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CASE NO.: Appeal (civil) 2388 1994         Appeal (civil)  2394    1994

PETITIONER: COMMISSIONER OF WEALTH TAX

       Vs.

RESPONDENT: PRINCE MUFFAKHAM JAH BAHADUR CHAMLIJAN

DATE OF JUDGMENT:       12/12/2000

BENCH: Y.K.Sabharwal, S.P.Bharucha, S.N.Hegde

JUDGMENT:

L.....I.........T.......T.......T.......T.......T.......T..J       J U D G M E N T

     BHARUCHA, J.

     These  are  appeals that relate to the same  assessee, Prince Muffakham Jah;  they are in respect of the Assessment years  1969-70 to 1975-76 and 1977-78.  They raise the  same question.   That question was referred on the application of the  Revenue  by  the Income Tax Appellate Tribunal  to  the Andhra  Pradesh High Court under Section 27(1) of the Wealth Tax  Act.  The question reads thus :  Whether on the  facts and  in the circumstances of the case the Appellate Tribunal was right in law in upholding the Commissioner of Income-Tax (Appeals)  order  who  directed the Wealth  Tax  Officer  to exclude  the amount for the assessment year 1977-78 relating to the life interest of the assessee added by the Wealth Tax Officer  in accordance with Rule 1B of the Wealth Tax Rules, 1957.

     The principal judgment of the High Court was delivered in  the  case  of  Commissioner of  Wealth-Tax  vs.   Prince Muffakkam Jah Bahadur [186 I.T.R.  421], which is challenged in Civil Appeal Nos.  2388-2394 of 1994, and it was followed in  the orders which are challenged in Civil Appeal  No.3603 of 1997.

     The  assessee  is a member of the family of  the  late Nizam  of  Hyderabad.  One of the several trusts created  by the  late Nizam for the benefit of his heirs, relations  and others  was the Prince Mukaram Jah, Prince Muffakkam Jah and Princess  Dur-Re-  Shewar  Trust.    The  trustees  thereof, pursuant  to the directions contained therein, constructed a house  on  specified land.  The assessee was entitled  under the terms of the trust to live in that house during his life time without being required to pay any rent.

     In  his wealth tax return for the assessment years  in question  the assessee did not include the value of the life

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interest so created in his favour for the reason that he had no alienable interest in the house.  The Wealth-Tax Officer, however,  added  the value of the said life interest in  the assessees  wealth, applying for the purpose the  provisions of Rule 1B of the Wealth Tax Rules.  The appellate authority in  first  appeal held to the contrary, and the Tribunal  in further  appeal  agreed.   From  out of  the  order  of  the Tribunal  the question aforestated was referred to the  High Court.

     The  High  Court, in the impugned judgment,  took  the view  that  the  said life interest could not be  called  an asset  for  the purposes of the Wealth-Tax Act, inasmuch  as the  assessees interest was only to live in the house as  a licensee  and  he could not dispose of his interest or  deal with  it  in  any manner for his benefit.  He  had  also  no proprietary interest therein.

     The High Court followed its decision in R.C.  No.69 of 1969,  disposed  of on 5th November, 1971.  In that  matter, the  Shahebzadi Anwar Begum Trust created by the late  Nizam was  in issue.  It provided that the trustees thereof  would allow  the  Shahebzadi to wear and use specified  jewels  on ceremonial  or festive occasions and other specified  jewels for  ordinary everyday use.  The trustees were empowered  to convert  any  part  of the jewellery fund into  an  income yielding  investment,  the income whereof was to be paid  to the  Shahebzadi.   In  the event of the  death,  divorce  or remarriage  of the Shahebzadi, the trustees were required to sell the jewels and invest the sale proceeds and pay out the income  to  the  children  and other  remote  issue  of  the Shahebzadi  and Prince Muazzam Jah.  The question before the High  Court was whether the right to wear the jewellery  was an  asset  and  whether its value could be included  in  the Shahebzadis  wealth  for the purposes of wealth  tax.   The High Court concluded that the Shahebzadis interest was of a permissive  nature and could not be called property, however widely  the  expression was interpreted.  This was  for  the reason  that  the Shahebzadi had no proprietary interest  of any  sort  in  the  jewellery and she  could  not  lend  it. Besides,  the trustees were given the right to withdraw  the jewellery  from  her and sell it without her  consent.   Her interest  in  the jewellery was limited to being allowed  to wear it if the trustees did not withdraw it from her.

     It  was common ground before the High Court that  Rule 1B was not workable in the circumstances of the present case because  the formula therein could not be applied if  income did  not accrue to an assessee from his life interest.   The High Court agreed, therefore, with the Tribunal that Rule 1B could  not be applied for determining the value of said life interest.   It added, This of course does not mean that  an asset  should be excluded altogether from computation.  Even if  the  said  rule does not apply, an asset must  still  be valued and must be included in the wealth of the assessee if it satisfies Section 7(1).

     Section  2  of  the  Wealth   Tax  Act  sets  out  the definitions  of  the expressions used therein.   Clause  (e) thereof  defines  assets  to  include  property  of  every description,  movable  or  immovable.   Clause  (m)  thereof defines  net  wealth  to  mean the  amount  by  which  the aggregate  value, computed in accordance with the provisions of  the Wealth Tax Act, of all the assets, wherever located, belonging  to the assessee on the valuation date,  including

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assets  required to be included in his net wealth as on that date under the Wealth Tax Act, is in excess of the aggregate value of all the debts owed by the assessee.  Section 7 sets out  how the value of assets is to be determined.  So far as it is relevant here, it says :

     S.7.   Value  of  assets how to  be  determined-  (1) Subject  to any rules made in this behalf, the value of  any asset,  other than cash, for the purposes of this Act, shall be  estimated  to be the price which in the opinion  of  the Assessing  Officer it would fetch if sold in the open market on the valuation date.

