Commissioner of Income Tax vs Rajalakshmi Venkatakrishnan

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following question for our opinion u/s 256(1) of the

Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Appellant Tribunal was right in holding that the annual payment made by the

Royal Insurance Company to the assessee is not liable to be treated as income in the hands of the assessee ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal''s view that the allowance made by the Royal Insurance

Company of the U.K. to the widow of Sri Venkatakrishnan is a gift and, therefore, no assessable as income in her hands in sustainable in law.

The assessee is an individual. Her husband, Sri Venkatakrishnan, was an employee of Royal Insurance Company of the United Kingdom. On

January 1, 1973, the business of Royal Insurance Company was taken over by the General Insurance Company, a Government of India

undertaking. The husband of the assessee became an employee of the General Insurance Company after leaving the service of Royal Insurance

Company. After the death of the assessee''s husband, the Royal Insurance Company granted an allowance at the rate of Pounds 1,638-48 per

annum to the assessee in recognition of the assessee''s husband''s faithful and diligent service with the Royal Insurance Company from November

15, 1943. The above allowance was granted to the assessee for her lifetime. For the assessment years 1976-77 and 1977-78, for which the

corresponding accounting years ended on 31st March of the respective accounting years, the assessee received sums of Rs. 22,320 and Rs.

25,512, respectively, in pursuance of the above allowance. While making the assessments for the above two assessment years, the Income Tax

Officer sought to bring to tax the above sums. The assessee contended that the above payment by the Royal Insurance Company was made

gratuitously and at the discretion of the said company. It was pointed out that the receipt was causal and, therefore, exempt from Income Tax. The

Income Tax Officer held that it was an annuity received by her and taxed the above two sums under the head ""Other sources"". On appeal, the

Appellant Assistant Commissioner held that the amount received by the assessee from the royal Insurance Company represented income in her

hands and assessable under the head ""Other sources"". On further appeal, the Appellate Tribunal held that the receipt of Rs. 22,320 and Rs.

25,512 for the assessment years 1976-77 and 1977-78, respectively, is not taxable in the hands of the assessee since the annual payments were

made not in respect of any employment or office but by the kind past employer of the late husband of the assessee and the payment was made

entirely at its decoration, is continuance being uncertain and made dependent upon the existence of certain facilities referred to in the letter written

by the Royal Insurance Company.

Before us, learned standing counsel appearing for the Department submitted as under :

In the letter written by the Royal Insurance Company, it is clearly stated that the amounts were paid in recognition of the faithful services rendered

by the husband of the assessee from the date of his employment till the date of taking over of the Royal Insurance Company by the General

Insurance Company. Therefore, according to learned counsel, the income derived by the assessee is not casual in nature. Learned standing counsel

pointed out that the source of income is definite and the receipt of income is periodical, and since it is not a bounty, it would chargeable as income

under the Income Tax Act. The annuities were paid be for the past services rendered by the husband of the assessee. Therefor, this is the

consideration for the payment of annuities by the Royal Insurance Company. According to learned standing counsel, even if the amounts paid were

considered to be a gift, it is connected with the employment and, therefore, it is income in the hands of the assessee. Even if the payment made by

the royal Insurance Company is voluntary, it is liable to Income Tax. Therefore, according to learned counsel, since the payment is having direct

connection with the employment of the husband of the assessee, the payment made by the Royal Insurance Company annually is chargeable in the

hands of the assessee as income.

In order to support his contentious, learned counsel appearing of the Department relied upon the decision in C. Lakshmi Rajyam Vs.

Commissioner of Income Tax, Madras, . According to the facts arising in that decision, the assessee, an actress, acted the part of the heroine in a

motion picture produced by a partnership. She was paid all that was due to her under the contract of service. The picture was released for public

exhibition with great success. One of the partners, voluntarily and gratuitously excited a document in her favour agreeing to pay her a fourth of his

share of the realisations from the picture in consideration of the wholehearted help, co-operation, and valuable services rendered by her in respect

of the production and completion of the picture by way of special remuneration in addition in addition to the fixed remuneration paid by the

partnership for her services. By virtue of this agreement, the assessee received the sums of Rs. 63,258 and Rs. 10,362 in the years of account

relevant to the assessment years. The question was whether these amounts were the assessee''s taxable income. On these facts, this court held

