Commissioner of Income Tax vs Hans Raj Gupta

Leila Seth, J.—At the instance of the Commissioner, the Appellant Tribunal has referred for our opinion the following question of law: Whether, on the facts and in the circumstances of the case, the assessee was liable to be assessed in respect of the income for the whole year from properties at Shahdara, Palwal, Dadri and Kosi for the assessment year 1951-52?

The assessee, Mr. Hans Raj Gupta, is an individual whose main source of income was from his share in three firms. The matter pertains to the assessment year 1951-52, the corresponding previous year being the year ending 31-3-1951. The assessee owned some immovable properties at Shahdara, Palwal, Dadri and Kosi which were registered in his name. However, it is alleged that in 1950, the Shahdara property was sold by the assessee to a connected company known as Raj Enamel Works Ltd. and payment received; the properties at Palwal, Dadri and Kosi were also sold to a connected company Hans Raj Gupta & Co. Ltd. and the moneys were received in July, 1950. But the properties continued to remain registered in the name of the assessee. 2. The shareholders of Raj Enamel Works Ltd. had passes a resolution on 23-5-1955 to the effect that the freehold property comprising of the land on which the workshop of the company was situated, together with all other buildings, be purchased from Lala Hans Raj Gupta for the value of Rs. 2 lakhs.

Thereafter Rs. 2 lakhs were received for the Shahdara property and the said amount was credited to the property account in the books of the assessee. The company showed this property as its assests; since it was being used for the company''s own business, no rent was being charged and the assessment was made accordingly.

But prior to the resolution, the Central Investment Ltd. had purchased shares to the extent of Rs. 2 lakhs of Raj Enamel Works Ltd. This was, after a chain of intermediaries, Ultimately traceable to the assessee. On receipt of Rs. 2 lakhs, the assessee settled his overdraft liability with the United Commercial Bank and released the said property which was pledged.

For the assessment year 1951-52, the ITO took the view that the assessee continued to be the legal owner of the property. He, therefore, computed the income u/s 9 of the Indian income tax Act, 1922 (hereinafter refer red to as "the 1922 Act") and taxed it in his hands. The ITO observed that the sales of the immovable properties to Raj Enamel Works Ltd. and Hans Raj Gupta & Co. Ltd. were not supported by transfer deeds nor were they duly registered. He, therefore, concluded that the sale was not complete; as such Mr. Hans Raj Gupta remained the owner of the properties; the payment of Rs. 2 lakhs by Raj Enamel Works Ltd. could at best be treated as a deposit; and the resolutions of the purchasing company could not materially alter the legal position.

On appeal, the AAC confirmed the order of the ITO.

On further appeal to the Appellate Tribunal, the assessee contended that he was not liable to be taxed as the income from property could be taxed only in the hands of the beneficial owner, i.e., the company; the property was the company''s asset and had been shown as such in its balance sheet; the assessments of the company had been completed on that basis; that before 1956 that company was entitled to keep property registered in the name of a director and Mr. Hans Raj Gupta was a director of the company; that the company was not doing well and in order to save stamp duty, etc., registration had not taken place; and that in any case, the company had become the complete owner of the property by adverse possession. The Full Bench decision of this Court in COMMISSIONER OF Income Tax, PUNJAB, JAMMU AND KASHMIR, AND HIMACHAL PRADESH Vs. R.B. JODHAMAL KUTHIALA., was relied on.

On the other hand, the revenue''s contention was that the assessee, being the legal owner of the property, was liable to be taxed on its income. It placed reliance on the decision in CIT v. Ganga Properties Ltd. [1970] 77 ITR 673 (Cal.).

The Tribunal relying on the decision of this Court in Jodhamal Kuthiala''s case (supra), held that since the income was neither received by, nor accrued to, nor could be deemed to accrue to the assessee, the question of computation of such income in the hands of the assessee did not arise. It further held that the background against which and the manner in which the consideration for the transfer of the Shahdara property was received did not impair the basic fact that the assessee had lost dominion over the property by reason of having accepted the consideration. The subsequent conduct of the parties also fortified, rather than undermined this fact. In the ultimate analysis what had happened was that the assessee had introduced secret moneys into the company by way of share capital which enabled the company to acquire the property from him. But in this arrangement he relinquished effective dominion over the property which the company acquired. There was also no suggestion that the company was a "benamidar" of the assessee; and in the eyes of law the company and the assessee were different entities and had to be so treated. The Tribunal, therefore, excluded the income from the Shahdara property from the assessment of the assessee to the extent it arose after the amount of Rs. 2 lakhs had been received by the assessee. For similar reasons, the income from the properties at Palwal, Dadri and Kosi were also excluded to the extent that they arose after the receipt of the considerations by the assessee.

