J. M. RAJARATNAM, Appellant, and THE COMMISSIONER OF INLAND REVENUE, Responent

030-NLR-NLR-V-73-J.-M.-RAJARATNAM-Appellant-and-THE-COMMISSIONER-OF-INLAND-REVENUE-Responent.pdf


123
Rajaratnam v. Commissioner of Inland Revenue
1969Present: Samerawickrame, J., and Weeramantry, J.
J. M. RAJARATNAM, Appellant, and THE COMMISSIONEROF INLAND REVENUE, Respondent
S. C. 3J67—Case Stated Income Tax BRA J339
Income Tax Ordinance (Cap. 243)—Section 15 (1) (a)—Meaning of term "annuity *’-—
Agreement of a voluntary nature to pay money annually—Payments made
annually thereunder—Right of payer to deduct them from his statutory
income."
An “ annuity ” in section 15 (1) (a) of the Income Tax Ordinance is notlimited to an annuity purchased with a sum of money but extends to otherannual payments.
By each of two agreements or deeds of covenant .executed by him in favourof two of his brothers, tho assessee-appellant undertook voluntarily that for aperiod of seven years or during the residue of his life, whichever should boshorter, ho would pay annually to each brother named therein during his lifo thesum of Rs. 1,500. The' covenants or agreements vrero accepted by the twobrothers and certain payments made thereunder were declared by them as partof their income in their income tax returns.
Held, that the two sums of Rs. 1,500 paid by tho assessee-appellant to hisbrothers in terms of the agreements were annuities and, therefore, deductibleunder section 15 (1) (o) of the Income Tax Ordinance in ascertaining hisassessable income for tho year of assessment 1958/59..
" For a payment to be an annuity it must—
be made with reference to a year though it may bo paid in periodio
instalments, e.g., quarterly or monthly,
not bo a receipt or accrual of a capital nature to (ho payeo,
be made under a legal obligation,
be either recurrent or capable of recurrence,
be pure income or profit of the payee ”.
SAMERAWICKRAME, J.—Rajaralnam v. Commissioner of Inland Revenue 129
C*ASE stated for the opinion of tho Supremo Court under s. 74 of theIncomo Tax Ordinance (Cap. 242).
S. Ambalavanar, with M. Radhakrishnan, for tho assessee-appcUant.
II. Deheragoda, Senior Crown Counsel (now Deputy Solicitor-General),with P. Nagulesuaran, Crown Counsel, for tho assessor-respondent.
Cur. adv. vult.
December 10, 1969. Samebawickbame, J.—
Tho appellant executed two agreements or deeds of covenant in favourof two of his brothers. By each agreement tho appellant undertook thatfor a period of seven years or during tho residue of his life whicheverperiod should be shorter he would pay annually to the brother namedtherein during his life tho sum of Bs. 1,500. The two sums of Rs. 1,500were paid to liis brothers and they havo been returned by them andincluded in the assessments made on them for income tax. The appellantclaimed that the two sums paid to his brothers were annuities payable byhim and were deductible under Section 15 (1) (a) of tho Incomo TaxOrdinance in ascertaining his assessable incomo for the year of assessment195S/59.
Tho assessor disallowed deduction of the two sums and assessed theassessable income of the asscssee at Rs. 2S,101. An appeal was made totho Commissioner against tho assessment and tho Deputy Commissionerwho heard tho appeal confirmed tho assessment. On an appeal to it theBoard of Review held that tho appellant wa3 not entitled to a deductionof the two sums paid by him to his two brothers. On an application bythe appellant the Board has stated a case for the opinion of this Court onthe following :—
(а)aro the two sums of Rs. 1,500 paid by the asscssee to his twobrothers annuities payablo by' him,
(б)arc the two sums of Rs. 1,500 paid by tho asscssee to his twobrothers dcductiblo under s. 15 (1) (a) of tho Incomo TaxOrdinance.
There is no definition of annuity in tho Ordinance. The Oxford.English Dictionary' gives the following meanings :—
" (1) A yearly grant, allowance, or income.
(2) The grant of an annual sum of money', for a term of years, for 'life, or in perpetuity'; which differs from a rent chargo in beingprimarily chargeable upon tho grantor’s person, and his heirsif named, not upon specific land.
330 SAMER-AWICKRAME, J.—Rujaratnam v. Commissioner oj Inland Revenue
(3) An investment of money, wheroby the investor, becomesentitled to receive a series of equal annual payments, which,except in the case of perpetual annuities, includes the ultimate,return of both principal and interest; also, tho annual (or, forconvenience, quarterly) payment thus made.”
