Income Tax Appellate Tribunal - Delhi
Bindals Developers Pvt. Ltd. vs Income-Tax Officer on 9 March, 2007
ORDER
Vimal Gandhi, President
1. This appeal by the assessee for the Assessment Year 2001-02 is directed against order of Commissioner of Income-tax (Appeals) upholding assessment of Rs. 36,00,000/- as rental income assessable in the hands of the assessee under the head "house property".
2. The facts of the case are that one Professor Harnam Singh is the owner of the property located at 55-A, Friends Colony (East), New Delhi. It was let out to Modi Rubber Ltd. from time to time. Last written lease having expired somewhere in 1994 the company was holding over. It is claimed that Prof. Harnam Singh was not able to get the premises vacated from M/s. Modi Rubber, therefore he executed a lease on 17.11.1998 in favour of the assessee company (appellant) for a period of 9 yrs. and 11 months, the lease to commence from the date the assessee appellant was able to get possession of the property. Clause 6 of above deed provided that appellant was entitled to sublet the premises to any third party on terms and conditions to be settled by the appellant.
3. It is stated that appellant negotiated with M/s. Modi Rubber Ltd. to vacate the property and after great deal of negotiations M/s. Modi Rubber Ltd. agreed to pay enhanced rent of Rs. 25,000/- per month with retrospective effect from 16.6.1999. Subsequently, lease rent from first June 2001 was enhanced from 25,000/- P.M. to Rs. 1,25,000/- P.M. with retrospective effect from 16th June, 1999. It is stated by the assessee that difference of rent of Rs. 1,00,000/- P.M. (Rs. 1,25,000 minus Rs. 25,000/-) for the period 16th June 1999 to 31st March, 2001 was offered to tax in Assessment Year 2002-2003 on due basis.
4. The second floor of the aforesaid premises was let out by the appellant to M/s.Gujarat Guardian Ltd. on rent of Rs. 1,20,000/- P.M. for 3 years with effect from 1st April 1999. The appellant declared rental income of Rs. 17,40,000/- as per details given below for assessment for the assessment year under consideration, under the head "other sources":
Therefore, the appellant declared the rental income amounting to Rs. 17,40,000/- under the head " Income From Other Sources" as per details given below:
1) Rent received from Modi Rubber Ltd. = Rs. 3,00,000.00
[Rs. 25,000 x 12 = Rs. 3,00,000]
2) Rent received from Gujarat Guardian Ltd. = Rs. 14,40,000.00
[Rs. 1,20,000 x 12 = Rs.l4,40,000/-]
TOTAL = Rs. 17,40,000.00
The arrears of rent on account of enhancement with retrospectives effect were offered for tax in assessment year 2002-03.
5. The appellant claimed that rent received as a lessee was liable to be assessed under the head "other sources" as the appellant was not the owner of the premises.
6. The Assessing Officer noted that property in question was in occupation of Shri V.K. Modi, Director of M/s. Modi Rubber Ltd. who was using ground floor and first floor of the property as his residence. Second floor was let out to M/s. Gujarat Guardian Ltd. For all practical purposes entire property was in occupation of Shri V.K. Modi and used by him for his residence. Assessing Officer also observed that total area in occupation of M/s. Gujarat Guardian Ltd. was less than 1/3 of area in occupation of M/s. Modi Rubber Ltd. The Assessing Officer also found that assessee had incurred more than Rs. 16 Lakhs as expenditure on civil and other works. But no detail of expenses incurred was furnished. The Assessing Officer assessed the rental income under the head "house property income by applying Section 27 of the Income-tax Act and by taking annual letting value of property at Rs. 36 Lakhs. However no reasons are available in the assessment order why income has been taken under the head "house property" when assessee disclosed rent as income under the head "other sources".
7. The Assessing Officer also disallowed expenditure claimed by the assessee against the rental income. He allowed expenditure as are permissible under the head "house property".
8. The assessee challenged above assessment in appeal before the Commissioner of Income-tax (Appeals) and reiterated its submission that rental income has to be assessed under the head 'other sources', as assessee appellant was merely a lessee. As per registered lease deed dated 17.11.98 Prof. Harnam Singh was the owner of the property and therefore there was no question of taking assessee as beneficial owner under Section 22 of I.T. Act or a deemed owner under Section 27(iiib) of IT Act. It was contended that assessee appellant had rightly returned rental income under the head "other sources" and question of enhancing that income on notional basis did not arise. As a corollary it was contended that expenditure claimed were wrongly disallowed.
