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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: PODAR CEMENT (PVT.) LTD. and others
Court Name: Supreme Court of India Judge(s): K. Venkataswa mi, K. S. Paripoornan, B. N. Kirpal Title: COMMISSIONER OF INCOME-TAX vs PODAR CEMENT (PVT.) LTD. and others Case No.:Tax References Cases Nos.9 and 10 of 1986 with C.A. Nos. 4165 of 1994 and
JUDGMENT
Reported As: 1998 PTD 200 Result: Order accordingly Judgment JUDGMENT K. VENKATASAWAMI, J.---In all these cases the scope of section 22 of the Income Tax Act, 1961 (hereinafter called the "Act") arises for consideration. The brief facts are necessary to appreciate the question that arises for our consideration. The respondent in Tax References Cases Nos.9-10 of 1986 is a company and an assessee under the Act (hereinafter called the "assessee"). It owns four flats bearing Nos.231, 232, 241 and 242 in a building called "Silver Arch" on Nepean Sea Road, Bombay. The builders of the said building are Malabar Industries (Pvt.) Ltd. Out of the four aforesaid flats, two were directly purchased by the respondent-company from the builders and the other two were purchased by its sister concern and subsequently by the assessee. The possession of the flats was taken after payment of consideration in full sometime in August, 1973. It is common ground that all these flats have been let out to various persons. The rental income from these flats was included in the return for the assessm ent years in question, namely, 1975-76 and 1976-77. It was the case of the assessee that the rental income from the flats was assessable as "income from other sources" under section 56 of the Act inasmuch as the assessee-company was not the "legal owner" of the property in the flats. Such a claim was put forward before the Assessing Officer mainly on the ground that the title to the property (four flats) had not been conveyed to the cooperative society which was formed by the purchasers of the flats and that so long as the ownership was not transferred in the name of the assessee, the rental income from the flats could not be assessed as "income from house property" (under section 2 of the Act).
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One other subsidiary question was also raised by the assessee that the rental income should be calculated on the bona fide annual value and not the actual rent received. As a matter of fact, the assessee has shown Rs,49,800 as chargeable rent. The Income-tax Officer, however, has taken the annual letting value of those flats at Rs,1,31,268 on the basis of rent receivable in respect of flats in an adjoining building. The Income-tax Officer also rejected the claim of the assessee that the income from the flats should be assessed under section 56 of the Act. Aggrieved by the orders of the Income-tax Officer, the assessee preferred appeals to the Commissioner of Income-tax (Appeals), who by an order, dated April 9, 1981, upheld in to the views as stated above by the Income-tax Officer. After receiving the orders from the appellate authority, the assessee filed miscellaneous application, dated September 14, 1981, before the appellate authority purporting to be under section 154 of the Act. It was contended before the appellate authority that in view of the decision of this Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee (1980) 122 ITR 700, the authorities were bound to take the annual letting value of those flats on the basis of the standard rent chargeable and in any case not on the basis of the actual rent receivable with regard to some other flats. The appellate authority accepted the assessee's miscellaneous applications by order, dated March 17, 1982, and rectified its earlier order, dated April 9, 1981. Still not satisfied with the appellate order, the assessee preferred two appeals against the order of the appellate authority contending that the income from the four flats should have been assessed under section 56 of the Act and not under section 22. The Revenue preferred two appeals against the rectification order, dated March 17, 1982. Those four appeals were considered by the Income-tax Appellate Tribunal (Bombay Bench "A"), Bombay, and the Tribunal by a common order, dated May 8, 1986, purporting to follow several decisions of the Bombay High Court accepted the case of the assessee and held that the income from the flats could not be taxed as "income from house property" under section 22, but should be taxed as "income from other sources" under section 56 of the Act. The Tribunal, however, did not decide the other question, namely, whether the actual rental income should be taken into account for the computation or the chargeable rental value. We are not concerned with the latter question here. The Tribunal, when moved by the Revenue under section 256(1) of the Act, referred the case straightaway to this Court under section 257 of the Act in view of the conflicting decisions between the High Courts. The question referred reads as follow: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income derived by the assessee-company from flats from the building known as ' Silver Arch' of Bombay is taxable under the head ' Income from other sources' under section 56 of the Income-tax Act and not income from 'house property' under section 22 of the Income Tax Act, 1961?" Civil Appeal No .41650 of 1994: In this case the respondent-assessee, an individual, returned for the assessment year 1983-84, the rental income from two flats bearing Nos.406 and 407 at Kailash Building, Curzon Road, New Delhi, and also parking space and claimed that the said income must be assessed as "income from house property". However, the Income-tax Officer took view that the assessee only had tenancy rights and, therefore, the income could be assessed under the head "Income from-other sources", namely, under section 56 of the Act. Aggrieved by the order of the Assessing Officer, an appeal was preferred to the Commissioner of Income-tax (Appeals), New Delhi, who has accepted the case of the assessee and directed the assessm ent under section 22 of the Act.
