M. Damodaran Nair v Income Tax Officer

Income Tax Appellate Tribunal

COCHIN BENCH (SMC)

31 January 2003

It Appeal No. 231 (Cochin) of 1999

The Order of the Court was as follows :

1. This appeal by the assessee is for the assessment year 1995-96. The only effective ground urged by the assessee in this appeal is directed against the order of the Commissioner (Appeals) treating the lease rent earned by the assessee by sub-letting the property as income from house property. It is the case of the assessee that the Commissioner (Appeals) failed to note that the assessee was carrying on business activity by taking property on lease and sub-letting the property to others apart from the business of builders, money lenders, etc.

2. In this case, the return filed by the assessee was accepted under section 143(1)(a) on 19-2-1996. Subsequently, it was found that the assessee had returned the rental income under the head business and claimed expenses there from. Accordingly, it was held that income chargeable to tax had escaped assessment and action under section 147 was initiated by issuing notice under section 148 on 24-11-1997. In reply, the assessee stated that the return filed on 29-8-1995 should be treated as one filed in response to notice under section 147.

3. The assessee derives income from sub-letting and also interest. For the year under consideration, assessee received rent of Rs. 2, 76, 750 from the buildings leased out to Canfin Homes and Oriental Insurance Company. This building was taken on lease by the assessee from Smt. Leela Amma and Sri M. Baiju. After deducting certain expenses from the lease rent, the assessee offered for assessment a sum of Rs. 1, 01, 496 under the head ‘business income’. The contention of the assessee before the Assessing Officer was that since he was not the owner of the building, the lease rent received is assessable as income from business. The Assessing Officer did not accept the above contention of the assessee holding that the assessee is deemed owner as per the provisions of section 27(iii)(b) read with Explanation to section 269(UA)(f). He treated the lease rent received by the assessee as income from house property. The assessee appealed to the first appellate authority.

4. The first appellate authority accepted the submission of the assessee that the term of lease had not exceeded 12 years so to bring the assessee within the Explanation to section 269(UA)(f) i.e., deemed owner. However, he held that the plea that it should be treated as income from business or profession cannot be accepted in the light of the following decisions :

(1) CIT v. V. Shanmugham 1980 Indlaw MAD 167 ‘ (Mad.). The first appellate authority held that this decision is distinguishable on facts, since this assessee was running a lodging house and not doing the business of letting out.

(2) CIT v. Anand Rubber and Plastics (P.) Ltd. 1988 Indlaw PNH 53 (Punj. and Har.) : This was a case where a factory consisting of main building, a front shed and a rear shed could not be utilised by the assessee for the purpose of business due to adverse marketing conditions, and it was temporarily let out. CIT, therefore, held that this decision is also distinguishable on facts.

(3) East India Housing and Land Development Trust Ltd. v. CIT 1960 Indlaw SC 384 (SC): In this case, it was held by the Supreme Court that even when a company is formed to set up a market and in that process purchased land, developed it and set up a market, the income received from the shops in the market was taxable as income from house property.

(4) CIT v. Bhakhtawar Construction (P.) Ltd. 1985 Indlaw MUM 168 : In this case, the Bombay High Court held that the income derived by the assessee by incurring considerable expenditure for air-conditioning installation and its maintenance, if it is as per an agreement, was taxable not under the head ‘income from other sources’ but under the head ‘income from house property’. The first appellate authority held that this decision is also distinguishable on facts.

In the light of the above decisions, the first appellate authority dismissed the assessee’s appeal. The assessee is in further appeal before the Tribunal.

5. Before me, relying upon the Board’s Circular No. 495 dated 22-9-1987 and the decision of the Kerala High Court in the case of CIT v. Palace Fund (Individual) 1991 Indlaw KER 128 ‘ and also the decision of the Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT 1971 Indlaw SC 417, the assessee’s representative contended that the lease rent received by the assessee by sub-letting the property is liable to be treated as income from business. He submitted that the assessee is in this line of business from the assessment year 1984-85 and onwards. The income was always accepted as business income. The assessee’s representative distinguished the decisions (1) S. G. Mercantile Corpn. (P.) Ltd. v. CIT 1972 Indlaw SC 250 (SC) and (2) R.B. Jodha Mal Kuthiala’s case (supra) and placed reliance on the decision of the jurisdictional High Court in Palace Fund (Individuals’) case (supra). The fact that by two successive agreements, the property was in the possession of the assessee for more than 12 years is not disputed. The assessee’s representative submitted that both the Assessing Officer and the Commissioner (Appeals) erred in treating the lease rent received by the assessee as income from house property. Assessee was taking buildings on lease and was sub-letting them. Therefore, the income received from such an activity is assessee’s business income. He further submitted that it was by Finance Act, 1987 that the meaning of the expression “ownership” was extended for the purpose of adding income under the head “income from property”. The expression “ownership” meaning legal ownership had the effect of excluding cases where an assessee possessed all rights to an immovable property except the husk of the title. Relying upon a portion of the extract from Circular No. 495 dated 22-9-1987 which reads as under :

“Enlarging the meaning of ownership of house property : 23.1

The Finance Act, 1987 has extended the meaning of the expression “ownership” for the purpose of computing income under the head “income from house property”. The expression ownership meaning legal ownership had the effect of excluding cases where an assessee possessed all rights to an immovable properly except the husk of the title.”

