9911796707
TMI Blog1934 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... rial that the total amount of such capital 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'income' and on the other 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be found by the purchaser or not ; as 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning which (using the Income Tax Acts themselves 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&quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 66 (2), Income Tax Act. The assessee was the proprietor of the estate known as 9 ,annas Tikari Raj. Under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money, annuities and other annual profits and gains not charged by virtue of any other schedules contained in the Act : (Income Tax Act 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 dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng through a transaction is very much a guide to the true nature of the transaction. I read this agreement taking it as a whole as a trading convention. 23. I have 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvenient to the vendee. Taking the transaction as a whole I am forced to adopt the latter view. No doubt, at one place in the deed it is mentioned that the assessee 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 specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain, though no not the period. Income is something derived from capital , and not capital itself. 28. I am of opinion that assessment in this particular case will really be taxing 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: The object of the Indian Act is to tax 'income' a term which it does not define. It is expanded, no doubt, into 'income, profits and gains but the expansion is 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 &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of a gross sum. The annuity was paid half-yearly, each payment representing; as to part, an instalment of the purchase money, and as to the rest, interest on the amount of the purchase money 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence whether the contract to make the annual payments is entered into in consideration of money paid or in consideration of property assigned.
33. I rely upon the last portion of the observations quoted by me. Looking at the facts of this case it is clear that the object of the transfer was, as mentioned in the deed, to obtain for the assessee an adequate income apart from the burden of discharging his debts, just as one can arrange to purchase an annuity by paying a certain number of instalments in cash to an insurance company, which annuity is admittedly taxable. There is nothing to indicate that the annuity would cease to be taxable simply because instead of cash deposits an estate or a part of it was transferred. I am of opinion that the real object of the transfer was not to receive the capital price of the property but to secure an income for the assessee without the trouble and anxiety of managing the estate. For these reasons I would most respectfully differ from the view expressed by my learned brother NOOR, J., and I would answer the question in agreement with my Lord the Chief Justice that the sum in question is not capital but is a taxable income. X X X X Extracts X X X X X X X X Extracts X X X X
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