Income Tax Appellate Tribunal - Mumbai
Rajas R. Doshi vs Eighth Income-Tax Officer on 8 October, 1993
Equivalent citations: [1994]48ITD77(MUM)
ORDER
N.R. Prabhu, Accountant Member
1. This is an appeal by the assessee against the order of the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961. Brief facts of the case have to be set out to bring into focus the grievance of the assessee.
2. The assessee is a director of Messrs. Walchand and Co. Pvt. Ltd. The assessee's father, Sri Ratanchand Hirachand, was a director probably from the very inception of the company. In the year 1962, the company purchased three4 flats and they were let out to the directors. One such flat given to Sri Ratanchand was in a building at Little Gibbs Road, Malabar Hill, Bombay. The purchase price paid for this flat was Rs. 86,000 and the cost of two garages was Rs. 16,500. The rent realised from Sri Ratanchand Hirachand, father of the assessee, was Rs. 440 per month. Sri Ratanchand continued to be in occupation of the flat till his death in November, 1981. During the period between 1962 and 1981, when he died, there was only a marginal increase in the rent paid/payable by Sri Dpshi. In August, 1984, the assessee was appointed as a director. In January, 1986, the company transferred the ownership rights in the said flat and garage for a sum of Rs. 2,30,000 to the assessee. The Commissioner was of the view that the market value of the flat could be around Rs. 47 lakhs as the flat was situated in a posh and aristocratic locality in Bombay. The order of assessment for this year had been completed by the Income-tax Officer in the usual routine manner. In so far as this matter was not looked into by the Income-tax Officer while finalising the order, the Commissioner took the view that the order was erroneous and prejudicial to the interests of the Revenue. He, thereafter, passed an order under Section 263 and set aside the assessment order. He considered that it would be reasonable to allow one more opportunity to the assessee to put forward his case in regard to the quantification of the value and the consequential quantification of addition to be made under Section 2(24)(iv) of the Income-tax Act, 1961. This follows his perception that the difference between the market value and the consideration actually paid by the assessee would be liable to tax under the provisions of Section 2(24)(iv) of the Act. In passing his order, the Commissioner did not accept the contention of the assessee that the assessee and before him his father, were monthly tenants of the flat belonging to Walchand and Co. Pvt. Ltd. He, in this contention, relied on the board's resolution dated January 21, 1963, under which the company decided to purchase three flats for the use of the directors of the company. He also relied on the decision in J. Dalmia v. CIT [1982] 138 ITR 653, where the Delhi High Court had, inter alia, observed that (at page 658): "when property belonging to a company is allowed to be used by a director, then it is not a case of letting out". The assessee is aggrieved.
3. It is contended on behalf of the assessee that even as per the Commissioner of Income-tax, the consideration paid for the acquisition of the flat was only a sum of Rs. 1,02,000. The company of which the assessee's father, was a director, at the relevant time, took a conscious decision to acquire a flat and to let it out to the assessee's father. The assessee's father was, in fact, a tenant of the company. The company also determined the fair rent that the flat could fetch and a sum of Rs. 440 per month was the amount which was considered to be the fair rent at the relevant time. It has to be remembered in this connection that the acquisition was about three decades ago and the cost of acquisition was only a little over Rs. 1 lakh at the relevant time. The return by way of rent again could not be considered as low at the relevant time having regard to the prevailing rate of interest in the market. It is only in the last one or two decades, the cost of flats had escalated in Bombay and they were not available for rent. The situation as prevailing at that time, the sale was effected to the assessee cannot be compared with the situation as available in the year in which the company acquired the flat and gave it on rent to the assessee's father. The assessee's father was a director of the company and was entitled to only a salary. The terms of employment did not require the company to provide the director with any residential accommodation. The company acquired the flat and decided to let it out to the director and such decision of the company was as per the resolution passed in November, 1962. The relationship between the company, Walchand and Co. Pvt. Ltd., and the assessee's father right from the beginning was that of landlord and tenant and not that of an employer and employee, in so far as the assessee's occupation of the flat was concerned. In such circumstances, the Commissioner of Income-tax was not justified in relying on the passing remark made by the Delhi High Court in their decision in J. Dalmia v. CIT [1982] 138 ITR 653 to the effect that where the property belonging to the company was allowed to be used by a director, then it was not a case of letting out. It is then submitted that the Income-tax Officer assessing the company, namely, Walchand and Co., had written a letter as early as on August 29, 1964, to ascertain whether the rent received by the company from the late Ratanchand Hirachand, father of the assessee, was reasonable. The assessee had then explained to the Income-tax Officer that the flat was given on the basis of annual value which was determined in a fair and reasonable manner. Based on this letter, no action was taken by the Income-tax Officer to increase the notional rent of the flat. This alone would support the case of the assessee. That the late Sri Ratanchand Hirachand was a tenant as far as this flat is concerned and not the licensee of the company who was permitted the occupation of the flat only by virtue of his position in the company as a director. It is then submitted that Ratanchand Hirachand expired in 1981. The assessee continued to be in the occupation of the flat. The rent paid by the assessee was accepted by the company and the rent receipt was also issued by the company. It was only in 1984 that he was inducted in the board as a director. The decision was taken in 1986, to sell the flat to the assessee only because that was in the best interest of the company. Then the rent realised from the assessee had gone up to a sum which was a little over Rs. 600, it gave a negative figure of income. Thus, the flat, became an onerous asset. The company sold the flat after getting a valuer's report and the value indicated in the said report was much less than the consideration received by the company from the assessee. It is then pointed out that there is no bar against the company purchasing a flat and giving it to a director-employee on tenancy basis. Even if this is considered as an amenity to the director which could perhaps be taxed under Section 2(24)(iv) of the Act the point of time at which the tax could be levied is when the flat was given on a tenancy basis to the employee, and not after the lapse of more than two decades when the landlord had found that the asset had become a onerous asset and decided to sell the same. It is then pointed out that the assessee had filed Form No. 37EE before the Department on February 27, 1986, but no action was taken on the basis of that form. This would clearly go to show that the wing of the Department which was engaged in acquisition matters did not consider the amount received by Walchand and Co, from the assessee as inadequate. If it were not so, the Department would have proceeded to acquire the same by paying the required solatium of 15 per cent, to the concerned party. Our attention is also invited to the valuation report of the Assistant Valuation Officer, Sri Livingstone, wherein the value of this property was determined at Rs. 2,01,600 by him. This valuation report had been rejected by the Assessing Officer on the ground that though the report was prepared in August, 1987, the copy of the same was forwarded to him on a much later date and further the Assistant Valuation Officer had passed the order without any jurisdiction. It has to be remembered in this connection that this very Valuation Officer had written a letter to Messrs. Walchand and Co. Ltd. in which he informed that the fair market value of the flat had to be determined. The said letter was also forwarded by Sri Livingstone to the Inspecting Assistant Commissioner (Assessment). At that stage, no objection was raised by the Assessing Officer regarding the jurisdiction of the Assistant Valuation Officer. After rejecting the Assistant Valuation Officer's report, a fresh reference was made in connection with wealth-tax matters against Messrs. Walchand and Co. Ltd. The Valuation Officer determined the value of this flat as on March 31, 1984, and March 31, 1985, at Rs. 29.60 lakhs and 32.86 lakhs, respectively. The Commissioner of Income-tax has stated that on the day of transfer, the property's value was about Rs. 47 lakhs without properly disclosing the basis for such estimate. It would be evident from the facts surrounding'the whole issue that the Valuation Officer, Unit III, was probably manipulated to submit a report to suit the whims of the Department.
