ORDER
R.V. Easwar, Judicial Member
1. This order will dispose of 10 appeals. In all the 10 appeals the only point involved is whether the assessees are entitled to the exemption under Section 5(1)(xvia) of the Wealth-tax Act in respect of National Defence Gold Bonds, 1980, for the assessment years 1987-88 and 1988-89.
2. The objection of the department to granting the exemption is that the bonds have matured on 27-10-1980 and thereafter the Reserve Bank of India holds the gold in trust for the assessee and, therefore, the character of the Bonds as Bonds has ceased and the value of the gold has to be included in the assessments. The other minor objection raised by the department is based on the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.
3. The objection of the department cannot be upheld in view of the provisions of the Public Debt Act, 1944 and the Negotiable Instrument Act, 1881. We shall advert to those provisions a little later after noticing the preliminary objection of the Ld. D.R. before us. He submitted that the issue is decided against the assessee by two decisions of the Tribunal – (1) Executors & Trustees of the Estate of Late ShriR.G. Saraiya v. Second WTO [1988] 24 ITD 211 (Bom.) and (2) Smt. Subhadraben Shankerlal Patel v. WTO [1990] 32 ITD 711 (Ahd.). It was also brought to our notice that the decision of the Tribunal in IAC v. Mrs. Sakina [1988] 27 ITD 370 (Nag.) was in favour of the assessee. We have carefully gone through the decisions which were stated to be against the assessee. In these two decisions, the provisions of the Public Debt Act and the Negotiable Instrument Act were not considered. The bonds with which we are now concerned have been issued under the provisions of the Public Debt Act and they are in the form of Promissory Notes payable to order and, therefore, we cannot ignore the provisions of the Public Debt Act and the Negotiable Instrument Act in order to ascertain the true nature and the legal character of the Bonds. We are, therefore, of the opinion that the Tribunal’s orders relied on by the Ld. D.R. are not impediments to the case of the assessees being examined in the light of the aforesaid statutory provisions. The National Defence Gold Bonds, 1980 were issued on 27-10-1965 and the Bond is in the form of a Promissory Note payable to order. There was a provision for interest payment every year. The Bonds were issued by the Public Debt Office. Under Section 2(2) of the Public Debt Act the Government security means a security created and issued by the Government for the purpose of raising a public loan and having one of the following forms, namely, either stock or promissory note payable to order or a bearer bond payable to bearer etc. The security can also be issued in any other form prescribed by the Government. The bond in the instant case takes the shape of a promissory note payable ‘to order’. The last two words denote that the bond itself is negotiable. Under Section 60 of the Negotiable Instrument Act read with Section 13 thereof, a promissory note payable to order, which is a negotiable instrument, can be negotiated until payment or satisfaction thereof by the maker of the same at or after maturity, but not after such payment or satisfaction. A Negotiable instrument is negotiable ad infinitum until it has been paid or discharged on behalf of the acceptor. The negotiability of the instrument may be restricted by restrictive covenant or endorsement but there is no such restriction in the National Defence Gold Bonds, 1980 issued by the Government. The negotiability of the negotiable instrument ceases only when it is paid Or satisfied by or on behalf of the person liable therein at or after maturity and not otherwise. Therefore, the first objection of the department that the character of the Bond as Bond ceased on the date of maturity, namely, 27-10-1980, cannot be upheld. The provisions of Section 23 of the Public Debt Act lend support to this view. That provision states that the Government shall be discharged from all liability on a bearer bond on payment to the holder of such bond on presentation on or after the date when it becomes due to the amount expressed therein unless restrained by a competent Court of India. This shows that the Government will be discharged from the liability, even in respect of a bearer bond, only on presentation of the Bond for payment. Such presentation can be either on the date when it becomes due or at any date thereafter. The effect is that till the Bond is paid the Government is not discharged from the liability. Section 23 of the Public Debt Act only incorporates the principle enshrined in Section 60 of the Negotiable Instrument Act. If this is the position under the Public Debt Act even in respect of a bearer Bond, a fortiori, in the case of promissory note made payable to order. Section 24 of the Public Debt Act is also a relevant provision to be noticed in this connection. That section states that the liability of the Government in respect of any interest payment due on Government security shall terminate on the expiry of six years from the date on which the amount due by way of interest became payable. This provision is only in regard to the interest payment. Since nothing is said about the principal due under the Government security, the natural consequence is that the principal will continue to be a liability without any period of limitation and shall never cease. This provision is applicable to all Government securities which include a promissory note payable to order under Section 2(2) of the Public Debt Act under which the National Defence Gold Bond, 1980, falls.
4. We are, therefore, of the considered opinion that having regard to the relevant provisions of the Public Debt Act and the Negotiable Instrument Act the department’s view that the Bond ceases to be gold bond on the date of maturity cannot be accepted.
5. We will now deal with the other objection of the department based on the assumption that after maturity of the gold bond the Government of India holds the gold in trust for the assessee and, therefore, the exemption under Section 5(1)(xvia) cannot be given in the assessments. This contention is also untenable in view of the express provision of Section 6 of the Public Debt Act, 1944. Under Sub-section (1) the Government is under no obligation or liability to receive any notice of any trust in respect of any Government security nor shall the Government be bound by any such notice of trust, even if such notice is given expressly. The sub-section goes on to say that the Government shall not be regarded as trustee in respect of any Government security. This provision is clinching and proves that the stand of the department that the Reserve Bank of India holds the gold represented by the gold bond in trust for the assessee after the date of maturity is clearly untenable. A question may arise as to what happens if and when any directions regarding the payment of interest or the maturity value are given by the holder of the Government security to the Government and whether the Government is bound to abide by such directions. Subsection (2) of Section 6 states that such directions are not binding on the Government of India and do not create any trust but the Government may agree to abide by such directions only as an “act of grace” and without any liability. This sub-section clearly shows that even if an assessee had requested the Government of India to hold the gold for a period after the date of maturity, the Government does not automatically hold the gold in trust for the beneficiary but it does only as an act of grace and without any liability whatsoever. The provisions of Section 6 of the Public Debt Act, clearly negative the contention of the Ld. D.R. that a trust is created whereunder the gold is held by the Reserve Bank of India in trust for the assessee after the date of maturity.