The point in issue before us is whether the income from these immovable properties should be taxed in the hands of the legal owner, i.e., the assessee, or in the hands of the connected companies which are using the properties by virtue of payments pertaining to sale price.

Mr. Wazir Singh appearing for the revenue contended that such income should be taxed in the hands of the assessee, i.e., the owner, and the decision in Jodhamal Kuthiala''s case (supra) on which the Tribunal had relied, had been given in a different context and was not applicable. He further contended that the sale of property not having been registered, the ownership remained with the assessee.

We find that the said Full Bench decision of this Court has since been affirmed by the Supreme Court in R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, . But what was in issue therein was whether the displaced persons from the area now comprising Pakistan continued to be the owners of the properties left behind by them in Pakistan within the meaning of section 9, notwithstanding the Evacuee Legislation in force in Pakistan. The Supreme Court held that in view of the provisions of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, the property vested in the Custodian of Evacuee Property and the assessee had only a residual beneficial interest. That residual beneficial interest was in a sense ownership but could not be considered ownership for the purpose of section 9. Hegde, J. speaking for the Court opined:

... The property having vested in the Custodian, who had all the powers of the owner, he was the legal owner of the property. In the eye of the law, the Custodian was the owner of that property. The position of the Custodian was no less than that of a trustee.... (p. 574)

This Court in S. Kartar Singh Vs. Commissioner of Income Tax, considered the decision of the Full Bench in Jodhamal Kuthiala (supra). Kapur, J., who spoke for the Court in both the cases, after setting out the passage from the Full Bench decision of Jodhamal Kuthiala (supra) dealing with ownership, and including the passage appeared on p. 612, viz.

... The said provision shows that section 9 merely prescribes the notional method of arriving at the income from property on which an assessee has to be taxed but basically the tax is on income. It follows that the property must be such from which an owner can earn income, or, in other words, the assessee must be in a position to earn income from the property unless he choses not to do so or the circumstances do not permit him to earn income even though he has dominion or control over the property....", observed (p. 612)

.....It is also to be borne in mind that the question before the Full Bench was different, namely, the impact of the evacuee legislation in Pakistan on the ownership of the assessee. (p. 444)

The Court then went on to hold that the tax u/s 9 was upon the owner, legal or beneficial. It was levied not upon the actual income but on notional income represented by the bonafide annual letting value. Even where the owner had diverted the income from the house property at source, he would continue to be liable to pay income tax on the annual letting value, subject to specified deductions given in section 9. In that case, the assessee who had executed a deed of settlement with respect to his house property in favour of his father, as he was desirous of making provision for his maintenance for life, was held liable to be taxed on the income from the property. On a reading of the terms of the deed of settlement, the Court came to the conclusion that the assessee had transferred only the income from the property and the ownership continued to vest in him; the power to transfer the property still inhered in the grantor, though it could not be exercised in derogation of the rights of the grantees.

It is well settled, that in the case of immovable property of the value of Rs. 100 and above, its transfer can be effected only by means of an instrument in writing, duly stamped and registered-- see Commissioner of Income Tax Vs. Bhurangya Coal Co., and Alapati Venkataramiah Vs. Commissioner of Income Tax Hyderabad, . This principle has been consistently applied in a large number of decisions in the context of the question of capital gains or balancing charge, which arise on a transfer or sale.

In Ganga Properties Ltd.''s case (supra), the Calcutta High Court after referring to numerous decisions and the provisions of the Indian income tax Act, 1922, the Transfer of Property Act, 1898 and sections 17(1)(i) and 47 of the Indian Registration Act, 1908, summed up the position as follows:

In the case of a sale of immovable property a registered document is necessary to give effect to the sale.

The sale takes effect from the date of execution of the document.

In Indian law, beneficial ownership is unknown and there is but one owner, namely, the legal owner both in respect of vendor and purchaser and trustee and cestui que trust.

And the expression ''income from property'' used in sections 6 and 9 of the Indian income tax Act, 1922, refers to the income of the legal owner of the property who is the only person assessable to tax on the basis of the bona fide annual value thereof.

It, therefore, held that the ownership was not transferred until the registration of the deed of conveyance took place on 8-7-1958, despite the fact that there was an oral agreement of 27-3-1956, to sell the property in consequence of which delivery was made over to the purchaser on 29-3-1957, the purchase price had been paid on 16-4-1956 and the amount credited to the suspense account; and agreement for sale had been drawn up on 28-4-1956 and the deed of conveyance was executed on 17-3-1958.

