Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala v. Yuvraj Amrinder Singh Etc

1'1JLZAPDBXAR, J. The common question of law that arises for our determination in these appeals is: Whether on the facts and in the circun.stances of the case, the right or interest of an assessee in an annuity policy is exempt frOlll wealth tax under s, 5 L E. (1) (vi) of the Wealth Tax Act, 1957? F The facts giving rise to the question are briefly these. Yuvraj Arminder Singh and Frincess Rupinder Kumari are individual assessees being assessed to wealth tax under the Wealth Tax Act, 1957 (hereinafter called the Act). As regards the former the two assessment years are 1964-65 and 1965-66 for which the respective G valuation dates 31.3.1964 and 31.3.1965, whereas the assessment year in the case of Princess Rupinder Kun.sri is 1965-66 for which the valuation date is 31.3.1965. lhe two assessees had purchased one annuity policy each and they claimed exemption in respect of the value of each policy in each one's assessment to wealth tax under s. 5 (1) (vi) of the Act. The value of the annuity policy 1n the case of Yuvraj Amrinder Singh was Rs. 2,13,000 while in R the case of Princess Rupinder Kumari it was Rs. 2,35,176. Exemption in respect of such value was claimed under s, 5 (1) (vi) of the Act inasmuch as the annuity policies fell within the expression "any policy of insurance" occurring in the said provision. The Wealth Tax Officer rejected the claim and included the above mentioned amounts in the assessees' net wealth for the concerned assessment years on the ground that the exemption was allowable only to insurance policy whereas the policy taken out by the assessee was an annuity policy whereunder the assessee had made lumpsum payment and he would be getting periodical returns after the lapse of a number of years and as such annuity policy could not be considered as insurance policy. Aggrieved by the orders passed by the Wealth Tax Officer the assessees preferred appeals to the Appellate Assistant Commissioner who allowed their appeals holding them to be entitled to exemption under s. 5 (1) (vi) as according to him annuity policies were covered by the term "any policy of insurance" used in the said sub-section. This view of the Appellate Assistant Commissioner was confirmed by the Income Tax Appellate Tribunal in appeals pref erred by the Revenue. In the three Wealth Tax References ~os. 2, 3 & 4 of 1972 made to the High Court by the Tribunal at the instance of the Revenue the High Court confirmed the Tribunal's view and answered the question set out above (which arose in each Reference) in favour of the assessee. The revenue has come up in appeals challenging the view taken by the High Court. Since the question raised in these appeals concerns the proper construction of the expression 'any policy of insurance' occurring in s. 5 (l)(vi) of the Act read with the other connect­ ed provisions thereof in relation to the terrus of the annuity policies purchased by the two assessees it will be desirable to set out the terms of the two annuity policies. In each the annuitant is the proposer and each contains a provision for comnutation, that is to say, neither is a non-commutable policy. It may be stated that the terms and conditions of both the annuity policies are the same and hence the terms and conditions of one (of Yuvraj Amrinder Singh) may be set out which are as follows: "Type of Annuity: Date on which the annuity vests: Deferred annuity without profits guaranteed for 35 years. lwenty-second day of January, Nineteen Hundred and sixty four. C.li.T. v. YUVRAJ AMRINDER SING!i [TULZAPURKAR, J.] 571 Event on the happening of which annuity ceases or determines: To whom annuity payable: Dates when annuity payable Special provisions : On expiry of 35 years calculated from the date on which the annuity vests or at the, death of annuitant, if later. To the annuitant On the stipulated due date of the 1st Annuity instalment and monthly there­ after. (1) If the annuitant shall die before the date on which the annuity vests, the amount of the single premium paid but without any interest shall be returned to the proposer or in case he shall be then dead to his Proving Executors or Administrators or other legal representatives who should D take our representation to his Estate or limited to the moneys payable under this policy from any Court of any State or Territory of the Union of India, or in case the Annuitant (provided he is also the proposer) shall have appointed any nominee to receive such money or executed any assignment in favour of any assignee to such nominee or E assignee. (2) In lieu of the payment of the annuity under this policy the proposer has the option to be exercised before the date on which the annuity vests to receive a cash payment of Rs. 2,88,184 on 22nd January, 1964." Before dealing with the rival submissions made by the learned counsel for the parties the relevant provisions of the Act with which we would be concerned may be referred to. Under the charging provision contained in s. 3 of .the Act wealth tax ts charged, subject to the other provisions contained in the Act, for every assessment year in respect of the net wealth on the G corresponding valuation date of every individual, Hindu undivided family and company, at the rate or rates specified in Schedule I. 