Income Tax Appellate Tribunal - Kolkata
Assistant Commissioner Of Wealth-Tax vs Anupam Pictures (P.) Ltd. on 9 September, 1996
Equivalent citations: [1997]60ITD640(KOL)
ORDER
R.V. Easwar, J.M.
1. The assessee in these appeals is a closely-held company liable to wealth-tax under section 40 of the Finance Act, 1983. On 17th July, 1984 it entered into a document styled as 'Memorandum of Agreement for Lease' with one Kanhaiyalal Mehrotra in respect of the roof portion of the premises at No. 22 x 92, Elliot Road, Calcutta, of which Mehrotra was the absolute owner. The premium for the lease was fixed at Rs. 20,000. The lease was to be for a period of 30 years. It was further agreed between the parties that a lease deed as such would be executed and registered after completion of certain formalities. The lessee, i.e., the assessee, was to be given permission for erecting one or two stories on the roof portion of the premises as per the plan sanctioned by the Calcutta Municipal Corporation. It was agreed that the assessee would be entitled to assign or transfer its right, title and interest in the floors to be built to any other person with the previous consent of Mehrotra, the lessor. There was a further stipulation for payment by the assessee of service charges or rent or levy on the constructed area at the rate of Re. 1 per sq.ft. subject to the further condition that it will be increased to Rs. 1.50 per sq.ft. as soon as the floors are let out by the assessee to outsiders.
2. The memorandum containing the aforesaid conditions was executed in Rs. 5 stamp paper. The same was not registered under the Registration Act and this fact constitutes common ground.
3. The assessee-company commenced construction on the roof in the financial year 1985-86 and it borrowed monies from its shareholders as well as the relatives of the director for the purpose of construction. The constructed space was let out to Indian Bank with effect from 16-3-1987 on a rent of Rs. 25,500 per month.
4. In the assessments to wealth-tax, the WTO was of the view that the assessee was the owner of the building constructed on the roof of the premises and was, accordingly, assessable to wealth-tax under section 40 of the Finance Act, 1983. He was of the view that the building did not constitute the assessee's stock-in-trade because the assessee-company was not dealing in real estate or as property developer. He further observed that the building constructed by the assessee-company was later sold to one Lalji Mehrotra, a relative of K.L. Mehrotra the lessor in two parts totalling Rs. 8,32,500. As per the working of the value of the building in accordance with Schedule-III to the Wealth-tax Act, the value came to Rs. 18,36,000 which was adopted in the assessments. Certain deductions were given for loans taken and for liabilities for expenses and the net wealth was determined accordingly.
5. The assessee appealed and contended that the Wealth-tax Officer was wrong in holding that the assessee was the owner of the building. The CIT(A) after noting the relevant facts, observed that in the income-tax assessments, following the Supreme Court decision in the case of S.G. Mercantile Corporation (P.) Ltd. v. CIT [1972] 83 ITR 700, the assessee's activities in constructing the structure on the roof and letting out the same to Indian Bank were considered to be commercial activities and the income therefrom was considered as business income. As regards the memorandum of agreement for lease, the CIT(A) noticed that since it was not registered, at best the assessee could only be considered as a tenant from month to month liable for eviction upon fifteen day's notice. She, therefore, held that the assessee had no ownership rights in the building constructed by it. In this view of the matter, she held that the value of the structure cannot be included in the assessments.
6. The Revenue challenges the conclusion of the CIT(A) as unsound on the facts and circumstances of the case. In particular, it was pointed out that whatever may be the position in law, it was a fact that the assessee was given permission to construct the structure on the roof by the lessor, that the same had been constructed and also led out to Indian Bank which is a Government of India Undertaking, that the assessee had also sold the building subsequently and all these facts must be taken into account and if they are taken into account, the conclusion would follow that irrespective of the invalidity of the lease the company exercised ownership rights on the structure which was rightly brought to wealth-tax. Our attention was invited by the ld. D.R. to the judgment of the Calcutta High Court in the case of CIT v. Smt. Damyanti Devi Jhunjhunwalla [1993] 203 ITR 142.
