COMMISSIONER OF WEALTH TAX, LUCKNOW vs. P. K. BANERJEE (DEAD) BY LRS.

CIVIL APPEAL No. 1163/1973Supreme Court[1981] 1 S.C.R. 65709 September 1980Bench: 2 JudgesAuthor: P.N. BHAGWATI, E.S. VENKATARAMIAH16 pages
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What were the facts?

The assessee, P. K. Banerji, received the net income of a trust fund after his father's death, as per a deed of trust dated October 26, 1937, modified on April 28, 1950. The assessee claimed this income as an annuity, seeking exemption under Section 2(e)(iv) of the Wealth Tax Act, 1957. All authorities, including the Appellate Tribunal, Allahabad Bench, negatived this claim. The Tribunal directed the Wealth Tax Officer to revalue the assessee's life interest, as including the entire corpus was incorrect. The High Court, on reference, held the interest to be an annuity exempt under Section 2(e)(iv). The Commissioner of Wealth Tax appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that for an item to be considered an annuity exempt under Section 2(e)(iv) of the Wealth Tax Act, 1957, it must be established that it is an annuity and that its commutation into a lump sum is precluded. The Court clarified that an annuity requires a periodic payment that is fixed or pre-determined and not subject to variation based on the income of the charged fund. The intention of the settlor is crucial: whether a pre-determined sum was intended or the entire net income. In this case, the settlor's intention was for the assessee to receive the whole net income of the trust fund, which could vary, especially with the trustee's power to reinvest. Therefore, the assessee's right could not be treated as an annuity. The High Court's reliance on In re Duke of Norfolk: Public Trustee v. Inland Revenue Commissioners (1950) Ch. 467 was found to be erroneous. The appeals were allowed, the High Court's judgment was set aside, and the question was answered in the negative, against the assessee.

What were the issues?

1. Whether the interest of the assessee in the trust fund amounted to an annuity exempt under Section 2(e)(iv) of the Wealth Tax Act, 1957? (Question of law) Assessee's Contentions: The assessee contended that the interest received from the trust fund constituted an annuity, which is exempt from wealth tax under Section 2(e)(iv) of the Wealth Tax Act, 1957. The High Court had accepted this contention. Revenue's Contentions: The revenue contended that the amount received by the assessee was not an annuity. For an amount to be an annuity, it must be a fixed or pre-determined payment not liable to variation based on the income of the charged fund. The revenue argued that the assessee was entitled to the entire net income of the trust fund, which could vary, and that the trustee had the power to reinvest, further indicating potential variation. The revenue relied on the principles laid down in Commissioner of Wealth-tax, Rajasthan v. Her Highness Maharani Gayatri Devi of Jaipur (1971) 82 I.T.R. 699.

Which sections of the Income-tax Act were involved?

Section 2(e)(iv),Section 27(1)

AI-generated summary — verify with the full judgment below

65 7 COMMISSIONER OF WEALTH TAX, LUCKNOW v. P. K. BA~ERJEE (DEAD) BY LRS.

September 9, 1980 [P. N. BHAGWATT, E. S. VENKATARAMIAH, JJ.J Wealth Tax Act, 1957, Section 2(e)(iv), scope of-Annuity-Nature of the amount to fall under the annuity, to claim exemption under the Wealth Tax Act, exp/ai117d.

The respondent assessee, under a deed of trust dated October 26, 1937 executed by his father Pyarey Lal Banerji which was modified by another trust 'deed dated April 28, 1950, received "the net income of the trust funds" after the death of his father.

The assessee treated this amount as an annuity and claimed exemption under section 2(e)(iv) of the Wealth Tax Act, 1957. The claim for exemption was negatived by all the authorities including the Appel· late Tribunal, Allahabad Bench.

The Tribunal, however, holding that the inclusion of the en titre. value of the corpus in the computation of net wealth was not correct as the assessee had merely a life interest in it, direcled' the Wealth Tax Officer to modify the assessments valuing the life interest of the assessee according to recognised principles of valuation.

On a reference, i1t the instance of the asseseee, the Hi

The order continues below.

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