4. The learned Departmental Representative, on the other hand, contends that the issue before the Tribunal was simple and straightforward. It is inconceivable, according to him, that a flat whose area is more than 2,500 sq. ft. could fetch only a sum of Rs. 2,30,000 in the year 1986. This alone would go to show that the transfer was effected by Messrs. Walchand and Co. Ltd. to one of its directors at a price which was far below the market price. Thus, the assessee had received a benefit which is in the nature of income referred to in Section 2(24)(iv) of the Income-tax Act. The insertion of this clause in the statute book was with a view to preventing a mistake of this nature. It is common for closely held companies to buy flats at a fabulous price and then let them out to its directors who were closely associated with the company. The flats, after a lapse of time, are sold to them at a very nominal price. The idea behind these transactions is to confer an undue benefit on the directors without their being required to pay additional tax. The relevant fact to be considered in this case is that the flat was purchased for providing accommodation to one of the directors and it was also sold at a very nominal price to the son of the director who, at the time of sale was also a director of the company. There cannot be an escape from the provisions of Section 2(24)(iv) of the Income-tax Act. The order of the Commissioner of Income-tax, in these circumstances, is not open to any challenge. It has also to be remembered in this connection that the company did not take any steps to get the assessee evicted. Not even a request was made to him to vacate the premises. The company took a decision to sell the flat to him in undue haste. The surrounding circumstances would clearly go to show that it was not at all a business decision but a decision taken to confer some benefit to the assessee who is a director and a shareholder of the company.
5. In reply, learned counsel for the assessee contends that the provisions of Section 2(24)(iv) of the Act cannot be applied in the case of a capital transaction as the same would lead to some absurd results. If the assessee chooses to sell the flat for a consideration, the actual cost for the purpose of determining the capital gains would be a sum of Rs.. 2,30,000 only ; thus if the order of the Commissioner of Income-tax is held to be valid, the assessee would be required to pay the tax on the difference between the actual cost paid by the assessee and the sale price realised. This would be totally inequitable and for that reason also, the order passed by the Commissioner of Income-tax cannot be upheld.
6. We have heard the parties to the dispute and we are of the view that the order passed by the Commissioner of Income-tax cannot be upheld. The flat sold to the assessee, was no doubt purchased by Messrs. Walchand and Co. Ltd. and one of the factors that influenced the company to make an investment in the flat was the desire to provide accommodation to the late Sri Ratanchand Hirachand, father of the assessee, who was then a director of the company. But, it has to be remembered that the relationship between the late Sri Ratanchand Hirachand and Messrs. Walchand and Co. Ltd., as far as the flat was concerned was that of a landlord and tenant. This was made clear by the company in its letter to the Income-tax Officer written as early as in 1964. This letter was in response to a letter by the Income-tax Officer wherein, inter alia, he had sought to convey as to why the income from property from this flat could not be assessed at a much higher figure. The company, in fact, wrote to the Income-tax Officer that the flat was let out on the basis of the annual letting value determined by them and the said annual letting value was quite fair and reasonable. This would clearly go to show that the position of Sri Ratanchand Hirachand, the late father of the assessee was that of a tenant. The benefit, if any, was conferred at the time the company accepted the father of the assessee as a tenant and not when the flat was sold by the company to the assessee. Further, it has to be remembered that under the terms of the contract of employment, the company was not required to provide the late Sri Ratanchand Hirachand with any accommodation. The company in fact only spent a little over a lakh of rupees to buy the flat and offered it on a tenancy basis to the late Sri Ratanchand Hirachand. The motive behind such an act on the part of the company may be to help the director who is closely associated with the company not only as a director but also as an important shareholder, but this cannot be urged as a reason for bringing to tax the difference between the price paid by the assessee and the market value of the flat in the year in which the transfer on sale of the flat took place. We may, in this connection, mention that the tenant, under the Bombay Rents, Hotels and Lodging Houses Control Act, 1947, would mean only any person by whom or on whose behalf rent is payable for any premises. If this definition is applied to the assessee's late father, there could be no doubt, that he was the tenant of Messrs. Walchand and Co. Ltd. It does not need to be stressed in this case that the tenancy under the law in force devolves by inheritance. Therefore, on the death of the assessee's father, Sri Ratanchand Hirachand, the assessee who was in possession and occupation of the flat along with his father, became the tenant of the company. This position was acquiesced in by the assessee, in the sense that rent receipts were issued to him as in the case of his father. Though Sri Ratanchand Hirachand expired in 1981, it was only in 1984, that the assessee was inducted in the board as an additional director. During this interregnum between the death of Sri Ratanchand Hirachand and before the assessee was inducted in as a director, the assessee who was a shareholder was occupying the flat belonging to the company, Walchand and Co. Pvt. Ltd., as a tenant. Thus, it would be difficult to agree with the contention of the Departmental Representative that the transfer of the flat in 1986 when the assessee was on the board of the company Messrs. Walchand and Co. Ltd., has resulted in an income within the meaning given to that expression in Section 2(24)(iv) of the Income-tax Act. It may further be mentioned that at the time the flat was sold by Messrs. Walchand and Co. Ltd. to the assessee, the rent payable by him was a little over Rs. 600 per month. The asset in fact had become one which was non-productive. The valuation of the flat was referred to a Registered valuer and the sale consideration received by the company from the assessee was more than Rs. 1 lakh fixed by the Registered valuer. It may also be pointed out in this case that soon after the sale, the assessee had filed the requisite Form No. 37EE to the Competent Authority and no action seems to have been taken on the basis of such form. Thus, it is clear that at least a different wing of the Department did not consider that the sale had been made for a consideration which was below the market value. We may further mention that there is nothing in law in force which bars a limited company from purchasing flats and giving them on a tenancy basis to the directors of the company. At best, such acts could attract gift-tax proceedings. But where tenancy rights were conferred decades ago, to contend that such an act on the part of the company was with a view to providing some benefit to a director which could be treated as income within the provisions of Section 2(24)(iv) of the Act would be far fetched, at the time the flat was sold to the director or his legal heir at a price which is far less than the price it would fetch if sold in the open market as a vacant property.
7. We, in the circumstances, hold that the Commissioner of Income-tax was in error in holding that the transfer of the flat by Messrs. Walchand and Co. Ltd. to the assessee has resulted in some income to the latter. We, in that view, shall cancel the order of the Commissioner of Income-tax.
8. In the result, the appeal is allowed.
G.K. Israni, Judicial Member
9. I have had the benefit of the views expressed by my learned brother in his draft order, hut I am afraid that I do not feel persuaded to agree with those views for the reasons stated hereunder.
10. According to me, the relationship which was created by placing the flat by the company at the disposal of its chairman-director (late Shri Ratanchand Hirachand) for his use, was that of licensor and licensee and not that of landlord and tenant. In connection with the use of the flat, the assessee has placed his main reliance upon .paragraph 1 of the extracts from the minutes of the meeting of the board of directors of the company held on January 21, 1963. This document is available at page 1 of the paper book filed by the assessee. That paragraph reads as under :
"The board was informed that the company had purchased three flats for the use of directors of the company. These flats were given to three directors, viz., Shri Bharat G. Doshi, Shri Bahubali Gulabchand and Shri Ratanchand Hirachand, on rental basis." (emphasis provided).
