1. Refund of annuity deposit under the Annuity Deposit Scheme paid to the legal representative of a deceased depositor — Taxability as income under Section 2(24)(viii), Income-tax Act, 1961. (Para 2 )
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1998 Supreme(SC) 1260
1998(9) Supreme 375
Supreme Court of India
(From Delhi High Court)
S.P. Bharucha & D.P. Mohapatra, JJ.
Kapil Mohan -Appellant
versus
The Commissioner of Income-tax, Delhi -Respondents
Civil Appeal No. 5264 of 1990
Decided on 18-12-1998
Counsel for the Parties :
For the Appellant : G.C. Sharma, Sr. Advocate, Tripurari Rai, Vineet Kumar, Advocates.
For the Respondent : K.N. Rawal, Additional Solicitor General, Ranbir Chandra, B.K. Prasad, Advocates.
Important Points
Repayments of annuity deposits received by a legal representative or nominee of a deceased depositor are not taxable as income. Section 2(24)(viii) and 280-D only deem repayments to the original depositor as income; payments to heirs constitute a return of capital from the deceased's estate.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
Income-tax Act, 1961-Section 2(24)(viii) read with Section 280-D -Annuity Deposit Scheme, 1964-Income - Chargeable as - Annuity due - Original depositor died-Annuity was paid to his son who was also executor - Whether amount paid to him could be taxed in his hands?-No-Section 280-D does not apply to anyone other than original depositor-Only in hands of original depositor that annuity is income by reason of inclusive definition in Section 2(24) (viii)-It cannot be taxed in hands of legal representative.
Held : Section 280-D 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 provisions 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 280-D does not apply to anyone other than the original depositor. Only to the original depositor is the 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. (Para 11)
The amount of the annuity deposit was income in the hands of the original depositor and taxable as such. The provisions of the Act and 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. (Para 12)
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. (Para 13)
Legal Category Hierarchy
Table of Contents
2. Whether repayment of annuity to a legal representative under the Scheme constitutes income under Section 2(24)(viii) read with Section 280-D, or is a non-taxable return of capital. (Para 10 )
3. Section 280-D applies only to the original depositor; payments to legal representatives under the Scheme are returns of capital and not deemed income under Section 2(24)(viii). (Para 11 , 12 )
4. An annuity repayment to a legal representative of a deceased depositor is a return of capital and not taxable as income unless expressly provided by statute. (Para 12 )
5. Appeal allowed — Question answered in the negative and in favour of the assessee. (Para 14 )
6. Is an annuity repayment received by a legal representative of a deceased depositor taxable as income under Section 2(24)(viii) of the Income-tax Act, 1961?
No. Section 2(24)(viii) and Section 280-D only deem annuities paid to the original depositor as income. Repayments to legal representatives under the Scheme are returns of capital and not taxable as income unless the statute expressly deems them so. (Para 11 , 12 )
7. Does Section 159 of the Income-tax Act, 1961, make a legal representative liable for tax on annuity repayments received after the depositor's death?
No. Section 159 applies only to income that had accrued to the deceased while they were alive; it does not apply to annuity repayments received by the legal representative after the depositor's death. (Para 9 )
8. Can the principle of equity be used by the Revenue to tax a legal representative on annuity repayments if the statute is silent?
No. Tax and equity are strangers. A legal representative cannot be taxed on an annuity simply because the original depositor received tax relief at the time of deposit, if the statute does not expressly provide for such taxation. (Para 13 )
Judgment
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.
2. 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 of the Delhi High Court. The Delhi High Court, by the judgment and order under appeal, held against the assessee.
3. Section 2(24)(viii) of the Act defines “income” to include “any annuity due, or commuted value of any annuity 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(6) “to mean a person to whom the provisions of this Chapter apply”. Section 280-C requires an assessee covered by Chapter XXII-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 provisions of this Chapter and any scheme framed thereunder, the Central 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.
4. 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 6 thereof provided for payment to the depositor of the annuity. 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 of his death.”
5. The Delhi High Court, in the judgment under appeal, followed its earlier judgmen
