Bombay High Court
Rajas R. Doshi vs Income-Tax Officer. on 8 October, 1993
Equivalent citations: (1994)48TTJ(MUMBAI)187
ORDER
N. R. PRABHU, A.M. :
28th April, 1992.
This is an appeal by the assessee against the order of the CIT under s. 263 of the IT 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 M/s. Walchand & Co. Pvt. Ltd. The assessees father Sri Ratanchand Hirachand was a director probably from the very inception of the company. In the year 1962, the company purchased three flats and very were let out to the directors. One such flat given to Sri Ratanchand was in a building at Little Gibbs Road, Malabar Hills, Bombay. 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 the occupation of the flat till his death in November, 1981. During the period between 1962 to 1981 when he died, there was only a marginal increase in the rent paid/payable by Sri Doshi. 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 CIT 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 ITO in the usual routine manner. In so far as this matter was not looked into by the ITO while finalising the order, the CIT took the view that the order was erroneous and prejudicial to the interest of the Revenue. He, thereafter, passed an order under s. 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 quantification of value and consequential quantification of addition to be made under s. 2(24)(iv) of the 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 s. 2(24)(iv) of the Act. In passing his order, the CIT 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 & Co. Pvt. Ltd. He, in this connection, relied on the boards resolution, dt. 21st January, 1963, under which the company decided to purchase 3 flats for the use of the directors of the company. He also relied on the decision reported in J. Dalmia vs. CIT (1982) 138 ITR 653 (Del), where the Honble Delhi High Court had, inter alia, observed that "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 CIT, the consideration paid for the acquisition of the flat was only a sum of Rs. 1,02,000. The company, of which the assessees father was a director at the relevant time, took a conscious decision to acquire a flat and to let it out to the assessees father. The assessees 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 3 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 the 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 assessees father. The assessees 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 & Co. Pvt. Ltd., and the assessees father right from the beginning was that of landlord and tenant and not that of an employer and employee, in so far as the assessees occupation of the flat was concerned. In such circumstances, the CIT was not justified in relying on the passing remark made by the Delhi High Court in their decision reported in (1982) 138 ITR 653 (Del) (supra) 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 ITO assessing the company, namely, Walchand & Co., had written a letter as early as on 29th August, 1964, to ascertain whether the rent received by the company from late Ratanchand Hirachand, father of the assessee, was reasonable. The assessee had then explained to the ITO 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 ITO to increase the notional rent of the flat. This alone would support the case of the assessee. 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 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 upto a sum which was 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 valuers 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 s. 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 more than two decades when the landlord had found that the asset had become an 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 27th February, 1986, but on 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 & Co. from the assessee as inadequate. If it were not so, the Department would have proceeded to acquire the same by paying the required solatum of 15% to the concerned party. Our attention is also invited to the valuation report of the Asstt. Valuation Officer, Sri Livingston 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 Asstt. Valuation Officer (AVO) 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 M/s. Walchand & 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 Livingston to the IAC (Asstt.). At that stage, no objection was raised by the Assessing Officer regarding the jurisdiction of the AVO. After rejecting the AVOs report, a fresh reference was made in connection with wealth-tax matters against M/s. Walchand & Co. Ltd. The Valuation Officer determined the value of this flat as on 31st March, 1984 and 31st March, 1985 at Rs. 29.60 lakhs and 32.86 lakhs respectively. The CIT has stated that, on the day of transfer, the propertys 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 manipulating factual aspects the probably 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 2500 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 M/s. Walchand & 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 s. 2(24)(iv) of the IT Act. The insertion of this clause in the statute book was with a view to preventing mischief of this nature. It is common for closely held companies to buy flats at a fabulous price and then let them out to the 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 to the directors without they being required to pay some 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 s. 2(24)(iv) of the IT Act. The order of the CIT, 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 main shareholder of the company.
In reply, the learned counsel for the assessee, contends that the provisions of s. 2(24)(iv) of the Act cannot be applied in case of a capital transaction as the same would lead to some absurd results. If the assessee choose 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 CIT 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 CIT cannot by upheld.
