Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT (A) who directed the WTO to exclude the amount from each of the years 1969-70 to 1975-76 relating to the life interest of the assessee added by the ITO in accordance with r. 1B of the WT Rules, 1957 ?

High Court Of Andhra Pradesh

Commissioner Of Wealth Tax vs. Prince Muffakkam Jah Bahadur

Section WT 2(e)

Asst. Year1969-70, 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76

B.P. Jeevan Reddy & V. Neeladri Rao, JJ.

R.C. No. 84 of 1984

31st January, 1989 

Counsel Appeared

M. S. N. Murthy, for the Revenue : Y. Ratnakar, for the Assessee

B. P. JEEVAN REDDY, J.:

This reference is made under s. 27(1) of the WT Act, 1957, and the question referred is :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the CIT (A) who directed the WTO to exclude the amount from each of the years 1969-70 to 1975-76 relating to the life interest of the assessee added by the ITO in accordance with r. 1B of the WT Rules, 1957 ?”

The assessee is Prince Muffakkam Jah Bahadur, a member of H.E.H. the Nizam’s family. The question arose with reference to the assessment years 1969-70 to 1975-76. The late Nizam established several trusts for the benefit of his heirs, relations and others. One of the trusts so created is H. E. H. the Nizam’s Prince Mukaram Jah, Prince Muffakkam Jah and Princess Dur-Re-Shewar Trust. In pursuance of the directions given in the trust deed, the trustees constructed a house on the land belonging to Chamilijah at a cost of Rs. 6,00,000. The assessee was entitled to live in the said house during his lifetime free of rent.

In his return of wealth for the aforesaid assessment years, the assessee did not declare or include the value of the said life interest in his wealth on the ground that he had no alienable interest in the said house. The WTO, however, did not agree with this view and added the value of the said interest in the assessee’s wealth. On appeal, however, the CWT (Appeals) agreed with the assessee’s stand and directed the said value to be excluded from the wealth of the assessee. On further appeal, the Tribunal agreed with the AAC. Thereupon the aforesaid question was asked to be referred for the opinion of this Court which the Tribunal did. Sec. 3 of the WT Act (for short, “the Act”) levies wealth-tax upon the net wealth of every individual, HUF and company as on the corresponding valuation date every year. Sec. 7(1) says : “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 AO, it would fetch if sold in the open market on the valuation date.”

The expression “asset” is defined in cl. (e) of s. 2, the relevant portion whereof reads thus : “(e) `assets’ includes property of every description, movable or immovable, but does not include,— (1) (omitted as unnecessary) (2) in relation to the assessment year commencing on the 1st April, 1970, or any subsequent assessment year— (i) animals ; (ii) a right to any annuity not being an annuity purchased by the assessee or purchased by any other person in pursuance of a contract with the assessee in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant; (iii) any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee:…”

The expression “net wealth” is defined in cl. (m) in the following words : “‘net wealth’ means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that

date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than— (i) debts which under s. 6 are not to be taken into account; (ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act; and (iii) the amount of the tax, penalty or interest payable in consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the ED Act, 1953 (34 of 1953), the Expenditure-tax Act, 1957 (29 of 1957), or the GT Act, 1958 (18 of 1958)— (a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him; or (b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date: Explanation.—A building or part thereof referred to in cl. (iii), cl. (iiia) or cl. (iiib) of s. 27 of the IT Act shall be includible in the net wealth of the person who is deemed under the said clause to be the owner of that building or part thereof ;”

The definition of “asset” shows that it includes property of every description movable or immovable, but does not include those specifically mentioned in the said definition. According to s. 7, the value of any asset shall be estimated to be the price which in the opinion of the AO, it would fetch if sold in the open market on the valuation date. This determination shall of course be made in accordance with the rules made in this behalf. Rule 1B of the WT Rules provides the mode of determining the value of life interest. Rule 1B reads thus : “1B. (1) For purposes of sub-s. (1) of s. 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 1 the life interest by (1/p+d)-1 where `P’ represents the annual premium for a wholelife insurance without profits on the life of the life tenant for unit sum assured as specified in the Appendix to these rules, and `d’ is equal to i/1+i, `i’ being the rate of interest. Explanation. For the purposes of this rule— (a) `life tenant’ means a person for the duration of whose life the life interest is to subsist; (b) `average annual income’ means the average of the annual gross income derived by the assessee from the life interest up to, the period ending on the valuation date reduced (in each case) by the average of the expenses incurred on the collection of such income in those years: Provided that the amount to be reduced shall, in no case, exceed five percent of the average of the annual gross income : Provided further that in case the income so derived is for a period exceeding three years, only that income derived during the three years ending on the valuation date shall be taken into account; (c) the rate of interest shall be 6 1/2 per cnet. per annum. (2) Notwithstanding anything contained in sub-r. (1)— (a) the WTO may, if he is of the opinion that in the case of the life tenant a life insurance company would not take the risk of insuring his life at the normal premium rates in force but would demand higher premium, vary the valuation suitably; (b) the value of the life interest so determined shall, in no case, exceed the market value as on the valuation date of the corpus of the trust from which the life interest is derived.”