9. The ld. CIT(A) held that a beneficial owner could be treated as owner of the property for the purposes of Section 22 of the Income-tax Act. For this view, the ld. CIT (Appeals) placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Podar Cement Pvt. Ltd. 226 ITR 625 (SC) and R.B. Jodhamal Kuthiala v. CIT 82 ITR 570 (SC). On a close perusal of lease deed executed by Prof. Harnam Singh, the ld. C.I.T. (Appeals) concluded that assessee was a "beneficial owner" of the property and was entitled to enjoy the rental income from the property in his own right. She referred to and relied upon Clauses 3, 6, 7, 8, 9 & 10 of the lease deed, which permitted the assessee to use the property, to make addition or alterations and give it on lease or sub-let. She also held that period of lease is not restricted to 9 yrs. 11 months as that period was provided only as a "first instance" clearly implying that it could be extended for an unlimited period. The ld. CIT (Appeals) also took into account Clause 13 of the deed providing for payment of refundable security of Rs. 35 Lakhs to the lessor. She accordingly held that annual value of the property was liable to be assessed under the head 'house property" under Section 22 of the Income-tax Act.
10. Alternatively the ld. Commissioner of Income-tax (Appeals) examined question of assessment of rental income under the head "house property' under Section 27(iiib) of I.T. Act. On conjective reading of provision of Section 27(iiib) read with Clause (f) of Section 269UA of the Act, he held that assessee was deemed owner of the properties as stipulated period of lease of 9 yrs. 11 months was fixed, "at the first instance", which implied that there was no restriction to extend this period for an unlimited term. The period of lease, therefore, was not less than 12 years. The matter was thus treated as covered under explanation to Sub-clause (i) of Clause (f) of Section 269 UA of the Act. Thus assessment of rental income under the head "house property" was held to be justified in terms of Section 27(iiib) of the Act.
10.1 The ld. Commissioner of Income-tax (Appeals) also considered question of fixation of annual letting value of property at Rs. 36 Lakhs. For the reasons given by her in para 4.6 of the order she held that annual letting value was correctly and properly fixed at Rs. 36 Lakhs.
10.2 The ld. Commissioner of Income-tax (Appeals) also upheld disallowance of expenditure incurred on repair etc. amounting to Rs. 16,02179/-. This way, the entire appeal of the appellant was dismissed.
11. The assessee is aggrieved and has brought the issue in appeal before the Appellate Tribunal. Shri Ajay Vohra, Id. Counsel for the assessee vehemently contended that there is no sale deed in favour of the assessee and therefore assessee cannot be termed "owner of the house property". He was merely a lessee. An owner must have all the rights of ownership. A beneficial owner is one who has dominion over the property and can exercise all rights of ownership with small defect in its title; say want of registered deed. The owner apart from letting out the property should be in a position to sell or transfer the property in any manner he likes. No such right was available to the assessee appellant. Shri Vohra argued that decision of Hon'ble Supreme Court in the case of CIT v. Podar Cement Pvt. Ltd. and Ors. 226 ITR 625, Mysore Minerals Ltd. v. CIT 239 ITR 775 and R.B. Jodhamal Kuthiala v. CIT 82 ITR 570 were distinguishable. There the assessee had all the rights of an owner without transfer of title and therefore assessee was held to be owner of the property. Here Prof. Harnam Singh, as lessor, was the owner and assessee had a right to exploit the property for a period of 9 years and few months on terms and conditions stipulated in the lease deed. He cannot be treated as owner or beneficial owner of the property. Shri Vohra also contended that assessee was wrongly held to be deemed owner of the property under Section 27(iiib) of Income-tax Act. The period of lease here was for 9 years and 11 months and cannot be imagined to be for 12 years as provided under Clause (f) of Section 269UA. There was no question of estimating annual letting value as rental income was liable to be assessed under the head "other sources". Shri Vohra also pressed his claim for allowability of expenditure of Rs. 16,02,179/- under the head "other sources" as expenses were incurred wholly for earning and making income returned by the assessee under the head "other sources".
12. Shri Dehiya, ld. Departmental Representative read out different clauses of lease deed to emphasize that assessee was beneficial owner of the property and was rightly assessed in terms of Section 22 of the Income-tax Act. He argued that assessee was exercising all rights over the property which only an owner would exercise. Shri Dehiya, however did not support the claim that assessee could be deemed to be the owner of the property under Section 27(iiib) of the Income-tax Act as period of lease was less than 12 years. Shri Dehiya also supported impugned order on disallowance of expenses claimed in the return.