7. On behalf of the assessee heavy reliance was placed on the decision of the Supreme Court in the case of Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888. It was contended on the basis of this decision that the assessee should be the legal owner of the building before wealth-tax is imposed upon him but in the present case there was no valid lease of the roof portion upon which the structure was put up and if the assessee's leasehold rights over the roof portion were themselves non-existent in law, it could never be considered as the legal owner of the structure put up by it upon something the rights over which are non-existent. It was in this connection pointed out that the document entered into between Mehrotra and the assessee can never be considered as a valid lease. Firstly, there was no present demise of the roof portion but there was only an agreement to execute a future demise of the same. Secondly, there was no clear date of commencement of the lease. Thirdly, the agreement was for lease for a period of 30 years and any lease of immovable property for a term exceeding one year can be made only by a registered document as per section 107 of the Transfer of Property Act and the document in question admittedly not having been registered, was invalid as a lease. When for these reasons the lease itself was void, the assessee's occupation of the same was at best only as a monthly tenant under section 106 of the Transfer of Property Act, liable for eviction by 15 days' notice. If the lease itself is in such a precarious state, though the structure had been put up by the assessee, the same had no value nor can the assessee be treated as owner thereof in the real sense of the term. The following judgments were relied upon on behalf of the assessee in support of the above contentions :
1. CIT v. Mumbadevi Mansion Co-owners Housing Co-operative (P.) Ltd. [1983] 143 ITR 150 (Bom.),
2. Melluish (Inspector of Taxes) v. B.M.I. (No. 3) Ltd. [1996] 218 ITR 547 (HL),
3. Shankar Construction Co. (P.) Ltd. v. Union of India AIR 1984 Cal. 317,
4. Brijnandan Singh v. Jamuna Prasad Sahu AIR 1958 Pat. 589,
5. Hari Prasad Agarwal v. Abdul Haq AIR 1951 Pat. 160,
6. Hanno Lal v. Badri Das AIR 1945 All. 278,
7. Bechar Das Damodardas Kachia v. Borough Municipality AIR 1941 Bom. 346,
8. Ramjoo Mahomed v. Haridas Mullick AIR 1925 Cal. 1087,
9. Sultanali Mulla Rasoolji v. Tyeb Pir Mahomed AIR 1930 Bom. 210,
10. Durga Prasad v. Parveen AIR 1975 MP 196,
11. Biswabani (P.) Ltd. v. Santosh Kumar Dutta AIR 1980 SC 226.
8. We have carefully considered the rival contentions. It is not disputed that the memorandum of agreement for lease was not registered. As per section 107 of the Transfer of Property Act, a lease of immovable property from year to year or for any term exceeding one year can be made only by a registered instruments. In the present case as per clause (1) of the memorandum, the lessor and the lessee had agreed that the lease will be for a period of 30 years. Therefore, in the absence of registration under the Registration Act it is a void lease. At page 626 of the Commentary on the Transfer of Property Act by D.F. Mulla, 4th Edn. (1956) the consequence of non-registration have been brought out. There is reference to the judgment of the Privy Council in G.N.C. Ariff v. Jadunath Manjumdar Bahadur AIR 1931 PC 79 wherein it was held that if registration of a lease is compulsory under section 107, the lease can be made only by registered instrument and if it is not so made, the lease is void altogether. The other decisions to the same effect have been listed in foot-note (q) in the same page. The lease in the present case is not a valid lease also since it does not satisfy one of the