5. We have heard the parties to the dispute and we are of the view that the order passed by the CIT cannot be upheld. The flat sold to the assessee was no doubt purchased by M/s. Walchand & Co. Ltd. and one of the factors that influenced the company to make investment in the flat was the desire to provide accommodation to 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 late Sri Ratanchand Hirachand and M/s. Walchand & 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 ITO written as early as in 1964. This letter was in response to a letter by the ITO 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 ITO 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, late father of the assessee, was that of a tenant. The benefit, in 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 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 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 Bombay Rents, Hotels & Lodging Houses Rates 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 assessees late father, there could be no doubt that he was the tenant of M/s. Walchand & Co. Ltd. It does not need to be stressed on this case that the tenancy under the law in force devolves by inheritance. Therefore, on the death of the assessees father. Sri Ratanchand Hirachand, the assessee, who was in possession and occupation of the flat alongwith his father, became the tenant of the company. This position was acquiesced by the assessee, in the sense, 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 & Co. Pvt. 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, M/s. Walchand & Co. Ltd. has resulted in an income within the meaning given to that expression in s. 2(24)(iv) of the IT Act. It may further be mentioned that at the time the flat was sold by M/s. Walchand & Co. Ltd. to the rent payable by him was a little over Rs. 600 p.m. 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 atleast a different wing to 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 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 s. 2(24)(iv) of the Act would be far-fetched, at the time if 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 open market as a vacant property.
We, in the circumstances, hold that the CIT was in error in holding that the transfer of the flat by M/s. Walchand & Co. Ltd. to the assessee has resulted in some income to the latter. We, in that view, shall cancel the order of the CIT.
6. In the result, the appeal is allowed.
G. K. ISRANI, J.M. :
28th April, 1992.
I have had the benefit of the views expressed by my learned brother in his draft order, but I am afraid that I do not feel persuaded to agree to those views for the reasons stated hereunder.
2. 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 21st January, 1963. This document is available at page 1 of the paper-book filed by the assessee. The 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."
3. 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 flats were those of tenancy and not of a licence. The CIT has based his impugned order under s. 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 assessees 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 CIT 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 a acquired any tenancy rights. Support on this point was sought by the CIT from the observations of the Delhi High Court in the case of J. Dalmia vs. CIT (1982) 31 CTR (Del) 305. I have given my careful thought to all aspects of the matter and find myself in agreements with the CIT 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 CIT 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-cl. (iv) of cl. (24) of s. 2 of the IT 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 dt. 21st January, 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 CIT 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 as 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 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.
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, dt. 21st January, 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 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 creator or did create a tenancy of three flats in favour of three directors. The surrounding circumstances clearly suggest that the flats were given to the directors by virtue of their being the employees of the company for their use only. Such right to use would not give rise to the creation of any tenancy rights.
(b) Let me now advert to the law contained in the Bombay Rents, Hotel & Lodging House Rates Control Act, 1947 (hereinafter referred to as the Bombay Rent Control Act). The provision which is relevant for the present discussion is contained in cls. (f) and (g) of sub-s. (1) of s. 13 of that Act. These clauses read as under :
"(1) Notwithstanding anything contained in this Act but subject to the provisions of s. 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."
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 cls. (f) and (g) of sub-s. (1) of s. 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.
(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 Asstt. Valuation Officer, Shri Livingston, 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 sales 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 IT 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.
4. The last question raised was the point of time of the accrual of benefit and the applicability of sub-cl. (iv) of cl. (24) of s. 2 of the IT Act. It was contended by the learned representative of the assessee that the benefit, if any, under sub-cl. (iv) of cl. (24) of s. 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 CIT under s. 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-cl. (iv) of cl. (24) of s. 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-cl. (iv) of cl. (24) of s. 2 of the IT 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 is 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 the judicial authority has been cited in the present proceedings in support of the contention that this sub-clause is intended to cover only the benefits of revenue nature.
5. In view of the above discussion, I hold that the CIT was justified in initiating proceedings under s. 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-cl. (iv) of cl. (24) of s. 2 of the Act and is, therefore, taxable. The CIT was thus justified in passing the impugned order. This appeal is, thus, liable to be dismissed. The appeal is accordingly dismissed.
REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 30th April, 1992.
We, the Members of the Bombay Bench A have taken different views in ITA No. 3857/Bom/89, on the question of jurisdiction of the CIT under s. 263 of the IT Act. The appeal was against the order passed by the CIT under s. 263 of the Act and the issue before the Tribunal was whether the CIT exceeded his jurisdiction while passing the order under s. 263. The following question is referred to the Honble President of the Tribunal for resolution under s. 255(4) of the Act :
"Whether, on the facts and in the circumstances of the case, the CIT was justified in passing the order under s. 263 of the Act on the premise that the order of assessment passed by the ITO for the year under consideration was erroneous being prejudicial to the interest of the Revenue ?"
CH. G. KRISHNAMURTHY, PRESIDENT (AS THIRD MEMBER) 8th October, 1993.
This is a reference made to me under s. 255(4) of the IT Act 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 CIT was justified in passing the order under s. 263 of the Act on the premise that the order of assessment passed by the ITO for the year under consideration was erroneous being prejudicial to the interest of the Revenue ?"
2. The assessee at the relevant time was a director in a company called Walchand & Co. Pvt. Ltd. The assessees 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 Hills, 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 assessees father and the assessee were together living 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 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, Hotel & 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 were 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.
3. The assessment for Income-tax purposes was completed by the ITO accepting whatever was disclosed by the assessee. Subsequently the CIT (acting perhaps under s. 263 of the IT Act), came to know that this particular property was valued in connection with the gift-tax matter at Rs. 47.81 lacs. The CIT felt that when a property worth Rs. 47.81 lacs was sold for Rs. 2,30,000, there was as 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 s. 2(24)(iv) of the IT Act. He, therefore, gave a notice under s. 263 of the IT Act on 5th January, 1989 to the assessee requiring the assessee to show cause by 27th January, 1989, as to why the difference between the fair market value, i.e., Rs. 47.81 lacs and the apparent consideration paid, i.e., Rs. 2.30 lacs be not brought to tax as a benefit within the meaning of s. 2(24)(iv) of the IT 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 27th January, 1986, the assessee purchased the rights in the said property, pointed out that the provisions of s. 2(24)(iv) of the IT Act were inapplicable to the facts of this case and that the ITO rightly completed the assessment without resorting to this provision. The attention of the CIT was drawn to the valuation made by the valuation, wherein even though he arrived at value 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 CIT 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 s. 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 25th February, 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 IT 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 vs. CIT (1982) 138 ITR 653 (Del), it was submitted that if at all any benefit or perquisite is to be taxed under s. 2(24)(iv) of the IT Act, that amount of benefit or perquisite could not exceed the amount which the company had paid. Since the company had paid only Rs. 1,10,009, no benefit could be said to have been obtained by the assessee.
4. Rejecting all these contentions without referring to them in detail, the learned CIT 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 lacs, 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 assessees father was the original occupant, had acquired tenancy rights and thereafter on his demise those rights devolved on the assessee by inheritance, the learned CIT 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 acquittance 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 (supra), 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 assessees 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 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 & Co. vs. CTO (1985) 154 ITR 148 (SC). Though the valuation of this property was available as made by the Departmental Valuer at Rs. 47.81 lacs, in a gift-tax proceeding, the learned CIT 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 quantification of the value for the purposes of s. 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.
5. 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 CIT 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 & Co. Pvt. Ltd., did not result in an income within the meaning given to that expression in s. 2(24)(iv) of the IT 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 taken 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 IT 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, now to contend that such an act on the part of the company was taken with a view to provides some benefit to a director, which could be treated as income within the provisions of s. 2(24)(iv) of the Act, would be far-fetched. He, therefore, held that the CIT was in error in holding that the transfer of the flat by Walchand & Co. Pvt. Ltd. to the assessee had resulted in provision of some income to the assessee.
