NANDANAM CONSTRUCTION COMPANY v. INCOME TAX OFFICER
[Citation -1985-LL-0329-3]

Citation 1985-LL-0329-3
Appellant Name NANDANAM CONSTRUCTION COMPANY
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 29/03/1985
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags co-operative housing society • business or profession • computation of income • estate duty liability • co-operative society • date of registration • transfer of property • construction company • method of accounting • residential complex • beneficial interest • adverse possession • agreement for sale • urban land ceiling • immovable property • written agreement • value of property • notional income • registered deed • registered firm • double taxation • conveyance deed • quantum appeal • house property • rental income • special bench
Bot Summary: Calcutta High Court itself in the case of Ballygunge Bank Ltd. vs. CIT 14 ITR 409 found that during currency of a lease of certain lands, 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 the property. Since the Supreme Court has categorically laid down the ownership is with reference to income, and since it is 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. Income under income-tax law is concerned with taxing the income or the benefits derived by the assessee from the property. His income therefrom is bound to be assessable and assessed as business income or income from other sources. Even if we had accepted Departmental contention that absolute ownership in view is essential for computing property income under s. 22, we could not possibly have held that, say, the rental income by one of the purchaser in possession on hiring out the premises or capital gains on transfer of his right to possess 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 gain as it is income and has income character. No doubt, the authorities have been inconsistent in having a different concept of sale for purposes of computation of business income and, for income from property. Even assessing 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 revenue to be inconsistent in taxing the same income in two hands even if two different persons are sought to be taxed under different heads of income.


S. RAJARATHNAM, A. M. : These two appeals have been field by M/s Nandanam Construction Company, Mampalli, Hayderbad against orders both CIT (A) and CIT A. P. I. Hyderabad For asst. yr. 1979-80. assessee is 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 date of handing of possession of flat to owners as date of sale irrespective of date of registration of such sale deed. This has been consistent practice followed by assessee and accepted by ITO in past assessments. While assessee returned profits for year at Rs. 1,33,166 on basis of its books, ITO was of view that profits should have been higher then what has been disclosed and estimated it at Rs. 1, 73,000 making net addition of Rs. 39,830 This addition was disputed in appeal filed before CIT (A) in appeal was also taken up for hearing. CIT (A) was of view that property income till date of registration was to be assessed in assessees hands and had even heard assessee s objection therein as he had obviously contemplated enhancement. Assessee objected of jurisdiction to Commissioner to enhance income by taking into consideration new source of income. Meanwhile matter was brought to notice of administrative Commissioner. Who found than mot all flats which had been handed over to purchasers were yet registered in their names, though agreement for sale provided for registration on completion of flats. He took view that notional income from these flats had to be assessed in assessee s hands as income from property. He issued notice under s. 263 of Act for including such income in assessee s hands. Assessee objected to Commissioner s notice under s. 263 both on question of jurisdiction and merits. facts that assessee had filed appeal before CIT (A) was set up as bar to administrative Commission s jurisdiction though such appeal was still pending at time of proposed action. This argument on question of jurisdiction was not accepted by him after citing number of authorities. On merits, he found that assessee continued to be owner of these flats in law till such time as they were transferred by registered documents. Ownership is not mere matter of possession. He discussed number of cases before deciding against assessee on this point. He set aside assessment so that Income from these flats could be included in assessee s hands. I. T. A. No: 698/Hyd/83 is appeal against said order. CIT (A) thereafter posted case on question of estimate of income and dismissed appeal as infructuous in view that entire assessment has been set aside I. T. A. No. 697/Hyd/83 is appeal against this order . ld. counsel for assessee initially questioned jurisdiction of CIT in view of pendency of appeal before first appellate authority. It was suggested that it was open to ITO to seek enhancement in event of under assessment and that action under s. 