The learned Deputy Solicitor-General, submitted that, in the context ofIncome Tax, annuity had come to have the definite meaning of an incomepurchased with a sum of money and relied on Foley (Lady) v. Fletcher 1.Simon’s Income Tax (19G-1-G5) Vol. 2, page 737 states :—
“ An annuity will of necessity always bo an annual payment but notevery annual payment is an annuity. In Foley (Lady) u. Fletcher(supra), WatsonB.gave the following definition of one kind of annuity:—An annuity means where an income is purchased with a sum of money,and the capital has gone and ceased to exist, the principal having beenconverted into an annuity. – * Annuity ’ is generally used to describeannual sums of fixed amounts payable to individuals but whether anannual payment is described as an ‘annuity’ or otherwise is rarelyof great materiality in considering the application of Case III. ”
Tho provision in Case III contains “any annuity or other annualpayment…” Hence the distinction , between annuity and annualpayment is of little importance in English Income Tax Law. But inSouth Africa where the word “annuity” appears by itself in therelevant provision it has not been limited to an annuity purchased fora sum of money. Silke on South African Income Tax (3rd edition) at.page 63 states:—“ In Foley v. Fletcher it was held that. * an annuitymeans where an income is purchased with a sum of money and thecapital has gone and ceased to exist, the principal having beenconverted into an annuity ’. Whereas this definition meets the case ofthe ordinary type of annuity purchased from an insurance company,. ■>it does not cover all cases since an annuity may also be granted by wayof donation or inheritance without being purchased, in which event thoconversion of capital into an annuity does not arise•.
Tho learned Deputy Solicitor-General further submitted that in tho. Ordinance “ annuity ” is coupled with “ ground rent or royalty ” andthat as these terms imply a quid pro quo annuity too must be restrictedto an annuity purchased for consideration. Payment of ground rent orroyalty is. made for a benefit or consideration which continues to boreceived from the payee. A countervailing benefit to the payer or thestipulation, by him for future benefit of any kind precludes a paymentbeing considered an annuity—vide I. B. Commissioners v. National BookLeague2. The principle noscilur a sociis is, therefore, not appropriatefor application to the interpretation of the provisions in question.
.:« f1858) 3 B. <fc N. 769.1 (1957) Ch. 488.'-'
SAMERAW1CKRAME, J.—Rajamtnam v. Commissioner oj Intend Revenue 131
Stroud has tho following quotation, “ An annuity is a yearly paymentof a certain sum of money granted to another in fee, for life or years,charging the person of the grantor only (Co. Latt. 144b) Wharton’sLaw Lexicon has, '* an annuity is a fixed sum payablo annually cither inperpetuity or for any less period
I am of tho view that “ annuity ” in the Incomo Tax Ordinance is notlimited to an annuity purchased with a sum of money but extends toother annual payments. I am fortified in my view by tho fact that inLaw Society v. The Commissioner of Income Tax *, it was hold that thoannual grant of Rs. 50,000 received by tho Incorporated Law Societyfrom tho Government in terms of a statute was an annuity.
Definitions of annuity sot out abovo refor to fixed sums payableannually. Under the agreements entered into by tho appellant tho fixedsum of Rs. 1,500 is payable to each brother. It is, therefore, unnecessaryto consider what tho position would be if thero is an obligation to make apayment annually but the amount of iho payment varies from year toyear.- There is authority that fluctuating sums may nevertheless boannual payments within tho provision in tho English Act—vido I. R.Commissioners v. London Corporation 2.
Tho payments must not be annual instalments of a capital sura such asan antecedent debt or tho consideration for purchase of property. InThe Commissioner of Inland Revenue v. Silva3, it was held tiiat monthlysums stipulated for in an agreement were in reality part of the purchasoprice of a business and thereforo constituted payments of a capitalnature and not payment by way of annuity. In Commissioner of IncomeTax v. Nilyiriyu 4, it was held that the payments wero in effect instalmentsof a fixed gross sum that was due.
Thore must bo a legal obligation to mako the payments. Voluntarypayments cvc-n though mado regularly aro not annuities but gifts.
It is of the csscnco of an annuity that it has the quality of recurrence.Accordingly an annual payment to bo an annuity it must cither borecurrent or capablo of recurrence. Jn Asher v. London Film ProductionsLtd. 5, Lord Greene M. R. said :—
“ Tho payments aro annual payments in tho 6cnso that they havothat recurrent quality which is tho distinguishing mark differentiatingan incomo from a capital pajment for t-heso purposes. You can havoan annual payment under this rule, even though it happens by someaccident or other to fall due in one year only. The question is, has ittho necessary periodical or recurrent quality ? ”
It would appear that a single payment mado on a covenant for aperiod of years or for tho lifo of tho covenantor whichever is shorter,would bo an annuity even whero the covenantor died after one paymenthad become duo and had been paid.
* {1054) 56 Ar. L. R. 97.* (1061J 64 N. L. R. 65.
» (4055) I A. B. R. 1075.• (I960) 63 tf. L. R. 176.
(1944) 1 A.E.R. 77 at SO.