13. We have given careful thought to the rival submission of the parties and examined them in the light of material available on record. We shall first examine question of applicability of Section 27(iiib) of the Income-tax Act where a person can be "deemed to be the owner of the house property". Clause (iiib) covers acquisition of any right in or with respect to any building by virtue of any such transaction as is referred to in Clause (f) of Section 269UA of the Act. Now turning to aforesaid Clause (f), it is clear that "transfer in above clause would include a lease for a term of not less than 12 years".
14. In the present case it is admitted that lease deed dated 17.11.98 is for a period of 9 years and 11 months. It is no doubt stated that said period is fixed "at the first instance" but then there is no material to show that it was extended or could be extended so that total period of lease could be held to be "not less than 12 years". The gap that exits between 9 years and 11 months and 12 years has been filled up by the Revenue authorities on imagination only. There is no material to support or hold that period of lease fixed between assessee and Prof. Harnam Singh was more than 9 years and 11 months. Thus without material and on imagination, the case cannot be taken to be covered under Clause (f) of Section 269UA of Income-tax Act. Having regard to clear facts on record, even ld. Departmental Representative did not support the view taken by the ld. Commissioner of Income-tax (Appeals). The assessee could not be treated to be deemed owner of the house property. The arguments of Shri Vohra on this aspect of the case are held to be well taken and are accepted.
15. The other pertinent question is whether assessee could be treated to be the "beneficial owner of the house property" under Section 22 of the Income tax Act. Before proceeding to consider terms and conditions of the deed , it is necessary to have in mind principle laid down before their Lordships of Supreme Court in two recent decisions as follows:
1. CIT v. Podar Cement Pvt. Ltd. and Ors. 226 ITR 625
2. Mysore Minerals Ltd. v. CIT 239 ITR 775 15.1 In the case of Podar Cement Pvt. Ltd. (supra) the respondent, assessee claimed to be fulfledged owner of flat at Nepean Sea Road, Mumbai. Two of the flats were directly purchased by the assessee from builders and other two were purchased by sister concern and subsequently by the assessee from the sister concern. The possession of the flats was taken after payment of full consideration in August 1973. All the flats were let out by the assessee to various persons and rental income was included in the return under the head "other sources" as assessee had claimed that it was not legal owner of the property. It was claimed that without legal ownership i.e. without transfer of property in the name of the assessee, rental income could not be assessed under the head "houase property". The Assessing Officer however assessed only letting value of flats on the basis of rent receivable and rejected the claim of expenditure made by the assessee under Section 56 of the Income-tax Act. The Income-tax Appellate Tribunal however accepted the claim of the assessee. This led to the reference of the following question to the Hon'ble High Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income derived by the assessee-company from flats from the building known as Silver Arch' of Bombay is taxable under the head 'Income from other soruces' under Section 56 of the Income-tax Act and not income from 'house property' under Section 22 of the Income-tax Act, 1961.
16. Ultimately the matter was taken to the Supreme Court on the question whether assessee should be taken to be the owner of the house property. Reliance was placed before the Hon'ble Supreme Court on several decisions including the case of Jodhamal Kuthiala v. CIT, 82 ITR 570 Their Lordships of Supreme Court after taking into account, scheme of Income-tax Act, particularly provisions relating to assessment of house property, income assessable under the head "other sources" and large number of decisions of High Courts held as under:
We, therefore, need not go into the questions involving trusts where a person holds the property and receives the income in trust for others who are the legal beneficiaries. The crux of the matter is as to whether, as already stated above, the actual possession in a given particular case gives a right to retain such a possession until the contrary is proved and so long as that is not done, to that extent a possessor is presumed to be the owner.
Incidentally, although the Supreme Court in the case of Jodha Mal's case (supra) merely mentioned that Stroud's Judicial Dictionary had given several definitions and illustrations of ownership, it refrained from going into the details on account of the practical approach that was made in that case, to which we shall hereinafter refer and dilate upon. We think it worthwhile, the matter having been canvassed at length at the bar, to give a full illustration of the definitions of "ownership" as Stroud puts it. One such definition is that the "owner" or "proprietor" of a property is the person in whom (with his or her assent) it is for the time being beneficially vested, and who has the occupation, or control, or usufruct, of it, e.g., a lessee is, during the term, the owner of the property demised. Yet another definition that has been given by Stroud is that:
'Owner' applies to every person in possession or receipt either of the whole, or of any part, of the rents or profits of any land or tenement; or in the occupation of such land or tenement, other than as a tenant from year to year or for any less term or as a tenant at will'". (Stroud's Judicial Dictionary, 3rd Edn., Vol. 3 p. 2060).