     Our  attention  was drawn by learned counsel  for  the Revenue  to  several  judgments of this Court and  the  High Court  at Bombay in support of his contention that the  said life  interest was an asset of the assessee and it had to be taken into account in assessing his net wealth.

     In  Ahmed  G.H.   Ariff & Ors.  Vs.   Commissioner  of Wealth-Tax,  Calcutta [(1970)76 I.T.R.  471], this Court was concerned  with  the  right of a beneficiary to  receive  an aliquot share of the net income of properties comprised in a wakf-alal-  aulad created by a Muslim governed by the Hanafi school  of  Mohammedan  law.   It was held  to  be  property covered  by the definition of assets in the Wealth-Tax  Act, so  that the capitalized value of that right was  assessable to  wealth-tax.  This Court said that property was a  term of  the widest import and signified every possible  interest which  a  person could hold or enjoy.  It had been  held  to extend  even  to a mahantship or shebaitship which  combined the elements of office and property.  This Court referred to the  judgment  of the Bombay High Court in  Commissioner  of Wealth-tax,  Bombay City II vs.  Purshottam N.  Amersey  and anr.   [(1969)71  I.T.R.  180]and expressed its  concurrence with  the view that the charge of wealth-tax under Section 3 of  the  Wealth  Tax  Act  on  net  wealth  included   every description  of  property  of   the  assessee,  movable  and immovable,  barring  exceptions expressly stated.  The  High Court  had  rightly observed that when the statute used  the words  if  sold in the open market it did not  contemplate actual  sale  or  the actual state of the  market  but  only enjoined  that  it should be assumed that there was an  open market and the property could be sold in such market and, on that  basis,  its  value  had to be found out.   It  was  an hypothetical case which was contemplated.

     The  judgment of the Bombay High Court in the case  of Purshottam  N.   Amersey  was  upheld   by  this  Court   in Purshottam   N.   Amarsay  &   Anr.   vs.   Commissioner  of Wealth-Tax,  Bombay  City  II [(1973) 88  I.T.R.   417]  and observations  of  the kind set out above were repeated.   In response  to the argument on behalf of the assessee that the Court  had  not considered the possibility of an  asset  not having  any  value  whatsoever, it was said that  what  this Court  had  ruled  in  Ariffs case was  that  even  if  the property  in  question  was incapable of being sold  in  the market  for  the  reason that it was a personal  asset,  the interest  of the assessee had to be valued by the Wealth-Tax Officer.

     On  behalf of the assessee the view taken by the  High Court was commended, namely, that the said life interest was not  an  asset  because  it   only  conferred  a   personal,

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inalienable  right to reside on the assessee.  It was only a licence and, therefore, not an asset.

     It  is difficult, having regard to what has been  laid down  by  this Court in Ariffs case and Amerseys case,  to uphold the decision of the High Court.  The assessee has, by reason  of the said life interest, a right to reside in  the house  in question for the duration of his life.  There  can be no question but that such a right to reside, though it be personal  and  inalienable, is property which would  have  a market  in an assumed market place;  in other words, that an assumed somebody would acquire this personal right to reside in  the property during the lifetime of the assessee and pay a price for it.

     The  alternative contention advanced before this Court on  behalf  of  the assessee was as follows:   When  a  rule provides  a method of valuation of an asset, it is only that rule  that can be applied and no further recourse to Section 7 is permissible.  Rule 1B in the instant case indicated how a  life  interest was to be valued.  It had been applied  by the  Wealth-Tax  Officer.   That  application  was  correct. Because  the said life interest yielded no actual income  to the  assessee,  the  value  of the  said  life  interest  so calculated was zero.

     Rule 1B, in so far as it is relevant, reads thus :

     (1) For the purposes of sub-section (1) of Section 7, the  market value of the life interest of an assessee  shall be  arrived at by multiplying the average annual income that accrued  to the assessee from the life interest by 1/14141 = 1  where I represents the annual premium for a  whole-life insurance without profits on the life of the life tenant for unit  sum  assured  as specified in the  Appendix  to  those rules,  and d is equal to 1/1 plus, i being the rate  of interest.

     As  has  been noted, it was agreed by learned  counsel appearing  on  behalf of both the assessee and  the  Revenue before  the High Court that Rule 1B was not workable in  the circumstances  of the present case, which is clearly correct for  it  is  applicable  only to  an  income  yielding  life interest.  It is, therefore, difficult to see how it can now be  argued  on  behalf  of the assessee  that  Rule  1B  was correctly  applied.  In any event, we are in agreement  with the  High  Court, and indeed, with the Tribunal  before  it, that  even if Rule 1B did not apply, the said life interest, if  an asset, had still to be valued and be included in  the wealth  of  the assessee, which is what Section 7  required. In the absence of a rule which can apply to the valuation of a  particular  asset,  that  asset must  be  valued  in  the ordinary  way, by determining what it would fetch if it were sold  in an assumed market;  the value being what an assumed willing  purchaser  would pay for it.  This is how the  said life interest must be assessed, upon the assumption that the assessees  personal right to reside in the property  during his  life time is salable.  For the reasons aforestated, the judgment  and  orders  under challenge are set  aside.   The question  aforequoted  is  answered in the negative  and  in favour  of the Revenue.  The said life interest shall now be valued  for each of the Assessment Years in question in  the manner set out above.  No order as to costs.

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