'Net Wealth' is defined in S• 2 (m) as meaning (so far as is material) the amount by which the aggregate value of all the assets belonging to the assessee on the valuation date is in exceso of the aggregate value of all the debts owed by the · assessee on that date. 'Ihe expression 'assets' is defined in s. 2 B (e) and the relevant part thereof runs thus: 572 SUPIIDJE. COURT REPORTS [1985] SUPP.3 S.C.R. "2.(e) 'assets' includes property of every descrip­ tion, movable or immovable property, but does not include- ( i) xx xx xx (ii) xx xx xx (iii) xx xx xx (iv) a right to any annuity in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lumpsum grant;" c The next material provision is s. 5 (1) (vi) with which we are directly concerned and ·it runs thus: "Exemptions in respect of certain assets. 5.(1) Subject to the provisions of sub-section {lA), weatlh-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee - (vi) the right or interest of the assessee in any policy of insurance before the moneys covered by the policies become due and payable to the assessee: Frovided that in the case of a policy of insurance the premium or other payment whereon is payable during a period of less than ten years, the amount that shall not be included in the net wealth of the assessee under this clause shall be a sum that bears to the value of the right or interest of the assessee in the policy the same proportion as the number of years durint which the premium or other payment on the policy is payable bears to ten;" It may be stated that the above proviso was not there at the .relevant time and it has been inserted by Finance Act, 1974 with effect from 1.4.1975 but since an argument was based on it we have thought fit to reproduce the same. The next material provisions are s. 5 (1) (vi a) and (vii) which run thus: " (vi a) the right of the asses see to receive any annuity payable by the Central Government under the provisions of s. 280D of the Income tax Act; C.li .1. v. YUVRAJ AMRINDER SINGR [ Tu'LZAPUF.KAR, J.] 573 (Inserted by Taxation Laws (Amendment) Act, 1970 with retrospective effect from 1.4.1965) (vii) the right of the assessee to receive a pension or other life annuity in respect of past services under an employer;'' Since a contention was raised that annuity policies of the type with which '"e are concerned in the case cannot be regarded as life insurance policies it will be necessary to refer to the definition of "life insurance business" given in s. 2 (11) of the Insurance Act, 1938. Section 2 (11) runs thus: "2 (11) 'Life insurance business' means the bus+ness of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include - (a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance, (b) the granting of annuities upon human life; and (c) the granting of superannuation allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependants of such persons;" At the outset we would like to dispose of the initial contention raised on behalf of the Revenue that a contract for deferred annuity is quite distinct from a 'policy of insurance' - the expression used in s. 5 (l) (vi)- since there is no element of insurance against any risk involved in such annuity policy - a contention which found favour with the liealth Tax Officer but was rejected by the Assistant Appellate COllllllissioner, the Tribunal and the High Court. The contention is that in the case of a deferred annuity policy the annuitant, on payment of a lumpsum gets the risht to the annuity equivalent in the shape of deferred annual or monthly payments guaranteed for a certain period (in II R the instant case for 35 years), that there is a date on which the annuity vests in the annuitant (here 22.1.1%4), that usually there is a provision that in the event of the death of the annuitant before the date of vesting the single premium paid by him would be returned to the proposer, and that the proposer may have (as is the case here) the option, to be exercised before the date on which the annuity vests, to receive the comruuted value in lieu of deferred annual or monthly payments' and such provisions clearly show that the intention is that in essence the annuity contract is operative froru the date on which the annuity• vests and thereafter there is no element of insurance in the contract. It is, therefore, urged