11. Now, on account of the use of the word "rental" in the aforesaid minutes, it was stressed by the learned representative of the assessee that the flat was given on rent and not on licence. According to the learned representative of the assessee, the words "rent" and "let out" have been used more than once in the correspondence made by the company. This goes to show that the rights created in the flat were those of tenancy and not of a licence. The Commissioner has based his impugned order under Section 263 on his finding that the flats were purchased for the use of the directors and the company had not acquired the flats for earning income from the house property. The purpose of making investment in the flats was not to earn income but to provide a facility to the directors. Viewed in this light, it was obvious that ordinarily giving by a company of its own flat for the use of a director does not tantamount to letting out the flat in the normal sense of the term and hence the director does not acquire any tenancy right. So the then director, Shri Ratanchand Hirachand (the assessee's father) did not acquire any tenancy right in the flat when it was given to him for use as a director by the company. The Commissioner was further of the view that on the death of Shri Ratanchand Hirachand in November, 1981, the question of transfer of tenancy could not arise at all inasmuch as Shri Ratanchand Hirachand himself had not acquired any tenancy rights. Support on this point was sought by the Commissioner from the observations of the Delhi High Court in the case of J. Dalmia v. CIT [1982] 138 ITR 653. I have given my careful thought to all aspects of the matter and find myself in agreement with the Commissioner that, firstly, the right which originated on the placing of the flat at the disposal of Shri Ratanchand Hirachand, chairman-director, for his use was not that of tenancy, but was that of licence and, secondly, that the Commissioner was justified in setting aside the assessment order and directing the Assessing Officer to treat the benefit arising out of the sale of the flat to the assessee as a benefit under sub-clause (iv) of Clause (24) of Section 2 of the Income-tax Act and tax the same after quantifying it in accordance with law. The reasons for these findings of mine are as under :
"(a) The words 'rent' and 'let out' have been loosely used in the aforesaid minutes dated January 21, 1963, and other communications of the company. This loose use of language clearly indicates that the intention of the company was to provide a facility to its directors by making flats available to them for their use. On his own showing of the assessee, the three flats were purchased by the private limited company for the use of its directors, who were its employees. The minutes of the board did not suggest that there was any intention on the part of the company to create tenancy rights in the directors. There is no bilateral document between the company and Shri Ratanchand Hirachand to evidence creation of a tenancy. The Commissioner in his impugned order has correctly observed that ordinarily a company giving its own flat for the use of a director does not let out the flat in the normal sense of the term and hence the director does not acquire any tenancy rights. The flats were purchased and given over to directors in their capacity as the director-employees of the company and not to any disconnected persons or persons at arms-length. A distinction will have to be made between a lease and a licence. In the present case, no camouflage was attempted to disguise a licence into a lease. The mere use of the words "rent" and "let out" cannot be considered as material or conclusive. Even in a case where such a camouflage is attempted in a document so as to confuse an issue as to whether a particular document creates a lease or licence, it would be necessary to look into the document to understand the intention of the parties. For this purpose, the following factors will have to be kept in mind, viz :
(i) The substance of the document must be preferred to the form ;
(
(ii) The intention of the parties must be looked at to find whether they wanted to create a lease or a licence ;
(iii) If the document creates an interest in the property, it will be a lease and if it only permits the user of the property and the legal possession continues with the owner, it will be a licence ; and
(iv) If exclusive possession has been handed over under a document, prima facie, it will be understood as a creation of a lease but the circumstances may establish which may also negative the intention for creating a lease.
12. Various judicial authorities have consistently held that the mere use of the word "let out" or "rent" should not be considered as conclusive or determinative for the purpose of holding that the relationship created was that of tenancy and not of licence. All the surrounding circumstances will have to be looked into to ascertain as to what was the relationship sought and intended to be created. It would be evident from the board of directors minutes dated January 21, 1963, that those minutes were merely recording a fact of the past events of the company having purchased three flats and given them over to its directors for their use. It is not these minutes which authorised the purchase of the flats, or the giving over of the said flats to the three directors for their use. No other document--unilateral or bilateral--has been produced in the present proceedings to show that the company intended to create or did create a tenancy of the three flats in favour of the three directors. The surrounding circumstances clearly suggest that the flats were given to the directors by virtue of their being employees of the company for their use only. Such right to use would not give rise to the creation of any tenancy rights.
13. (b) Let me now advert to the law contained in the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (hereinafter referred to as "the Bombay Rent Control Act").
14. The provision which is relevant for the present discussion is contained in Clauses (f) and (g) of Sub-section (1) of Section 13 of that Act. These clauses read as under :
"(1) Notwithstanding anything contained in this Act but subject to the provisions of section. 15, a landlord shall be entitled to recover possession of any premises if the court is satisfied -- . . . .
(f) that the premises were let to the tenant for use as a residence by reason of his being in the service or employment of the landlord, and that the tenant has ceased, whether before or after the coming into operation of this Act, to be in such service or employment, or
(g) that the premises are reasonably and bona fide required by the landlord for occupation by himself or by any person for whose benefit the premises are held or where the landlord is a trustee of a public charitable trust that the premises are required for occupation for the purposes of the trust."
15. Now, it is claimed by the assessee that the flat, though of a high market value, was sold to the assessee at a much lower price for the reason that the assessee had acquired tenancy rights therein and, therefore, those tenancy rights substantially reduced the market value of the flat. As already stated, I am not inclined to accept the contention that the assessee had acquired either by inheritance or otherwise any tenancy rights in the flat. Even if for argument sake it be assumed that the assessee had acquired such rights, yet those rights could not have so adversely affected it as to reduce its market value from around Rs. 40 lakhs to Rs. 2 lakhs. It would be seen from Clauses (f) and (g) of Sub-section (1) of Section 13 of the Rent Control Act that the company had statutory right available to it to have the premises vacated on either of the grounds specified therein. Since the flats were acquired for the use of the directors, any change in incumbency in the board of directors would have rendered it necessary for the company to require the present occupant, who has since ceased to be a director, to vacate the premises for use by a new director. In case of refusal or failure by the old director a right is available to the company under the aforesaid two clauses of the Rent Control Act to have the premises vacated. In view of this position of law it would not be correct to contend that the alleged tenancy rights of the assessee in the flat had grossly reduced the value of the flat and that it was this factor which was responsible for the sale of the flat at such a disproportionately low price.
16. (c) At this stage, it would be necessary to discuss two other features of the case to which reference was made by the learned representative of the assessee. The first such reference was to the fact that the Assistant Valuation Officer, Shri Livingstone, had valued the property at Rs. 2,01,600 and. therefore, the sale of the flat for a sum of Rs. 2,30,000 to the assessee cannot be held to be unreasonable. This argument, according to me, holds no water inasmuch as this valuation has been done on the basis that the assessee had acquired tenancy rights in the flat and that the landlord under the provisions of the Rent Control Act had no right to evict the assessee from the premises. That being not the correct legal position, no value can be attached to the valuation put by the said Valuation Officer. The second feature to which a reference was made by the learned representative of the assessee was that even though the notice of the sale in Form No. 37EE was given of the proposed sale, yet the Department did not choose to go in for the acquisition of the property. I have given my careful thought to this aspect of the matter, but find that it cannot be allowed to have any material bearing on the issue. The acquisition proceedings are 'initiated under a self-contained and an independent scheme of the Income-tax Act. The acquisition proceedings are taken by an independent statutory authority under the Act. In such circumstances, non-Initiation of acquisition proceedings by that authority cannot be construed to mean that the market value of the property was around the figure at which it was actually sold to the assessee.
17. The last question raised was the point of time of the accrual of benefit and the applicability of sub-clause (iv) of Clause (24) of Section 2 of the Income-tax Act. It was contended by the learned representative of the assessee that the benefit, if any, under sub-clause (iv) of Clause (24) of Section 2 arose in the year in which the tenancy was created in favour of Ratanchand Hirachand or in favour of the present assessee. The addition, if any, under the said provision could have been made only in the relevant year in which the tenancy was created. I am of the opinion that this argument cannot be allowed to prevail. Firstly, I have come to the conclusion that no tenancy was created in the present case. Secondly, the benefit arose not at the time of the creation of the alleged tenancy, but only when the flat was sold by the company to the present assessee. That sale took place during the accounting year relevant to the assessment year under appeal and, therefore, the action of the Commissioner under Section 263 in relation to such sale cannot be held to be legally bad. The second argument made by the learned representative of the assessee was that the benefit, if any, to the assessee on account of the sale was of capital nature and since sub-clause (iv) of Clause (24) of Section 2 is not intended to cover the cases of benefits of capital nature that provision of law would not apply in the present case. Here again, I do not feel persuaded to accept this plea of the learned representative of the assessee. Sub-clause (iv) of Clause (24) of Section 2 of the Income-tax Act is a special piece of enactment, which covers benefits both of capital and revenue nature. This provision is intended to take care of passing of benefits by a company to its directors, who occupy the position of fiduciary relationship and hold an office of trust. The main object of this enactment is to prevent abuse/ misuse of official position by the directors of the company to their own advantage. No law or any decision of judicial authority has been cited in the present proceedings in support of the contention that this sub-clause is intended to cover only benefits of revenue nature.