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The Revenue aggrieved by the appellate order preferred an appeal to the Tribunal. The Tribunal held that the appellate authority was right in holding that the income from the flats should be assessed as income from house property and not as income from other sources. For coming to this conclusion, the Tribunal, as a matter of fact, found that the assessee is the owner of the flats as well as the parking space in question. The Tribunal rejected an application for reference under section 256(1) and the High Court also rejected the reference under section 256(2). Hence, the present appeal by special leave by the Revenue. Civil Appeal No,4549 of 1995: The Appellant in this case is an individual and the relevant assessment year is 1970-71. The appellant is the owner of three flats in a multi-storeyed building known as "Akash Deep". This multi- storeyed building has been constructed on a piece of land at Barakhamba Road which belongs to the Government but has been given under perpetual lease. The name of the original lessee was not known. However, the company known as Ansal and Sehgal (Pvt.) Ltd., entered into an agreement with the lessee and constructed a multi-storeyed building on the said piece of land. The assessee claimed, and it was not disputed, that he has paid the entire price thereof and got possession of the three flats. It is also the claim of the appellant that he had absolute rights of disposal over them and that he had let out these flats to different tenants and he was deriving income from the flats and was paying the municipal taxes in respect thereof. In the income-tax return for the assessm ent year in question the appellant has shown a net income of Rs,18,403 from these flats by way of rent. The said net income was arrived at after deducting the municipal taxes as well as the statutory deduction of one-sixth of the annual value on account of repairs as provided in section 24 of the Act. The Income-tax Officer while accepting the return denied the deduction for repairs claimed by the assessee on the ground that the income must be assessable under the head "Income from other sources" under section 56 of the Act. Aggrieved by that, the appellant preferred an appeal to the Appellate Assistant Commissioner who was convinced by the claim of the appellant, directed the Income-tax Officer to assess the income under the head "Income from the house property" and to allow statutory relief on account of repairs. The Revenue preferred an appeal before the Tribunal. The Tribunal found as a fact that there was no sale-deed as such in respect of the flats in favour of the assessee. There was only an agreement to sell-coupled with the payment of the purchase price and the handing over of occupation or possession. The Tribunal further found that the super-structure of the multi-storeyed building including the flats vested originally with the company which had constructed the same and the assessee had only entered into an agreement to purchase the flats, though actually the assessee had paid all the instalments of purchase price. The Tribunal was of the view that till regular sale deeds were executed in favour of the assessee, the title in the flats remained vested in the company and, therefore, the assessee could not in law claim as legal owner of those flats. The Tribunal, applying a decision of the Delhi High Court, upset the view taken by the Appellate Assistant Commissioner and restored the order of the Income-tax Officer. The appellant was successful in getting a reference under section 256(1) of the Act and the High Court in detail considered the matter. However, the High Court, in view of its earlier decisions confirmed view taken by the Tribunal and held that the income in question was assessable under section 56 of the Act as income from other sources. Aggrieved by that, the present appeal is by the appellant by special leave. It will be seen from the narration of facts in all these cases that a common question of law arises as regards the scope of section 22 of the Act vis-a-vis section 56 of the Act. Mr. K.N. Shukla, learned senior counsel appearing for the Revenue, has advanced arguments in general, in view of the fact that the Revenue had not taken a uniform stand in assessing the owners of flats as seen from the facts given above. He submitted that the owners of flats as well as
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promoters are liable to be taxed under sections 56 and 22, respectively, of the Income-tax Act. In other words, the promoters are the legal owners and income from house property will have to be taxed at the hands of the promoters under section 22 of the Act and the owners of the flats being in beneficial enjoyment of the respective properties will have to pay tax under section 56 as "income from other sources". He invited our attention to a decision of this Court in R.B. Jodha Mal Kuthiala v. CIT (1971) 82 ITR 570, rendered under the Income-tax Act and also a recent judgment in Muhammad Noor v. Muhammad Ibrahim, AIR 1955 SC 398; (1994) 5 SCC 562, rendered under the Rajasthan Tenancy Act, 1955. He also invited our attention to a judgment of the Bombay High Court in CIT v. Zorostrian Building Society Ltd. (1976) 102 ITR 499. In general, he left it to the ultimate decision of the Court on the issue in question without finally expressing his point of view in view of the conflicting stand taken by the Revenue while making the assessments under challenge. Mr. Sharma, learned senior counsel, advanced the leading arguments and according to him, section 22 of the Act charges the income arising from house property and not the ownership of house