Thus the juristic principle from the viewpoint of each one is to determine the true connotation of the term "owner" within the meaning of Section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately -a person in receipt of money having actual control over the property with no person havins better right to defeat his claim of possession or a person in legal parlance who mav remain a remainder man, say, at the end of extinction of the period of occupation after, asain say, a thousand years ? The answer to this question in favour of the assessee would not merely be doing palpable injustice but would cause absurd inconvenience and would make the legislature to be dubbed as being a party to a nonsensical legislation. One cannot reasonably and logically visualise as to when a person in actual physical control of the property realising the entire income and usufructs of the property for his own use and not for the use of any other person, havins the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of lesal ownership or a husk of title in the Ions run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here. A plain reading of Clause 4 of the agreement, as extracted above, clearly goes to show that the physical possession of the properties has passed on or is deemed to have passed on to the assessee to have and to hold for ever and absolutely with the power to use the same in whatsoever manner it thinks best and the assessee shall derive all income and benefits together with full power of disposal of the properties as well as the income thereof. Can it then be said that the recipient of the income being the assessee only having an absolute and exclusive control over the property without any let or hindrance on the part of the so-called vendor which, indeed, under law it was not entitled to do, as we shall presently show, shall be immune from the taxing provision is Section 22 of the Act ? The answer in our view is clearly in the negative. The reason is simple. The consideration money has been paid in full The assessee has been put in exclusive and absolute possession of the property. It has been empowered to deal with the income as it likes. It has been empowered to dispose of and even to alienate the property. Reference to Section 54 or for that matter, Section 55 of the Transfer of Property Act by the Tribunal merely emphasises the fact that the legal title does not pass unless there is a deed of conveyance duly registered. The agreement is in writing and the value of the property is admittedly worth more than hundred rupees. Section 54 of the Transfer of Property Act would, therefore, exclude the conferment of absolute title by transfer to the assessee. That, however, would not take away the right of the assessee to remain in possession of the property, to realise and receive the rents and profits therefrom and to appropriate the entire income for its own use. The so-called vendor is not permitted in law to dispossess or to question the title of the assessee (the so-called vendee). It was for this very practical purpose that the doctrine of the equity or part-performance was introduced in the Transfer of Property Act, 1882, by inserting Section 53A therein. The section specifically allows the doctrine of part-performance to be applied to the agreements which, though required to be registered, are not registered and to transfers not completed in the manner prescribed therefor by any law. The section is, therefore, applicable to cases where the transfer is not completed in a manner required by law unless such a non-compliance with the procedure results in the transfer being void. There is, however, a distinction between an agreement void as such and an agreement void in the absence of something which the vendor could do and had expressly or impliedly contracted to do, and where a vendor agrees to sell his share of property, including sir land, there is an implied term in the contract that he will apply for sanction to the Revenue authorities necessary for such transfers and the Court will direct him to do so. It cannot be said that such an agreement is void because no sanction has been obtained. In the instant case, having reference to Clause 5 of the agreement it would be seen that the option was given to the assessee to demand at its pleasure a conveyance duly registered being executed in its favour by the Sahay family (the vendor) and to get its name mutated in the official records. The assessee has not exercised its option for reasons best known to it presumably to have a double weapon in its hands to be used as and when circumstances so demanded. Can it yet be said that for the default on the part of the assessee itself it would be entitled to say that it is not the owner of the property for all practical purposes, receiving the rent all the time, appropriating the usufructs for its own purposes all the time and having no interference at the instance of the vendor ? Can that be a practical and logical approach to the true construction and purport of the substance and spirit of Seciton 22 of the Act ? The answer, in our view, is clearly in the negative and against the assessee. Having taken all the advantages and still taking all the advantages under the contract without any hindrance or obstruction on the part of anyone including the vendor which the vendor could not do in view of Section 53A of the Transfer of Property Act, the assessee cannot now turn back and say that because of its default in having a deed registered at its sweet-will it was not an owner within the meaning of Section 22 of the Act. It may bear repetition to say that it was on account of these facts that juristic principles have now emerged saying that one of the most important of the powers of ownership is the right to exclude others from possession and the property right is essentially a guarantee of the exclusion of other persons from the use or handling of the thing. In that sense, therefore, the assessee itself became the owner of the property in question. In our view, any decision to the contrary would not be subservient to the intent and purpose of Section 22 of the Act, with regard to which, as we have already stated, we can fairly look at the language used and the tax laws have to be interpreted reasonably and in consonance with justice. So far we have dealt with the case in this respect on juristic principles as if it were a matter of first impression. We have, therefore, now to refer to the case law on the subject.
