1994 (11) TMI 31 - HC - Income Tax

Summary

Issues Involved:
1. Whether the annual payment made by the Royal Insurance Company to the assessee is liable to be treated as income in the hands of the assessee.
2. Whether the allowance made by the Royal Insurance Company to the widow of Sri Venkatakrishnan is a gift and, therefore, not assessable as income in her hands.

Issue-Wise Detailed Analysis:

Issue 1: Treatment of Annual Payment as Income

The primary question was whether the annual payments made by the Royal Insurance Company to the widow of its former employee should be treated as taxable income. The Income-tax Officer initially taxed these payments under the head "Other sources," considering them as annuities. The Appellate Assistant Commissioner upheld this view. However, the Appellate Tribunal overturned this decision, stating that the payments were made at the discretion of the Royal Insurance Company and were not in respect of any employment or office held by the widow. The Tribunal emphasized that the payments were uncertain and dependent on certain facilities, thus not constituting regular income.

The Department argued that the payments were in recognition of the services rendered by the deceased employee, making them non-casual and periodic, and thus taxable. They cited precedents like C. Lahshmi Rajyam v. CIT and H. H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT to support their claim that even voluntary payments connected with employment could be considered income.

Issue 2: Characterization of Allowance as a Gift

The second issue was whether the allowance could be considered a gift and thus not assessable as income. The Tribunal had held that the payments were gratuitous and made at the discretion of the Royal Insurance Company, thereby classifying them as gifts. The Department contended that even if considered a gift, the payments were connected with the employment of the deceased and thus taxable.

The court examined the nature of the payments and the circumstances under which they were made. The Royal Insurance Company had nationalized its business, and the General Insurance Company had taken over its assets and liabilities. The allowance was granted voluntarily and without any request from the widow, indicating a gratuitous nature. The court noted that the payments were not made in recognition of any services rendered by the widow herself but were a gesture of goodwill for the past services of her deceased husband.

The court further analyzed precedents like Mahesh Anantrai Pattani v. CIT and Beynon v. Thorpe, which supported the view that such payments, made out of gratitude or moral obligation, could be considered gifts and not taxable income.

Conclusion:

The court concluded that the payments made by the Royal Insurance Company to the widow were gratuitous and in the nature of a gift. Therefore, they could not be classified as income under section 2(24) of the Income-tax Act, 1961. The Tribunal's decision to exempt these payments from income tax was upheld. The questions referred were answered in the affirmative and against the Department, with no costs awarded and counsel's fee fixed at Rs. 1,000.