6. 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 assessees 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 CITs 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 (supra). He also observed that the words "rent" and "let out" were loosely used in the minutes dt. 21st January, 1963, and that the use of the language indicated the intention of the company as 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 and 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 s. 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 rights were 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 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 s. 2(24)(iv) of the 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 s. 2(24)(iv) are applicable alike both to the revenue and capital receipts. He categorically held that the benefit that arose to the assessee was not at the time of the creation of the alleged tenancy as was held by the learned Accountant Member but only when the flat was sold by the company for the present assessee. He thus justified the action taken by the learned CIT in setting aside the assessment and directing the ITO to invoke the provisions of s. 2(24)(iv) of the IT Act and quantify the benefit for addition as income.
7. 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 skills 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 for 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 CIT 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 sometime. 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 s. 2(24)(iv) of the IT Act ?
8. If there is a relationship of a tenant and a landlord under the Bombay Rent Control Act, it is almost virtually impossible, except to 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 I may say, to a large extent resulted in diminishing the values of the 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 had led the legislature to enact r. 1BB in the WT Rules to peg the value of the residential house at a particular value and also the various rules made under the WT Act. It was the recognition of the 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 Direct Taxes Acts on yield method, i.e., capitalisation on the income as against the land and building method, which was the hot favourite of the Valuation Officer appointed under the WT Act and the IT Act.
9. 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 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 (s. 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 had committed any act contrary to the provisions of cl. (a) of s. 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 landlords 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 that the tenant has in respect of the premises been convicted of an offence of contravention of any provisions of cl. (a) of sub-s. (1) of s. 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 the 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 is required for occupation for the purposes of the trust; or
(i) A landlord can also recover possession if the premises are reasonably or bona fidely 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 the possession of the premises. If the premises is 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 the 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 was not used without reasonable cause for a continuous period of six months;
(l) A landlord may also recover the possession if the tenant has built or acquired vacant possession or has been allotted a suitable alternative residence.
These are in main 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.
10. 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 on of these circumstances exists, it is not possible for the landlord to go to Court and seek eviction of the tenant and recover the 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.
11. It is now seen that this property was in the continuous occupation ever since it was purchased by the company either of the assessees father or of 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 that 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 a landlord and a tenant.
12. I have already mentioned above how the learned CIT and my learned colleague, the Judicial Member, had viewed this aspect of relationship. Now let me go to the definition of the words "tenant", "licence" and also the "landlord" as given in the Bombay Rent Control Act. Sec. 5(3) of the Bombay Rent Control Act defines landlords 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 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 s. 15A, the licensor who has given such licence."
Sub-cl. (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,"
Sub-cl. (4)(a) inserted by the amending Act of 1973 w.e.f. 1st April, 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 Co-operative 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."
Sub-cl. (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 s. 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 tenants 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 purpose 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 tenants family using the premises, for the purposes of education or carrying 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 this 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."
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 tenants family with the tenant in relation to any premises let for residence when the tenant happened to die. In the absence of such member riding 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 the "legal representative" as given above, I think it is extremely difficult even by overdrawing of my legal acumen of what little I possess, to say that the assessees father was not a tenant and the company was not the landlord under the Bombay Rent Court 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 included a person in the service or employment of the licensor. The resolution passed by the board of directors on 21st January, 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 dt. 21st January, 1963 provided :
"The Board was informed that the company had purchased 3 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."
Then it wen on to say :
"The rents fixed for each flat it 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."
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 pot 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 landlord and a tenant within the meaning of 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 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 theses 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 assessees 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.
13. Even otherwise the expression lease has been defined in s. 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 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."
The relationship of lessor and lessee is one of contract. A licence is defined in s. 52 of the Indian Easements Act 5 of 1882 as follows :
"A licence is defined in s. 52 of the Indian Easements Act 5 of 1882 as 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 in 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."
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.
14. Assuming for the sake of argument that the relationship between the assessees father and the company was that of a licensor and licensee, the provisions of s. 15A of the Bombay Rent Control Act clearly state that :
"15A. Certain licensee in occupation on 1st February, 1973 to become tenant. - (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-s. (1) shall not affect in any manner the operation of sub-s. (1) of s. 15 after the date aforesaid."