The Tribunal was of the opinion that r. 1B is not workable in the present case and cannot, therefore, be applied. The Tribunal further held that where income does not actually come from a definite source or where the assessee does not have the right to receive income from a definite source, it cannot be said that he derives income. The Tribunal also held that if a person is entitled to stay in a house free of rent, it cannot be said that he is deriving income thereby; may be he is saving expenditure, but it does not amount to deriving income within the meaning of r. 1 B.

It is contended by learned standing counsel for the Revenue that the right to live in a house free of rent is also an “asset.” He submitted that the fact that the said interest cannot be sold or is not permitted to be sold is of little relevance. He submits that the words “which in the opinion of the AO it would fetch if sold in the open market on the valuation date” do not envisage the asset being actually sold nor do they contemplate that the asset must be capable of being sold. The said words only provide measure for estimating the value of an asset. Learned counsel further submitted that if this benefit was not given to the assessee he would have been obliged to take a house on rent or construct his own house which would involve him indefinite expenditure. He says that in truth and in effect, the said benefit is an asset and its value must be included in the wealth.

Both counsel agreed before us that r. 1 B is not workable in the circumstances of the case. The formula contained in r. 1B is multiplication of the average annual income that accrued to the assessee from life interest in a particular manner. Unless income accrued to the assessee from the life interest, the said formula cannot be applied. Now, in this case, the assessee is not deriving any income from the life interest. His right is only to live in the house. The trust deed does not empower him to lease out or otherwise dispose of the said interest. It is also not permissible for him to sub-lease the said house or lease out a part of it. Thus, we agree with the Tribunal that r. 1 B cannot be applied for determining the value of the said interest. 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 s. 7 (1). The question then is whether it is an “asset” within the meaning of s. 7(1), and as defined in cl. (e) of s. 2. We have already referred to the fact that the assessee has no right to dispose of the said interest in any manner. His only right is to live in the house and nothing more. Can it be called an asset ? We find that a similar question was considered by a Bench of this Court on an earlier occasion in R. C. No. 69 of 1969, disposed of on 5th Nov., 1971. Under one of the trusts created by the Nizam, namely, “Shahebzadi Anwar Begum’s Trust”, it was provided that the trustees shall allow Shahebzadi Anwar Begum to wear and use the jewels specified in Part I of the First Schedule on ceremonial or festive occasions and to allow her to wear and use the jewels specified in Part 11 of the First Schedule “for her ordinary and everyday use.” The trustees were further empowered to convert any part of the “jewellery fund” into an income-yielding investment in which case the net income from the investment was to be paid to Anwar Begum. She was to be allowed to wear and use the jewels until her death, divorce or remarriage. In the event of her death, divorce or remarriage, the trustees were directed to sell the jewels, invest the sale proceeds and pay the income to the children and other remote issues of the said lady and Prince Muazzam Jah Bahadur. The question was whether the right to wear the jewellery was an asset and whether its value should be included in the wealth of Anwar Begum. This is what the Court said : “Even so we are not satisfied that the interest of Shahebzadi in the `jewellery fund’ is an asset within the meaning of s. 2(e) of the WT Act. Under the terms of the trust deed, Shahebzadi is merely allowed to wear the jewels. She has no proprietary interest of any sort in the jewels. For instance, she cannot pledge the jewels ; she cannot lend the jewels to a friend or relative to be worn on occasions. The trustees are further given the right to withdraw the jewels from her any time they like and sell them. No doubt the income from the sale proceeds will have to be paid to the Shahebzadi but the Shahebzadi herself has no voice on the question whether the jewels may or may not be sold. Her interest in the jewels is limited to being allowed to wear them if the trustees do not withdraw them from her. To our minds, the interest appears to be of a permissive nature and cannot be called property, however widely the expression may be interpreted.” We are of the opinion that the said reasoning applies equally to the interest of the assessee concerned herein. Here too the interest of the assessee is in the nature of a licence. He can only live there. He cannot dispose of the said interest nor can he deal with it in any manner to his benefit. It cannot also De said that he has a proprietary interest therein.

Learned standing counsel for the Revenue brought to our notice decision of the Bombay High Court in CWT vs. Purshottam N. Amersey (1969) 71 ITR 180 and certain English decisions referred to therein, but we find that this decision was also considered by the Bench in the aforesaid decision and the said conclusion arrived at. We see no reason to take different view now.

For the above reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs.

[Citation : 186 ITR 421]

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