K.D. Thakar vs Commissioner of Income Tax, Gujarat-III

B.K. Mehta, J.—We are concerned in this reference with three assessment years, viz., 1967-68, 1968-69 and 1969-70. Assessee,

Kanaiyalal D. Thakkar, made a gift of Rs. 30,000 to his wife on February 2, 1963. Out of this amount of gift, the assessee''s wife purchased a

property for a sum of Rs. 28,000 on July 4, 1963. This property was admittedly self-occupied property. For assessment year 1967-68, the ITO

did not include any income from the said property in the income of the assessee, Thereafter, the ITO initiated action under S. 154 of the I.T. Act,

1961, with a view to rectify the assessment for inclusion of a sum of Rs. 1,500 being the income from the said property. The assessee, at that time,

did not object to the rectification of the order but submitted that the property income includible would be nil as the assessee''s wife had no other

income having regard to the proviso to S. 23(2) and, therefore, the value of the said property should be taken as nil. This contention of the

assessee did not find favour with the ITO, who was of the opinion that in the past, that is, in assessment year 1965-66, the income from the

property was included which was not objected to by the assessee. He, therefore, included a sum of Rs. 1,500 on that account for the assessment

years under reference in the income of the assessee under S. 64(1)(iv) of the I.T. Act, 1961. The assessee being aggrieved by the said order, went

in appeal before the AAC, Same contention was reiterated before the appellate authority that having regard to the proviso to S. 23(2), income

from self-occupied property is to be computed in the hands of the wife subject to a maximum value of 10% of the other income of the owner of the

property, and that the income from house property could be included in the hands of the assessee under S. 64(1)(iv) of the I.T. Act, 1961. The

AAC of Income Tax accepted this contention and granted reduction of Rs. 1,500 for each of the assessment years 1967-68 and 1968-69 and Rs.

1,803 for assessment year 1969-70.

The revenue, therefore, carried the matter in further appeal before the Income Tax Appellate Tribunal. The Tribunal read the relevant provisions

and also considered the decision of the Supreme Court in Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, and

the decision of the Calcutta High Court in B.K. Guha, I.C.S. (Retd.) Vs. Commissioner of Income Tax, and the decision of the Madras High

Court in R. Ganesan Vs. Commissioner of Income Tax, Madras, . The Tribunal held, having regard to the observations contained in the decision of

the Supreme Court in Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, , that once the income from house

property is includible in the hands of the assessee, as a necessary corollary the annual value of the assessee''s residential house has to be computed

at 10% of the other income of the assessee. At the instance of the assessee, therefore, the following question is referred to us for our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in concluding that the income from house property was to be

computed at 10% of the total income of the assessee, and not that of the wife of the assessee ?

We are of the opinion that this reference should be accepted obviously for the following reasons : On a plain reading of S. 23(2) and S. 64(1)

(iv) of the I.T. Act, 1961, we are of the opinion that both these provisions operate in different fields and unless we can read either in S. 64 or in S.

27 that the assessee is the owner of the house property in question, it is not possible to agree with the view of the Tribunal that once the income

from house property is includible in the hands of an assessee, as a necessary corollary the annual value of the assessee''s residential house has to be

computed at 10% of his total income. The Tribunal has overlooked a very important aspect of the question as to who is the owner of the house

property in question. Section 23 of the I.T. Act, 1961, provides the mode of determination of annual value of a property which is broadly deemed

to be the sum of which the property might reasonably be expected to let from year to year; or where the property is let and the annual rent

received or receivable by the owner, subject to the deductions which have been provided in S. 23(1) where the property is in the occupation of a

tenant. Section 23(2) provides for the mode of computation of income of property which is in the occupation of the owner for purposes of his

residence. In the latter case, the annual value of such property would be determined in the same manner as if the property had been let and further

be reduced by one-half of the amount so determined or one thousand and eight hundred rupees, whichever is less. In a case where more than one

house is in the occupation of the owner for purposes of his residence, the provisions of cls. (i) and (ii) of sub-s. (2), set out above, are to be

applied in respect of one of such houses specified by the assessee in that behalf. Proviso to sub-s. (2), however, restricts the maximum value of the

income to 10% of the total income of the owner and the total income for this purpose is to be computed without including therein any income from

such property and before making any deduction under Chap. VIA. In other words, the maximum value of income from house property which is

occupied by the owner himself is 10% of his other income. Section 64 is a part of Chap. V, which provides for inclusion of income of other

persons in assessee''s total income. Section 64 provides for inclusion of income of spouse, minor child, etc., in the income of an individual. Section

64(1)(iv), which is relevant for the purpose of this reference, provides as under :

(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ........

