheme  says that "the annuity shall be  payable  to  his  legal  representatives"  if  the deceased  depositor  has  not  made  a  nomination.  It was, therefore, that the annuity had been paid to  the  assessee; it  had  been  paid under the Scheme. Section 280-D required the Central Government, subject to the provisions of Chapter XXII-A and  any  Scheme  framed  thereunder,  to  repay  the annuity deposit. The payment to the assessee being under the Scheme,  it  is  a  payment  under the provisions of Section 280-D. It  is,  therefore,  income  as  defined  by  Section 2(24)(viii) and taxable as such in the assessee’s hand. As  we read it, Section 280-D, which has been quoted above, states that  the  requirement  of  repayment  to  the depositor  of  the  annuity  deposit  "in ten annual equated instalments of principal and interest at such rate as may be notified" is subject  to  the  other  provision  of  Chapter XXII-A and any Scheme framed thereunder; that is to say that the  Scheme  may provide for a different manner of repayment to the depositor.  In any event and assuming that the Scheme can provide that the repayment be made to someone other than the original depositor and payment is made  accordingly;  it is  payment  under  the Scheme and not payment under Section 280-D, Section 280D does not apply to anyone other than  the original depositor.    Only to the original depositor is the

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annuity paid under the provisions of Section 280-D.  It  is, therefore,  only in the hands of the original depositor that the annuity is income, by reason of the inclusive definition in Section 2(24)(viii) and taxable as such. The amount of the annuity deposit was income in  the hands of  the  original  depositor and taxable as such.  The provisions of the Act the Scheme obliged  him  to  make  the deposit thereof  instead  of paying income-tax thereon.  The annuity deposit, when made, became capital.  When  returned, either  as  a  whole or by instalments, it was not liable to tax as income.  For  this  reason  Section  2(24)(viii)  was enacted,  whereby  the  instalment or annuity was treated as income, provided it was received under Section  280-D;  that is  to  say,  the  annuity  was  to  be treated as income if received by  the  original  depositor.    On  the   original depositor’s death the balance of the annuity deposit that he had  made became part of his estate and was liable to tax as such,  as  the  Karnataka  High  Court   rightly   held   in Bhoomiamma’s case.  Becoming a part of his estate, his legal representatives  became  entitled  to  recover  it, and they would under the general law be entitled to recover it in one lump sum, paying no tax on it (except estate duty, should  a statute  levying  it  be on the statute book at the relevant time).  Sub-paragraph 4(a) of the Scheme does no  more  than recognise that the unpaid balance of the annuity deposit has to   be   paid   over  to  the  original  depositor’s  legal representatives, adding only this :  that it would  be  paid in instalments  as  annuity.  Though so paid in annuity form the repayment is of capital.  It cannot be taxed  as  income in  the hands of the legal representative unless the statute were expressly to deem it to be income in his hands. As to the argument based on equity, it has long been recognised that tax and  equity  are  strangers.    Just  as reliance  upon equity does not avail an assessee, so it does not avail the  Revenue.    The  legal  representative  of  a deceased depositor cannot be made to pay income-tax upon the annuity  only  because  the  original depositor had not been required to pay income-tax on  the  amount  of  the  annuity deposit,  on the basis that what the Revenue had lost out on then should be recouped to it now.  The  original  depositor did  not  voluntarily  make  the  annuity  deposit;  he  was required by the Act and Scheme to do so.  Insofar as he  was concerned,  the  Act  provided  that the annuity he received would be taxable as income.  Whether advisedly or otherwise, the Act did not provide that the annuity would be  taxed  as income  in  the hands of his legal representative, and there it must remain. The appeal is allowed.  the judgment and order under appeal is set aside.    The  question  is  answered  in  the negative and in favour of the assessee. No order as to cost.