Ultimately, the learned Judges held that the assessee in that case will fall under the true meaning of the term "owner" as used in Section 22 of the Act and, therefore, liable to tax from income out of the house property as owner thereof. This judgment of the Patna High Court was followed by the same High Court in the judgment in Krishna Lal Ajmani s case (supra).
14. The Rajasthan High Court in Maharani Yogeshwari Kumari s case (supra) again considered the same question and after referring to various judgments held as follows:
Section 22 of the IT Act has created a charge on the income in respect of annual value of the property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax under the head "income from house property". The question, therefore, arises as to whether the words "of which the assessee is the owner" can be applicable only to a registered owner or also to such person in whose favour the registered sale-deed has not been executed but a sale agreement has been executed, possession of the property has been given and consideration for sale has been paid. Section 53A of the Transfer of Property Act contemplates that when any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part-performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part-performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that the contract, though required to be registered, has not been registered, or where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract. The proviso to the aforesaid section contemplates that nothing in that section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part-performance thereof. If the view that without there being conveyance, the transferor continues to be the owner is taken, still a question arises that the income has not been received by the owner and, therefore, whether the assessment of the transferee could be made by considering that there was diversion of income or the transferor has ceased to have any right in respect of the income received ? This section debars the transferor from enforcing his rieht to the property. In the case of Hamda Ammal v. Avadiappa Pathar , it was held by the apex Court that the document after its registration relates back to the date of execution of the sale-deed. Though under the IT law, the benefit of ownership is unknown, but still if the income is assessed in the hands of the transferor who has not received the income from the property whether such a transferor can be made liable to make the payment of tax. Various decisions given by the different High Courts have taken different views. The view of the Calcutta, Bombay, Delhi and Allahabad High Courts as mentioned above is on one hand, whereas the view of the Andhra Pradesh High Court in the case of CIT v. Nawab Mir Barkat Ali Khan (1974) Tax LR 90 and the Karnataka High Court in the case of Ramkumar Mills (P) Ltd. v. CIT is different. So far as the view taken by the apex Court in the case of Osman Ali Khan v. CWT is concerned that was in the context of the WT Act where the language of the section was different. Section 53A debars a transferor from exercising the rights of an owner after he has received full consideration and handed over possession under the contract. The transferor in a case where he has executed the document and received consideration and even handed over possession of the property, cannot exercise any right of an owner. This Court in the case of Rajputana Hotels (P) Ltd. v. State of Rajasthan D.B. Civil Writ Petition No. 511 of 1989 decided on 27th May, 1992, while interpreting the provisions of Rajasthan Land and Building Tax Act, 1964, has held that the person who is entitled to receive the rent is assessable in respect of a property even if it is not registered in his name.
The matter can be considered from another angle. Under the IT Act, the assessing authority has power to assess the income in the hands of the real owner. If 'A 'purchases the property in the name of X', simply because the property is registered in the name of X', A' cannot escape his liability. Secondly, there can be a partnership where the partners have contributed the property and the property has become the partnership property, then no registration is required, the income in such a case has to be assessed in the hands of the partner ship-firm and not the individuals who have contributed the property. Thirdly, the transferee who has received the income has already been assessed in respect of income derived from such property as income from the property, whether Section 22 can again the invoked against the transferor in respect of such income. Fourthly, in respect of a co-operative society the members thereof are given the property on the basis of allotment letters which may or may not be registered. The members thereafter transfer the property from one hand to another and if it is considered that it is only the registered owner or the society who can be assessed to tax, then the person who has enjoyed the income would escape liability of tax. Fifthly, if it is considered that the registered owner alone is liable to pay tax while the income is received by the transferee, the transferee would enjoy the income but the tax will be levied from the registered owner who may or may not be in a position to make the payment of tax. Sixthly, there could be diversion of income by overriding title as was considered in the case of Savita Mohan Nagpal v. CIT . Seventhly, if the property is in the name of a trust and the beneficiary is entitled to a specific share of the income, whether the other provisions of the Act can be said to be inoperative and, eighthly, there may be some similar other instances.
We do not think that it is necessary to set out extracts from the judgments of other High Courts taking similar view.
15. The contrary view taken by the other High Courts was mainly based on the facts that unless there is a registered deed conveying the property, the person in possession/enjoyment of the property cannot be considered as legal owner and, therefore, he cannot be called upon to pay the tax under Section 22 of the Act.