18. In view of the above discussion, I hold that the Commissioner was justified in initiating proceedings under Section 263 of the Act and coming to the conclusion that as a result of the sale of the flat of a higher market value for a mere sum of Rs. 2.30 lakhs by the company to the assessee, the assessee has received a benefit, which is income within the meaning of sub-clause (iv) of Clause (24) of Section 2 of the Act and is, therefore, taxable. The Commissioner was thus justified in passing the impugned order. This appeal is, thus, liable to be dismissed. The appeal is accordingly dismissed.
ORDER OF REFERENCE TO THIRD member
19. We, the Members of the Bombay Bench 'A', have taken different views in I. T. A. No. 3857/(Bom) of 1989, on the question of jurisdiction of the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961. The appeal was against the order passed by the Commissioner of Income-tax under Section 263 of the Act and the issue before the Tribunal was whether the Commissioner of Income-tax exceeded his jurisdiction while passing the order under Section 263. The following question is referred to the Hon'ble President of the Income-tax Appellate Tribunal for resolution under Section 255(4) of the Act :
"Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was justified in passing the order under Section 263 of the Act on the premise that the order of assessment passed by the Income-tax Officer for the year under consideration was erroneous being prejudicial to the interests of the Revenue ?"
ORDER OF THIRD MEMBER
20. This is a reference made to me under Section 255(4) of the Income-tax Act, 1961, for my opinion as a third Member on the following point of difference of opinion, that arose between the Members of the Bombay Bench 'A' :
"Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax was justified in passing the order under Section 263 of the Act on the premise that the order of assessment passed by the Income-tax Officer for the year under consideration was erroneous being prejudicial to the interests of the Revenue ?"
21. The assessee at the relevant time was a director in a company called Walchand and Co. P. Ltd. The assessee's father, Ratanchand Hirachand, was also a director in the said company. In February, 1962, the said company bought flat No. 33 in a building at Little Gibbs Road, Malabar Hill, Bombay, and two garages for Rs. 86,000 and Rs. 16,500, respectively. The said company took possession of the flat and garages in November, 1962, and in January, 1963, they were given by the said company to the father of the assessee on a rent of Rs. 440 per month. The assessee's father and the assessee were living together in that flat ever since as tenants by paying the rent as fixed. In November, 1981, the father of the assessee, Ratanchand Hirachand, died but the assessee continued to live in that flat after the demise of his father. There were some minor increases in the rent which were duly paid by the assessee. In August, 1984, the assessee was made a director of the said company. In January, 1986, as a consequence of a resolution passed by the board of directors of the said company, the said flat and two garages were transferred to the assessee for a consideration of Rs. 2,30,000. The said flat and the garages belonged to one co-operative society called the Las Palmas Co-operative Housing Society Ltd., in which the company became a member, acquired ownership rights and those ownership rights were transferred to the assessee for the abovesaid consideration. It was pointed out in the resolution passed by the board of directors of the said company that the outgoings paid and the expenses incurred by the company in respect of the said flat and garages were almost double the amount of the rent received with permitted increases from the occupants, the assessee, and that thereby the company was losing and the property had become a negative property. It was also pointed out that under the Bombay Rents, Hotels and Lodging House Rates Control Act, 1947, which governs this flat and the garages, it was not possible to increase the rent. A statement was prepared showing the aggregate outgoings and the receipts to show that the company was not able to make any income out of this property. The resolution also pointed out that a firm of architects was requested to value this property and the said architects placed a valuation of Rs. 1,25,000 on this property having due regard to the provisions of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, and the protection provided by that Act to the tenants, the assessee herein, and the difficulties involved in recovering the possession from the tenants. It was then decided that the company should transfer the shares it held in the said society to the assessee for a total sum of Rs. 2,30,000 to be paid in three instalments.
22. The assessment for income-tax purposes was completed by the Income-tax Officer accepting whatever was disclosed by the assessee. Subsequently, the Commissioner of Income-tax (acting perhaps under Section 263 of the Income-tax Act) came to know that this particular property was valued in connection with the gift-tax matter at Rs. 47.81 lakhs. The Commissioner of Income-tax felt that when a property worth Rs. 47.81 lakhs was sold for Rs. 2,30,000, there was a large chunk of benefit conferred by the company on the assessee, the director, and that benefit should have been taxed as income under the provisions of Section 2(24)(iv) of the Income-tax Act, 1961. He, therefore, gave a notice under Section 263 of the Income-tax Act on January 5, 1989, to the assessee requiring the assessee to show cause by January 27,1989, as to why the difference between the fair market value, i.e., Rs. 47.81 lakhs, and the apparent consideration paid, i.e., Rs. 2.30 lakhs, be not brought to tax as a benefit within the meaning of Section 2(24)(iv) of the Income-tax Act. In reply thereto, the assessee after tracing the entire history as to how his father became a tenant of this property and how after his demise, he became the tenant and how as a consequence of the resolution passed on January 27, 1986, the assessee purchased the rights in the said property, pointed out that the provisions of Section 2(24)(iv) of the Income-tax Act were inapplicable to the facts of this case and that the Income-tax Officer rightly completed the assessment without resorting to this provision. The attention of the Commissioner of Income-tax was drawn to the valuation made by the valuer, wherein even though he arrived at the value of Rs. 19,000 and yet fixed the value at Rs. 1,25,000 and in spite of that the company had sold it for Rs. 2,30,000, which was more than fair and no advantage of any kind was conferred by the company on the assessee. It was also pointed out that the fair market value referred to by the Commissioner of Income-tax in his order was without any basis or evidence and was only a proposal made for a different purpose, to rebut which valuation the assessee had no opportunity. It was also pointed out that under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (hereinafter referred to as "the Bombay Rent Control Act"), governing the said property, it was in the best interest of the company to dispose of this property as it was giving negative income. It was also pointed out that under the provisions of Section 2(24)(iv) a benefit must accrue to the assessee as a director to the detriment of the said company and that since no detriment was suffered by the company, no benefit can be said to have been acquired by the assessee. Compared to the cost of acquisition of these flats by the company at Rs. 1,02,500, the sale price of Rs. 2,30,000 was more than reasonable and even on this account also there was no benefit obtained by the assessee from the company. What is more on February 25, 1986, the said company and the assessee filed Form No. 37EE, statutory form, before the Competent Authority so that the authority could exercise its mind to acquire the property. The Competent Authority did not initiate any proceedings under Chapter XX-A of the Income-tax Act, which showed that the Competent Authority was satisfied that the apparent consideration shown in the document was real and, therefore, it could not be said that the apparent consideration was far lower than the fair market value. Had it been so, the Competent Authority would have initiated action. Relying upon a decision of the Delhi High Court in the case of J. Dalmia v. CIT [1982] 138 ITR 653, it was submitted that if at all any benefit or perquisite is to be taxed under Section 2(24)(iv) of the Income-tax Act, that amount of benefit or perquisite could not exceed the amount which the company had paid. Since the company had paid only Rs. 1,10,109, no benefit could be said to have been obtained by the assessee.