that a contract for deferred annuity cannot be treated as a policy of insurance and as such the value thereof would not be exempt under s. 5 (1) (vi) of the Act. The gravamen of the contention is that there is no element of insurance covering any risk on human life involved in a deferred annuity policy. The contention, in our view, proceeds on a misconception of the true or real nature of a deferred annuity policy. It is well known that a contract of insurance based on human life can be effected in two ways, (a) the insurer, in consideration of pay­ ment of periodical prenJ.a, undertakes to pay the person for ~hose benefit the insurance is made a stipulated lumpsum upon the death of the person whose life is insured or the happening of any contingency dependant on human life (e.g. usual life policies or endowment policies) and (b) the insurer, in consideration of payment of a gross sum premium: undertakes to pay the person for whose benefit the insurance is made annuity equivalent (either annual or monthly instalments) after a certain age on the happen­ ing of a contingency depending upon the duration of human life (e.g. deferred annuity policies). In either case it is insurance against the risk of penury and as such is a contract of insurance. That contracts of insurance based on human life are effected in one of the two ways mentioned above will be clear from the manner in which the concept of life insurance is under­ stood in the legal and commercial world. In Halsbury's Laws of England, Fourth E.dition, Volume 25, page 13, the following passage occurs in para 7 under the heading 'Nain types of risk': "'7. }iain types of risk. For convenience the different types of insurance business may be classified as follows: (1) marine, aviation and transport insurance (2) ordinary long-term insurance; (3) personal acci­ dent insurance; (4) property insurance; (5) liability c.w.T. v. YUVRAJ AMRINDER SINGH [TIJLZAPUM<AR, J.] 575 insurance; (6) motor vehicle insurance; (7) pecuniary loss insurance; (8) war risks assurance; and (9) industrial ansurance." Foot-note 2 deals with 'ordinary long term insurance business' and says - 'ordinary long term insurance business' means the business of effecting and carrying out contracts of insurance on human life or to pay any annuities on human life (s. 83 (2) (a) of Insurance Companies Act, 1974) In Bouvier's Laws Dictionary (Rawle's Third Revision) Vol. 2, at page 1619, the following passages occur under the caption 'Life Insurance': "LIFE INSURANCE. The insurance of the life of a person is a contract by which the insurer, in consideration of a certain premium, either in a gross sum or perio­ dical payments, undertakes to pay the person for whose benefit the insurance is made, a stipulated sum, or annuity equivalent, upon the death of the person whose life is insured, whenever this shall happen, if the. Insurance be for the whole life or in case this shall happen within a certain period, if the Insurance be for a limited time. An agreement by the insurer to pay to the insured or his nominee a specified sum of money either on the death of a designated life, or at the end of a certain period provided the death does not occur before, in consideration of the present payment of a fixed amount, or of an annuity till the death occurs or the period of Insurance is ended." The definition of 'life insurance business' as given ins. 2 (11) of our Insurance Act, 1938 clearly includes, by a deeming provision, the business cf granting of annuities upon human life within the expression 'life insurance business'. In C.I.T. v. General Family Pension Fund, (1952) 22 COm. Cas 89 the Calcutta High Court has held that if the right to payment under annuity contract is governed by the happening of a contingency which depends in any way upon the duration of human life the business of effecting such a contract is life insurance business. When the same case came up in appeal before this Court this Court confirmed that view by observing that where the business of a company oonsists exclusively in granting terminable pensions or annuities dependent on human life in favour of the subscribers such business is life insurance business. In O.anclnJe! Harjiwmidas Vo ec-issioner of Incooe Tu, Gujarat, 63 ITR 627 while dealing with a policy called 'Children's Deferred Endowment Assurance" issued by the Life Insurance Corporation of India in the context of the question whether rebate was allowable on the premia paid during the minor­ ity of the life assured under s. 15 (1) of the Indian Income-true Act, 1922, this Court at page 631 of the Report has observed thus: "Life insurance in a broader sense comprises any contract in which one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life, in consideration of the ilil!lediate payment of a smaller sum or