1. These two appeals have been filed by Nandanam Construction Co.
Nampalli, Hyderabad, against the orders of both Commissioner (Appeals)-I and Commissioner A.P.I., Hyderabad, for the assessment year 1979-80.
2. The assessee is a registered firm and is in real estate business. It constructs and sells flats on ownership basis. Its method of accounting of its profits is by treating the date of handing over of possession of flats to the owners as the date of sale irrespective of the date of registration of such sale deed. This has been the consistent practice followed by the assessee and accepted by the ITO in the past assessments. While the assessee returned the profits for the year at Rs. 1,33,166 on the basis of its books, the ITO was of the view that the profits should have been higher than what has been disclosed and estimated it at Rs. 1,73,000 making a net addition of Rs. 39,830. This addition was disputed in the appeal filed before the Commissioner (Appeals). The appeal was also taken up for hearing. The Commissioner (Appeals) was of the view that property income till date of registration was to be assessed in the assessee's hands and had even heard the assessee's objection therein, as he had obviously contemplated enhancement. The assessee objected to jurisdiction of the Commissioner to enhance an income by taking into consideration a new source of income. Meanwhile, the matter was brought to the notice of the administrative Commissioner, who found that not all flats which had been handed over to the purchasers were yet registered in their names, though the agreement for sale provided for registration on completion of the flats. He took the view that the 'notional income' from these flats had to be assessed in the assessee's hands as income from property. He issued a notice under Section 263 of the Income-tax Act, 1961 ('the Act') for including such income in the assessee's hands.
3. The assessee objected to the Commissioner's notice under Section 263 both on the question of jurisdiction and merits. The fact that the assessee had filed an appeal before the Commissioner (Appeals) was set up as a bar to the administrative Commissioner's jurisdiction though such an appeal was still pending at the time of the proposed action.
This argument on the question of jurisdiction was not accepted by him after citing a number of authorities. On merits, he found that the assessee continued to be the owner of these flats in law till such time as they were transferred by registered documents. Ownership is not a mere matter of possession. He discussed a number of cases before deciding against the assessee on this point. He set aside the assessment so that the 'income' from these flats could be included in the assessee's hands. IT Appeal No. 698 (Hyd.) of 1983 is the appeal against the said order.
4. The Commissioner (Appeals-I) thereafter posted the case on the question of estimate of income and dismissed the appeal as infructuous in the view that the entire assessment has been set aside. IT Appeal No. 697 (Hyd.) of 1983 is the appeal against this order.
5. The learned Counsel for the assessee initially questioned the jurisdiction of the Commissioner in view of the pendency of an appeal before the first appellate authority. It was suggested that it was open to the ITO to seek enhancement in the event of an underassessment and that action under Section 263 was, therefore, not only justified but was also necessary. As for merits, he contended that tax laws were concerned with beneficial ownership and not nominal title alone which was mere husk. He pointed out that the most compelling reason for the Commissioner's conclusion was the decision of the Andhra Pradesh High Court (which was binding on him) in the case of CIT v. Nawab Mir Barkat Ali Khan 1974 Tax LR 90, which held that the concept of beneficial ownership was unknown to the Indian law and that legal ownership alone mattered. But this decision, he argued, though rendered on 30-1-1973 had overlooked the decision of the Supreme Court in the case of R.B.Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 rendered on 9-12-1971. The Andhra Predesh High Court had followed the decision of the Calcutta High Court in the case of CIT v. Ganga Properties Ltd. [1970] 77 ITR 637, which itself had been earlier specifically dissented from by the Full Bench decision of the Delhi High Court in CIT v. R.B. Jodhamal Kuthiala [1968] 69 ITR 598, a decision which was, subsequently, confirmed by the Supreme Court. He, therefore, claimed that the view expressed by the Andhra Pradesh High Court in the case as followed by the Commissioner should be deemed to have been impliedly overruled along with the view of the Calcutta High Court in the case of Ganga Properties Ltd. (supra) and the similar view of the Bombay High Court in the cases of CIT v. Union Land & Building Society (P.) Ltd. [1972] 83 ITR 794, CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499 and some other cases though rendered later. He claimed that earlier the Bombay High Court's view in the case of CIT v. Modern Flats (P.) Ltd. [1967] 65 ITR 67. The Punjab and Haryana High Court in the case of Smt.
Kala Rani v. CIT [1981] 130 ITR 321 (where liability was confirmed in the case of purchaser) and the Madras High Court in the case of Mrs.