essential conditions, namely, that the demise must be in praesenti, as stipulated by section 105 of the T.P. Act. There is only an agreement to execute and register a lease deed at a future point of time, subject to various obligations being fulfilled by lessor and the lessee. In the case reported in Durga Prasad's case (supra), the Madhya Pradesh High Court held that under section 105 there must be a lease in praesenti under section 105 of the T.P. Act and a document styled as an agreement to lease at a future point of time, in the absence of a formal lease deed executed and registered, cannot satisfy the requirement of the section and at best the arrangement can only be called a licence. However, it has been later held by the Supreme Court in the case of Biswabani (P.) Ltd. (supra) after referring to the judgment of the Privy Council cited supra, that if the landlord accepts rent from a tenant in possession under a void lease, an inference of tenancy would follow. In this connection, the Supreme Court referred to its earlier decision in the case of Ram Kumar Das v. Jagdish Chandra Deo AIR 1952 SC 23. The Supreme Court also referred to Mulla's Transfer of Property Act (6th Edn. at page 680) wherein it has been observed that an oral agreement accompanied by delivery of possession, if for more than one year is valid by delivery of possession, for the first year and thereafter the lessee continuing in possession with the assent of the lessor becomes a tenant by holding over under section 116 of the T.P. Act. Such a lease having been created by operation of law was held to be binding even though the provisions of section 107 have not been complied with. It was again emphasised that though a unregistered lease deed is void as a permanent lease, it can be deemed to be a monthly lease terminable by 15 days' notice under section 106 of the Act. The observations of the Supreme Court in paragraphs 11 and 12 of the aforesaid judgment settle the position beyond doubt and they are extracted below :
"11. Even if it is assumed that the appellant was put in possession for the first time under a lease which turns out to be void the appellant came into possession of the premises with the consent of the landlords and paid rent from month to month. As the lease was to be for a period of 5 years for want of registration no operative lease came into existence. In almost identical circumstances in Ram Kumar Das v. Jagdish Chandra Deb Bhabal Deb 1952 SCR 269 at page 280, an inference to tenancy was made and the duration of the tenancy in such circumstances was held to be from month to month.
12. Woodfall on Landlord and Tenant, Volume 1, 27th Edn., p. 187, para 446, in this context states as under :
'Moreover, if the tenant enters into possession under a void lease, he thereupon becomes tenant from year to year upon the terms of the writing, so far as they are applicable to and not inconsistent with a yearly tenancy. Such tenancy may be determined by the usual notice to quit at the end of the first or any subsequent year, and it will determine, without any notice to quit, at the end of the term mentioned in the writing. But if the lessee does not enter, he will not be liable to an action for not taking possession; nor will an action lie against the lessor for not giving possession at the time appointed for the commencement of the term but before the lease is executed.'"
9. Thus, we reach the conclusion that the assessee in the present case should be considered to be a tenant from month to month and the tenancy is terminable by 15 days' notice as contemplated by section 106 of the T.P. Act. The argument on behalf of the assessee that it obtained no rights of tenancy cannot, therefore, be accepted.