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 tile alone which was mere husk. He pointed out that most compelling reason for CIT s conclusion was decision of Andhra Pradesh High Court (which was binding on him) in case of CIT vs. Nawab Mr Barket Ali Khan 1974 Tax LR 90 (AP) which held that concept of beneficial ownership was unknown to Indian law and that legal ownership alone mattered. But this decision, he argued, though rendered on 30th Jan., 1973 had overlooked decision of Supreme Court in cases of R. B. Jadhamal Kuthiala vs. CIT (1971) 82 ITR 570 (SC) rendered on 9th Dec., 1971. A. P. High Court had followed decision of Calcutta High Court in case of CIT vs. Ganga Properties Ltd. (1970) 77 ITR 637 (Cal) which itself had been earlier specifically dissented form by Full Bench decision of Delhi High Court in CIT vs. R. B. Jahdamal Juthila (1968) 69 ITR 598 (Del) (FB) decision which was subsequently confirmed by Supreme Court he, therefore, claimed that view expressed by H. P. High Court it case as followed by Commissioner should be deemed to have been impliedly overruled along with view of Calcutta High Court in case fo Ganga Properties (supra) and similar view of Bombay High Court to case of CIT vs. Union Land & Building Society (Pvt.). Ltd. (1972) 83 ITR 794 (Bom), CIT vs. Zorstrian Building Society Ltd. (1976) 102 ITR 499 (Bom) and some other cases though rendered later. He claimed that earlier Bombay view in case of CIT vs. Modern Flats (P) Ltd. (1967) 65 ITR 67 (Bom), Punjab & Haryana High Court in case of Kalarani vs. CIT., (1981) 21 CTR (P & H) 17: (1981) 30 ITR 321 (P & H) where liability was confirmed in case of purchaser) and Madras High Court in case of Smt. M. P. Gnanambal vs. CIT (1982) 136 ITR 103 (Mad) laid down correct law and cited few other cases which may not be strictly relevant to issue besides citing Special Bench decision of Tribunal in ITO vs. R. K. Sawhney (1982) 2 ITD 207 (Del) (SB) which supported his contention that mere title cannot fasten liability, He contended that what is contemplated under s. 22 is ownership of annual value (income) from property unlike perhaps concept of ownership of asset itself as under s. 32 for purpose of deprecations where Building, machinery, plant or furniture should be owned by assessee Even Allahabad High Court, for example has held in case of Addl. CIT vs. U. P. State Agro Industrial Corporation Ltd. (1981) 20 CTR (All) 141: (1981) 127 ITR 97 (All) had held that delay in execution of conveyance deed by itself need not stand in way of allowance of depreciation though Delhi High Court has taken contrary view in CIT vs. Hindustan Cold Storage & Refrigeration Ltd. 1976 CTR (Del) 78: (1976) 103 ITR 455 (Del) followed for purpose of property income in CIT vs. Hans Raj Gupta (1982) 28 CTR (Del) 92: (1982) 137 ITR 195 (Del). He argued that controversy as far as we are concerned is resolved in Special Bench decision in R. K. Sawhney (1982) 2 ITD 207 (Del) and that we should follow same. He claimed that right to enjoyment of income itself is not in dispute as in this case where payment has been received by assessee and possession since handed over there can never be any serious controversy. He claimed that delay in registration in not due to omission or fault of assessee but partly due to bureaucratic delay in obtaining exemptions from Urban Law Ceiling Legislation and partly due to delay on part of purchases to pay stamp duty as per agreement. He took us over agreement of sale of flat to point out that assessee had done all that was expected of him under agreement. He gave particulars of registration though in later years. He pointed out to decision of Supreme Court in case of CED vs. Aloke Mitra (1980) 19 CTR (SC) 367: (1980) 126 ITR 599 (SC) wherein liability with reference to nominal title was held to be wrong though for purpose of estate duty, but in view that benamidar had no beneficial interest in property. He contended that similar view was taken by Department itself when Board in its Circular No. 330 dt. 6th March, 1982 had taken that view that relief under s. 33 (1) (N) of ED Act is to be given even when there is less than full ownership. He also referred circular regarding assessment of income of flat owners where co-operative society continues to be legal owner. He also pointed out to decision of Supreme Court in case of CIT vs. T. N. Arvinda Reddy (1979) 12 CTR (SC) 423: (1979) 120 ITR 46 (SC) where it was held that relief under s. 54 was admissible to assessee on basis that words purchased or sale should have wider interpretation in commercial sense and not with reference to law-taxation. He argued that owner should also interpreted in same popular sense. He also claimed that authorities are not consistent in their view as flat owners in possession have already been assessed on their income and that present attempt amounts to double taxation. He contended that there is no consistency even in same assessment as handing over possession is treated as sale for computation of income from sale itself as business income but not so for purpose of computation of income form property. ld. Departmental Representative took us over provisions of Transfer of Property Act, Registration Act and Stamp Act. He pointed out that registered deed of conveyance alone can confer legal ownership even as held in case CIT vs. Ganga properties Ltd. (1970) 77 ITR 637 (Cal) and CIT vs. Zorastrian Building Society Ltd. (supra) and recent detailed decision of Madras High Court in M. A. Muthaiah Chettiar vs. CIT (1984) 148 ITR 532 (Mad) besides decision of Andhra Pradesh High Court itself Mir Barket Ali Khna s case (Supra), s. 53A of Transfer of Property Act based upon doctrine of part- performance he contended merely served as protection or shield against 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 notional income and liability goes along with ownership. He also relied upon Delhi High Court Decision in CIT vs. Hans Raj Gupta (1982) 28 CTR (Del) 92: (1982) 137 ITR 195 (Del) He contended that ownership of property was material for both sections. As for allegations