M.P. Gnanambal v. CIT [1982] 136 ITR 103 laid down incorrect law and cited few other cases which may not be strictly relevant to the issue besides citing the decision of the Tribunal, Special Bench in ITO v.R.K. Sawhney [1982] 2 ITD 207 (Delhi) which supported his contention that mere title can not fasten liability. He contended that what is contemplated under Section 22 of the Act is the ownership of annual value (income) from the property unlike perhaps the concept of ownership of asset itself as under Section 32 of the Act for the purposes of depreciations where 'building, machinery, plant or furniture' should be owned by the assessee. Even the Allahabad High Court, for example, has held in the case of Addl. CIT v. U.P. State Agro Industrial Corporation Ltd. [1981] 127 ITR 97 had held that delay in execution of conveyance deed by itself need not stand in the way of allowance of depreciation though the Delhi High Court has taken a contrary view in CIT v. Hindustan Cold Storage & Refrigeration (P.) Ltd. [1976] 103 ITR 455 followed for the purposes of property income in CIT v. Hans Raj Gupta [1982] 137 ITR 195. He argued that the controversy, as far as we are concerned is resolved in the Special Bench's decision in R.K. Sawhney's case (supra) and that we should follow the same. He claimed that the right to enjoyment of the income itself is not in dispute as in this case where the payment has been received by the assessee and possession since handed over, there can never be any serious controversy. He claimed that the delay in registration is not due to omission or fault of the assessee but partly due to bureaucratic delay in obtaining exemptions from the urban law ceiling legislation and partly due to the delay on the part of purchasers to pay stamp duty as per an agreement. He took us over the agreement of sale of flat to point out that the assessee had done all that was expected of him under the agreement. He gave particulars of registration though in the later years. He pointed out to the decision of the Supreme Court in the case of CED v. Aloke Mitra [1980] 126 ITR 599 wherein liability with reference to nominal title was held to be wrong though for the purposes of estate duty, but in the view that a benamidar had no beneficial interest in the property. He contended that a similar view was taken by the department itself when the Board in its Circular No. 330, dated 6-3-1982 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn.,p. 1537) has taken the view that relief under Section 33(1)(n) of the Estate Duty Act, 1953 is to be given even when there is less than full ownership. He also referred the circular regarding the assessment of income of flat owners, where the co-operative society continues to be the legal owner. He also pointed out to the decision of the Supreme Court in the case of CIT v. T.N. Aravinda Reddy [1979] 120 ITR 46, where it was held that relief under Section 54 of the Act was admissible to the assessee on the basis that the word 'purchased' or 'sale' should have wider interpretation in a commercial sense and not with reference to a law taxation. He argued that the 'owner' should also be interpreted in the same popular sense. He also claimed that the authorities are not consistent in their view as the flat owners in possession have already been assessed on their income and that the present attempt amounts to double taxation. He contended that there is no consistency even in the same assessment as handing over possession is treated as sale for computation of income from sale itself as business income but not so for the purposes of computation of income from property.
6. The learned departmental representative took us over the provisions of the Transfer of Property Act, 1882, the Registration Act and the Stamp Act. He pointed out that a registered deed of conveyance alone can confer legal ownership even as held in the cases of Ganga Properties Ltd. (supra) and Zorostrian Building Society Ltd. (supra) and the recent detailed decision of the Madras High Court in Dr. Raja Sir M.A. Muthiah Chettiar v. CIT[1984] 148 ITR 532, besides the decision of the Andhra Pradesh High Court itself Nawab Mir Barkat Ali Khan's case (supra). Section 53A of the Transfer of Property Act, based upon the doctrine of part performance, he contended, merely served as a protection or a shield against the invasion of his rights and that no person can claim right of ownership on that basis alone. He further pointed out that property income is a notional income and liability goes along with ownership. He also relied upon the Delhi High Court decision in Hans Raj Gupta's case (supra). He contended that ownership of property was material for both the Sections. As for the allegations of inconsistencies, he claimed that there was none. Computation of property and business income have to be made according to the provisions of the statute and that is what has been done. Similarly, he claimed that if the occupants had been assessed as owners, it is for the occupants to seek remedies under the law and that, on that account, the assessee cannot be absolved from liabilities.