6. Mr. Bajoria, the learned counsel for the assessee, drew our attention to a decision of the Hon’ble Calcutta High Court (His Lordship Justice P.B. Mukherji) in Iswardas Khaitan v. C. Gregory AIR 1955 Cal. 509 where a similar contention was raised by the decree holder in that case who sought to attach cheques issued by the Railway Administration out of the Provident Fund account of the employee against whom a decree was sought to be executed. The contention of the decree holder was that the amount had shed its character as Provident Fund since the cheque has been handed over to the debtor. It was held that though the amount was transferred from the Provident Fund to Miscellaneous Account ‘E’ under the Indian Railway Code of Accounts Department, it did not alter the character of Provident Fund money as such. Under the Provident Fund Act the deposit in the Provident Fund shall not be liable for any attachment. It was held by the Court that it will be “most senseless construction” to say that the money shall continue to remain only under the Provident Fund Act in order to remain immune from attachment and that the moment it is transferred from one account of the Government to another account of the Government it ceases to be an immune from attachment. The criticism made by the Court of the contention of the decree holder in that case is equally applicable to the stand taken by the department in the present case, having regard to the true nature of the Bonds vis-a-vis the provisions of the Negotiable Instrument Act and the Public Debt Act.
7. It was further pointed out by Mr. Bajoria that even after the date of maturity there was no earmarking of the gold represented by the Gold Bond and that the assessee can collect the gold from any of the Public Debt Offices which was against the contention that a trust has been created in favour of the assessee. We have seen the relevant press notifications issued by the Government from time to time extending the facility for repayment of the gold. Originally the Government extended the facility of redemption through the nationalised banks and later on the facility was restricted to Public Debt Offices.
8. Mr. Bajoria further pointed out that para 42.1 of circular No. 461, dated 9-7-1986 issued by CBDT explaining the provisions of the Finance Bill, 1986 stated that the exemption given under Section 5(1)(iiia) of the Gift-tax Act in respect of the National Defence Gold Bonds, 1980 was being withdrawn from the assessment year 1986-87 only because there was no “likelihood” of any gift of the bond after a period of six years from the date of maturity. According to the CBDT since there was no such likelihood the exemption provision had become “redundant”. This circular in a way shows that the provision was being deleted only because most of the gold bonds would have been redeemed and it was never stated by the CBDT that the exemption was being withdrawn because the gold bonds have ceased to be gold bonds on the date of maturity. This of course is a negative way of showing the character of the gold bond.
9. It is, however, pertinent to remember that the exemption under the WT Act continues to remain in the statute even though the similar provision in the Gift-tax Act has been deleted as stated above. Having regard to the deletion of the exemption under the Gift-tax Act and the continuance thereof under the WT Act it can be inferred that the intention of the Government was to continue to grant the exemption under Section 5(1)(xuta) of the WT Act in respect of gold bond though it has not been redeemed on the date of maturity.
10. The Ld. D.R. pointed out that the very purpose of issuing gold bonds was to grant exemption to wealth representing undisclosed income and it would be improper to extend the benefit of the exemption beyond the period of maturity. However, it should be remembered that we have to construe the exemption provision in the light of the other statutory provisions which have a bearing on the true nature of the gold bond, such as, Public Debt Act and the Negotiable Instrument Act. We have got also to bear in mind the fact that the Government though fully aware that the bonds matured on 27-10-1980 did not take any steps to delete the exemption provision in the WT Act but allowed it to remain in the Act. We cannot therefore subscribe to the view expressed by the Ld. D.R. that the exemption provision in the WT Act, after the date of maturity of the gold bonds, has become dead wood without any effect. Such a construction of the exemption provision has to be avoided.
11. The only other objection that remains to be considered is based on the decision of the Supreme Court in McDowell’s case (supra). We are unable to see any tax avoidance measure or device adopted by the assessees in the present case in claiming the exemption. It cannot be stated that when the assessee claims the exemption which is given by the statute itself, a tax avoidance device or measure is being adopted so as to attract the McDowell doctrine. This position has been made clear by the Supreme Court in CWT v. Arvind Narottam [1988] 173 ITR 479 where the court held that if the language of the deed of settlement is plain and admits of no ambiguity, the McDowell doctrine is not attracted. The Madras High Court has held in M.V. Valliappan v. ITO [1988] 170 ITR 238 that when a statutory provision is made use of to reduce tax liability it cannot be stated that it is a tax avoidance measure or a colourable device which would attract the principle of McDowell & Co. Ltd.’s case (supra). The relevant observations of the Court appear in pages 279 to 286. In the present case the assessees have claimed the exemption under Section 5(1)(xufa) and have raised a legal ground that notwithstanding the fact that the Bonds have matured for redemption on 27-10-1980, they continued to remain as Bonds without any change in the character and will be entitled to the exemption. The question has to be decided or resolved only on a proper interpretation of the relevant statutory provisions. To such a case the McDowell doctrine is not attracted as held by the Supreme Court and the Madras High Court in the decisions cited above.
12. For these reasons we hold that the assessees are entitled to the exemption under Section 5(1)(xvia) of the WT Act in respect of the National Defence Gold Bonds, 1980, held by them.
13. In the result, the appeals are allowed.