1991 (4) TMI 192 - AT - Income Tax

Summary

Issues:
1. Whether the entire value of annuity policies taken by producers for the benefit of the assessee should be assessed as the income of the assessee in the previous year.
2. Whether the introduction of a guarantor for the payment of remaining premium instalments affects the taxability of the premium paid for the annuity policies.
3. Whether the conditions prescribed in CBDT Circular No. 1310 were violated in this case.

Analysis:

Issue 1:
The Commissioner directed the Income-tax Officer to modify the assessment by adding the entire value of the annuity policies to the total income of the assessee. The assessee contended that no part of the premium payable subsequently had been received or accrued to the assessee in the previous year. It was argued that the annuities would be received only after a deferred period of ten years, and the assessment was in conformity with CBDT instructions allowing taxation of annuities on receipt basis. The Tribunal held that under the cash system of accounting, only the annuities could be assessed when received, not the premium paid for the policies. The Tribunal also noted that factually, only one instalment of the premium had been paid in the previous year, supporting the assessee's position.

Issue 2:
The revenue contended that the introduction of a guarantor implied constructive receipt of the premium by the assessee. However, the Tribunal found that the guarantor, Leo Enterprises, was introduced to protect the interests of the assessee and did not confer any right on the assessee to receive the premium. The agreements clarified that the liability was only to pay the remaining premium to the LIC, not to the assessee. The Tribunal emphasized that Leo Enterprises was a registered firm conducting its own business, and no income from the firm had been diverted to the assessee. Therefore, the revenue's argument that the premium should be treated as the assessee's income was dismissed.

Issue 3:
The assessee argued that there was no violation of the conditions in CBDT Circular No. 1310, as the circular instructed the Income-tax Officers to assess only the annuities. The Tribunal clarified that the circular did not grant any benefit but highlighted the existing legal position. The Tribunal found that the introduction of a guarantor did not violate the circular's conditions, as it was a feature extraneous to the circular. The Tribunal concluded that the Commissioner failed to establish a case for taxing the amount received by Leo Enterprises as the assessee's income, and hence, the assessment order was not erroneous.

In conclusion, the Tribunal allowed the appeal, cancelling the Commissioner's order and upholding the assessment in line with the tax treatment of annuities under the cash system of accounting and CBDT instructions.