Dealing with the Full Bench decision in Jodhamal Kuthiala''s case (supra) and the observations relating to possession of those rights in relation to property which result in the earning of income, the Calcutta High Court opined that those observations have to be read in the context in which they were made and noticed that u/s 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, "all evacuee property shall vest and shall be deemed always to have vested in the custodian with effect from 1-3-1947", as such there was no question of any "owner" apart from the custodian during the period the property remained vested.

This position was reiterated in the decision of the Bombay High Court in CIT v. Union Land & Building Society (P.) Ltd. [1972] 83 ITR 974 and Ganga Properties Ltd.''s case (supra). That Court also observed that decision of the Full Bench in R.B. Jodhamal Kuthiala''s case (supra) was based on the Court''s opinion as to the effect of the evacuee property law, i.e., that the title of the assessee was statutorily suspended and virtually put to an end during the period of the legislation, in favour of the custodian.

We also feel that the observation of the Supreme Court in R.B. Jodha Mal Kuthiala (supra) have to be read in the context of that case and the finding of the Court that the property vested in the custodian and he was the legal owner just as a trustee is. We may also mention that the Bombay High Court even in an earlier case, i.e., Commissioner of Income Tax, Bombay Vs. Modern Flats Private Ltd., , while dealing with section 9 of the 1922 Act, had held that tangible immovable property cannot be transferred without a registered instrument in view of the clear provisions of section 54 of the Transfer of Property Act.

In The Commissioner of Income Tax Vs. Meattels Ltd., this Court while dealing with a question whether an assessee was entitled to a deduction of a balancing allowance u/s 10(2)(vii) of the Act for the assessment year 1957-58, held that there was no sale of the mills during the accounting period as the conveyance deed had not been registered. It observed that the word "sale" was a well recognized legal concept and in that since a sale could be made only by a registered instrument in case of an immovable property of a value of Rs. 100 and upwards, even though an agreement of sale had been executed and possession had been handed over. The facts were that the assessee-company had passed a resolution on 1-2-1957 approving the draft agreement relating to the sale of its mills and its stock-in-trade to its subsidiary company in consideration of Rs. 8,75,000 and Rs. 3,75,063. The consideration for the sale of the mills was to be in equity shares of the subsidiary company. The subsidiary company took possession of the mills on 1-2-1957 and started running it. But the sale deed was executed only in 1963 and registered thereafter. In these circumstances, it was held that the assessee-company had not "sold" the property during the assessment year 1957-58; the entries in the account books of the vendor and vendee were irrelevant for the purpose of determining the date of sale.

The same principle was reaffirmed by this Court in the case of Commissioner of Income Tax Vs. Hindustan Cold Storage and Refrigeration P. Ltd., .

u/s 9, it is the income from the house property of the owner that is taxed and it is, therefore, necessary for us to determine whether the assessee continued to be the owner despite the payment of the purchase price and other factors.

Resolutions by the two purchasing companies were passed by their respective boards of directors. The resolution of Raj Enamel Works Ltd. dated 23-5-1950 in respect of the Shahdara property has already been referred to. The resolution of Hans Raj Gupta & Co. (P.) Ltd. passed on 22-1-1950 is to the following effect:

Resolved that the following godown premises and buildings be acquired from L. Hansraj Gupta on the valuation shown, all costs of transfer being borne by the company:

Palwal Godown

Rs. 12,500

Dadari

Rs. 3,000

Kosi Kalan

Rs. 9,500

Pt. Mela Ram was authorised to take the necessary steps in the direction.

Mr. Hansraj Gupta did not vote this resolution.

Resolved that the company shall take over these premises as from 1-7-1950 and no rent shall be paid thereon as from date. The rents to be paid to L. Hansraj Gupta on 30-6-1950 are hereby confirmed.

As noticed earlier, the sale consideration was paid in consequence thereof and entries were made in the respective accounts of the company and the assessee. However, the property which consisted of the factory premises, godown buildings, etc., and was being used by the company, continued to be used by it and no payment for its user was given to or claimed by the assessee.