7. We have carefully considered the records as well as the arguments.
On the question of jurisdiction, the assessee cannot succeed. Merely because an appeal was pending before the first appellate authority, the jurisdiction of the Commissioner does not get whittled down. The authorities cited by him in his order support his conclusion. As for facts, the agreement for sale of three flats is in a standard form. The assessee was constructing a residential complex of flats and the assessee for a consideration to be paid in instalments had 'agreed to allot (sell)' the flat and the other party had 'agreed to purchase one such flat'. If the assessee were not in a position to hand over the possession of the flat within 18 months unless for reasons beyond his control or an act of the God, he was liable to pay an interest of 6 per cent on the moneys deposited towards the cost of the flat. The purchaser is bound to make good all the payments due and take possession of the flat within one week of receipt of intimation from the assessee that the flat is ready. The allotment is liable to be cancelled even if possession is not taken over even after one month of such intimation at the risk of loss of 50 per cent of moneys deposited towards cost. The agreement also assures peaceful possession and enjoyment of the property to the purchaser from the date of his possession. Agreement also makes it clear that the cost of registration has to be borne by the purchaser. The schedule to the agreement identifies the flat under agreement of sale. The assessee has consistently reckoned the date of handing over possession as the date of sale in its accounts year after year and such computation has been accepted for the purposes of computation of business income subject to other adjustments warranted by law. These flats have also been registered sooner or later in regular sale deeds in a standard form.
The fact that possession had already been handed over is mentioned in the final formal sale deed. The assessee has filed the dates on which the registrations have been effected. There has been a gap between the date of handing over of possession and registration. Meanwhile, each flat was assigned a different municipal number and the purchaser was assessed to municipal tax in his own name. It is contended that delay in registration had been partly due to uncertainties of the urban land ceiling laws, the failure of the purchaser to come up with stamp charges and for registration and such other factors and was not due to any negligence on the part of the assessee. The dispute before us is whether the assessee is assessable on the 'notional income for these flats for the period of gap between the dates of possession and conveyance.
8. The proposition that right or an interest in an immovable property cannot be transferred without a registered conveyance deed is too well established to deserve serious discussion. It is for this reason that we do not go into the statute and case law submitted by the learned departmental representative. In fact, this proposition canvassed by him is not disputed by the learned Counsel for the assessee as it cannot obviously be disputed. We have, therefore, to go on the basis that the assessee continues to be a titular, nominal or 'legal' owner of these flats till the registration was completed notwithstanding the facts that the assessee had received full consideration and handed over the possession of these flats as per prior written agreement of sale. The purchasers had the right to specific performance of the execution of document of sale in their favour. The doctrine of part performance under Section 53A would no doubt protect them from any encroachment invasion of their right by the seller, but that does not make them the 'owners' of these flats in the strict sense of the word as full and absolute owners. It is in this context, we do not consider it necessary to enter into the controversy whether Section 53A merely provides a shield as canvassed by the learned departmental representative or can act as a sword as well. It is even possible to argue that the assessee could have sold the self-same flats to a bonafide purchaser for consideration without notice of adverse possession and can transfer valid title to such purchaser and thereby defeating their right to the possession of the flat as well and that there will only be remaining right to proceed against the assessee for compensation. In fact, this was precisely the argument of the revenue before the Supreme Court to justify the estate duty liability on benamidar's estate on benamidar's death in the case of Aloke Mitra (supra). In this case the Supreme Court did not accept the view of the Allahabad High Court that property can pass on benamidar's death as he has the 'legal title' in law.
Though the decision of the Supreme Court was rendered in the context of the estate duty law, the inference that taxation laws should follow 'legal' ownership in the view that concept of beneficial ownership is unknown in the Indian property laws does not appear to be unqualified even as a very general proposition.
9. We do not, however, have to go into the larger question of ownership in the absolute sense. For the purpose of depreciation, the ownership of asset in question is a precondition and the issue may have to be considered in the stricter sense. Even there, the Allahabad High Court in the case of U.P. State Agro Industrial Corpn. Ltd. (supra) has preferred a more liberal view though the Delhi High Court in the case of Hindustan Cold Storage & Refrigeration (P.) Ltd. (supra) had taken a stricter view. But this controversy, in our opinion, need not detain us for long. For the purposes of Section 22, we are concerned with computation of income and it stands to reason that ownership has to be understood in that context. It is not correct to say, as canvassed by the learned Counsel for the assessee that the words 'of which the assessee is the owner' in Section 22 qualifies only the words 'annual value' and not 'property' when the composite phrase in section as a whole reads as under : 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'.