16. The law laid down by this Court in Jodha Mal's case (supra), according to us, has been rightly understood by the High Courts of Punjab & Haryana, Patna, Rajasthan, etc. The requirement of registration of the sale-deed in the context of the Section 22 is not warranted.
The above summing up is factually based on the judgments of this Court as well as English decisions.
24. A Constitution Bench of this Court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas and Anr. , while considering the nature of amendment to Section 29(2) of the Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows:
The amending clause does not seek to explain any pre-existing legislation which was ambiguous or defective. The power of the High Court to entertain a petition for exercising revisional jurisdiction was before the amendment derived from Section 115, CPC, and the legislature has by the amending Act attempted to explain the meaning of that provision. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.
25. From the circumstances narrated above and from the Memorandum explaining the Finance Bill, 1987 (supra), it is crystal clear that the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word "owner" in Section 22 of the Act. We do not think that in the light of the clear exposition of the position of a declaratory/clarificatory Act it is necessary to multiply the authorities on this point. We have, therefore, no hesitation to hold that the amendment introduced by the Finance Bill, 1987 was declaratory/clarificatory in nature so far as it relates to Section 27(iii), (iiia) and (iiib). Consequently, these provisions are retrospective in operation. If so, the view taken by the High Courts of Patna, Rajasthan and Calcutta, as noticed above, gets added support and consequently the contrary view taken by the Delhi, Bombay and Andhra Pradesh High Courts is not good law.
26. We are conscious of the settled position that under the common law 'owner' means a person who has got valid title legally conveyed to him after complying with the requirements of law such as Transfer of Property Act, Registration Act, etc. But in the context of Section 22 of the IT Act having regard to the ground realities and further having regard to the object of the IT Act, namely, 'to tax the income', we are of the view, 'owner' is a person who is entitled to receive income from the property in his own right.
17. In the case of Mysore Minerals Ltd. v. CIT 239 ITR 775 their Lordships have observed as under:
Section 32 of the Income-tax Act, 1961, confers a benefit on the assessee. The provision should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee to secure the benefit intended to be given by the Legislature to the assessee. It is also well settled that where there are two possible interpretations of a taxing provision the one which is favourable to the assessee should be preferred.
Section 32 of the Act allows certain deductions, one of them being depreciation of buildings, etc. owned by the assessee and used for the purposes of the business or profession. The terms "own", "ownership" and "owned" are generic and relative terms. They have a wide and also a narrow connotation. The meaning would depend on the context in which the terms are used. CIT v. Podar Cement Pvt. Ltd. , is a case under the Income-tax Act and has to be taken as a trend-setter in the concept of ownership. Assistance from the law laid down therein can be taken for finding out the meaning of the term "owned" as occurring in Section 32(1) of the Act. The term owned as occurring in Section 32(1) of the Income-tax Act must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. "Building owned by the assessee", the expression as occurring in Section 32(1) of the Income-tax Act, means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as the Transfer of Property Act and the Registration Act, etc. Generally speaking depreciation is an allowance for the diminution in the value due to wear and tear of a capital asset employed by an assessee in his business. The very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset and is utilizing the capital asset and thereby losing gradually the investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. It is well settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting Section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time-being vests the domination over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent.
The assessee was a private limited company. During the assessment year 1981-82 (accounting year ending on March 31, 1981), the assessee had purchased for the use of its staff seven low income group houses from the Housing board. The assessee had made part payment and was in turn given allotment of the houses followed by delivery of possession by the Housing Board. The actual deed of conveyance was not yet executed by the Housing Board in favour of the assessee. The assessee made a claim under Section 32 of the Act in respect of depreciation of buildings used for the purpose of the business of the assessee. The claim was rejected by the Assessing Officer. This was upheld by the Tribunal and the High Court. On appeal to the Supreme Court:
Held, reversion g the judgment of the High Court, that the finding of fact arrived at in the case at hand was that though a document of title was not executed by the Housing board in favour of the assessee, the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer domination over the property on the assessee whereafter the assessee had in its own right allotted the quarters to the staff and they were being actually used by the staff of the assessee. The assessee was entitled to depreciation in respect of the seven houses in respect of which the assessee had not obtained a deed of conveyance from the vendor although it had taken possession and made part payment of the consideration.
Decision of Karnatake High Court reversed.