The assessee''s claim that he could no longer be considered the owner for the purpose of section 9 as he was bereft of all rights of dominion and control and of income of the property after receipt of the purchase price, does not appear to be correct. According to us, the above noticed resolutions of the purchasing companies and the payment of purchase price by them could not have the effect of depriving the seller of his ownership; nor could the fact that the purchasers continued in possession of the property without payment of rent, even assuming it amounted to constructive delivery in consequence of payment of consideration, be equated with a conveyance and the entries in the account books of the vendor and the vendee are not relevant for the purpose of determining whether a sale of immovable property has taken place. It is too well settled that the title to lands and buildings cannot pass till a conveyance deed is executed and duly registered. As such, it is clear that the assessee remained the owner of the properties irrespective of the fact that he was not earning any income from them. The observations in Jodhamal Kuthiald''s case (supra), as noticed above, must be construed to be confined to the context of the case, the Court having found the custodian to be the owner. In the present case it cannot be said that the assessee have been divested of all vestiges of ownership or that they were virtually suspended either by statute or settlement deed. Therefore, the income from property has to be taxed in the hands of the assessee.

After reserving judgment in this matters, we have come across the decision of the Punjab and Haryana High Court in Smt. Kala Rani Vs. Commissioner of Income Tax, , which applied the decision of the Supreme Court in R.B, Jodha Mal Kuthiald''s case (supra) to the special facts before it, which are materially different from those of the present case.

We think that the decision of the Supreme Court in R.B. Jodha Mai Kuthiald''s case (supra) rendered in the context of the somewhat far reaching provisions of the Pakistan Evacuee Property Ordinance, which deprived an owner of property of all his rights in the property, save the husk of title. It cannot, we think, be so broadly interpreted, as has been urged before us, to completely by pass the provisions of the Transfer of Property Act and the Registration Act and we think that the view taken by this Court, the Bombay High Court, and the Calcutta High Court in the decisions already referred to applies squarely to the situation here.

It is true that in recent years, parties with a view to avoid heavy stamp duty and registration charges on transfer documents, resort to several types of arrangements by which they attempt to transfer virtual control and dominion even over immovable property from one person to another without drawing up a deed and having it registered. One such common mode is that of entering into an agreement for sale accompanied by delivery of possession, leaving the intending purchaser to work out his rights by relying on the doctrine of part performance or otherwise. Such an arrangement has been considered by this Court in the decisions already cited, the Supreme Court in Ram Gopal Reddy Vs. Additional Custodian Evacuee Property, Hyderabad, and the Bombay High Court in Union Land & Building Society''s case (supra). The inadequacy of such an arrangement in conveying title to the intended transferee has been pointed out in these decisions.

It will also be appreciated that the plea u/s 53A of the Transfer of Property Act is one to be established on facts by the intending purchaser vis-a-vis the intending vendor and will not avail against a bonafide purchaser without notice. At some point of time both parties may put forward such a plea because it suits them for purposes of income- tax. For instance, in the present case, the claim enables the assessee to avoid tax in his hands of the income from the property. In the hands of the companies, claimed to be the legal owners of the property again, no tax is charged because they are said to occupy the property for purposes of their business. On the other hand, they are enabled to claim depreciation on the properties. In such a situation the self interest of the parties may dictate a plea of this type, particularly where the parties are closely connected with each other and it will not be possible for the revenue to effectively go into the question of whether the conditions of section 53A have been fulfilled.

One cannot foresee the stand that the parties may take if eventually a necessity should arise to have the matter tested in a litigation between the interested parties. The real truth or efficacy of such an arrangement will come out only when there is a change in the constitution of one of the parties (which may be a firm or company), or their mutual relationship, or if the vendor should, at a later date, purport to transfer the property again to an outsider for consideration in exercise of his rights of legal ownership and such a party claims to be a bonafide transferee for value without notice of the agreement now alleged. It is impossible to anticipate what attitude the parties would take or what evidence would be available for or against the contentions of the respective parties in such a situation. It would not, therefore, be correct to base any conclusion in this regard on the provisions of section 53A of the Transfer of Property Act.

Other methods adopted for such "transfer" have yet to be tested in the Courts and their legal efficacy examined. It may be that time may come when such modus operand even between strangers becomes universal and practical considerations may underline the futility of continuing to assess the nominal owner in preference to the person who is in fact in possession and enjoyment of the property. But as at present section 22 is perhaps one of the simplest sections in the 1961 Act, consistently construed on the basis of the well settled concepts that it taxes the owner of a property in respect of a notional income from the property, irrespective of the actual derivation of any income or enjoyment thereof by the owner, and that there is no notion of beneficial ownership under the Indian law. We do not feel that this line of interpretation should be disturbed and an element of un certainty and indefiniteness introduced into the interpretation of section 9 or section 22 of the 1961 Act on mere considerations of possible hardship. We may leave it to the Legislature to remedy the situation as and when such transactions become the rule rather than the exception and the section, in its present form, faces practical hurdles in application, which need to be overcome.

In the result, the question has to be answered in the affirmative and in favour of the revenue, who will be entitled to costs. Counsel''s fee Rs. 350.