certain equivalent periodical payments by another party (Halsbury's Laws of England, third edition, volume 22, page 273)." In the instant case in each of the two annuit~ policies there is a term stipulating the event on the happening of which the annuity shall cease or determine and it states that the annuity shall cease or determine "on the expiry of 35 years calculated from the date on which the annuity vests (22.1.1964) or at the death of the annuitant, if later," In other words the monthly payments are guaranteed for a period of 35 years cor mencing from 22.1.1964 even if the death occurs before the expiry of the period but in case the annuitant lives beyond the said period of 35 years the monthly payments shall continue to be made till he dies, In view of this provision which is to be found in each of the two annuity policies it cannot be gainsaid that the policies evidence a contract of insurance covering the risk of human life and.such would fall within the expresaion a 'policy of insurance' occurring ins. 5 (1) (vi) of the Act. The contention that no element of insurance covering any risk of human life was involved after 22,1,1964 (the date of vesting) was, in our view, rightly rejected by the AAC, tha Tribunal and the High Court. In the light of the above discussion the position becomes quite clear that annuitieo dependent on human life constitute a species of contracts of life insurance and would normally fall within the expression "any policy of insurance" occurring in s, 5 ~ c.w.T. v. YUVRAJ AMRINDER SINGH [TllLzAl'URKAR, J,] 577 (1) (vi) of the Act. The object ·of enacting the provision is the encouragement of thrift which element is present in both types of life insurance and hence the provision should be interpreted in such a manner as not to nullify that object. Moreover, s. 5 deals with exemptions in respect of certain assets and one of such exempted assets under sub-clause (vi) of sub-a, (1) thereof is B "the right or interest of the assessee in any policy of insurance before the moneys covered by the policy become due and payable to the assessee"; It is quite clear that while granting chis exemption the legislature has used the expression "any policy of insurance" which is a very wide import. The exemption is not confined to·rights or interests in life insurance policies alone c much less any particular species of life insurance policies but it extends to rights or interests of an assessee in other types of insurance policies also, such as a marine or a fire insurance policy, etc. It cannot be suggested that the right or interest of an assessee in such other types of policies has no value or can- not be valued. For instance, a marine or fire insurance policy D may be for three or five years and in such a case the unexpired value of the premium could be one of the bases for determining the value of the assessee's interest in the policy on the valua­ tion date; similarly it is possible that the contingent event insured against has occurred, though the claim is pending deter- mination on adjudication, and in such a case also the assessee E would have a valuable interest in the policy. In such case the assessee 1 s interest would be exempt under the aforesaid clause if the moneys under the policy have not become due and payable on the valuation date. It is, therefore clear that the exemption contemplated by s. 5 (1) (vi) covers interests of an assessee in all types of insurance policies and the expression 'any policy of insurance' in the said provision would a fortiori attract within F its ambit or scope a deferred annuity pOlicy based on human life, it being a species of life insurance policies and, therefore, unless there is some warrant to cut down the ambit or scope of that expression the right or interest of an assessee in such a policy would be exempt from the charge of wealth-tax unless of course any moneys thereunder have become due and payable to the G assessee on the valuation date. Counsel for the revenue urged a two-fold contention in support of the plea that there is such a warrant to cut down the ambit or scope of the expression 'any insurance policy' occurring in s. 5 (1) (vi) and confine it to life insurance policies of the usual type where in consideration of periodical premia the H stipulated lumpsum becomes payable upon the death or happening of an event dependant upon duration of human life, that is to say the usual Life Policies or Endowment Policies. In the first place it was urged that the proviso to sub-clause (vi), though inserted by Finance Act, 1974 with effect from l.