23. Rejecting all these contentions without referring to them in detail, the learned Commissioner observed that in the most posh area of Bombay a flat with about 2,500 sq. ft. of area along with two garages in January, 1986, was not available for anything less than Rs. 40 lakhs, that too with vacant possession. Therefore, the apparent consideration shown at Rs. 2,30,000 was obviously understated with a view to confer a benefit upon the assessee, who happened to be a director of the said company. Rejecting the contention of the assessee that the assessee's father as the original occupant had acquired tenancy rights and thereafter on his demise those rights devolved on the assessee by inheritance, the learned Commissioner pointed out that when the property was purchased and was given to the directors for their use on rental basis fixing the rent at a very low amount of Rs. 440 per month, the company was not making any business proposition to earn income. It should, therefore, be presumed that the flats were given to the directors as a facility and the provision of such a facility would not amount to acquisition of tenancy rights in the flats. He sought reinforcement for his view from a decision of the Delhi High Court in the case of J. Dalmia [1982] 138 ITR 653, which was relied upon by the assessee himself. The High Court had observed in this case at page 653, that when property belonging to a company is allowed to be used by a director, it would not be a case of letting. Having thus come to the conclusion that the assessee's father did not acquire any tenancy rights in the flat when it was given to him on rent for his use as a director, the question of the assessee acquiring tenancy rights by inheritance did not arise. He observed that the apparent consideration of Rs. 2,30,000 was not at all acceptable and the value placed upon this property by the valuer by capitalising the rent was also quite improper and unjustified. He distinguished the Delhi High Court decision relied upon by the assessee and eventually held that the transaction entered into by the assessee with the company was not a transaction at arms length and applied the principles laid down by the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148. Though the valuation of this property was available as made by the Departmental Valuer at Rs. 47.81 lakhs, in a gift-tax proceeding, the learned Commissioner felt that it would be reasonable to allow one more opportunity to the assessee to put forward his case before the Assessing Officer in regard to the quantification of the value for the purposes of Section 2(24)(iv) of the Act. With these directions, he set aside the assessment and directed the Assessing Officer to finally decide the issue of quantification.
24. Aggrieved by this order, the assessee preferred an appeal to the Tribunal. The learned Accountant Member, who wrote the leading order accepted almost all the points raised by the assessee before the Commissioner both in writing and orally and came to the conclusion that the transfer of the flat and garages in 1986, when the assessee was on the board of the company of Walchand and Co, P. Ltd., did not result in an income within the meaning given to that expression in Section 2(24)(iv) of the Income-tax Act. He laid stress on the aspects mentioned by the assessee, namely, that when the registered valuer had fixed the value at Rs. 1,25,000, the company had preferred to sell it for Rs. 2,30,000 and that was more than fair having regard to the restrictive provisions of the Bombay Rent Control Act. Secondly, when the assessee filed the requisite Form No. 37EE before the Competent Authority, it did not take any action, which meant that that authority, which was concerned with the acquisition of the property, was satisfied that the apparent consideration was more than fair. When one wing of the Income-tax Department did not consider that the sale was made for a consideration below the market value, another wing of the same Department could not construe it differently. He also held that when tenancy rights were conferred decades ago, to contend now that such an act on the part of the company was taken with a view to provide some benefit to a director, which could be treated as income within the provisions of Section 2(24)(iv) of the Act would be far fetched. He, therefore, held that the Commissioner was in error in holding that the transfer of the flat by Walchand and Co. P. Ltd. to the assessee had resulted in the provision of some income to the assessee.
25. But the learned judicial Member was totally opposed to this view. According to him, the relationship between the assessee and the company was not that of a landlord and tenant but was that of a licensee and licensor. Even though the word "rental" was used in the resolution, under which the flat was given on rent to the assessee's father in 1962, still it must be construed as bringing into existence the relationship of licensor and licensee and not that of a landlord and tenant. He agreed with the learned Commissioner's view that when the purpose of making investments in the flat was not to earn income but to provide a facility to the director, the director does not acquire tenancy rights in that property. When the father of the assessee did not acquire any tenancy rights in the flat, the assessee acquiring tenancy rights by inheritance or transmission did not arise. He also sought to place reliance upon the observations of the Delhi High Court in the case of J. Dalmia [1982] 138 ITR 653. He also observed that the words "rent" and "let out" were loosely used in the minutes dated January 21, 1963, and that the use of the language indicated the intention of the company to provide a facility to the director and the provision of such a facility did not amount to creating tenancy rights. Had there been tenancy rights conferred upon the father of the assessee, there would have been an agreement evidenced by a document or an agreement and the absence of a document would show that no tenancy rights were created. He referred to the distinction between "lease" and "licence" and after setting out the factors that would determine a lease or licence, he held that this was a case of a licence and not of a tenancy. When the directors were the employees of the company, the provision of facility of rental accommodation would not give rise to the creation of tenancy rights. He referred to the provisions of Section 13 of the Bombay Rent Control Act and held that a property of a high market value was sold to the assessee at a much lower price on the ground that the tenancy rights had substantially reduced the market value and since no tenancy was created, the question of reducing the market value substantially on account of the operation of the provisions of the Bombay Rent Control Act did not arise. The company had a statutory right available to it to have the premises vacated but since no attempt was made, it could not be said that the Bombay Rent Control Act had adversely affected the market value. The valuation done by the Valuation Officer on the premise that the assessee had tenancy rights could not be said to be a proper value and, therefore, that should be brushed aside as of no consequence. So too should be the consequence of the Competent Authority not taking any action on the filing of Form No. 37EE. One of the contentions raised was that if at all there was any benefit under Section 2(24)(iv) of the Income-tax Act, that benefit in this case was only a capital receipt and since capital receipts were not contemplated for that purpose, no action should be taken. He rejected this argument by pointing out that the provisions of Section 2(24)(iv) are applicable alike both to revenue and capital receipts. He categorically held that the benefit that arose to the assessee was not at the time of creation of the alleged tenancy as was held by the learned Accountant Member, but only when the flat was sold by the company to the present assessee. He thus justified the action taken by the learned Commissioner in setting aside the assessment and directing the Income-tax Officer to invoke the provisions of Section 2(24)(iv) of the Income-tax Act and to quantify the benefit for addition as income.
26. I have heard the very vehement opposition to the view taken by the Revenue and supported by the learned Judicial Member put forth by Shri B.K. Khare, appearing for the assessee, and the very lucid arguments presented with all his might and persuasive skill for the Department by Shri Keshav Prasad supporting the order of the learned Judicial Member and opposing the view taken by the learned Accountant Member. The blind faith in the definitions as given in the Bombay Rent Control Act, particularly of the words "tenant", "licence" and "landlord" reposed by Shri B. K. Khare was matched by the strong advocacy of the views taken by the learned Commissioner that a facility provided to a director of a company for the immediate benefit of the company was not something equal to the rights of tenancy. That was how the arguments before me proceeded for quite some time. Eventually it appeared to me that the key to the main issue that confronted me in this matter lies in the answer to the question whether the assessee or his father had at any time tenancy rights in the property creating the relationship of a landlord and a tenant between himself or his father and the company or whether he is only a licensee. If the former position is true, then what would be its consequence on the valuation of the property and the consequent application of the provisions of Section 2(24)(iv) of the Income-tax Act ?
27. If there is a relationship of tenant and landlord under the Bombay Rent Control Act, it is almost virtually impossible except at a great cost and time and litigation, for the landlord to recover possession of the property. This statutory protection afforded to the tenants has greatly, if 1 may say so to a large extent, resulted in diminishing the value of properties. A tenanted property in a metropolis has a much less value in the market than a property with vacant possession. Realisation of this principle has led the Legislature to enact Rule 1BB in the Wealth-tax Rules to peg the value of the residential house at a particular value and also the various rules made under the Wealth-tax Act. It was the recognition of this principle that had persuaded the Supreme Court of India to repeatedly lay down the rule that properties governed by the Rent Control Acts should be valued for the purposes of the Direct Tax Acts on the yield method, i.e., capitalisation of the income as against the land and building method, which was the hot favourite of the Valuation Officers appointed under the Wealth-tax Act and the Income-tax Act.
28. Before I go to the definitions of "tenant" and "licence", let me first notice how difficult it is to eject a tenant under the Bombay Rent Control Act. Under the Act a landlord is not entitled to recover possession of any premises so long as the tenant pays or is ready or willing to pay the amount of the standard rent and the permitted increases, if any, and at the same time observes and performs the other conditions of tenancy provided they are consistent with the provisions of the Bombay Rent Control Act (Section 12). A landlord can recover possession of the premises only on the satisfaction of certain conditions imposed by the Act in the following circumstances :
(a) A landlord can become entitled to recover possession if the tenant has committed any act contrary to the provisions of Clause (a) of Section 108 of the Transfer of Property Act, 1882. This clause provides that the tenant must not use or permit another to use the property for a purpose other than that for which it was let or fell or sell the timber, pull down or damage the buildings, etc., etc.
