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Petitioner: COMMISSIONER OF INCOME TAX VS Respondent: SHREE NIRMAL COMMERCIAL LTD. (and JUDGMENT
Court Name: Bombay High Court Judge(s): S. M. Jhunjhunuwala, V. A. Mohta, I. G. Shah Title:COMMISSIONER OF INCOME TAX vs SHREE NIRMAL COMMERCIAL LTD. (and
JUDGMENT
Reported As: 1997 PTD 730 Result: Order accordingly Judgment JUDGMENT ' I.G. SHAH, J.---Income Tax Reference No,1 of 1982 has been made by the Income Tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961, both at the instance of the Revenue and the assessee. It pertains to the assessment years 1971-72 and 1972-73. ' The following three questions have been referred at the instance of the Revenue: "(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the Income Tax Officer was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right? (2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in cancelling the order passed under section 104 of the Income Tax Act, 1961, thereby deleting the additional demand of Rs,22,242 for the assessment year 1970-71? (3) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Income Tax Officer was not entitled to enhance the compensation to the extent of compensation received by the shareholders in their own right?" ' The following three questions have been referred at the instance of the assessee: "(4) Whether, on the facts and in the circumstances of the case, the sum of Rs,2,96,285 and Rs,77,100 received by the applicant during the relevant assessment years 1971-72 and 1972-73, respectively, as 'non-refundable' deposits were income of the applicant?
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(5) Whether, on the facts and in the circumstances of the case, the claim of the applicant that the amount of Rs,4,77,393 and Rs,4,79,176 for the assessment years 1971-72 and 1972-73, respectively, are allowable as deduction either under section 28 or under section 37 of the Act has been rightly rejected by the Tribunal? (6) Whether, on the facts and in the circumstances of the case, the claim of the applicant that losses of past years should be carried forward and adjusted against the income of the applicant for the assessm ent years 1971-72 and 1972-73 has been rightly rejected by the Tribunal?" ' In Income Tax Reference No,138 of 1982, the Income Tax Appellate Tribunal has referred the following two questions for the assessment years 1973-74, 1974-75 and 1975-76 at the instance of the assessee: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs,2,87,250, Rs,13,000 and Rs,2,87,250 received by the assessee during the assessm ent years 1973-74, 1974-75 and 1975-76, respectively, as non-refundable deposits were assessable as income for the assessee? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the claim of the assessee to deduct a sum of Rs,4,47,399 for the assessment year 1973-74, Rs,4,16,775 for the assessm ent year 1974-75 and Rs,3,24,694 for the assessment year 1975- 76, being payment of interest on deposits either under section 28 and/or under section 37 of the Act was not allowable?" ' The said references came up before the Division Bench consisting of learned brothers Dr. B.P. Saraf and D.R. Dhanuka, JJ., of this Court. The Division Bench on consideration of the references in the background of the facts and circumstances of the case and various authorities placed by counsel for both the sides, felt that for a proper determination of the various legal issues arising in the case, it was necessary to scrutinize some of the legal propositions already laid down by some of the Division Benches of this Court, more particularly in the cases referred to in CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Bonn.), CIT v. Shah Construction Co. Ltd. (1983) 142 ITR 696 and the assessee's own case reported in Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694 (Born.), and to take a fresh decision in case some of these decisions were felt to be in conflict with others, it was necessary to refer the matter to a larger Bench. They were also of the opinion that the decision in the case of the assessee itself needs reconsideration in the light of the Supreme Court decision, earlier decision of this Court and the provisions of the Income Tax Act, Transfer of Property Act, Registration Act, etc. The Division Bench, therefore, without expressing any opinion on the merits of the rival contentions of the parties directed that the Hon'ble Chief Justice be moved for forming a Full Bench for the decision of these two references. Accordingly, two references are placed before us after obtaining necessary orders from the Hon'ble Chief Justice. ' The brief facts giving rise to these two references are as under: ' By an agreement of lease, dated November 28, 1964, the Government of Maharashtra agreed to grant a long term lease in respect of certain plots of land situate at the Backbay Reclamation, Nariman Point, Bombay, in favour of the assessee. The assessee