TMI Blog1934 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... sum will depend upon the duration of his life. Secondly, it is contended that in any case the payment should be considered as derived from the estate and therefore exempt from taxation under Section 4 (3) (viii) as agricultural income. As to the first of these points it has long been recognized that an owner of capital may exchange it for an income which is taxable, or for another form of capital which is not taxable and the question whether what was obtained in exchange should be considered as taxable depended upon the nature of the transaction in the particular case. In the leading case Foley v. Fletcher the distinction was clearly indicated. There the owner of certain buildings, lands and mines assigned the same to purchasers, who covenanted to pay a specified sum in cash and a further specified sum by annual instalments. It was held that the annual instalments were not liable to income tax. Chief Baron POLLOCK said (p. 779): These instalments are payments of money due as capital ; the Act has made no provision for such a case. It (the Act) professes to charge profits only.... If payments such as those in the present case are subject to income tax, whether any debt of any sor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther hand, 'capital It is not the case of a contrast between ' income ' and ' profits and gains', but merely that 'profits and gains' are varieties of income' Under the Income Tax Act if an annuity is in fact an income it is chargeable to income tax unless specifically exempted. Indeed the contention for the assessee was pushed to the extent of a proposition that a life annuity purchased in the ordinary course of business from a life assurance company is not taxable, there being no express words (save under Section 7) relating to annuities. But the difficulty and extravagance of this proposition became manifest, and on behalf of the assessee it was then urged that in this particular case the assessee should not be deemed to have purchased an annuity. 6. It was suggested that he had merely sold a capital estate and the purchaser had covenanted to pay the 'price' in the shape of annuity. Now, to my mind, the test of the matter does not depend upon whether there had been a 'sale' or whether the assessee is to be considered as a 'vendor' or as a purchaser'. It is also immaterial whether what is received by the assessee is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the land depended on this contingency and upon the quantity of oil, found, if any, the price, not unnaturally, was made to depend in part on the result. This case was relied upon by the assessee because of the resemblance between it and his own case in the matter of the uncertainty of the purchase price. 9. To my mind this resemblance is entirely immaterial. The point is that their Lordships held on the facts of that case that the price received by the vendor was in the nature of capital and not in the nature of income. The argument of the assessee is moreover fallacious for, whereas in the Canadian case the value of the land depended upon the contingency that oil might or might not be found and upon the quantity so found, it cannot be said in this case that the value of the estate transferred by the assessee depended in any manner on the uncertainty as to the number of years which he might live. In the case before us the assessee, before the transaction, enjoyed the benefits of a capitalist with the burden of control of the capital. He has discarded the capital with its pleasures, burden and risks and now enjoys an income only. It is no part of the business of ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emselves as the expositors to the meaning of the word) is intended by the word ' annuity.' 10. It will be noticed that their Lordships dealt with the substance and not the mere form of the contract and the rights of the assessee thereunder and moreover considered that the material question was whether, notwithstanding the use of the word annuity the annual sum was or was not to be considered as income. The decision in Foley v. Fletcher was moreover approved. In my opinion it is unnecessary to refer to the other numerous examples provided by authorities quoted in the course of the argument. I can see no conflict between them in matters of principle. Enough have been examined to provide a boundary line between capital and income for the purposes of this case. The first question submitted to us is, whether in the eye of the law the sum in question is part of the price of the property and as such is capital and so not taxable. 11. I would answer this by saying that the sum in question is not capital but is income and is so taxable, and it is immaterial that it is the price of the property transferred. The assessee further contends that in any case the income rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a deed of sale dated 29th March, 1930, he transferred practically the estate, or at any rate a very large portion of it, to Rani Bhubaneshwar Kuer, who on her own right is the proprietress of the 7 annas Tikari Raj. The lady's son was married to the daughter (the only child) of the assessee. The consideration for the transfer as mentioned in the deed of sale was the payment of the debt due from the assessee amounting to ₹ 10,26,937 a cash payment of ₹ 4,73,063 to-meet the expenses of the marriage of the daughter and other expenses, making a total of ₹ 15,00,000 and an annual payment of ₹ 2,40,000 during the life of the vendor. The question is whether this annual receipt of ₹ 2,40,000 by the assessee is assessable to income and super taxes. It was contended on behalf of the assessee that the payment being the consideration money of the estate sold was capital and not taxable and in the alternative it was urged that the transaction was a family arrangement and the annual payment was to be made from the income of the estate itself and was as such an agricultural income. The following questions were formulated by the Commissioner of Income Tax: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1853). 