of inconsistencies he claimed that there was none. Computation of Property and business income have to be made according t o provision of statue and that is what has been done. Similarly had claimed that if occupants had been assessed as owners, it is for occupants to seek remedies under law and that, on that account, assessee cannot be absolved from liabilities. We have carefully considered records as well as arguments. On question of jurisdiction, assessee cannot succeed. Merely because appeal was pending before first appellate authority, jurisdiction of CIT does not get whittled down. authorities cited by him in his order support his conclusion. As for Facts. agreements for sale of three flats is in standard from. assessee was constructing residential complex of flats and assessee for consideration to be paid in instalments had "agreed to allot (sell)" flat and other party had "agreed to purchase one such flat". If assessee were not in position to had over possession of flat within eighteen months unless for reasons beyond his control or act of God. He was liable to pay interest of 6per cent on money deposited towards cost of flat. purchaser is bound to make good all garments due and take possession of flat within one week of receipts of intimation form assessee that flat is ready. allotment is liable to be cancelled even if possession is not taken over even after one month of such intimation at risk of less of 50per cent of moneys deposited towards cost. agreement also assures peaceful possession and enjoyment of property to purchaser from date of possession-agreement also makes it clear that cost of registration has to borne by purchaser. schedule to agreement identified flat under agreement of sale. assessee has consistently reckoned date of handing over possession as date of sale in its accounts year after year and such computation has been accepted for purposes of computation of business income subject to other adjustments warranted by law. These flats have also been registered sooner or later is regular sale deeds in standard form. fact that possession had already been handed over is mentioned in final formal sale deed. assessee has filed dates on which registrations have been effected. There has been gap between date o f handing over of possession and registration. Meanwhile each flat was assigned was assessed to Municipal number and purchaser was assessed to Municipal tax in his own name, It is contended that delay in registration had been partly due to uncertainties to Urban land Ceiling Laws, failure of purchaser to come up with stamp charges and for registration and such other factors and was not due to any negligence on part of assessee. dispute before us is whether assessee is assessable on "Notional income" for these flats for period of gap between dates of possession and conveyance. proposition that right or interest in immovable property cannot b e transferred without registered conveyance deed is too well established to deserve serious discussion, It is for this reason that we do not go into statue and case law submitted by ld. Departmental Representative in fact, this proposition canvassed by him is not disputed by ld. counsel for assessee, as it cannot obviously be disputed. We have therefore, to go on basis that continues to be titular, nominal or "Legal" owner of these flats till registration was completed notwithstanding facts that assessee has received full consideration and handed possession of these flats as per prior written agreement of sale. purchasers has right to specific performance of execution of document of sale in their favour. doctrine of part performance under s. 53 -A of Transfer of Property Act would no doubt protect them from any encroachment of invasion of their right by seller, but that does not make them "Owners" of these flats in strict sense of word as full and absolute owners., It is in this context, we do not consider it necessary to enter into controversy whether s. 53A of Transfer of Property act merely provides shield as canvassed by ld. Departmental Representative or can act as sword as well. It is even possible to argue that assessee could have sold self- same flats to bona fide purchaser for consideration without notice of adverse possession and can transfer valid title to such purchaser and thereby defeating their right to possession of flat as well and that there will only be remaining right to proceed against assessee for compensation. In fact, this was precisely argument of revenue before Supreme Court to justify estate duty liability on benamidar s estate or benamidar s death in cash of Aloke Mitra (1980) 19 CTR (SC) 367: (1980) 126 ITR 599 (SC). In this case Supreme Court did not accept view of Allahabad High Court that property can pass on benamidar s death he has "Legal title" in law. Though decision of Supreme Court was rendered in context of estate duty law, inference that taxation laws should follow "legal" ownership in view that concept of beneficial ownership is unknown in Indian porperty laws does not appear to be unqualified even as very general proposition. We do not, however, have to go into larger question of ownership in absolute sense. For purpose of depreciation, ownership of asset in question is precondition and issue may have to be considered in stricter sense. Even there Allahabad High Court in case of Agro Industries Corporation (supra) has preferred more liberal view though Delhi High Court case of Hindustan Cold Storage & Refrigeration (supra) had taken stricter view. But this controversy, in our opinion need not detain us for long. For purposes of s. 