(iv) subject to the provisions of clause (i) of section 27, in a case not falling under clause (i) of this sub-section, to the spouse of such individual

from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an

agreement to live apart.

It is common ground that the present case is not falling under clause (i) of sub-s. (1) of S. 64. As stated by us above, S. 64 and S. 23(2)

operate in different fields. Section 23(2) provides for the method of computation of property income which is self-occupied. Section 64, on the

other hand, provides for inclusion of income of spouse or minor child in the income of an individual in various contingencies mentioned in cls. (i) to

(vii) of sub-s. (1) of S. 64. It is, therefore, difficult to appreciate the view of the Tribunal that the moment the income from house property is

included in the hands of an assessee for purposes of computation of value of such income, the assessee''s total income, except the income from

property, should be considered for purposes of finding out the maximum value. We do not think that this conclusion follows as a necessary

corollary to the inclusion of income from house property in the income of an individual under S. 64(1)(iv) of the I.T. Act, 1961, unless the case falls

within the terms of S. 27(i). It should be recalled that S. 27 is a definition clause which defines various terms for purposes of computing income

from house property under Ss. 22 to 26. Section 27(i) defines who is the owner of a house property by a deeming fiction. It provides as under :

For the purposes of sections 22 to 26 -

(i) an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection

with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so

transferred.

In other words, an individual would be deemed to be an owner of that house property which he has transferred otherwise than for adequate

consideration to his or her spouse, or to a minor child not being a married daughter, except where such transfer is in connection with an agreement

to live apart. Unless, therefore, a case comes within the terms of S. 27(i), the other income of a transferor of any house property cannot be

considered for purposes of computing income from the house property occupied by the transferee. It may be that income from such house

property may be liable to be included in the income of an individual under S. 64(1)(iv). That situation would not necessarily result, as held by the

Tribunal, in the other income of the assessee being considered for the basis of application of the proviso to S. 23(2), because the said proviso

enjoins that income from house property should not exceed 10% of the other income of the owner. On a plain reading of these three provisions, it

is clear to us that it is the other income of an owner - whether actual or fictional - which is to be considered for finding out the maximum value of

the income from house property under the proviso to S. 23(2). It cannot be gainsaid that the fictional owner would be one under S. 27(i) of the

Act, who transfers otherwise than for adequate consideration any house property to his spouse or minor child not being a married daughter. If the

property transferred by an individual is not house property, the deeming fiction would not come into play at all. In the present case, it is common

ground that what was gifted to his wife by the assessee was cash amount of Rs. 30,000 in 1963 out of which the house property in question was

purchased for a sum of Rs. 28,000 by the wife of the assessee in her name. In the circumstances, therefore, the Tribunal was clearly in error in

taking the view as it did that the moment the income from house property is includible in the income of an individual, for the purpose of working out

the proviso to find out 10% of the maximum value of such income, the basis which is to be taken is of all the other income of an individual assessee

in whose income such property income is included. The Tribunal reached this conclusion in view of the observation made by the Supreme Court in

Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, . We are of the opinion that the Tribunal has read more than

what is warranted in that decision. In the case before the Supreme Court, the assessee was the holder of an impartible estate. He granted to his

wife two premises at Camac Street, Calcutta, for life by way of maintenance, During the assessment years 1957-58 to 1960-61, the income from

those house properties was included in the total income of the assessee under S. 16(3)(a)(iii) of the Indian I.T. Act, 1922. The assessee challenged

the validity of that inclusion on two grounds; firstly, that S. 16(3)(a)(iii) was ultra vires art. 14 of the Constitution and, secondly, that the income in

question could not be considered as his income for the purpose of the said section. These objections were overruled by the tax authorities and

three questions were, therefore, referred at the instance, of the assessee to the High Court of Patna. The relevant question, which can be said to

have some bearing on this reference, is question No. 3, which reads :

Whether, in the facts and circumstances, the Tribunal was right in holding that the income u/s 16(3)(a)(iii) was to be included in the total income

for the purpose of computing the net annual value of the residential house at 10% of the total income under the first proviso to section 9(2)?