18. In the Indian Act, as I have said, annuities have not been expressly taxed except as salary and before an annuity can be taxed it must be shown to come within the purview of income, profits or gains as mentioned in Section 12, Income Tax Act. The learned advocate for the assessee placed his case rather too high when he contended that annuities were not assessable at all in India, as they are not specifically mentioned in the Indian Act. They were assessable in England by virtue of a specific provision of law. I am however unable to agree with this contention. The omission of annuity in the Indian statute does not, in my opinion, affect the question. The Indian law has used a very wide term income and annuities are assessable provided they are income, but not if they are capital. 19. The question which we are called upon to answer is whether this annual receipt of money by the assessee is income as contended for by the department, or capital as urged by the assessee. If the latter, there is no doubt that it cannot be assessed. I regret that I have respectfully to differ from my Lord. In my opinion, the annual receipt is the capital price of the property, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to these cases in order to show that the decision does not depend at all upon the interpretation of the statute, but upon the interpretation of the transaction. A transaction may from one point of view be looked upon as an acquisition of income, and from another point of view it may be a transfer and realization of a capital value. Unfortunately in this case the department has not supplied us with sufficient materials to dissect the transaction. It would have been useful to know the value of the estate and the amount which would have secured a life annuity of ₹ 2,40,000 for the assessee who was aged 47 years on the date of the transaction. In Perrin v. Dickson already referred to, evidence was adduced before the Commissioners to show the real nature of the transaction. I see no reason why the Commissioner of Income Tax did not investigate the matter further in order to ascertain how this annual payment of ₹ 2,40,000 was arrived at. 24. The assessee in his application to the Commissioner of Income Tax stated that the property was worth two crores. This has not been challenged ; rather Mr. Manohar Lal relied upon it for the purposes of his own argument. The v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee wanted to secure an income, but in the other place he calls the charge upon the estate rent charge . These words are of great importance. To my mind the real nature of the transaction is that it is a sale of the estate out and out and the realisation of the price is spread over a number of years to end on the death of the assessee. The cessation of the payment of the instalment after the death of the assessee may be due to the fact that thereafter the instalment would have been payable to the daughter of the assessee who had already been provided for by her marriage with the son of the vendee and there was no point in her getting the instalment from her mother-in-law. 26. Though the Privy Council has pointed out in Commissioner of Income Tax v. Shaw Wallace Co., that it is not always right to refer to English decision on income tax in dealing with Indian cases, I wish to examine some English cases which have been referred to by my Lord. My object is to show that even in England where annuity is specifically taxable the decision of the question whether a particular receipt was or was not income has not been free from difficulty and ultimately it rested upon the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing capital. I am not unmindful of the fact that efforts may be made to defeat the Income Tax Act. As my Lord has pointed out, this will always be the case howsoever carefully a statute may be drafted. It is a well recognised principle that a subject is entitled so to arrange not to attract taxes imposed by the Crown if he do so within the law. A subject may legimately claim the advance-taxing provisions are being defeated on account in the statute they can always legislate. Our duty is to apply the law strictly. If a subject comes within the terms of the statute he must be taxed irrespective of the consequences. If he does not come, then he must be released. In this case the department has not shown that any portion of this ₹ 2,40,000 is income within the meaning of the Act. I would therefore on the materials before me answer the first question in the affirmative and hold that the annual receipt of ₹ 2,40,000 is not income within the meaning of the Act but is the price of the estate sold of which the full value was not taken cash down. Varma, J. 29. I have had the advantage of' reading the judgment of my Lord the Chief Justice and that of my brother Khaja Moh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. This income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital/ But capital, though possibly the source in the case of income from securities, is in most, cases hardly more than an element in the process of production. 31. Now, bearing these observations in mind, I proceed to consider the cases which have been cited on behalf of the assessee. In Minister of National Revenue v. Catherine Spooner, 20 acres of land were transferred to a company whose object was drilling for and procuring the production and finding of oil. The transferor was to receive some cash, sortie shares and 10 per cent, of the petroleum, natural gas and oil recovered f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey unpaid. In those circumstances it was held that the Income Tax Acts do not tax capital as income, and that the income-tax was not payable upon that part of the annuity which represented capital. From the facts of this case referred to in the judgment of the Hon'ble the Chief Justice and my brother NOOR, J., it is clear that the period of time and the amount of money were fixed, and therefore, there was no difficulty in coming to the conclusion that the half-yearly payments were a part of the capital and not taxable income. It will be noticed in all these cases that the vendee's or transferee's liability does not cease with the life of the transferor, neither does it depend upon the life of the transferor. In the case of Chadwick v. Pearl Life Insurance Co., WALTON, J., while discussing the law on the subject said as follows: In considering this question (whether the annual payment was an annuity or an annual payment) the general scheme of the legislation as to annuities in the Income Tax Acts must be kept in mind. It is admitted that there may be, in the words of the Act, an annual payment payable as a personal debt by virtue of a contract which is not an 'ann ..... 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