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 ld. counsel for assessee that words "of which assessee is owner" in s. 22 qualifies only words "annual value" and not "property" when composite phrase in section as whole reads as under: "The annual value of property consisting of any building or lands appurtenant thereto of where assessee is owner, other than such portions of such property as he may occupy for purposes of any business or profession carried on by him profits of which are chargeable to income-tax, shall be chargeable to income-tax under head 'Income from house property ." In context of section, since annual value is yardstick to measure income, annual value as computed (under s. 23) is also relevant. T h e section itself contemplated both occupation (Possession) as well as ownership. Ownership is complete bundle of rights Possession is integral part of it. It is possible to own property without present right to possession as in case of tenanted or leasehold properties as right of reversioner over property subject to life or other limited interest in favour of third party. Court have recognised right to possession as being foundation for liability on more than one occasion. It has been held for example that lessee of property will be assessable on income from property under analogous provisions of Indian IT Act. case of Ganesh Properties Ltd .vs. CIT (1962) 44 ITR 606 (Cal) following much earlier decisions is instance on this issue. Calcutta High Court itself in case of Ballygunge Bank Ltd. vs. CIT (1946) 14 ITR 409 (Cal) found that during currency of lease of certain lands, assessee, who was lessee was "Owner" for period of lease and was assessable on income from such lease as income from property. There are number of decisions to same effect under s. 32 also four purposes of depreciation wherever assets have to be "Owned by assessee". No doubt, leasehold is recognised legal right in property. But we are mentioning these decisions only for limited purpose of concluding that it is not necessary that there should be absolute ownership for invoking s. 22. Limited ownership will do. Does not s. 53A of Transfer of Property Act confer right, however, limited to may be, in favour of purchase when in pursuance of agreement has paid full price and because either party sought to back out of transaction but only because registration was delayed due to reasons beyond control of parties? Unless there were such reasons beyond control, we cannot assume, as had been done by CIT, that seller merely tried to put off registration when no facts or purpose for such action is mentioned or indicate. As pointed out by Supreme Court in R. B. Jodha Mal Kuthiala vs. CIT (supra) extracted by Patna High Court in Addl. CIT vs. Sahay Properties and Investment Co. (P) Ltd. (1983) 34 CTR (Pat) 382: (1983) 144 ITR 357 at 371 (Pat) while referring to s. 9 of 1922 Act analogous to s. 22 of IT Act, 1922 mentioned earlier that section seeks to bring to tax income of property in hands of owner. Hence focus of that section is on receipt of income. word owner has different meaning in different contexts (underlining by High Court for emphasis). High Court then proceeded to cite various authorities like Stroud s Judicial Dictionary (referred by Supreme Court as well, Pollock on Jurisprudence, Dias on Jurisprudence and Patons Text-book on Jurisprudence) for following conclusion stated in Stroud s Judicial Dictionary as what 'Owner means in (1983) 144 ITR 357 at 362 (Pat): "Owner applies to every person in possession or receipt either of whole, or of any part, of rents or profits of any land or tenement; or in occupation of such land or tenant, other than as tenant from year to year or for any less term or as tenement at will " (Stroud s Judicial Dictionary, 3rd Edn., Vol. 3 p. 2060). High Court further proceeded to observed at same page as under: "Thus, juristic principle from view point of each one is to determine true connotation of term "owner" within meaning of s. 22 of Act in its practical sense, leaving husk of legal title beyond domain of ownership for purpose of this statutory provision. reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately person in receipt of money having actual control over property with no person having better right to defeat his claim of possession or person in legal parlance who may remain reminder man, say, at end of extinction of period of occupation after, again, say thousand years?" We are of view that decision of Supreme Court in case of R.B. Jodha Mal Kuthiala vs. CIT (supra) should leave us in no doubt as to course of action before us. It was case where attempt on part of revenue to tax evacuee as owner where custody vested in Custodian of Evacuee Property was not upheld on ground that "owner" in context of section means person who can exercise his right over property as owner during relevant period. reasonable interpretation, Supreme Court, pointed out can justify taxation of income in hands of person who has right over income as otherwise interpretation sought to be put by revenue could make section "an instrument of oppression". factual position in this case i s not much different. purchasers are in occupation of flat and in unrestricted enjoyment of same. Assessee has only husk of legal title. It is not suggested that assessee had exercised any right over income of property or otherwise enjoyed income from property. In fact purchasers have offered incomes in their own income-tax assessment and t h e value of property