This shows that as and from 1st day of February, 1973, the licensee shall become a tenant. In other words as and from 1st February, 1973 it appears as if the licence is abolished and only tenancy remains. It is an undisputed fact that upto February, 1973 the assessees father was in the occupation of the premises continuously without any break. If he is occupying of the premises as 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 1st February, 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 s. 15A of the Bombay Rent Control Act.
15. Now, by operation of law in terms of the definition of the word "tenant" as given in cl. 11(c), which came into force from 1978, the assessee was continuously residing with this 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.
16. 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 the 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 to 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. Inspite 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 is 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 I am 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 acceptance of the offer, thus a binding contracts 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 tenant is created by the operation of Bombay Rent Control Act, 1947.
17. In view of what I have said earlier that, by operation of law, namely, s. 15A of the Bombay Rent Control Act, even licence gets converted into a tenancy w.e.f. 1st February, 1973, I do not think it is necessary for me to discuss and comment upon the tests laid down to differentiate a leases from a licence.
18. The learned Judicial Member referred to s. 13 of the Bombay Rent Control Act only to show that the landlord could recover the 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 of 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 s. 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 s. 13 may not be easily available to the landlord to recover the possession from the assessee. The learned Judicial Member did not refer to s. 15A and the effect thereof, which, in my opinion is very crucial and in a way provided the key to the entire controversy in this case.
19. Reliance was placed upon the decision the Delhi High Court in the case of J. Dalmia (supra) 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 not 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. These 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 ITO 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 s. 2(24)(iv) of the IT 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 IT 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 vs. New Delhi Municipal Committee & Anr. (1980) 122 ITR 700 (SC) and Mrs. Sheila Kaushish vs. CIT (1981) 131 ITR 435 (SC), the Delhi High Court held that no person can let out the property at a rate higher that 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 case of a company giving its own premises for use to an employee-director, the High Court relying upon a decision of the Allahabad High Court in the case of Lakshmipat Singhania vs. CIT (1974) 93 ITR 162 (All), 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 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 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 company being allowed by the company to be used by the directors without charging any rent. This observation does not men 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 a 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 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 is isolation but in the context of the provisions of s. 23 of the IT 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 reasonable the expected to 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 s. 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 this decision is of any help to the issue before me. I am also of the opinion that the learned CIT also has fallen, if I may say so, into this error.
20. To repeat the entire evidence on record clearly showed that the relationship of a landlord and a tenant has come into existence between the company and the assessee and all the consequences of the Bombay Rent Control Act have to follow.
21. Another important aspect, which in my opinion is relevant, is submission of Form No. 37EE. Chapter XX-A provides for acquisition of immovable properties in certain cases of transfers to counteract evasion of tax. These provisions are more onerous and are concerned with the collection of tax a much as the provisions of s. 2(24)(iv) of the IT Act. Both of them operate in the same field, namely, collection of tax and prevention of evasion. Under s. 269AB of the IT 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 s. 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 s. 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 its 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 any 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.
22. The learned CIT pointed out that in a gift-tax proceeding the value of this property was estimated at Rs. 47.81 lacs. 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 national. 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 CIT 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 s. 2(24)(iv) of the IT Act. He should have seen that the property in question had been bringing in negative income and the company wanted to get rid off of this liability by bringing into existence a positive income by sale of the property.
23. Another interesting features 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 r. 1BB of the WT Rules at Rs. 30 lacs by adopting a queer method. He ignored the tenancy. He assumed that the property was unoccupied and unencumbered and the rent would be 10% of the estimated market value as on 31st March, 1984. I am unable to appreciate how these assumptions are valid and have legal sanction being them. They are purely conjectural and only thrive in the realm of imagination.
24. 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 s. 2(24)(iv) of the IT Act.
25. I am, therefore, of the opinion that the CIT was not justified in setting aside the assessment on the ground that the assessment made by the ITO was erroneous as caused prejudice to the interests of the Revenue on the belief that the value of this property was Rs. 40 lacs 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.
26. The matter will now go before the regular Bench for the disposal of the appeal in accordance with the opinion of the majority.