has constructed a multi-storeyed building on the said plots of land known as "Nirmal". The assessee is the owner of the said building and lessee of the said plots. The assessee collected large amounts from its shareholders during the course of years under the caption 'non-refundable deposits'. The assessee allotted floor space in the said building to its shareholders and conferred rights on the shareholders-allottees to transfer their occupancy rights to the third parties. The shareholders-allottees are liable to pay periodical amounts to the assessee labelled as 'compensation' as fixed by the assessee, mainly having regard to the object of covering maintenance charges and liabilities for municipal taxes, etc., payable for the property. The shareholders-allottees charge higher 'compensation' to the third party occupants. The third party occupants are inducted in the premises forming part of the
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building. Income Tax References Nos. 108 of 1977 and 216 of 1977---Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694 (concerning the assessee) for the assessment years 1967-68, 1968-69 and 1969-70 were decided by this Court by its judgment and order, dated April 10-25, 1991. By the said judgment and order, this Court, inter alia, held--- "(I) Notwithstanding the use of the nomenclature of 'deposit', the so-called non-refundable deposits were in essence the consideration paid by the shareholder for sale of occupancy rights. The amounts of the so-called deposits were liable to be treated as 'revenue receipts' in the hands of the assessee. The so-called deposits were taxable as ' business income of the assessee' after deducting therefrom the cost of construction. (2) The assessee continued to retain the residuary ownership rights in the building although the 'occupancy rights' were sold out by the assessee to its shareholders. (3) Section 22 of the Income Tax Act was inapplicable as the property was inherently incapable of being let out by the assessee even though the assessee had retained ownership rights in the building with itself while making allotments of floor space in the building to the shareholders concerned. (4) 'Compensation' received by the assessee from shareholders was liable to be taxed as business income and not as income from house property under section 22 of the Act. (5) For determination of the income of the assessee company, the Income Tax Officer cannot enhance the compensation to the extent of the compensation received by the shareholders from other parties for occupation of the premises allotted to them by the assessee." ' The contention of the assessee is that the controversy concerning questions Nos. 1, 4 and 6 pertaining to the assessm ent years 1971-72 and 1972-73 and question No,1 pertaining to the assessm ent years 1973-74, 1974-75 and 1975-76 stands concluded by the above-referred judgment of this Court since reported in Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694. The assessee contends that the said judgment was delivered in the assessee's own case and, therefore, is binding and the ratio of the said decision must be followed in this reference. The assessee therefore in short contends that the only question which needs to be considered in the present references is; "whether the assessee is entitled to deduction of interest payable on the amounts of 'non-refundable deposits' despite the so-called deposits themselves having been held by this Court as trading receipt/revenue receipts in the hands of the assessee". ' The Division Bench of this Court which has referred the matter to the Full Bench has expressed that there appears to be some inconsistency in the views expressed by this Court earlier in the earlier decisions in CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 and CIT v. Zoroastrain Building Society Ltd. (1976) 102 ITR 499 on one side and Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694. In the decisions in CIT v. Union Land and Building Society (Pvt.) Ltd. (1976) 83 ITR 794 (Born.) and CIT v. Zoroastrain Building Society Ltd. (1976) 102 ITR 499 (Born.), it was held that the liability of an owner to pay any tax under section 22 of the Income Tax Act, 1961, does not depend either on the power of the owner to earn the income therefrom or on the power or the capacity of the person to let out or his own power to receive rent or income from bona fide annual value. Even the decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT (1986) 162 ITR 888 which is relied upon lays down that the assessee-company is construed to be the owner of the property and the annual letting value of the said property computed in the manner laid down in section 23 of the said Act is assessable in the hand of the owner under the head "Income from house property". In view of this first it would be proper to consider whether any such conflict really exists or not. On behalf of the Revenue also, the contention is raised that there is conflict as indicated by the learned Division Bench and the view taken by the Division Bench in the decision in Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694 (Born.) being in conflict with the earlier decisions of the Division Bench of this Court is not correct. It would be proper to state here only that the decision in