(b) If the tenant has without the landlord's consent in writing erected in the premises any permanent structure.
(c) If the tenant or any person residing with the tenant has been guilty of conduct which is a nuisance or annoyance to the adjoining or neighbouring occupiers or has been convicted of using the premises or allowing the premises to be used for immoral or illegal purposes or the. tenant has in respect of the premises been convicted of an offence of contravention of any provision of Clause (a) of Sub-section (1) of Section 394 of the Bombay Municipal Corporation Act ; or
(d) If the tenant has given notice to quit the premises and in consequence of that notice the landlord has contracted to sell or let the premises or has taken any other steps by which the landlord would be seriously prejudiced if he could not obtain possession of the premises; or
(e) If the tenant has unlawfully sublet the whole or part of the premises or given on licence the whole or part of the premises or transferred or assigned his interest in any manner to others.
(f) The landlord will also become entitled to recover possession if the premises were let to the tenant for use as a residence by reason of his being in the service or employment of the landlord and the tenant has ceased to be in such service or employment.
(g) The landlord can also recover possession if the premises are reasonably and bona fide required by the landlord for his occupation or by any person for whose benefit the premises are built ; or
(h) If the landlord is a trustee of a public charitable trust, the premises are required for occupation for the purposes of the trust ; or
(i) A landlord can also recover possession if the premises are reasonably or bona fide required for carrying out repairs or for the purposes of demolishing them for the purposes of erecting a new building on the premises. Similarly, if a demolition is ordered by a local authority, then the landlord becomes entitled to recover possession of the premises. If the premises are only land, then the landlord can recover possession if the land is required for erection of a building.
(j) A landlord will also become entitled to recover possession if the rent charged by the tenant for the premises or any part thereof, which is sublet, is in excess of the standard rent and the permitted increases.
(k) A landlord becomes entitled to recover possession if the premises were not used without reasonable cause for a continuous period of six months.
(l) A landlord may also recover possession if the tenant has built or acquired vacant possession or has been allotted a suitable alternative residence.
29. These are in main the various classes of cases in which the landlord shall be entitled to recover possession of the premises subject to satisfying the court. None of these things is present in this case. It is, therefore, impossible to recover possession back.
30. Before I go to the relationship of tenancy or licensee, I would like to mention here that the learned Judicial Member has opined that since no action was taken by the company for the eviction of the tenant, it could not be assumed that the company was hamstrung or hemmed in by these regulations of the Rent Control Act so as to diminish its value. Unless any one of these circumstances exists, it is not possible for the landlord to go to the court and seek eviction of the tenant and recover possession of the premises. This argument is therefore not available to any one claiming under this argument that there was no diminution in the value of the property.
31. It is now seen that this property was in the continuous occupation ever since it was purchased by the company either for the assessee's father or for the assessee. There was no break in the occupation except that the assessee occupied the property as a tenant paying the rent till he became a director of the company. If the assessee is a tenant, directorship was what was imposed upon the assessee without in any manner affecting the rights of tenancy. It is something like a tenant acquiring the benefit of a lottery, which has nothing to do with the tenancy. The tenancy remains intact irrespective of the fortunes of the occupant. Nothing therefore should be read more into a directorship as an event having an influence on the valuation of the property. The valuation of the property has therefore to be seen in the light of the provisions of the Rent Control Act independent of the directorship provided the relationship is that of landlord and tenant.
32. I have already mentioned above how the learned Commissioner of Income-tax and my learned colleague, the Judicial Member, had viewed this aspect of the relationship. Now let me go to the definition of the words "tenant", "licence" and also "landlord" as given in the Bombay Rent Control Act. Section 5(3) of the Bombay Rent Control Act defines "landlord" as under :
"5(3). 'landlord' means any person who is for the time being, receiving, or entitled to receive, rent in respect of any premises whether on his own account or on account, or on behalf, or for the benefit of any other person or as a trustee, guardian; or receiver for any other person or who would so receive the rent or be entitled to receive the rent if the premises were let to a tenant, and includes any person not being a tenant who from time to time derives title under a landlord and further includes in respect of his sub-tenant, a tenant who has sublet any premises : and also includes in respect of a licensee deemed to be a tenant by Section 15A, the licensor who has given such licence."
33. Sub-clause (4) defines "legal representative" as under :
"5(4). 'legal representative' means a legal representative as defined in the Code of Civil Procedure, 1908, and includes also, in the case of joint family property, the joint family of which the deceased person was a member ;"
34. Sub-clause (4)(a) inserted by the amending Act of 1973 with effect from April 1, 1973, defines "licensee" as under :
"'licensee' in respect of any premises or any part thereof, means the person who is in occupation of the premises or such part, as the case may be, under a subsisting agreement for licence given for a licence fee or charge ; and includes any person in such occupation of any premises or part thereof in a building vesting in or leased to a co-operative housing society registered or deemed to be registered under the Maharashtra Cooperative Societies Act, 1960 ; but does not include a paying guest, a member of a family residing together, a person in the service or employment of the licensor, or a person conducting a running business belonging to the licensor, or a person having any accommodation for rendering or carrying on medical or para-medical services or activities in or near a nursing home, hospital or sanatorium, or a person having any accommodation in a hotel, lodging house, hostel, guest house, club, nursing home, hospital, sanatorium, dharamshala, home for widows, orphans or like premises, marriage or public hall or like premises or in a place of amusement or entertainment or like institution, or in any premises belonging to or held by an employee or his spouse who on account of the exigencies of service or provision of a residence attached to his or her post or office is temporarily not occupying the premises, provided that he or she charges licence fee or charge for such premises of the employee or spouse not exceeding the standard rent and permitted increases for such premises, and any additional sum for services supplied with such premises, or a person having accommodation in any premises or part thereof for conducting a canteen, creche, dispensary or other services as amenities by any undertaking or institution ; and the expressions 'licence', 'licensor' and 'premises given on licence' shall be construed accordingly."
35. Sub-clause (11) defines a tenant as under :
"'tenant' means any person by whom or on whose account rent is payable for any premises and includes-
(a) such sub-tenants and other persons as have derived title under a tenant before the 1st day of February, 1973 ;
(aa) any person to whom interest in premises has been assigned or transferred as permitted, or deemed to be permitted, under Section 15;
(b) any person, remaining, after the determination of the lease, in possession, with or without the assent of the landlord, of the premises leased to such person or his predecessor who has derived title before the 1st day of February, 1973 ;
(c) (i) in relation to any premises let for residence, when the tenant dies, whether the death has occurred before or after the commencement of the Bombay Rents, Hotel and Lodging House Rates Control (Amendment) Act, 1978, any member of the tenant's family residing with the tenant at the time of his death, or, in the absence of such member, any heir of the deceased tenant, as may be decided in default of agreement by the court ;
(ii) in relation to any premises let for the purposes of education, business, trade or storage, when the tenant dies, whether the death has occurred before or after the commencement of the said Act, any member of the tenant's family using the premises for the purposes of education or carrying on the business, trade or storage in the premises, with the tenant at the time of his death, or, in the absence of such member, any heir of the deceased tenant, as may be decided in default of agreement by the court ;
Explanation.--The provisions of the clause for transmission of tenancy shall not be restricted to the death of the original tenant, but shall apply, and shall be deemed always to have applied, even on the death of any subsequent tenant, who becomes tenant under these provisions on the death of the last preceding tenant."