, the assessee’s representative submitted that the extended meaning of ‘ownership’ as brought in the statute book byFinance Act, 1987 is applicable and as such, the assessee becomes the deemed owner as per the provisions of section 27(iiib) read with the Explanation to section 269UA(f) only in the cases and circumstances mentioned in the Circular and not in any other case like that of the assessee whose business is to take buildings on lease and then sub-let them for rent.

6. The ld. departmental representative, on the other hand, supported the orders of the revenue authorities. He first of all objected to the reliance placed by the assessee’s representative on the decision in the case of Jindal Photo Films Ltd. v. Dy. CIT 1998 Indlaw DEL 311 (Delhi). He submitted that in the instant case of the assessee, first of all there was no assessment earlier. It was only an intimation. He contended that the mere fact that in the earlier years the Department had taken a different view does not preclude it from taking a contrary view in the subsequent year based on the correct position of law. He submitted that the assessee had taken the property for more than 12 years in succession by continuing the agreements. Therefore, by virtue of section 21(iiib) read with section 269UA(f), assessee has become the owner of the property. Section 269UA(f) is very clear. It defines ‘transfer’. By virtue of the Explanation to section 269UA(f), the assessee had become the deemed owner of the property. He thus submitted that the orders of the revenue authorities are liable to be upheld.

7. I heard the rival submissions and have gone through the orders of the revenue authorities, as well as the decisions relied on by the assessee’s representative. I am of the view that the assessment itself is erroneous as it is passed on a mis-conception of law.

8. First of all, Chapter XXA consisting of sections 269A to 269S was inserted by the Taxation Laws (Amendment) Act 1972 with effect from 15-11-72. It ceased to be in operation in respect of the transfer of immovable property made after 30-9-1986. This Chapter itself was introduced to avoid tax evasion. The heading reads :

“Acquisition of immovable properties in certain cases of transfer to counteract evasion of tax”

. Section 269A is the defining section. First of all the heading itself indicates that the acquisition of immovable properties are in cases where there was a transfer between the parties or distant relatives showing lesser value of the property in the document so as to avoid tax. Hence; Chapter XX-A is applicable only in the case of Government and not to individuals. Chapter XX-C consisting of sections 269UA to section 269UD was inserted with effect from 1-10-1986 vide Notification No. S.O. 480(E) dated 7-8-1986. The heading of this Chapter reads ;

“Purchase by Central Government of immovable properties in certain cases of transfer.”

The above heading indicates that this Chapter was introduced so as to counter the tax evasion. Section 269UA reads:

“The provisions of Chapter shall come into force on such date as the Central Government may, by notification on the official gazette, appoint, and different dates may be appointed for different areas”. Section 269UA(a) defines what is” agreement for transfer”

. It means an agreement, whether registered under the Registration Act, 1908 or not for the transfer of any immovable property. This means that firstly there should be an agreement, whether registered or not, and the agreement should be for the transfer of the immovable property. According to section 269UA(b), there should be first an agreement for transfer and secondly there should be an “apparent consideration.” Section 269UA(b)(1) states

“in relation to any immovable property in respect of which an agreement for transfer is made”

. Section 269UA(b) deals with apparent consideration in relation to sub-clause (i) of clause (d). It means (a) if the property is transferred by way of sale, the consideration is what is specified in the agreement for transfer, (b) in the case of exchange, the consideration can be things only; as per sub-clause (ii)(B), consideration can be things and a sum of money, (c) if the transfer is by way of lease, the consideration can be the premium as specified in the agreement for transfer or it can be by way of rent and the amounts for the service or things forming part of or constituting the rent as specified in the agreement of transfer. It can be premium and rent, and also the aggregate of the amount of the premium, the rent and the amounts for the service or things forming part of or constituting the rent as specified in the agreement for transfer. Section 269UA(b)(2) reads as under:

“(2) in relation to any immovable property in respect of which an agreement for transfer is made, being immovable property of the nature referred to in sub-clause (ii) of clause (d), means, –

(i) in a case where the consideration for the transfer consists of a sum of money only, such sum;

(ii) in a case where the consideration for the transfer consists of a thing or things only, the price that such thing or things would ordinarily fetch on sale in the open market on the date on which the agreement for transfer is made;

(iii) in a case where the consideration for the transfer consists of a thing or things and a sum of money, the aggregate of the price that such thing or things would ordinarily fetch on sale in the open market on the date on which the agreement for transfer is made, and such sum, and where the whole or any part of the consideration for such transfer is payable on any date or dates falling after the date of such agreement for transfer, the value of the consideration payable after such date shall be deemed to be the discounted value of such consideration, as on the date of such agreement for transfer, determined by adopting such rate of interest as may be prescribed in this behalf.”