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Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694 (Born.) is in fact accepted by the Revenue as they have not appealed against the said decision. ' To wriggle out of this situation, an attempt is made to contend on behalf of the Revenue that there is no principle of res judicata applicable in the matter of assessment under the Income Tax Act. There is no doubt that the said contention is legally sound. However, at the same time, Shri Dastur, learned counsel appearing for the assessee, has invited our attention to a decision of our Court in H.A. Shah and Co. v. CIT (1956) 30 ITR 618, wherein Chagla & C.J. Held that the effect of revising an earlier decision should not lead to injustice and the Court must always be anxious to avoid injustice being done to the assessee and, therefore, the present case is not a fit case for which the issue referred by the Division Bench to the Full Bench should be gone into. It is further rightly contended by Shri Dastur that the Department having accepted the decision, there is no occasion to take a different view. We do feel that there is considerable force in the argument of Shri Dastur. Having urged earlier that the income in the earlier assessment years was income from business or trade, it would not be property to allow the Department to completely turn around and now contend that the income of the assessee is taxable under the head "House property" so as to disallow the deductions claimed by the assessee in respect of interest paid on the nonrefundable deposits of the shareholders either under section 28 or section 37 of the Income Tax Act, 1961. The income of the assessee must be treated as income from trade or business. ' The second limb of the argument of Shri Jetly, learned counsel appearing for the Department, is based on the decisions in CIT v. Union Land and Building Society Ltd. (1972) 83 ITR 794 (Bom.) and CIT v. Zoroastrain Building Society Ltd. (1976) 102 ITR 499 (Born.). Relying on these two decisions, he urged that it is already conclusively held that the non-refundable deposits are sale proceeds and income of the assessee. The third limb of the argument of Shri Jetley is that the property of "Nirmal" building is of the ownership of the assessee as no conveyance is executed and, therefore, the assessee is still the owner and, therefore, the assessee is required to be held liable to pay tax under the head "House property". Not only that it is further urged that as the assessee under the head of the property is liable to pay tax on the annual letting value, in the present case, if the shareholders have let out the premises at the higher rate, the annual letting value being the basis for assessing the income from the house property, the owner of the property is liable to pay tax on that annual letting value. Shri Dastur, on the other hand, has urged that in fact the Department cannot be allowed now to contend that the assessee is liable to be assessed on the basis of income under the head of house property. The assessee not being the owner of the property, the assessee is not liable to be assessed under section 22 of the Income Tax Act, 1961, under the head "House property". ' Relying on the decisions in CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Bom.); CIT v. Shah Construction Co. Ltd. (1983) 142 ITR 696 (Born.); CIT v. R.B. Jodhamal Kuthiala (1968) 69 ITR 598 (Delhi); (F.B.) R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (575) (SC) Sir Currimbhoy Ebrahim Baronetey Trust v. CIT (1963) 48 ITR 507 (Born.) and D.M. Vakil v. CIT (1946) 14 ITR 298 (Born.), Shri Dastur contended that the decisions relied upon by Shri Jetley have no application to the present case on the facts. The cases relied upon by Shri Jetley were in respect of classical property of house and land, while in the present case the property is not such a classical property. Shri Dastur for the assessee pointed out that in CIT v. Shah Construction Co. Ltd. (1983) 142 1TR 696 (Born.), a building was constructed by a limited company called Khetan Estate Ltd. The assessee-company, viz., Shah Construction Co. Ltd. As a shareholder had been allotted a flat. Shareholders were required to pay monthly rent to the company, viz., Khetan Estate Ltd. For the flats allotted to them. The High Court held that in view of the decision in CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Born.) the assessee, viz., Shah Construction Co., was the real owner of the flat in question. In CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Born.), the question which was referred directly was as to whether the assessee, Mr. Mahendra J. Shah, who was allotted a flat as a shareholder of the same