18. It will be clear from above that question involved before their Lordship was little different from question involved before us. In above cases, as is clear from the underlined portion of decisions, the assessee was in possession of property and was exercising complete domain over the property with an absolute power of disposal in its own right. There possession was also protected Under Section 53A of the Transfer of Property Act. For certain reasons, transfer deed in favour of assessee was not registered. The question arose whether in above circumstances, assessee can be treated to be the owner Under Section 22 of the I.T. Act. Their Lordship of Supreme Court held that when assessee was realizing rent in its own right to the exclusion of others, from use of building or thing, then assessee would be treated as owner of the property, although he was not legal owner. There was no other beneficial owner of the property involved other than the assessee.
19. While proceeding to consider application of above rulings, we find that parties here have agreed as under, as per lease deed dated 17.11.1998:
1(a) The owner does hereby agree to grant to the lessee a lease of the premises for the period and on the terms & conditions hereinafter contained.
1(b) that in consideration for the grant of the lease, the lessee shall pay a monthly rent of Rs. 20,000/- (Rupees Twenty thousand only) p.m. for the demised premises which will be paid by an accounts payee cheque or by Bank Draft on or before the 7th day of each calendar month with effect from the date of commencement of the lease in terms of Clause 10 hereunder.
1(c) that the lessee has deposited with the lessor at the time of execution of this agreement Rs. 35,00,000/- (Rupees Thirty five lacs only) as "interest free security deposit".
2. That the rent reserved herein shall be inclusive of all charges viz. municipal taxes, cess, levies either statutory or non-statutory and all other outgoings of whatsoever nature and therefore the liability to pay taxes on the property to the Municipal Corporation and/or other local Authorities or otherwise relating to the premises shall be of the owner but the same shall be discharged by the lessee for and on behalf of the owner against demands/bills raised and shall be debited to the account of the owner which will be adjusted against the rent payable by the lessee hereunder.
3. That the lessee shall be at liberty to use the said premises for itself and for its Directors, Officers or employees.
4. The owner declares that but for the rights of Modi Rubber Ltd, as tenant in the said property, there is no other encumbrance on the demised premises and the premises is free from any kind of attachment, judgment or decree and the owner agrees and undertakes that during the term of the Agreement the owner shall not alienate, surrender or otherwise dispose off the property or any part thereof without the prior consent of the Lessee. The owner shall not enter into any further agreements or contracts with Modi Rubber Limited and shall not extend the period of the current lease beyond the current period and all further correspondence and dealings with Modi Rubber Ltd shall be only through the Lessee herein.
5. That the water and electricity expenses would be borne by the lessee as per bills raised by the authorities.
6. That the lessee shall be at liberty to sub-let the premises in whole or in part(s) in favour of any third party and on terms and conditions to be settled by the lessee and the lessor hereby grants unconditional permission for such sub-letting(s) and ratifies and agrees to ratify all such actions/documents that may be executed by the lessee in this behalf as if the same had been executed by the owner.
7. That the lessee shall be entitled to make additions, alterations and modifications as may be required by the lessee as per its requirements and to carry out ducting and constructions of cooling towers, lifts etc, at its own cost. The lessee shall be entitled to remove and take back all such structure/s at the time of expiry of this agreement or at the option to leave the same behind without any payment in respect thereof.
8. That the repairs in the demised premises as and when required shall be carried out by the lessee at its own cost.
9. That the Lessor shall not be liable or responsible for any damage/loss to the premises on account of any natural calamities and acts of God such as fire, floods or otherwise on account of riots, public violence etc. The lease shall not come to an end on the destruction of the property but the term of the Lease shall be determined excluding the period during which the premises is restored/rebuilt to its original state. The Lessor shall, therefore, keep the premises suitably insured to cover the cost of reconstruction and the Lessee shall be free to reconstruct the house at its costs.
10. That the lease shall be for a period of 9 (nine) years and 11 (eleven) months at the first instance with effect from the date of the lessee securing physical possession of the entire premises from the owner and/or the present tenant M/s Modi Rubber Limited. The securing of possession from Modi Rubber Limited will be the sole responsibility of the Lessee.
11.1 (a) The owner hereby authorizes the lessee and for the said purpose does constitute the lessee as its Attorney to execute and do all or any of the folio wings:
(i) To enter into discussions with M/s Modi Rubber Ltd, for purposes of resolving the disputes between the owner and the said Modi Rubber Ltd. with respect to the present period of the lease of M/s Modi Rubber Ltd.
