1998 (12) TMI 3 - SC - Income Tax

Annuity Deposit Scheme repayments to deceased depositor's executor-whether instalments are taxable income or return of capital; not taxable.

Whether annuity instalments repaid under the Annuity Deposit Scheme to a deceased depositor's executor/legal representative are taxable as the recipient's ... Annuity Deposit Scheme - repayment of annuity deposit received by a nominee or a legal representative - provisions of section 280D - Whether, the Tribunal was justified in holding that the refund of annuity 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 is executor of the estate of the deceased - Held That:- 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 280D'. Chapter XXII-A of the Act provides for annuity deposits. 'Annuity' is defined by section 280B(4) to mean 'any annuity instalment of principal and interest thereon payable by the Central Government under the provisions of section 280D'. A 'depositor' is defined by section 280B(6) to mean 'a person to whom the provisions of this Chapter apply'. Section 280C 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 280D, which has been quoted above, 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 280D. Section 280D does not apply to anyone other than the original depositor. Only to the original depositor is the annuity paid under the provisions of section 280D. 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. 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 280D, 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 K. Bhoomiamma's case [1978 (6) TMI 44 - KARNATAKA HIGH COURT]. 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). 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. The original depositor did not voluntarily make the annuity deposit; he was required by the Act and Scheme to do so. In so far 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. The appeal is allowed. The judgment and order under appeal is set aside. The question is answered in the negative and in favour of the assessee. Issues Involved:1. Taxability of annuity payments received by the legal representative of a deceased depositor under the Annuity Deposit Scheme.2. Interpretation of relevant sections of the Income-tax Act, 1961, specifically sections 2(24)(viii) and 280D.3. Applicability of section 159 of the Income-tax Act, 1961, to the case.4. Differing judicial opinions from various High Courts on the issue.Detailed Analysis:1. Taxability of Annuity Payments Received by Legal RepresentativeThe primary issue was whether the refund of annuity payments received by the legal representative of a deceased depositor under the Annuity Deposit Scheme constituted income taxable in the hands of the legal representative.2. Interpretation of Relevant Sections of the Income-tax Act, 1961- Section 2(24)(viii): Defines 'income' to include 'any annuity due, or commuted value of any annuity paid, under the provisions of section 280D.'- Section 280D: States that the Central Government shall repay the annuity deposit in ten annual equated instalments of principal and interest to the depositor. The key question was whether this provision applied to payments made to legal representatives or nominees of the deceased depositor.3. Applicability of Section 159 of the Income-tax Act, 1961- Section 159: This section was argued by the Revenue to imply that the legal representative should be liable to pay any sum the deceased would have been liable to pay if he had not died. However, the court clarified that this section applies to income accrued to the deceased while alive and not to the annuity payments received by the legal representative after the depositor's death.4. Differing Judicial Opinions- Delhi High Court: Held that the annuity payments received by the legal representative were taxable as income.- Gujarat High Court: Supported the view that annuity payments received by the legal representative retained their character as income.- Karnataka High Court: Addressed the inclusion of annuity deposits in the estate's principal value and held that the income-tax payable by heirs on annuity deposits was irrelevant for estate valuation.- Bombay High Court: Contrarily, ruled that the annuity payments received by a nominee or legal representative were not covered under the definition of income in section 2(24)(viii).- Madras High Court: Supported the Bombay High Court's view, emphasizing that there was no statutory provision deeming such payments as income in the hands of the legal representative.Supreme Court's Judgment:The Supreme Court allowed the appeal, setting aside the judgment of the Delhi High Court and answering the question in the negative, thereby ruling in favor of the assessee. The court concluded that:- The annuity payments received by the legal representative were not taxable as income under section 2(24)(viii).- Section 280D applied only to the original depositor, and payments made to legal representatives under the Scheme were not covered by this section.- The legal representative receiving the annuity payments did so as a return of capital, not as income, unless expressly deemed so by statute.- Equity considerations could not override the clear statutory provisions, and the Revenue could not retrospectively impose tax obligations on the legal representative that were not explicitly provided for by the law.Conclusion:The appeal was allowed, and the judgment and order of the Delhi High Court were set aside. The Supreme Court held that the annuity payments received by the legal representative of the deceased depositor were not taxable as income under the provisions of the Income-tax Act, 1961. The question was answered in favor of the assessee, with no order as to costs.