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company Khetan Estate Ltd., was assessable to tax in respect of the said property as income from house property under section 9 of the Indian Income Tax Act, 1922 (corresponding to section 22 of the Income Tax Act, 1961). The High Court answered the question in the affirmative. It was submitted that the facts in the two decisions cited above and the present case before us turn on their own facts and the peculiar position emerging from the right of occupancy arising from ownership of shares in a company and the principles to be applied is such a case were wholly different from the principles to be applied in the case of agreement to sell classical immovable property in the form of land and structure which was considered by our Court in CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 and CIT v. Zorostrian Building Society Ltd. (1976) 102 ITR 499. Shri Dastur strenuously pointed out that in these two earlier decisions the agreement for sale was entered into but conveyance which was necessary to be executed for vesting title in the transferee had not been executed. He further pointed out that in CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Born.) and CIT v. Shah Construction Co. Ltd. (1983) 142 ITR 696 (Born.) and in the present case, there is nothing which has remained to be executed, as a conveyance is not at all contemplated and by virtue of ownership of shares being transferred, full ownership is vested in the shareholder for occupying and enjoying the unit which goes with the holding of the shares. Shri Dastur, therefore, pointed out that there is no conflict to be resolved in the earlier two decisions and the decision in Shree Nirmal Commercial Ltd. v. CIT (1992) 193 ITR 694 (Born.). In the decision reported in CIT v. Mahendra J. Shah (1979) 118 ITR 902 (Born.), the Court held that where a building was constructed with the moneys of the flat owners who were in actual possession of the respective flats in the building, it was the flat owners who should be regarded as owners of the areas occupied by them and the company to whom the land initially belonged could not claim ownership rights. Without prejudice to the above contentions, Shri Dastur also submitted that the earlier decisions of the High Court in CIT v. Union' Land and Building Society (P.) Ltd. (1972) 83 ITR 794 (Born.) and CIT v. Zoroastrain Building Society Ltd. (1976) 102 ITR 499 (Born.) required reconsideration in the light of the decision of the Supreme Court in R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570. The Supreme Court in the said decision pointed out that for the purposes of section 9 of the Indian Income Tax Act, 1922, the owner of a property is a person who can exercise the rights of the owner in his own right. The Supreme Court confirmed the decision of the Full Bench of the Delhi High Court in CIT v. R.B. Jodhamal Kuthiala (1968) 69 ITR 598. In the abovesaid decision, the Supreme Court noted particularly at page 579 the consequences' of taking a contrary view. In the present case also, according to Shri Dastur, if a contrary view is taken, it would mean that in a case where a person purchase a share in a company and where the shares entitle him to occupy a certain unit, he would not be regarded as the owner and accordingly the benefit conferred by section 54 of the Income Tax Act, 1961, where a residential house is sold and another residential house is purchased, may not be held to be available to him. He conceded that the consequences of interpretation are not determinative of the issue normally, but according to him they would be useful to fix the meaning of the statutory language where it is of some doubt. To support this proposition, Shri Dastur relied upon a decision in Additional CIT v. Surat Art Silk Cloth Manufacturers' Association (1980) 121 ITR 1, 17 (SC). He also submitted that it is for this very reason that the Court observed in R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570, 575 (SC): It is, therefore, that equitable considerations are irrelevant in interpreting the tax laws. But those laws, like all other laws, have to be interpreted reasonably and in consonance with justice." Shri Dastur also submitted that it is necessary to note that in CIT v. Union Land and Building Society (Pvt.( Ltd. (1972) 83 ITR 794 (Born.), the High Court has noticed that the decision of the Full Bench of the Delhi High Court was contrary to the earlier decisions of the High Court of Bombay in Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT (1963) 48 ITR 507 and D.M. Vakil v. CIT (1946) 14 ITR 298. He, therefore, pointed out that the decision in CIT v. Union Land and Building SOciety (Pvt.) Ltd. (1972) 83 ITR 794 (Born.) was based on the earlier decisions of this Court in Sir