36. A look at the definition of the word "tenant" shows that a person is a tenant if he or on his behalf any rent is payable for any premises and includes any member of the tenant's family residing with the tenant in relation to any premises let for residence when the tenant happened to die. In the absence of such member residing with the tenant at the time of his death, any heir of the deceased tenant will also become a tenant. Now, a landlord is a person, who is receiving or entitled to receive the rent in respect of any premises, whether on his own account or on account or on behalf, or for the benefit of any other person. Under these definitions of "tenant", "landlord" and "legal representative" as given above, I think it is extremely difficult even by overdrawing of what little legal acumen I possess, to say that the assessee's father was not a tenant and the company was not the landlord under the Bombay Rent Control Act, The licensee is a person who is in the occupation of the premises under a subsisting agreement for licence given for a licence fee or charge but does not include a person in the service or employment of the licensor. The resolution passed by the board of directors on January 21, 1963, when it purchased flats to let it out to the father of the assessee clearly shows that the flat was purchased for the use of the director on rental basis. The resolution dated January 21, 1963, provided :
"The board was informed that the company had purchased three flats for the use of the directors of the company. These flats were given to three directors, viz., Shri Bharat G. Doshi, Shri Bahubali Gulabchand and Shri Ratanchand Hirachand on rental basis."
37. Then it went on to say :
"The rents fixed for each flat if recovered from the monthly remuneration of directors would facilitate from the accounts point of view. It would also be beneficial to the directors because the reserves of the company exceeded the share capital and if any debits were shown against the name of any of these directors occupying these flats, it was to be treated as deemed dividend in their hands. Hence, it is advisable in the interest of the company as well as the owner of the flats to collect the agreed rents from their monthly remuneration."
38. This shows the clear understanding between the company and the father of the assessee that the father of the assessee was only a tenant of the company and he was put in possession of the property for use by him. Even though this is a facility provided, that facility is the result of the legal relationship that was brought in by the implementation of the resolution and the relationship that was brought in, according to me, is that of a landlord and a tenant, within the meaning of the Bombay Rent Control Act. The facility cannot, therefore, be seen divorced from the legal relationship. The legal relationship as brought in by the Bombay Rent Control Act is that of a tenant and a landlord. The only condition imposed for a person to become a landlord is to receive rent in respect of any premises from a tenant and the tenant is a person by whom the rent is payable. Both these conditions are satisfied in this case and, therefore, there cannot be anything other than the relationship of a tenant and a landlord. The resolution clearly postulated payment of rent and it never spoke of licence. Therefore, the father of the assessee cannot be said to be a licensee. There is also no possibility to presume that these words were loosely used words as if loosely used words could be given a meaning different from the meaning they are supposed to convey. Even otherwise the conduct of the parties during the lifetime of the assessee's father and the company clearly showed the relationship of landlord and tenant and that conduct establishes a relationship contrary to the one that was supposed by the learned Judicial Member, namely, licensor and licensee.
39. Even otherwise, the expression "leases" has been defined in Section 105 of the Transfer of Property Act as follows :
"A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions, to the transferor by the transferee, who accepts the transfer on such terms.
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent."
40. The relationship of lessor and lessee is one of contract. A licence is defined in Section 52 of the Indian Easements Act (5 of 1882) as follows:
"A licence is defined in Section 52 of the Indian Easements Act 5 of 1882, as a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property. The distinction between a licence and a lease is marked by the last clause of the definition, for a licence does not create any estate or interest in the property to which it relates.
There is no simple litmus test for distinguishing a lease from a licence. The character of the transaction turns on the operative intent of the parties. If interest in immovable property, entitling the transferee to its enjoyment, is created, it is a lease ; if permission to use the land without the right to exclusive possession is alone granted, the transaction is a licence.
It is the creation of an interest in immovable property or a right to possess it that distinguishes a lease from a licence."
41. The same definition is incorporated in the Bombay Rent Control Act also. Therefore, when an interest in the property is created by enjoyment of the property for a consideration, namely, the rent, it is a lease and not a licence.
42. Assuming for the sake of argument that the relationship between the assessee's father and the company was that of a licensor and licensee, the provisions of Section 15A of the Bombay Rent Control Act clearly state that:
"15A. Certain licensees in occupation on February 1, 1973, to become tenants.--(1) Notwithstanding anything contained elsewhere in this Act or anything contrary in any other law for the time being in force, or in any contract, where any person is on the 1st day of February, 1973, in occupation of any premises, or any part thereof, which is not less than a room, as a licensee, he shall on that date be deemed to have become, for the purposes of this Act, the tenant of the landlord, in respect of the premises or part thereof, in his occupation.
(2) The provisions of Sub-section (1) shall not affect in any manner the operation of Sub-section (1) of Section 15 after the date aforesaid."
43. This shows that as and from the 1st day of February, 1973, the licensee shall become a tenant. In other words as and from February 1, 1973, it appears as if licence is abolished and only tenancy remains. It is an undisputed fact that up to February, 1973, the assessee's father was in the occupation of the premises continuously without any break. If he is occupying the premises as a licensee as was supposed by the learned Judicial Member--incidentally this was not the case of the Revenue-then he becomes a tenant as and from that date, namely, February 1, 1973, till the date of his death in 1981. Shri Ratanchand Hirachand, the father of the assessee, thus became the tenant of the company by virtue of the provisions of section 15A of the Bombay Rent Control Act.
44. Now, by operation of law in terms of the definition of the word "tenant" as given in Clause (11)(c), which came into force from 1978, the assessee who was continuously residing with his father and also as his legal representative, became the tenant. That the assessee was residing continuously with his father in the same premises and that he is the legal representative were not issues in dispute at all. They were admitted facts. Therefore, by operation of law, the assessee became the tenant under the Bombay Rent Control Act and it is not possible to say that he is only a licensee.
45. As the assessee is shown to be a tenant all the consequences in law should follow. The first consequence is the near impossibility of evicting him and the recovery of possession of the premises by the landlord. This acted as a great limiting factor in the valuation of the property. The resolution passed by the board of directors, under which this property was offered to the assessee for sale, shows that a statement was prepared showing that the outgoings of this property were much more than the rent received by the company and, therefore, this property had become a liability and the company wanted to get rid of this liability by sale by realising as much money as possible therefrom. It is now a settled law that a tenanted property governed by the Rent Control Act is to be valued only on yield method and not on land and building method. The valuer who was appointed to value this property had therefore correctly appreciated the legal position and the valuation was done on the basis of rent method and arrived at the value of Rs. 19,000, although he suggested a sale value of Rs. 1,25,000. In spite of this, the company offered to the assessee to sell this property for Rs. 2,30,000 which was nearly double the price that the valuer had suggested. Therefore, there is no question of this property being undersold or the valuation report being vitiated by a wrong understanding of the legal position as was supposed by the learned Judicial Member or the fair market value of the property being higher than the apparent consideration for the simple reason that for properties governed by the Rent Control Acts, the fair market value is always the value arrived at by capitalising the rent and not by any other method. The learned Judicial Member is, therefore, in my opinion, not correct in discarding the valuation report as of no consequence. Nor am I persuaded to accept the observations of the learned Judicial Member that the minutes of the board of directors did not suggest that there was any intention on the part of the company to create tenancy rights in the directors. The learned Judicial Member referred to the absence of a bilateral document as proof of non-existence of a tenancy. In my opinion, the resolution passed by the board of directors served as an offer and occupation by the late Ratanchand Hirachand of the premises on payment of rent served as acceptance of the offer, thus a binding contract as effective as a bilateral document came into existence. The absence of a bilateral document is not therefore a valid reason nor can it be said to be against the creation of tenancy rights. The manner in which the company acquired the flats and provided the facility to the directors does not determine the legal relationship. The legal relationship of a landlord and a tenant is created by the operation of the Bombay Rent Control Act, 1947.
46. In view of what I have said earlier that by operation of law, namely, section 15A of the Bombay Rent Control Act, even a licence gets converted into a tenancy with effect from February 1, 1973, I do not think it is necessary for me to discuss and comment upon the tests laid down to differentiate a lease from a licence.