(headnote), ""an emolument, or perquisite of an employee may be paid to him under a contract; it is also possible to conceive of cases, where there

may be customary presents attached to an employment. An employer may also remunerate the services of an employee by a voluntary gifts either

because there are no emoluments attached to the employment, or because he wants to give him something over and above his contractual

remuneration. In all such cases, the amounts received will be the income of the profession or vocation of the employee. It is also possible that an

employee may get a gift from his master, without it being intended as additional remuneration to the employee, though it might be that what induced

the gift was the loyal services of the latter. It cannot be said that, in such a case, what was given was remuneration for the service. A gift made on

personal grounds cannot amount of payment for service, although the services might have provided a motive or reason for making the gift. There is

no reason why a purely personal gift cannot comprise a right to obtain a recurring payment. The mere fact that a gift or payment was made by a

person other than an employer will not be decisive of the question whether it was intended as a remuneration or a present. In order to determine

the character of a voluntary payment to the assessee it has to be seen whether, from the point of view of the assessee, the amount received

accrued to him by virtue of his employment. That is a matter of evidence.

Learned counsel also placed reliance upon a decision reported in H.H. Maharani Shri Vijaykuverba Saheb of Morvi and Another Vs.

Commissioner of Income Tax, Bombay City II, . According to the facts arising in that decision, the ruler of a native State abdicated in favour of his

son in January, 1948. From April 1949 onwards his on paid him a monthly allowance. The allowance was not paid under any custom or usage.

The allowance could no be regarded also as maintenance allowance, since the assessee possessed a large fortune. On these facts, the question

raised was whether what the Maharaja received from his son would constitute income in his hands assessable under the Income Tax Act. While

answering this question, the Bombay High Court held that (At page 604) : ""there is no doubt that under the Indian Income Tax act, 1922, even

payments, which are voluntarily made may constitute ''income'' of the person receiving them. It is not necessary that order that the payments may

constitute ''income'', they must proceed from a legal source, in that, if the payments are not made the enforcement of the payments could be sought

by the payee in a court of law. It does not, however, mean that every voluntary payment will constitute ''income''. Thus, voluntary and gratuitous

payments, which are connected with the office, profession, vocation or occupation may constitute ''income'' although if the payments were not

made the enforcement thereof cannot be insisted upon. These payments constitute ''income'' because they are referable to a definite source, which

is the office, profession, vocation or occupation. It could, therefore, be said that such a voluntary payment is taxable as having an organ in the

office, profession or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian Income Tax Act in

income from every source (barring the exceptions provided in the Act itself) and even a voluntary payment, which can be regarded as having an

origin, which a practical man can regard as a real source of income, will fall in the category of ''income'', which is taxable under the Act. Where,

however, a voluntary payment is made entirely without consideration and is not traceable to any source, which a practical man may regard as a real

source of his income, but depends entirely on the whim of the donor, it cannot fall in the category of ''income''. What we have to see, therefore, in

the present case, is whether the payment made by the son Maharja to the father Maharaja, though voluntary, could be regarded as having an origin

in what might be called the real source of income. On the facts found in the present case, we cannot stay that the payments would be referable to

any such source. The department has not been able to show any material on record, from which such a conclusion can be drawn."" Ultimately, the

Bombay High Court came to the conclusion that (headnote) : ""as the payments were commenced long after the ruler had abdicated, they were not

made under a legal or contractual obligation. As the allowances were not also made under a customs or usage or as a maintenance allowance, they

were not assessable.