for wealth-tax assessment. If we accept revenue s interpretation in this case, income will taxed in one hand while it is enjoyed by another who is total stranger. fact that income from property computed under s. 22 is "notional" can only mean that it is measure notionally as in case of self-occupied property or in case of tenanted property with reference to rent which it may fetch it left from year to year without going by actual rent received alone. It cannot mean that persons income is taxed in hands of another notionally. Unless as under s. 64 there are specific provisions to include income on one in hands of another, there is absolutely no warrant for such attempt. No doubt there had been som conflict of views among High Courts at their point. But since Supreme Court has categorically laid down ownership is with reference to income, and since it is assessee s claim that it had no right over income as per agreement of sale and that claim that it had not enjoyed any income is matter of record. We should accept assessee s claim. Since revenue has sought to bank upon decision of Andhra Pradesh High Court in Mir Barkat Ali Khan s case (supra) some discussion as to decisions of High Courts cannot be avoided. This decision as pointed out by ld. counsel was rendered without noticing Supreme Court decision. It is pointed out by Patna High Court in case of Addl. CIT vs. Sahay Properties & Investment Co. (P) Ltd. (1983) 34 CTR (Pat) 382: (1983) 144 ITR 357 (Pat) in similar circumstances that income is assessable under s. 22 in hands of person in possession of property following decision of Supreme Court in Jodhamal Kuthala s case (supra) and further pointed out that decision in Mir Barket Ali Khan s case (supra) cannot be correct in view of Supreme Courts decision. Similar view was taken by Punjab & Haryana High Court in case of Smt. Kala Rani vs. CIT (1981) 21 CTR (P&H) 17: (1981) 130 ITR 321 (P&H), where it was pointed out that decision of A.P. High Court was not in consonance with Supreme Courts decision in Jodhamal Kuthiala s case. It will not be correct to say that beneficial ownership which may or may not be regarded in India for purpose of property laws will be irrelevant for tax purpose. Income under income-tax law is concerned with taxing income or benefits derived by assessee from property. No tax consequence follows from mere titular ownership. Even where income derived from property not owned by taxpayer cannot be taxed under s. 22 on ground that he is not owner, there is no immunity for him from taxation. His income that he is not 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 two decisions cited here in before, High Courts were connected with liability on part of persons having possession over property and had upheld such liability. same income as pointed out cannot be taxed in two hands. proposition is again too well established as in case of Laxmipat Singhania vs. CIT (1969) 72 ITR 291 at 294 (SC) where Supreme Court pointed out that it is fundamental rule of law of taxation that, unless otherwise provided, same income cannot be taxed twice. Since we would have confirmed liability in hands of purchasers i n possession, we cannot possibly uphold such liability in hands of assessee. Even if we had accepted Departmental contention that absolute ownership in view is essential for computing property income under s. 22, we could not possibly have held that, say, rental income by one of purchaser in possession on hiring out premises or capital gains on transfer of his right to possess and other rights under agreement will not be assessable at all, since such income will still be assessable as income from other sources or capital gain as it is income and has income character. No doubt, authorities have been inconsistent in having different concept of sale for purposes of computation of business income and, for income from property. Even assessing inconsistency is permitted by law by providing different basis for computing income from two sources, we do not think it is open to revenue to be inconsistent in taxing same income in two hands even if two different persons are sought to be taxed under different heads of income. We are informed that in case of most of purchasers in possession 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 same income, order of CIT under s. 263 cannot stand. We also found that revenue itself has taken reasonable view in such circumstances. It was for example in Board s Circular No. 7 (XVII-D-I) of 1954 dt. 10th March, 1954 stated that individual member of Co-operative Housing Society should be assessed on income of their building/flats though ownership in many cases may rest with co-operative society. Later by another Circular in F.No. 8/2/69/IT (A-I) dt. 25th March, 1969 Board tried to read agreement itself as one resting ownership in such members for same result. similar Circular was issued for wealth-tax purposes in letter No. F.No. 8/2/69-1 (A-T) dt. 25th March, 1969 Source pages 893-894 of Vol. I of Sundaram s Law of Income-tax in India Golden Jubilee Edition. We therefore set aside order of CIT under s. 263 and restore order of ITO. Since we have restored order of ITO in proceeding paragraph in ITA No. 698/Hyd/83, appeal in respect of quantum can no longer be treated is in fractious. Hence order of CIT(A) is set aside and Quantum appeal restored to CIT(A) for fresh disposal in accordance with law. In result, both appeals are allowed. *** NANDANAM CONSTRUCTION COMPANY v. INCOME TAX OFFICER
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