132 SAMERA3VICKRAME, J.—liojarotnam r. Commissioner oj Inland Revenue
The amount paid must be pure income or profit of (he p.^’cc—vide In
re Hanbury, Coniskey v. I I anbury.1 It would appear that there arc anumber of payments, without doubt annual, the nature and quality of
which mako it impossible to treat them as tho pure income or profit ofthe recipient. An example given is that of a yearly payment made to
. the proprietor of a garage for the hire of a motor car. The very natureof the payment itself having regard to tho circumstances in which it ismade necessarily makes the sum paid in the hand of the recipient anelement only in the ascertainment of his profits. Thus a yearly paymentmade to a tradesman for supplies or services, though it possesses all theother characteristics required, would not be an annuity. In- I: R.Commissioners v. National Book League (supra), it was held that certainpayments received by a charity under covenant in respect of which thecovenanter received certain benefits were not pure income of the• charity as tho benefits received by the covenantors were 6uch that it .could not bo said that tho payments were made without conditions orcounter stipulations. Simon’s Income Tax (1064-65) Vol. 2, page 744states:—
“ There must it seems be a countervailing benefit in respect of eachannual payment (which otherwise qualifies as such) to prevent thatpayment being ‘pure income profit’ of the recipient; equally a tradingreceipt will not satisfy the test as the references to In re Hanbury, ante,
' demonstrate ; nor will any payment which is of a kind against whichthe expense of earning it may properly be set in order to ascertain thetaxable income therefrom.”
From what I have stated.above it would follow that for a payment tobe an annuity it must—
be mado with reference to a 3-ear though it may be paid in periodicinstalments, o.g., quarterly or monthly,
"not be a receipt or accrual of a capital nature to the payee,
Jbe made under a legal obligation,
be either recurrent or capable of recurrence,
be pure income or profit of the payee.
It has not been necessary for tho purpose of this case to decide whether" the sum paid yearly must be fixed or may vary from year to yeap.
… Tho learned Deputy Solicitor-General submitted that under our law a‘ duty to maintain is not limited to a man in respect of his wife or childbut.that in certain circumstances a child is under an obligation to maintaina parent or a brother another brother and that the pa3Tnents made by' the appellant to his brothers were made in pursuance of an obligationunder our law to maintain them and not by reason of the covenants he •had entered into. Assuming that in certain circumstances a duty may'arise’upon a person to maintain his biother that duty would only arise
* 38 Tax Cases SS8.
SAMERAWICKRAME. J.—Rajaratnam v. Commissioner of Inland Revenue 133
"where the brother is in indigent circumstances of a kind in which the law-gives him the right to claim maintenance. There is no evidence in thiscase that the brothers of the appellant were in such indigent circum-stances that there was in law an obligation on the appellant to maintainthem. As the basis of fact upon which the learned Deputy SolicitorGeneral based his argument docs not exist it is unnecessary to considerfurther what might have been the position had such a basis of fact beenshown.
He further submitted that the appellant was in effect making a gift toeach of his brothers of a sum of Rs. 10,500 in yearly instalments ofRs. 1,500 and that the payments would accordingly not constituteannuities. There is no material to show that there was an antecedentfixed sum of Rs. 10,500 which was to be liquidated or paid in the mannerprovided for in the agreement. The agreement itself stipulated thatpayments were to be made for a period of seven years or during theresidue of the appellant’s life whichever period should be shorter. Italso provided that the payments were to be during the lifetime of thebrother. In view of the nature of the provision in the agreement it is notpossible to take the view that it provided for the payment of a lump sumof Rs. 10,500 in annual instalments of Rs. 1,500.
The submission also raises the question as to whether paj-ments werevoluntary. The act of the appellant in entering into the agreement orcovenant was no doubt voluntary in the sense that ho was a free agentand could have abstained from entering into it if he wished but once hehad executed the agreement the payments under it were not. voluntaryif the agreement was a binding agreement. In that case there would boa legal contractual obligation on him to make the payments stipulatedfor in the agreement—vide I. R. Commissioners v. Peters l. Under ourlaw a promise or agreement to pay money is binding if it has beenaccepted—vide Public Trustee v. Vdurawnna.2 The covenants or agree-ments entered into by the appellant had been accepted and money duounder them had been paid to his brothers and had been declared by themas part of their income in returns made for purposes of income tax. Iam, therefore, of the view that the payments made by the appellant interms of the covenants were not voluntary but were made under a legal■obligation.
The amounts of tho annuities claimed as deductible by the appellant•was a sum of Rs. 3,000 as against hi3 income of Rs. 2S.10I which is alittle over ten per cent. It is unnecessary to decide in this case, and Ireserve for a decision in an appropriate caso when the question docs a risewhether payments of sums amounting to a much larger proj>ortion of aperson’s income may be claimed as deductions on the basis of payment byway of annuity..
1 (1941) s A. E. R. 620.* (1919) 61 X. L. R. 193.
134
Suri’jabandara v. Oe Fransz
l am of the ricw that the payments roado by the appellant satisfy thecharacteristics of an annuity and that his claim for deduction of themfrom his statutory income in ascertaining his assessable income shouldhave been allowed. I accordingly answer tho two matters raised in theCase Stated
(a) The two sums of Rs. 1,500 paid by tho assesseo to his two brotherswero annuities payable by him,
{b) The two sums of Rs. 1,500 paid by the assesseo to his two brothersare deductible under s. 15 (1) (a) of the Income Tax Ordinance.
The respondent must pay tho appellant costs fixed at Rs. 202*50. Theappellant rill also be entitled to a refund of the 6um of Rs. 50 paid unders. 78 (1).
Weeiumantry, J.—I agree.
. Appeal allowed.