So, the whole thrust of Chapter XXC which is applicable in certain cases is to prevent the evasion of tax. Clause (d) (f) of section 269UA(b)(2) gives the extended meaning of ‘transfer’. Sub-clause (f) above reads as under :

“(f)” transfer

“, –

(i) in relation to any immovable property referred to in sub-clause (i) of clause (d), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882;

Explanation.- For the purposes of this sub-clause, a lease which provides for extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years;

(ii) in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, such property.”

A reading of the above makes it very clear that the lease for a term of not less than 12 years includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. Therefore, the mere occupation of the property for a term of not less than 12 years does not make an assessee owner of the property. The Assessing Officer relied on this extended meaning of ‘transfer’ to hold that the assessee is the owner of the property because he had taken the property on lease for more than 12 years by virtue of consecutive lease agreements. Section 269UB explains who are the appropriate authorities for the purpose of this Chapter. Section 269UC puts some restrictions on transfer of immovable property. Section 269UD provides the modes by which the Central Government purchases the immovable property.

9. The extended meaning of transfer in relation to an immovable property referred to in sub-clause (i) of clause (d) is that the transfer should be of such property referred to in sub-clause (i) of clause (d) and not any other property. Because, the definition says that the transfer should be in relation to an immovable property referred to in sub-clause (i) of clause (d). The emphasis is on such property. It means any land or building or part of a building and includes, where a land or building or part of building is to be transferred together with machinery, plant, furniture, fittings or other things, such machinery, plant and other things also. The above definition makes it clear that it should be a building to be transferred. If there is no intention to transfer the building, the mere possession of the property for 12 years or more will not constitute the change of ownership. Further, coming back again to the section (section 269U), it is clear that the provisions of this Chapter (Chapter XXC) shall come into force on such date as the Central Government may, by notification in the official gazette appoint, and different dates may be appointed for different areas.

10. It means, the provisions of Chapter XXC have no application throughout the country. The Government has first to decide the date and it has to be published by notification in the official gazette, and the government is empowered to give different dates to make it applicable for different areas at different times. It is seen that this provisions has not been made applicable to Calicut. It is applicable to Greater Bombay, Union Territory of Delhi (as it was then), Calcutta, Madras, Bangalore, Ahmedabad, City of Poona, Chandigarh, Jaipur, Trivandrum, Cochin, Patna, Bhopal, Indore, Cuttack, Hyderabad, Coimbatore, Madurai, Surat, Ghaziabad and Noida.

11. Once again coining to section 27(iiib), it reads as under :

“S. 27 : For the purposes of sections 22 to 26 –

(iiib) 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 269UA, shall be deemed to be the owner of that building or part thereof.”

It means, the transaction should be the one referred to in clause (f) of section 269UA. Then only the person concerned will be the owner of the building or part thereof on the basis of the extended meaning of ‘transfer’ in section 269UA. Repeating again, the definition in section 269UA is the definition pertaining to or applicable particularly to Chapter XXC. The building or part of the building as referred to in section 27(iiib) should be a building or part of the building as referred to in clause (f) of section 269UA. Taking of the building by the assessee on lease has no relevance in the instant case. There was no agreement for transfer; there was no apparent consideration for transfer except giving the immovable property on rent by the real owners to the assessee who, in turn, sub-let it.

12. Coming to the Board’s Circular No. 495 dated 22-9-1987 relied on by the assessee, the relevant portion of which has been reproduced hereinabove on page 4, it is clear that this circular deals with the extended meaning of “ownership” in a case where the assessee is possessing all the rights of an immovable property except the husk of the title.

13. The Circular proceeds to enumerate the circumstances. First it deals with the situation where the shares of a Flat Construction Company are allotted to its real owners. “Real owners” means the persons who are the subscribers to the shares of the Company. Due to certain legal hurdles, the transfer of ownership by legal means is hampered and in such circumstances, though the flat-owners are the real owners of the flats, the Company is the legal owner. In such circumstances, the extended meaning “ownership” applies. So also in a situation where by means of a Power of Attorney in favour of a person the property is transferred and the holder of the Power of Attorney enjoys all the rights except that he is not the legal owner, the extended meaning of ownership applies. Similarly, possession of an immovable property is allowed to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. This means putting the other person in possession of the property as the first step of transferring the property in consequence of part performance, as referred to in section 53A of the Transfer of Property Act, 1882. The above Circular concludes ” All these types of transactions have the effect of transferring the house property in fact, though not in law. With the extended definition of the expression ‘ownership’, transactions covered by section 269UA of the Income tax Act, 1961 (including transfer of property by power of attorney) shall be considered as having the effect of transfer of title. The Finance Act, 1987, by substitution of clauses (iii), (iiid) and (iiib) in section 27, covers all the transactions referred to above for the purpose of determining the ownership of the property for assessing income under the head “income from house property”. This means, this Circular applies to the transactions mentioned above and not to any other transaction.

14. In the instant case of the assessee, it is not a transfer or transaction as referred to above, and as such, the extended meaning of ‘ownership’ cannot be applied. In the light of the above, I am of the view that the orders of the revenue authorities are liable to be set aside. I set aside the orders of the revenue authorities and allow the appeal by the assessee.

15. In the result, the appeal by the assessee is allowed.