10. We now proceed to the question as to whether the assessee can be considered to be the legal owner of the structure put up on the roof taken on lease. Here, section 108(h) of the T.P. Act is clear. It says that in the absence of a contract or local usage to the contrary, the lessee may, even after the determination of the lease, remove at any time whilst he is in possession of the property leased but not afterwards, all things which he has attached to the earth, provided he leaves the property in the state in which he received it. The section thus recognises the fact that the lessee is the legal owner of the structure or fixtures put up by him. In India the legal position is that the land can be owned by one person, whereas the building put up on the land can be owned by a different person and this legal position had been recognised in the judgment of Hon'ble Chief Justice Sir Owen Beasly in the case of CIT v. Madras Cricket Club [1934] 2 ITR 209 (Mad.) and the principle has been reiterated and affirmed by the Calcutta High Court in the case of Ballygunge Bank Ltd. v. CIT [1946] 14 ITR 409. During the period of the lease, the effect of clause (h) of section 108 is that the lessee is the owner of the buildings, etc., put up by him on the lessor's land. The Bombay High Court so held in Laxmipat v. Larsen & Toubro AIR 1951 Bom. 206. In Pormanick's case, a Full Bench of the Calcutta High Court held that the general rule was that a person who makes improvements to a leased property is not a mere tresspasser but was in possession under a bona fide title and was, therefore, entitled to remove the materials, restoring the land to the original state (please see 1867 - 6 W.R. 228 at page 229 - observations extracted at page 644 of Mulla's T.P. Act, 1956 Edn.). Thus, there is ample authority for the proposition that the lessee who puts up construction on the leased land is the owner thereof and is also entitled to remove the building on the termination of the lease. In the present case the assessee has been given permission for erecting one or two storeys on the roof portion of the premises and the assessee has also accordingly put up the construction. In the memorandum the lessee's right to assign or transfer its right, title and interest in such construction has been recognised - please see clause (F) of the document at page 7. Therefore, it is not possible for us to accept the contention on behalf of the assessee that it is not the legal owner of the building. In view of the authorities cited above and the clear provisions of section 108(h) of the T.P. Act, the condition for assessability under the wealth-tax, namely, ownership of the property, as expounded in the judgment of the Supreme Court in the case of (Late) Nawab Sir Mir Osman Ali Khan (supra) cited on behalf of the assessee, stands satisfied. Therefore, even as per test laid down in the aforesaid decision, the assessee is to be considered as the owner of the building put up by it.
11. Quite apart from the legal position, the assessee's case fails to pass the test of common sense also. It has proceeded to put up a structure on the roof taken on lease at a substantial cost, has let it out to a nationalised bank at a handsome rent, was in enjoyment of the property without any let or hindrance for a number of years before it was sold and yet it claims that it has no ownership rights over the same. The conduct of the assessee is wholly inconsistent with its claims. The fact that the lease is precarious because it is terminable at 15 days' notice and on termination the assessee has to pull down the structure does not affect its rights as owner of the building till the termination of the lease, at best it may be one of the factor to be taken into account while estimating the value of the structure.
12. We are also unable to uphold the view of the CIT(A) that the structure constitutes stock-in-trade in the hands of the assessee, as it has been let out and has produced income. As pointed out by the W.T.O., the assessee is not engaged in the business of property development or of constructing and selling flats/buildings in which case alone the building can be considered as its stock-in-trade. There is no evidence to this effect. A mere letting out of an asset does not lead to the conclusion that it represents stock-in-trade. In this connection, reference may be made to the Gujarat High Court in H. Mohmed & Co. v. CIT [1977] 107 ITR 637 wherein the characteristics of stock-in-trade have been pointed out. More particularly, at pages 643-645, it has been held that stock-in-trade is something in which a trade deals whereas his capital asset is something with which he deals, that stock-in-trade means "all these goods or commodities in which the particular individual deals in the sense of buying and selling in the course of his business activity and it cannot be said to include a commodity which is acquired for the purpose of being let on hire" and that the distinction "is between selling outright in the course of business activity as distinguished from deriving income from exploitation of one's assets". The assessee in the present case not being a company which is buying/selling flats/buildings, the structure put up by it cannot constitute stock-in-trade in its hands. The proviso to section 40(3) does not therefore apply and the CIT(A) was wrong in invoking the same.
13. So far as the valuation of the structure is concerned, we find that this matter has not been adjudicated upon by the CIT(A) since she had held that the building was not includible in the assessments. As there is no adjudication on this point, the proper course for us would be to restore the question to the file of the CIT(A) for a decision in accordance with law and after giving adequate opportunity to the assessee of being heard. We direct accordingly.
14. To sum up, we hold that the buildings was rightly included as an asset in the assessee's assessment for the years under appeal and to that extent the orders of the CIT(A) are reserved. The question of valuation of the building, as already stated, is restored to the CIT(A).
15. In the result, the appeals by the revenue are partly allowed.