~.1975, suggests that the legislature intended that the said expression should be so confined and annuities on life are excluded and in this behalf reliance was placed on Notes on Clauses accompanying the relevant Finance Bill as also the speech of the Hon'ble Finance Minister while introducing the Bill. Secondly it was urged that since non-commutable annuities only have been excluded from the defini­ tion of 'assets' given in s. 2(e}, the legislature could not have intended to exempt annuities based on human life under s. 5 (1) (vi) by bringing them within the expression 'any policy of insurance' used therein. For the reason which we shall indicate presently there is no substance in either of the pleas pressed by Counsel for the Revenue. The proviso to sub-clause (vi) has been reproduced above. It has the effect of cutting down the exemption contained in the sub-clause to some extent. It commences with the words "Provided that in the case of a policy of insurance the premium or other pa.}'1lellt whereon is payable dur:i,Dg a period of less than 10 years" and the argument is that the under-lined words suggest that the expression "any policy insurance" in the main sub-clause IlllBt mean a policy based on human life and that too where periodical premia are payable and as such annuity on life which consists of lumpsum investment followed by deferred annual or monthly payments is excluded. It is impossible to read the under-lined words in the proviso in this manner which has the effect of unduly narrowing down the expression "any policy of insurance" used in the main sub-clause, which as indicated earlier, is of very wide import covering all types of insurance policies like life, marine, fire etc. In the first place the main provision (sub-clause vi) was enacted in 1957 and continued to operate for 17/18 years till 31.3.1975 without any qualification and dS such it will be absurd to attribute to the legislature, because of the insertion of the proviso (containing the under-lined words) in 1975, an intention of having used the wide expression "any policy of insurance" throughout all this period in a narrow sense as suggested. Secondly, if the main provision and the proviso are read together the under-lined words do not suggest that any narrow construction, much less as urged, was intended and to say so would be missing the real object or purpose of the proviso. In our view the proper way to read the proviso would be to treat the main provision as creating or granting an exelllption and the ' c.w.T. v. YUVRAJ &-JUt<llER SINGh [TUL2Af'URKAR, J.] 579 proviso carving out so1Lething from the exemption. The main· provision creates an exemption in respect of the assessee's "right or interest in any policy of insurance" and the proviso seeks to cut down that exemption to a. limited extent, namely whenever there is a policy of insurance in respect whereof periodical premia are payable for a duration of less than 10 years then in such a case a proportionate exemption specified therein will be available to the assessee irrespective of what type of policy it is; the proviso has no other effect. That such was the object or purpose of inserting the proviso will be clear if regard is had to relevant part of ~otes on Clauses accompanying the Bill and the relevant portion of the speech of the Finance Ninister while introducing the Bill. we were taken through the relevant portions of Notes on Clauses [vide 93 ITR 125 (Statutes)] and the speech of the Hon'ble Finance Minister while introducing the Bill vide [93 ITR 74 (Statutes)] and in our . view far from supporting the contention of counsel for the Revenue these lend support to the view which we have just expressed. 1he relevant portion of 'Notes on Clauses' states that "under this amendment (the insertion of proviso) the value of the taxpayer's right or interest in a policy of insurance will be exempt from tax only if the premia are payable over a period of ten years or more. In cases where premia are payable over a period of less than ten years, only a proportionate amount of the value of the taxpayer's right or interest in the policy of insurance will be exempt from wealth-tax." The Finance Minister's speech though strictly not relevant as an aid to construction, substantially reiterates what has been stated in the 'Notes on Clauses' accompanying the Bill. On this a~count therefore, there is no warrant to put a narrow construction on the expression "any policy of insurance" occurring in sub-clause (vi) of s. 5 (1). Similarly counsel's reliance 6n the definition of 'assets' given in s. 2 (e) of the Act and particularly the exclusionary part contained in sub-clause (iv) in relation to annuities for . the purpose of giving a narrow construction to the expression 'any policy of insurance' occurring in sub-clause (vi) of s. 5 (1) is of no avail. ~e have already quoted above s. 2 (e) (iv). The definition of 'assets' is in two parts; the first part defines assets as including property of every description, movable or immovable while the second part excludes certain ite!IIB