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Currimbhoy Ebrahim Baronetcy Trust v. CIT (1963) 48 ITR 507 and D.M. Vakil v. CIT (1946) 14 ITR 298. Shri Dastur, therefore, contended that it is clear from the decision in R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570 (SC) and the decision of the Delhi High Court in CIT v. Jodhamal Kuthiala (R.B.) (1968) 69 ITR 598 (FB), that the decision in CIT v. Jodhamal Kuthiala (R.B.) (1968) 69 ITR 598 (FB), that the decision in CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 (Born.) is no longer good law. He also pointed out that in CIT v. Zorostrian Building Society Ltd. (1976) 102 ITR 499 (Bom.), this apparent conflict was pointed out to the High Court, but the-High Court took the view that there was no contradiction and unless a conveyance was executed the original owner continues to be the owner of the house property. Shri Dastur then was at pains to point out that in view of the decisions relied upon by him, the said view is erroneous and in the present case this Court should, if necessary, correct the said earlier decisions. According to Shri Dastur, the said decisions overlook the fact that a person would be assessable on income from house property even when he does not enjoy any income from the property and even though someone else enjoys that income and has been assessed thereon. He also contended that it would lead to double assessm ent which is repugnant to the basic principles of the law of taxation. Shri Dastur tried to contend by giving an example that if ' A' has agreed to sell the land and building to 'B' and 'B' is in possession and lets out the same to another, 'B' would be chargeable to tax in respect of the income as he earns the same, but according to the Department ' A' would be also chargeable as the alleged owner of the property if the contention of the Department is acceptable. Shri Dastur also relied upon the decision in Saiffuddin v. CIT (1985) 156 ITR 127 of the Rajasthan High Court wherein it is held that the person who met the cost of construction was to be recorded as the owner of the immovable property and the Rajasthan High Court had followed the decision of this Court in Fazalbhoy Investments' case (1977) 109 ITR 802 and also the decision of the Punjab and Haryana High Court in Kala Rani v. CIT (1981) 130 ITR 321. He pointed out that the said Courts have applied the principles laid down in Kuthiala's case (1971) 82 ITR 570 (SC), that the owner must be the person who can exercise the rights of the owner. He also pointed out that a similar view has been taken by the Calcutta High Court in Modgul Udyog v. CIT (1990) 184 ITR 484. In that case, he pointed out, that a builder had built a building and sold the individual flats to buyers and the conveyance had not been executed. But it was held that individual purchasers of the flats were to be regarded as the owners of the flats holding that the word "owner" appearing in section 22 of the Income Tax Act, 1961, must be construed in the setting of socioeconomic development in the concept of ownership and it was also pointed out that there cannot be and should not be double assessm ent of the same income, once in the hands of the assessee-firm and again in the hands of the buyers. Shri Dastur also very strenuously pointed out that at page 502 of the said decision, after referring to the decision in Kuthiala's case (1971) 82 ITR 570 (SC), it is stated that the decision in CIT v. Ganga Properties Ltd. (1970) 77 ITR 637 (Cal.), should be read and understood in the light of the subsequent decision in Kuthiala's case (1971) 82 ITR 570 (SC) and that Ganga Properties Ltd.'s case (1970) 77 ITR 637 (Cal.) did not deal with all aspects of ownership and did not consider the recent development of the concept of multi-storeyed buildings and issues incidental thereto and he also further pointed out that in both the decisions, i,e,, CIT v. Zorastrian Building Society Ltd. (1976) 102 ITR 499 (Bom.), and CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 (Born.) this Court had placed great reliance on the decision of the Calcutta High Court in Ganga Properties Ltd.'s case (1970) 77 ITR 637 while the Calcutta High Court itself in Madgul Udyog v. CIT (1990) 184 ITR 484 stated that the decision in Ganga Properties Ltd.'s case (1970) 77 ITR 637 (Cal.), would have to be read in the context of the decision in Kuthiala's case (1971) 82 ITR 570 (SC), and should not be regarded as laying down the final law. Similarly, he also further pointed out that the Calcutta High Court again in Chitpore Golabari Co. (Pvt.) Ltd. v. CIT (1971) 82 ITR 753, held that the decision in Ganga Properties Ltd.'s case (1970) 77 ITR 637 (Cal.), has not considered all aspects of ownership.
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The decisions relied upon by Shri Dastur support his contention that the property of the assessee in the present case is of a different…
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