Reliance was also placed upon a decision of the Gujarat High Court in the case of SMT. DHIRAJBEN R. AMIN Vs. COMMISSIONER OF

Income Tax, GUJARAT II, AHMEDABAD., . According to the facts arising in that case, the assessee was a member of a family which had a

substantial interest in Alembic Chemical Works Ltd. and allied concerns. Resolutions were passed by the board of directors of two of the

companies, where by the assessee was to be paid Rs. 1,000 per month by one of the companies and 20 per cent. of the profits of another

company for services to be rendered by her. The amounts were disallowed as expenditure in the assessments of the two companies. The Revenue

authorities and the Appellate Tribunal found that no services had been rendered by the assessee and the payments were gratuitous and the amounts

were assessed in her hands. On a reference before the High Court, the assessee contended that inasmuch as the payment had been held to be

gratuitous, they did no constitute income and in the alternative the payments constituted ""salary"" and she was entitled to the exemption under

Notification No. 878-F and earned income relief in respect of them. While considering the contentions raised by the assessee, the Gujarat High

Court held that though no services had been rendered by the assessee to the companies, the payments were received periodically and arose from a

definite source. Hence, the amounts received were income. This decision was rendered by the Gujarat High Court following the decision of the

Bombay High Court in H.H. Maharani Shri Vijaykuverba Saheb of Morvi and Another Vs. Commissioner of Income Tax, Bombay City II, .

In view of the abovesaid decision, learned standing counsel for the Department submitted that, in the present case, the source of income is

definite and the assessee was receiving the annuities regularly every year and, therefore, the allowance received by the assessee is chargeable as

income under the Income Tax Act.

Non appeared on behalf of the assessee.

We have heard learned standing counsel of the Department and also perused the records carefully.

As already stated, Rajalakshmi Venkatakrishnan was paid by the Royal Insurance Company annually Pounds 1,638-48 in view of the service

rendered by her husband to the said company before it was notionalised. The Royal Insurance Company wrote a letter to the assessee dated April

28, 975. In the said letter, it is stated that she had been granted a widow pension allowance as from January 1, 1975, in recognition of her late

husband''s faithful and diligent services with the group from November 15, 1943, till the business was nationalised with effect from January 1,

1973. It is further stated that the allowance at the rate of Pounds 1,638-48 per annum will be paid into the Indian Bank count in quarterly

instalments in arrears throughout her lifetime against a proper discharge. It is further stated that these arrangements are in conformity with the U.K.

regulations and are dependent on the continuance of existing facilities. In the said letter, ultimately, it is stated that the allowance has been granted

entirely at the discretion of the directors and not other form of benefit will be afforded by the group. In pursuance of the said letter the assessee had

received the amounts which were brought to tax in the assessment years under consideration. The abovesaid amounts were paid solely out of the

discretion of the directors of the company had not in pursuance of any agreement or understanding. The allowance was not made to their

employee, Venkatakrishnan, but it was paid to his wife after his health.

The first point that arises for consideration is whether the amounts paid by the Royal Insurance Company to the widow of its employee can be

treated gift pure and simple. The allowance was granted voluntarily and without any request made by the assessee. After the Royal Insurance

Company was nationalised, the General Insurance Company took over the assets and liabilities of the Royal Insurance Company as it stood on the

date. Thereafter, on the date of retirement of Sri. Venkatakrishnan, the General Insurance Company would have paid all amounts due to a retired

employee. After the taking over, the Royal Insurance Company has nothing to do with Venkatakrishnan. Therefore, the allowance granted by the

Royal Insurance Company to the widow of Venkatakrishnan cannot be considered in recognition of any services rendered by Venkatakrishnan

throughout his employment with the company. The General Insurance Company would have paid all the amounts due to him on his retirement.

While so, it cannot be said that the notice for payment of annuities by the Royal Insurance Company was the services rendered by

Venkatakrishnan before notionalisation, that cannot have any nexus to the services rendered by Venkatakrishnan to the Royal Insurance Company.

The promise made by the Royal Insurance Company to the assessee is also not supported by any consideration. The services rendered by

Venkatakrishnan cannot be considered as consideration for payment of annuities to his wife after his death since the retirement benefits in view of

the services rendered by Venkatakrishnan were already paid out to him on the date of his retirement. While Venkatakrishnan was alive, no

promise was made by the Royal Insurance Company to pay any allowance to his issue after his death. Therefore, the annuities paid by the Royal

Insurance Company to the widow of Venkatakrishnan can only be considered as gratuitous. Gratuitous payment can be termed as gift in view of

the provisions contained u/s 5(xiii) of the Gift-tax Act. According to the abovesaid provision of the Gift-tax Act, where an employer makes a gift

by way of bonus, gratuity or pension to the employee or to the dependants of the deceased employee, then such a gift would be exempt from gift-

tax. As already stated, the motive for payment of annuities is the services rendered by Venkatakrishnan to the Royal Insurance Company. If that is

so, the annuities paid by the Royal Insurance Company to the widow of Venkatakrishnan is a gift supported by consideration.