In the context of the section since the annual value which is the yardstick to measure income, the annual value as computed under Section 23 of the Act is also relevant. The section itself contemplates both occupation (possession) as well as ownership. Ownership is a complete bundle of rights. Possession is an integral part of it. It is possible to own property without present right to possession as in the case of tenanted or leasehold properties or as the right of reversioner over a property subject to life or other limited interest in favour of a third party. The Courts have recognised the right to possession as being the foundation for liability on more than one occasion. It has been held for example that a lessee of a property will be assessable on the income from the property under analogous provisions of the Indian Income-tax Act, 1922 ('the 1922 Act'). The case of Sri Ganesh Properties Ltd, v. CIT [1962] 44 ITR 606 (Cal.) following much earlier decisions is an instance on this issue. The Calcutta High Court itself in the case of Ballygunge Bank Ltd. v. CIT [1946] 14 ITR 409 found that during currency of a lease of certain land, the assessee, who was a lessee was the 'owner' for the period of lease and was assessable on the income from such lease as income from property. There are a number of decisions to the same effect under Section 32 also for the purposes of depreciation wherever the assets have to be owned by the assessee.
No doubt, the leasehold is a recognised legal right in property. But we are mentioning those decisions only for the limited purpose of concluding that it is not necessary that there should be absolute ownership for invoking Section 22. Limited ownership will do. Does not Section 53A confer right, however, limited it may be, in favour of the purchaser when in pursuance of an agreement has paid the full price and taken possession of property and non-registration is not because either party sought to back out of the transaction but only because registration was delayed due to reasons beyond the control of the parties. Unless there were such reasons beyond control, we cannot assume, as had been done by the Commissioner, that the seller merely tried to put off registration when no facts or purpose for such an action is mentioned or indicated. As pointed out by the Supreme Court in R.B. Jodha Mal Kuthiala's case (supra) extracted by the Patna High Court in Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd. [1983] 144 ITR 357 while referring to Section 9 of the 1922 Act analogous to Section 22 of the 1961 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 income. [Emphasis supplied] The word 'owner' has different meanings in differents contexts. The High Court then proceeded to cite various authorities like Stroud's Judicial Dictionary (referred by the Supreme Court) as well, Pollock on Jurisprudence, Dias on Jurisprudence and Paton's Text-book on Jurisprudence for the following conclusion stated in Stroud's Judicial Dictionary as what 'owner' means in Sahay Properties & Investment Co. (P.) Ltd.'s case (supra) : 'Owner' applies to every person in possession or receipt either of the whole, or of any part, of the rents or profits of any land or tenement ; or in the occupation of such land or tenement, other than as a tenant from year to year or for any less term or as a tenant at will. (Stroud's Judicial Dictionary, 3rd Edn., Vol. 3, p. 2060) (p.
364) Thus, the juristic principle from the viewpoint of each one is to determine the true connotation of the term 'owner' within the meaning of Section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for the purpose of this statutory provision. The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately--a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a remainder-man, say, at the end or extinction of the period of occupation after, again say, a thousand years ....
We are of the view that the decision of the Supreme Court in the case of R.B. Jodha Mal Kuthiala (supra) should leave us in no doubt, as to the course of action before us. It was a case where an attempt on the part of the revenue to tax an evacuee as the owner where its custody vested in the custodian of evacuee property was not upheld on the ground that 'owner' in the context of the section means a person who can exercise his right over the property as the owner during the relevant period. A reasonable interpretation, the Supreme Court, pointed out can justify taxation of the income in the hands of the person, who has right over the income as otherwise the interpretation sought to be put by the revenue could make the section 'an instrument of oppression'. The factual position in this case is not much different. The purchasers are in occupation of the flat and in unrestricted enjoyment of the same. The assessee has only the husk of legal title. It is not suggested that the assessee had exercised any right over the income of the property or otherwise enjoyed the income from the property. In fact, the purchasers have offered the incomes in their own Income-tax assessment and the value of property for wealth-tax assessments. If we accept the revenue's interpretation in this case, the income will be taxed in one hand while it is enjoyed by another who is a total stranger. The fact that the income from property computed under Section 22 is 'notional' can only mean that it is measured notionally as in the case of self-occupied property or in the case of tenanted property with reference to the rent which it may fetch if let from year to year without going by actual rent received alone.