property. Such income from house property can be real or notional. He also argued that income under the head "House property", real or notional, cannot escape taxation whoever may be regarded as the owner, but certainly it cannot have two owners at the same time. According to learned counsel, the owner is the person who in his own right can use the house property or derive income from it. Only such owner has to be taxed under the head "Income from house property". He alone has to be taxed under this head. If he cannot be taxed under this head, he cannot be taxed at all. In other words, he cannot be taxed under the head "Income from other sources" under section 56 of the Act. He also contended that income from house property cannot be taxed doubly, once in the hands of the legal owner under section 22 and again in the hands of the actual user and recipient of income under section 56 of the Act. Permitting such assessment would be opposed to equity and justice, which is not normally allowed by the Courts. As a corollary from the last contention he submitted that it is well-settled that the interpretation, which would avoid hardship and double taxation. Should be preferred to the interpretation which would result to hardship and double taxation. Lastly, it was contended by Mr. Sharma that wherever Parliament found it necessary it had provided for avoidance of double taxation expressly like in sections 64(2), 69-D, 93(2) and 94(4) but no such express provision was considered necessary as regards sections 22 to 27 as they thought in their wisdom that no authority of income-tax would assess the same income twice, once in the hands of the legal owner on notional basis and again in the hands of the buyer on actual receipt of rent. Mr. Sharma, learned senior counsel, in support of these arguments while placing heavy reliance on the judgment of this Court in Jodha Mal Kuthiala's case (1971) 82 ITR 570, also cited numerous judgments of the High Court which have applied the principles enunciated in the judgment of this Court in Jodha Mal Kuthiala's case (1971) 82 ITR 570. The judgments on which reliance was placed are the following: 1. Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. (1981) 127 ITR 97 (All). 2. Smt. Kala Rani v. CIT (1981) 130 ITR 321 (P & H). 3. Addl. CIT v. Sahay Properties and Investment Co. (P.) Ltd. (1983) 144 ITR 357 (Patna). 4. Saiffuddin v. CIT (1985) 156 ITR 127 (Raj). 5. Madgul Udyog v. CIT (1990) 184 ITR 484 (Cal). 6. Maharani Yogeshwari Kumari v. CIT (1995) 213 ITR 541 (Raj). 7. CIT v. General Mktg. And Mfg. Co. Ltd. (1996) 222 ITR 574 (Cal). 8. CIT v. Krishna Lal Ajmani (1996) 222 ITR 653 (Patna). Mr. H.N. Salve, learned senior counsel appearing for the respondent-assessee in Tax References Cases Nos.9-10 of 1986, took a different stand from that of Mr. Sharma and contended that the word "owner" in section 22 of the Income-tax Act should be understood in its general sense and not
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in the sense in which it was understood by this Court in Jodha Mal Kuthiala's case (1971) 82 ITR 570. According to learned counsel, the word "owner" can only refer to the legal owner and none else, as the concept of dual ownership is unknown in Indian jurisprudence. He invited our attention to the language of section 9(1) of the old Income-tax Act which corresponds to section 22 of the present Act and contended that the assessme nt does not depend on actual receipt of income from house property. He also submitted that the view taken by some of the High Courts that the owners of the flats even in the absence of any registered document of sale in their favour can be treated as owners in view of section 53-A of the Transfer of Property Act is wholly wrong and unsustainable. That view, according to him, is contrary to the well-settled position in law as laid down in several judgments of this Court. Learned senior counsel submitted that the ownership is paramount title and it cannot be otherwise interpreted. Mr. Salve submitted that even if the interpretation suggested by him to section 22 results in double taxation, even then that has to be accepted as being the correct position in law. There is no equity in taxation law. In support of his arguments, he placed reliance on the following judgments of this Court: 1. Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Comp. Cas. 563; AIR 1985 SC 520; (1985) 2 SCC 167. 2. Narandas Karsondas v. S.A. Kamtam, AIR 1977 SC 774; (1977) 2 SCR 341. 3. Bai Dosabai v. Mathurdas Govinddas, AIR 1980 SC 1334; (1980) 3 SCR 762. 4. Chhatra Kumari Devi v. Mohan Bikram Shah, AIR 1931 PC 196; (1931) 58 IA 279. We are given to understand that an identical issue is pending before a Full Bench of the Delhi High Court and Mr. Syali, learned counsel appearing in that case, sought our permission to place his arguments. The question being of some importance, we permitted him to submit his arguments. Mr. Syali, learned counsel, submitted that the Income-tax Act is a self-contained code, exhaustive of all matters dealt with therein and its provisions show an intention to depart from the common rule. In support of that, he placed reliance on a judgment of this Court in Rao Bahadur Ravulu Subba Rao v. CIT (1956) 30 ITR 163. According to learned counsel, the meaning of the word "owner" occurring in section 22 has to be understood contextually, purposively and only within the four corners of the Income-tax Act. Adopting a wider meaning, according to him, will not and cannot lead to rewriting the civil law. In a way, he supported the stand taken by Mr. Sharma, learned senior counsel, and he also placed heavy reliance on the judgment of Jodha Mal Kuthiala's case (1971) 82 ITR 570 (SC). In addition to the cases cited by Mr. Sharma, learned counsel, Mr. Syali, invited our attention to a case in Nawab Sir Mir Osman Ali Khan (Late) v. CWT (1986) 162 ITR 888 (SC). He also invited our attention to a recent judgment of this Court in State v. S.J. Choudhary, AIR 1996 SC 1491; (1996) 2 SCC 428, to support his contention that words occurring in a statute should be so construed as to continuously update the wording in accordance with the changes in social conditions. To appreciate the submissions made at the Bar, it is necessary to set out the relevant sections from the Act. We set out hereunder section 9(1) of the old Act, and sections 22, 27 and 56 of the new Act. "9. (1) The tax shall be payable by an assessee under the head 'Income from property' in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on, by him the profits of which are assessable to tax. 22. Income from house property.---The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head Income from house property'.
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27. 'Owner of house property', 'annual charge', etc., defined.-- For the purposes of sections 22 to 26- --... (iii) a member of a cooperative society to whom a building or part thereof is allotted or leased under a house building scheme of the society shall be deemed to be the owner of that building or part thereof, [before amendment] (iii) a member of cooperative society, company or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme of the society, company or association, as the case may be, shall be deemed to be the owner of that building or part thereof; (iii-a) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53-A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof; (iii-b) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269-UA, shall be deemed to be the owner of the building or part thereof... 56. Income from other sources.---(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following income shall be chargeable to income-tax under the head "Income from other sources", namely:-- (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'Profits and gains of business or profession' ." From the narration of the facts and the rival submissions it will be seen that the controversy revolves around the meaning to be given to the word "of which the assessee is the owner' occurring in section 22 of the Act. We may point out that section 9(1) of the old Act was substantially the same as section 22 of the new Act. We may also state that the whole of section 9 of the old Act has been split up and redrafted into several separate sections, namely, sections 22 to 27 under the new Act. We have noticed the reliance placed by the Bar on the decision of this Court in Jodha Mal Kuthiala's case (1971) 82 ITR 570 which was concerned with the old section 9(1) of the Act. In that case, this Court had occasion to consider the meaning to be given to the words 'of which he is the owner' of course, on the facts, the Court was called upon to decide whether the erstwhile admitted owner of the property is liable to pay income-tax on the house property under section 9, even after the said property has vested in the Custodian of Evacuee Property by virtue of section 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949. The contention of the Revenue in that was that notwithstanding the vesting of the house property in the Custodian, the legal ownership remained with the assessee therein and, therefore, section 9(1) of the old Act was attracted. This contention was repelled by this Court. Hedge, J., speaking for the Bench, observed at page 575 of 82 ITR: "The question is who is the 'owner' referred to in this section? Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property? It must be remembered that section 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive
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right over it. Hence, for the purpose of section 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right." The learned Judge observed that "it is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice. Again at page 577, it was held that "for determining the person liable to pay tax, the test laid down by the Court was to find out the person entitled to that income." Again at page 578 it was observed: "No one denies that an evacuee from Pakistan has a residual right in the property that he left in Pakistan. But the real question is, can that right be considered as ownership within the meaning of section 9 of the Act. As mentioned earlier that section seeks to bring to tax income of the property in the hands of the owner. Hence, the focus of that section is on the receipt of the income... The meaning that we give to the word 'owner' in section 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act." In our opinion, the above observations of this Court clearly fix the liability on a person who receives- --or is entitled to receive the income from the property in his own right. In spite of this, the Assessing Officers of various circles instead of uniformly following the ratio laid down in this case have taken different diametrically opposite views depending upon the pronouncements of the concerned High Courts in the circles, on the scope of section 22 of the Act. The High Courts of Allahabad, Punjab and Haryana, Rajasthan, Calcutta and Patna have taken the view, by correctly understanding the ratio laid down in Jodha Mal Kuthiala's case (1971) 82 ITR 570 (SC), and the High Courts of Bombay,_Delhi and Andhra Pradesh have taken a different view wrongly distinguishing on facts Jodha Mal Kuthiala's case (1971) 82 ITR 570 (SC). In…
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