(ii) To enter into discussions/settlements/arrangement with the said M/s Modi Rubber Ltd, with respect to securing the vacation of the said premises from the said M/s Modi Rubber Ltd either on the expiry of the period of the lease or earlier or thereafter and on such terms and conditions as may be settled between the said M/s Modi Rubber Ltd, and the lessee on the conditions that no financial liabilities shall be imposed on the owner and the financial liabilities if any arising on account of the compromise/settlement with the said M/s Modi Rubber Ltd, shall be paid and discharged by the lessee/sub-lessee and the Lessee shall keep the owner indemnified from all claims whatsoever that may be made by Modi Rubber Limited.
(iii) To receive and / or recover the monthly rent from M/s Modi Rubber Ltd, and institute suits or legal proceedings including Arbitration Proceedings against the said Modi Rubber Ltd., for purposes of resolving the disputes with that company relating to the rent and/or the period of the current lease (which according to the owner is due to expire on 14th June, 2004 and according to Modi Rubber Ltd, is due to expire thereafter) and for securing the rent and/or the vacant possession of the premises and to settle/compromise the dispute on such terms as the lessee may determine.
Cost of all legal proceedings shall, however, be borne by the lessee and/or its sub-lessee and the same shall not be recoverable from the owner.
(iv) To secure vacant possession of the said premises in whole or in part from the said M/s Modi Rubber Ltd, pursuant to and in terms of an agreement / settlement / compromise that may be arrived at with the said Modi Rubber Ltd, and to occupy the said premises / part thereof pursuant to and in terms of this agreement as a tenant for the period stipulated herein and on the terms and conditions stated here.
The facts involved in the present case are quite different. Admittedly, Prof. Harnam Singh is the owner of the property. He has not transferred all his rights to the assessee appellant, though some rights are transferred to the assessee including right to realize rent. Rights exercised by the assessee are referable to agreement with Prof. Harnam Singh. There is no term in the deed to show that Prof. Harnam Singh cannot transfer ownership of property or several other rights retained by him as owner. The assessee is not doing anything in its own right. He is exercising rights given to him or traceable to the documents in his favour. That document is not a sale deed nor the present case can be treated as a case of merely husk of title with Prof. Harnam Singh. He is the owner and lessor of the property and is realizing rent of the same. The assessee is also liable to pay rent to Prof. Harnam Singh. He is also to carry other obligations mentioned in the deed. A tenant can be authorized to sub let the premises and realize rent from tenants under him or who has attorned to him. This is quite a well known concept. Why such an arrangement was arrived at is also explained in the deed. The appellant in the present case is a lessee and tenants occupying the property and liable to pay rent to the assessee as sub lessees of the premises are with the consent of the owner. While Prof. Harnam Singh is the owner of the property, there cannot be a second owner like the appellant. It cannot be said that the assessee is realizing rent in his own right.
There may be cases where the lessee can be treated to be owner of the property. If the lease is for a considerable long time, say for 99 years, and lessee has right to construct property and to sell the property constructed by him. It is also reasonable to hold the lessee to be "deemed owner" of the property Under Section 27(iiib) of the I.T. Act where lease is not for less than 12 years. The Legislature having prescribed period of lease for treating the lessee as deemed owner, it is not possible to hold a lessee as a deemed owner where lease is for a period of less than 12 years. Nor such a lessee can be treated to be a beneficial owner. Such an interpretation would tantamount to acting agent the mandate of the Legislature. It would be illegal application of the statutory provision. Having already noted that lease with the assessee appellant is for a period of less than 12 years, he can neither be treated as a beneficial owner nor a deemed owner. To hold otherwise, would be to disregard the agreed terms as well as statutory provisions of the Act. We, therefore, do not find any good reason to hold the assessee as an owner or deemed owner of house property Under Section 22 of the I.T. Act. Income realized from sub lessee in occupation of the premises is income of the assessee. There is no dispute on this. The assessee's contention that above income is to be assessed under the head "other sources" as he is not owner of the premises, is well taken and is required to be accepted. There is no question of estimating annual letting value of the property. It is to be assessed as per agreement between the parties under the head "other sources". The Revenue authorities were not justified in assessing rental income under the head "house property". On facts of the case, we direct the Assessing Officer to take assessee's rental income under the head "other sources". The assessee would also be entitled to consequential relieves under the law. This ground of appeal of the assessee is accepted.
20. The other ground relating to certain expenses claimed by the assessee against rental income under the head "other sources" was disallowed as income was taken under the head "house property". We have already held that rental income is to be assessed under the head "other sources". Consequently we direct the Assessing Officer to re-examine the issue and allow expenses to the assessee as per law.
For the aforesaid reasons, the appeal of the assessee is allowed, in terms stated above.
Pronounced in Open Court on 09.03.2007.