Section 9(4) of the 1922 Act, as it stood at the relevant time of assessment years 1957-58 to 1960-61, was in terms similar to S. 27(ii) of the

1961 Act and S. 16(3)(a)(iii) of the 1922 Act was in pari materia to the one contained in S. 64(1)(iv) of the 1961 Act. It was in that context of the

provisions of the 1922 Act, as were in force, that the Supreme Court was called upon to answer the question set out above. The High Court had

not gone into the above question as it did not think it necessary to go into that question. Hegde J., as he then was, speaking for the Supreme Court,

observed as under (p. 5) :

Section 9 deals with only one head of income. Prior to the transfer by the assessee, he, in law, would have been considered as the owner of those

premises for purposes of ascertaining his income from house property and that income would have been taken into account in computing his total

income. In other words, in ascertaining the total income of the assessee for the purpose of assessment that income also would have entered into the

calculation. Hence when section 9(4)(a) speaks ''for the purpose of this section'' it really means for the purpose of determining the taxable income

of the assessee. It must be remembered that an assessee is not separately taxed under each head of income. Hence, when a source of income is

transferred by the assessee to his wife, excepting for the two purposes mentioned in section 16(3)(a)(iii), income from that source has to be

considered as the income of the assessee because an asset of the assessee stands transferred to his wife. Such a conclusion does not amount to

extending the fiction created u/s 9 beyond the purpose for which it is created. It merely gives effect to that fiction. It is true that a legal fiction should

not be extended beyond the purpose for which it is created; but that does not mean that the court should not give effect to that fiction.

Section 27(ii) of the Income Tax Act, 1961, which has taken the place of section 9(4) of the Act does not begin by saying ''for the purpose of this

section''. On the other hand, it says that ''the holder of an impartible estate shall be deemed to be the individual owner of all the properties

comprised in the estate''. It was contended on behalf of the assessee that this is a change in the law and on that basis we were asked to accept the

assessee''s construction of section 9(4)(a). We are unable to accept this contention. We do not think that there is any change in the law. Section

27(ii) of the Income Tax Act, 1961, makes explicit what was implicit in the provision as it originally stood.

In view of our conclusion that the income of the house property in question should be included in the total income of the assessee, it follows as a

necessary corollary that the annual value of the assessee''s residential house has to be computed at 10% of the total income to the assessee which

income, as already held, includes the income from the house properties transferred to his wife as required by the 1st proviso to section 9(2).

In is this last paragraph which had impressed the Tribunal and which has been emphasised by it for purposes of reaching the conclusion as it did.

What the Tribunal has overlooked is that under S. 9(4)(a) of the 1922 Act, and for that matter S. 27(ii) of the 1961 Act, the holder of an

impartible estate is deemed to be an individual owner of all the properties comprised in the estate irrespective of their transfer. However, in the

case of house property, a transferor would be deemed to be an owner only of the transfer is otherwise than for adequate consideration to his or

her spouse or minor child not being a married daughter. If the property transferred is not a house property but cash amount from which the

transferee purchases a house property, it cannot be said that the transferor would be a fictional owner under S. 27(i). The view of the Tribunal,

following the decision in Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal Singh, , would have been correct if the

assessee here could be held to be a fictional owner of the house property in question, which we cannot do in view of the definition of ""owner of

house property"" given in S. 27(i). It should be recalled that the assessee made a gift of cash amount to his wife out of which the house property in

question was purchased. Unless, therefore, the house property in specie is transferred otherwise than for adequate consideration to the spouse or

minor child, not being a married daughter, it cannot be concluded that the transferor would be a fictional owner. In our opinion, therefore, the

Tribunal was clearly in error in applying the ratio of the decision in Commissioner of Income Tax, Bihar and Orissa Vs. Maharaj Kumar Kamal

Singh, to the facts of the present case.

Our attention has been invited to the decision of the Madras High Court in R. Ganesan Vs. Commissioner of Income Tax, Madras, , where the

assessee before the Madras High Court transferred an amount to his wife towards construction of a house otherwise than for adequate

consideration, or in connection with an agreement to live apart. The income from the house property was sought to be included in the total income

of the assessee and a question arose as to what should be the measure of income. A Division Bench of the Madras High Court accepted the

contention of the assessee that the proviso to S. 9(2) of the 1922 Act provided for the maximum amount of such income and it would, therefore,

follow that the sum that could be included in the total income of the assessee in respect of the property in question must be the same which is

arrived at on the application of S. 9(2) and the first proviso thereof. The Division Bench, therefore, took the view that before determining the

quantum of income to be included in the income of an assessee, S. 9(2) together with its proviso should be worked out. In our opinion, as stated

above, on the plain reading of the three relevant provisions, we do not entertain any doubt that for purposes of computing the maximum value of

10% of the income from the house property, the basic income which is to be taken is the other income of the owner and if the assessee is not the

owner, as is the case in the present reference before us, his other income cannot be considered for working out the value under the proviso. We

have been told by the learned advocate for the assessee that the same Tribunal has taken the view which we are taking in this reference in a

subsequent appeal before it.

The result is that this reference should be accepted and the question referred to us should be answered in the negative, that is, in favour of the

assessee and against the revenue. The Commissioner of Income Tax shall pay the costs of this reference to the assessee.