47. The learned Judicial Member referred to Section 13 of the Bombay Rent Control Act only to show that the landlord could recover possession of the premises subject to the satisfaction of the conditions laid down therein, which spoke of the tenant being in the service or employment of the landlord. It is no doubt true, as I mentioned in the beginning of my opinion, that this is only an enabling provision providing for a right in the landlord to recover possession but recovery of possession is not so easy or free from difficulties and problems and hazards of litigation. This provision should not therefore be construed as bringing into existence the relationship of licensor and licensee or to take the view that even the relationship of landlord and tenant had come to an end. Assuming for the sake of argument that the employment of the father of the assessee had ceased on his death in 1981, still between 1981 and 1984 till the assessee became a director of the company, he continued to be a tenant by operation of law within the meaning of Section 5(11) of the Bombay Rent Control Act and thereafter he again became an employee after he became a director. At the relevant time he continued to be the employee. Therefore, 'the benefit of Section 13 may not be easily available to the landlord to recover the possession from the assessee. The learned Judicial Member did not refer to section 15A and the effect thereof, which, in my opinion, is very crucial and in a way provides the key to the entire controversy in this case.
48. Reliance was placed upon the decision of the Delhi High Court in the case of J. Dalmia [1982] 138 ITR 653 for the view that when property belonging to the company is allowed to be used by a director, then it is not a case of letting out and, therefore, there is no tenancy. In this case, the assessee was a director of a company, which provided him a portion of the house taken on rent by it for the purpose of his residence. The rent which was being paid for the whole building was Rs. 4,200 per annum. The assessee was to be assessed in respect of the value of the premises given to him for the purpose of Rs. 4,200 as the value. The Income-tax Officer valued the same at Rs. 12,000, which was confirmed both by the first and the second appellate authorities. On a reference to the High Court, the High Court referred to the provisions of Section 2(24)(iv) of the Income-tax Act and held that the value of a perquisite, if not already known, can be evaluated by some known method but if the value is already fixed, the Income-tax Department cannot revalue the same at a higher figure merely because it is possible to do so. What the Delhi High Court held was that what a company spends by way of providing a perquisite to the director should only be the value of the perquisite in the hands of the director and it should not be higher than what the company has spent. Applying the rule laid down by the Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 and Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435, the Delhi High Court held that no person can let out the property at a rate higher than the standard rent and, therefore, the standard rent fixed alone should guide the value of the perquisite in the hands of the director. While explaining the position in law as to how the rent should be fixed in the case of a company giving its own premises for use to an employee or director, the High Court, relying upon a decision of the Allahabad High Court in the case of Lakshmipat Singhania v. CIT [1974] 93 ITR 162, held that when property belonging to a company is allowed to be used by a director, then it is not a case of letting out in the sense of hiring it out for rent. So the value of the rent-free accommodation has to be determined keeping in view the law laid down by the Supreme Court in this behalf, namely, the standard rent will have to be determined and adopted. The standard rent has to be fixed because of the provisions of the Rent Control Acts. The observation that when property belonging to a company is allowed to be used by a director, then it is not a case of letting out has to be understood in the context of the property owned by the company being allowed by the company to be used by the directors without charging any rent. This observation does not mean or even remotely suggest that the relationship between the landlord, i.e., the company, and the director using the property free of rent is not that of landlord and tenant. In the case before the Allahabad High Court, the director concerned was occupying rent-free accommodation and the value of the rent was estimated at Rs. 19,440 and it was in that context, justifying the estimate of rent at Rs. 19,440, that this observation was made by the Delhi High Court. Therefore, nothing will turn upon this observation to suggest that the relationship of landlord and tenant is not brought into existence when property belonging to a company is allowed to be used by a director. This observation has to be seen again not in isolation but in the context of the provisions of Section 23 of the Income-tax Act as it stood at the relevant time, which provided that the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. It was in this context that the Delhi High Court made the observation that in a case where the director uses the property belonging to the company, there is no letting out and, therefore, the standard rent has to be determined for the purposes of this section. In other words, the provisions of Section 23 are applicable to the case of a company which allows its property to be used by a director without charging any rent. I do not think that this decision is of any help to the issue before me. I am also of the opinion that the learned Commissioner of Income-tax also has fallen, if I may say so, into this error.
49. To repeat, the entire evidence on record clearly showed that the relationship of landlord and tenant has come into existence between the company and the assessee and all the consequences of the Bombay Rent Control Act have to follow.
50. Another important aspect, which, in my opinion, is relevant is the submission of Form No. 37EE. Chapter XX-A provides for acquisition of immovable properties in certain cases of transfer to counteract evasion of tax. These provisions are more onerous and are concerned with the collection of tax as much as the provisions of Section 2(24)(iv) of the Income-tax Act. Both of them operate in the same field, namely, collection of tax and prevention of evasion. Under Section 269AB of the Income-tax Act, every transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act and every transaction whereby a person acquires any rights in or with respect to any building or part of a building, shall be reduced to writing in the form of a statement and such statement shall be in the prescribed form setting forth such particulars as are prescribed and verified in the prescribed manner and registered with the Competent Authority in such manner and within such time as may be prescribed, by each of the parties to such transaction. Form No. 37EE was the form prescribed under Section 269AB. This is therefore a statutory form. The purpose of the submission of the statement to the Competent Authority is to give notice to the Competent Authority about the transaction and then to enable him to make up his mind as to whether the transaction of the transfer of the property is genuine, bona fide and whether the apparent consideration stated therein is real and genuine or understated. This has therefore certain legal consequences to follow. When no action was taken on the submission of this form, which was submitted long before the transfer took place, it has to be presumed that the Competent Authority was satisfied with the amount shown as the apparent consideration. It cannot, therefore, be brushed aside or ignored as of no consequence. The Competent Authority must have been satisfied with the correctness of the apparent consideration stated therein because the property was tenanted and for a tenanted property whatever may be the location, the valuation should be on yield method and the value shown could not be higher than the apparent consideration and that the fair market value has no relevance. I am, therefore, inclined to accept the view put forth on behalf of the assessee and accepted by the learned Accountant Member that the acceptance of the statement by the Competent Authority shows that the apparent consideration stated in the document was not unreal. The learned Judicial Member, in my opinion, does not seem to be right in brushing it aside.
51. The learned Commissioner of Income-tax pointed out that in a gift-tax proceeding the value of this property was estimated at Rs. 47.81 lakhs. I do not know the circumstances under which it was valued at such a high figure. That value had not become final. That is purely imaginary and notional. There was a writ filed by the company against gift-tax proceedings. They are still pending before the High Court because the High Court granted a stay to complete the assessment but not to serve any demand on the assessee. Therefore, the Commissioner of Income-tax should not have placed reliance upon this imaginary value, which was in dispute, as real for the purpose of comparison so as to invoke the provisions of Section 2(24)(iv) of the Income-tax Act. He should have seen that the property in question had been bringing in negative income and the company wanted to get rid of this liability by bringing into existence a positive income by sale of the property.
52. Another interesting feature of this case, as came out during the course of hearing, was that a second valuer was appointed and he valued the property perhaps by applying Rule 1BB of the Wealth-tax Rules at Rs. 30 lakhs by adopting a queer method. He ignored the tenancy. He assumed that the property was unoccupied and unencumbered and the rent would be 10 per cent, of the estimated market value as on March 31, 1984. I am unable to appreciate how these assumptions are valid and have legal sanction behind them. They are purely conjectural and thrive only in the realm of imagination.
53. For all these reasons, I am of the opinion, as expressed earlier, that the assessee was a tenant at the relevant time and, therefore, the property has to be valued only on income method and so valued the apparent consideration is more than reasonable and the sale of the property at that value did not confer any benefit or perquisite on the director by the company so as to invoke the provisions of Section 2(24)(iv) of the Income-tax Act.
54. I am, therefore, of the opinion that the Commissioner of Income-tax was not justified in setting aside the assessment on the ground that the assessment made by the Income-tax Officer was erroneous and caused prejudice to the interests of the Revenue on the belief that the value of this property was Rs. 40 lakhs as against which it was sold for Rs. 2,30,000 and the difference amounted to conferring of a benefit on the assessee by the company.
55. The matter will now go before the regular Bench for the disposal of the appeal in accordance with the opinion of the majority.