It cannot mean that one person's income is taxed in the hands of another notionally. Unless as under Section 64 of the Act, there are specific provisions to include income of one in the hands of another, there is absolutely no warrant for such an attempt. No doubt, there had been some conflict of views among the High Courts on this point. But, since the Supreme Court has categorically laid down that ownership is with reference to income and since it is the assessee's claim that it had no right over the income as per agreement of sale and that the claim that it had not enjoyed any income is a matter of record, we should accept the assessee's claim.
10. Since the revenue has sought to bank upon the decision of the Andhra Pradesh High Court in Nawab Mir Barkat Ali Khan's case {supra) some discussion as to the decisions of the High Courts cannot be avoided. This decision as pointed out by the learned Counsel was rendered without noticing the Supreme Court decision. It is pointed out by the Patna High Court in the case of Sahay Properties & Investments Co. (P.) Ltd. (supra) in similar circumstances that income is assessable under Section 22 in the hands of the person in possession of the property following the decision of the Supreme Court in R.B. Jodha Mal Kuthiala's case (supra) and further pointed out that the decision in Nawab Mir Barkat Ali Khan's case (supra) cannot be correct in view of the Supreme Court decision in R.B. Jodha Mal Kuthiala's case (supra). Similar view was taken by the Punjab and Haryana High Court in the case of Smt. Kala Rani (supra), where it was pointed out that the decision of the Andhra Pradesh High Court was not in consonance with the Supreme Court's decision in R.B. Jodha Mal Kuthiala's case (supra).
It will not be correct to say that beneficial ownership which may or may not be regarded in India for the purpose of property laws will be irrelevant for the tax purposes. Income under the Income-tax law is concerned with taxing the income or the benefits derived by the assessee from the property. No tax consequence follows from mere titular ownership. Even where the income derived from a property not owned by a taxpayer cannot be taxed under Section 22 on the ground that he is not the owner, there is no immunity for him from taxation. His income therefrom is bound to be assessable and assessed as business income or income from other sources. In fact, in the two decisions cited hereinbefore, the High Courts were concerned with liability on the part of persons having possession over the property and had upheld such liability. The same income as pointed out cannot be taxed in two hands. This proposition is again too well established as in case of Laxmipat Singhania v. CIT [1969] 72 1TR 291 where the Supreme Court pointed out that it is a fundamental rule of the law of taxation that unless otherwise provided, same income cannot be taxed twice. Since we would have confirmed liability in the hands of purchasers in possession we cannot possibly uphold such liability in the hands of the assessee.
Even if we had accepted departmental contention that absolute ownership in law is essential for computing property income under Section 22, we could not have possibly held that, say, the rental income by one of the purchasers in possession on hiring out the premises or capital gains on transfer of his right to possession and other rights under the agreement will not be assessable at all, since such income will still be assessable as income from other sources or capital gains as it is income and has income character. No doubt, the authorities have been inconsistent in having a different concept of sale for the purposes of computation of business income and for income from property. Even assessing such inconsistency is permitted by law by providing different basis for computing the income from the two sources, we do not think it is open to the revenue to be inconsistent in taxing the same income in two hands even if two different, persons are sought to be taxed under the different heads of income. We are informed that in the case of most of the purchasers in possession, the assessments have been made and tax collected and such assessments by and large, became final wherever there is liability. On this sole ground that there cannot be double taxation of the same income, the order of the Commissioner under Section 263 cannot stand. We also found that revenue itself has taken a reasonable view in such circumstances. It was for example in the Board's Circular No. 7 (XVII-D-I) of 1954, dated 10-3-1954 stated that individual members of a co-operative housing society should be assessed on the income of their building/flats though the ownership in many cases may rest with the co-operative society. Later by another Circular No. 8, dated 24-3-1969 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 1339) the Board tried to read the agreement itself as one resting the ownership in such members for the same result. A similar circular was issued for the wealth-tax purposes in Letter No. F. No.8/2/69-IT (AI), dated 25-3-1969 of Sundaram's Law of Income-tax, Eleventh edn., Vol. 1, p. 894. We, therefore, set aside the order of the Commissioner under Section 263 and restore the order of the ITO.11. Since we have restored the order of the ITO in the preceding paragraph in IT Appeal No. 698 (Hyd.) 1983, the appeal in respect of quantum can no longer be treated as infructuous. Hence, the order of the Commissioner (Appeals) is set aside and the question in appeal restored to the Commissioner (Appeals) for fresh disposal in accordance with law.