According to the department, even though the payments were made ex gratia, but yet in the hands of the assessee, the amount constituted her

income because the payment of allowance was regular, recurring and expected. Before the Tribunal, the Department railed upon a decision of this

court in Commissioner of Income Tax Vs. P.N. Nagaraj and Another, . In that case the assessee received the amount under consideration as

remuneration for the services rendered by him as a professional. It was also found that the assessee utilised the services of Nagaraj Bros. proved

his intimate connection in bringing about the sale and, therefore, from the point of view of the company it was a payment for the services rendered.

Hence, it was held that the receipt of the sum of Rs. 12,333 received by Nagaraj and Bros. arose from the exercise of his profession and,

therefore, taxable as his income. But the facts arising in the present case are different. The assessee was no an employee under the Royal Insurance

Company. The annuities were aid by the Royal Insurance Company as gratuitous for the best services rendered by the husband of the assessee

and not in respect of any services rendered by her. Therefore, the decision in Commissioner of Income Tax Vs. P.N. Nagaraj and Another, would

not be applicable to this case.

It is the contention of the Department that since the annuities received were periodical and arose from a definite source, the amounts received

became the income of the assessee. Reliance was placed upon the decision in SMT. DHIRAJBEN R. AMIN Vs. COMMISSIONER OF

Income Tax, GUJARAT II, AHMEDABAD., . In that case, the payment promised was in respect of future services to be rendered by the

assessee. The High Court held that though the payments were made voluntarily and gratuitously and the enforcement thereof cannot be insisted

upon, yet the payments constituted income because they ewer referable to a definite source, viz., office, profession, vocation or occupation. There

was no question of any payment made to the heir of the deceased who rendered service and that too long after his death. But according to the fact

arising in this case, the payments were made to heir of the deceased. Therefore, this decision would not be applicable to the facts of this case.

Reliance was also placed upon a decision in Mahesh Anantrai Pattani and Another Vs. The Commissioner of Income Tax, Bombay North,

Ahmedabad, , wherein the Supreme Court held that the payment of a lump sum of Rs. 5 lakhs made to the assessee, who was ex-Diwan of

Bavanagar State, is a gift made for the personal qualities of the assessee and as a token of personal esteem. But, in the present case, the annuities

were paid by the company for the services rendered by the husband of the assessee even though the company was not liable to pay any amount to

the husband of the assessee. In such a case, the payment cannot be considered as a token of personal esteem.

The Tribunal also relied upon a decision of the King''s Bench Division in Beynon v. Thorpe [1928] 14 TC 1, wherein it was held that (at page

14) ""the payment was nothing but a gift moved by the remembrance of past services already efficiently remunerated as services in themselves, that

it was merely a gift moved by that sort of gratitude or that sort of moral obligation, that whether the gifts are large or small they are exactly on the

same footing as gifts which are made to a child or gifts which are made to any other person whom the giver thinks he ought to supply with funds for

one reason or another. Such gifts did not fall under the category of profits and gains which could be the subject-matter of taxation.

Reliance was also placed upon another decision of the King''s Bench Division in Stedeford v. Beloe [1930] 16 TC 505, wherein it was held

that ""the payment was only an annuity, i.e., a sum being paid every year, that it might be a gift which is paid every year, that it is just the same as an

allowance and that there was no basis for annual profits or gain when there was no employment and no office. It was held that it was merely a

contribution by kind person every time although it may be uncertain that they will continue to do it."" In the present case, the annuities were paid by

the Royal Insurance Company on a gratuitous basis which is in the nature of gift supported by consideration. Hence, it will not come under the

definition of ""income"" as contemplated u/s 2(24) of the Income Tax Act, 1961. Accordingly, we see no infirmity in the order passed by the

Tribunal in holding that the annuities received by the assessee are not taxable as income.

In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs. Counsel''s fee is

fixed at Rs. 1,000.