of property from falling within the expression 'assets' and one of the item coming within this exclusionary part is: "(iv) a right to any annuity in any case where the terms and conditions E. 580 SUPRE!iili COURT RE.POR15 [1985] SUPP.3 S.C.R. relating thereto preclude the commutation of any portion thereof into a lUllipsum grant". In other words .non-comruutable annuities only are excluded from 'assets'. The contention for the Revenue is that if under s. 2 (e) (iv) only non-commutable annuities have been excluded from the definition of assets then the legislature could not have intended to exempt annuities based on human life from wealth-tax charge under s. 5 (1) (vi); in other words it is urged that it would be incongruous for the legislature to include commutable annuities on life within the expression 'assets' under s • 2 (e) on the one hand and at the saILe time to exempt such annuities fro!L the charge by including them within the expression 'any policy of insurance' under s. 5(1) (vi). lhe contention in our view, is entirely misconceived, for, in the first place it proceeds on a wrong assumption that the topic of annuities is exhaustively dealt with under s. 2 (e) (iv) and secondly it ignores the scheme of the Act emerging from the relevant provisions. It is obvious that the postulate of the so called. incongruity that is being suggested on a reading of the two concerned provisions together must be that the topic of annuities has been dealt with exhaustively by s. 2 (e) (iv). But the postulate is non-existent. That clause (iv) of s. 2 (e) is not exhaustive of all annuities is clear from the fact that at least 2 types of annuities are·spearately and specifically dealt with under s. 5 (1) (vi-a) and 5 (1) (vii) - the forILer speaks of the assessee's right to receive annuity payable by the Central Government under s. 2800 of the Income-Tax Act and the latter speaks of the assessee's right to receive a pension or other life annuity in respect of past services under an employer. If that be so, the ar0Ull!ent based on any incongruity arising fro~ reading of s. 2 (e) (iv) and s. 5 (1) (vi) together must fall to the ground. Further a careful analysis of the two relevant provisions shows what is the general scheme of the Act. Section 2 (e) defines 'assets' to include property of every descri!'tion; it however excludes certain items from the purview of the charge by exclud­ ing them from the definition of 'assets', whiles. 5 (l) (vi) on the other hand exeILpts certain assets from the tax by declaring that tax will not be payable in respect of such assets. In other words in order to be covered by the exeILption under S• 5 (l) (vi) a property must in the first instance be an asset under s. 2 (e). lhe question of exeILptlng commutable annuity policies of insurance arises only because they are not excluded from the definition but because they fall within the definition of 'assets' • It is therefore, falacious to contend that because commutable annuity policies fall within 'assets' they should not H be exempted under s. 5 (l) (vi). c.w.1. v. YUVRAJ Af'.Rltl)E.R SINGH [TULZAPURl\Ak, J.J 581 We have already pointed out that a reading of s. 2 (e) together with s. 5 (1) (vi-a) and 5 (l)(vii) negates the view that legislative intention was to deal exhaustively with annuities under s. 2 (e) (iv). liow, a collilllutable life annuity received from an employer would undoubtedly be exempt from the charge of wealth-tax under s. 5 (1) (vii). u' s. 2(e) is construed as confining, by implication, the exemption frOIU wealth tax to non-commutable annuities alone, then there would be an obvious conflict between s. 5 (1) (vii) and s. 2 (e). Therefore, a harmonious reading of s. 2(e) (iv) with s. 5 (1) (vi) and s.5 (1) (vii) would be that while non--corumutatle annuities are wholly outside the purview of the wealth-tax, COtr..ni.utable annuities are exempt under s.5 (1) (vi) and 5 (1) (vii) to the limited extent mentioned in each. It is well settled that when such a harmonious construction is possible and which furthers the object of the Act namely to promote thrift and channelise private savings for national use, the same Uiust be preferred to the construction which leads to a conflict between s.2 (e) (iv) and s.5 (1) (vi). The contention that a narrow construction should be placed on the expression 'any policy of insurance' occurring in s. 5 (1) (vi) o'f the Act, has, therefore to be rejected. In other words conmrut­ able annuities on life like the ones in the instant case, would fall under s.5 (1) (vi) of the Act and the value thereof would qualify for the exemption from the charge. In the result we decide the point raised in the appeals in favour of the assessees and confirm the view of the liigh Court. The appeals are therefore, dismissed with costs. A.P.J. Appeals dismissed. L