1969 (12) TMI 28 - HC - Income Tax

Ex gratia payments deemed non-taxable; Asset not included in net wealth

The court held that the payments received by the assessee were not taxable income under section 12 of the Indian Income-tax Act, as they were casual and ... Voluntary ex gratia payment paid regularly to ruler in respect of State Palace for several years - they depended on the good wishes of the Government of India - therefore, they are casual and non-recurring in nature - various amounts received by the assessee were exempt from tax - moreover, they are not asset in Wealth tax Act Issues Involved:1. Whether the payments received by the assessee from the Government of India constituted taxable income under section 12 of the Indian Income-tax Act, 1922.2. Whether such income is exempt from taxation as it falls under section 4(3)(vii) of the Indian Income-tax Act.3. Whether a promise by the Government of India to make periodical ex gratia payments to the assessee constituted an asset within the meaning of section 2(e) of the Wealth-tax Act, 1957, for inclusion in his net wealth.Issue-wise Detailed Analysis:1. Taxability of Payments under Section 12 of the Indian Income-tax Act, 1922:The Tribunal held that the payments received by the assessee were taxable under section 12 of the Income-tax Act. The Tribunal reasoned that although the payments were voluntary, they were periodic and expected with regularity, thus constituting a source of income. The Tribunal concluded that the payments were taxable as income under section 12, despite being ex gratia and not enforceable by law.2. Exemption under Section 4(3)(vii) of the Indian Income-tax Act:The court examined whether the payments were exempt as casual and non-recurring receipts under section 4(3)(vii). The court noted that the payments, although ex gratia, were expected annually and thus formed a source of income. However, the court concluded that these payments were casual and non-recurring since they depended on the goodwill of the Government of India and could be discontinued at any time. The court referenced several cases, including Rani Amrit Kunwar v. Commissioner of Income-tax, to support the view that voluntary payments dependent on the donor's whim are casual and non-recurring. Consequently, the court held that the payments received by the assessee were exempt from taxation under section 4(3)(vii).3. Inclusion of Ex Gratia Payments as Assets under the Wealth-tax Act, 1957:The Wealth-tax Officer had included the capitalized value of the annual payments in the assessee's net wealth. The Appellate Assistant Commissioner and the Tribunal disagreed, stating that the term 'asset' must connote a property or right vested in an individual, which the assessee did not possess. The court affirmed this view, noting that the assessee had no enforceable right to the payments, which were entirely dependent on the Government's goodwill. Therefore, the promise of ex gratia payments did not constitute an asset under section 2(e) of the Wealth-tax Act. The court answered the question in the negative, ruling that such payments were not includible in the assessee's net wealth.Conclusion:In conclusion, the court held that the payments received by the assessee were not taxable income under section 12 of the Indian Income-tax Act, 1922, as they were casual and non-recurring in nature and thus exempt under section 4(3)(vii). Additionally, the promise of ex gratia payments did not constitute an asset under the Wealth-tax Act, 1957, for inclusion in the assessee's net wealth. The references were answered accordingly, with no order as to costs.