2015 (1) TMI 916 - AT - Income Tax

Taxability of certain rental income in the hands of the assessee - Inheritance at Muslim Law - right of assessee to divide the property or to divide the rent among the family members - Held that - We are not convinced with the claim of the assessee that the incomes are to be divided according to the Muslim Law. Had assessee taken recourse to legal proceedings and got the property divided between the legal heirs through a court of law may be the contentions can be accepted. However assessee chose to enter into MOU so as to divide only the incomes. Therefore we are not convinced with the assessee s argument. It is assessee s contention that the property devolved on him and that is against the personal law. This contention is also not correct. As seen from the declaration given on 10-08-1998 extracted in page 2 of this order what assessee got from the declaration of Smt. Sadath Khatoon was only enjoyment of property during his life time. It is very clear that assessee does not enjoy any absolute right on the property and only his two daughters shall be entitled to half equal share in the said property and they shall hold and enjoy their respective shares as exclusive owner and to use the same in any manner they like. This indicates that Smt. Sadath Khatoon has not bequeathed the property to assessee but only power to enjoy the property during his life time. In that way assessee s right in the property limited to the income is exclusive and to 100% of the income. In this context also assessee s contention that he has only 25% right is not correct. Looking at either way assessee s contentions cannot be accepted. In view of this we affirm the orders of the authorities for the above reasons. - Decided against assessee.

Issues Involved:
1. Taxability of rental income.
2. Validity of the MOU under Muslim Personal Law.
3. Applicability of Muslim Personal Law in determining fiscal liability under the Income Tax Act.
4. Provisions of Section 60 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Rental Income:
The primary issue in this case is the taxability of the rental income derived from a property originally owned by Smt. Sadath Khatoon. The assessee, after her death, declared only 20% of the rental income as per a Memorandum of Understanding (MOU) with his daughters and grandsons. The Assessing Officer rejected this division and assessed the entire rental income in the hands of the assessee. The Commissioner of Income Tax (Appeals) upheld this decision, stating that the assessee, as per the declaration by his deceased wife, was the exclusive owner of the property during his lifetime and thus liable for the entire rental income.

2. Validity of the MOU under Muslim Personal Law:
The assessee contended that under Muslim Personal Law, specifically Hanafi Law, the will executed by Smt. Sadath Khatoon, which bequeathed the entire property to her husband, was invalid as it deprived the legal entitlement of her daughters. According to Muslim Law, a person cannot bequeath more than one-third of their property to a single heir without the consent of other heirs. The MOU entered into by the assessee and his daughters was also not in accordance with Muslim Law, as it included grandsons who were not legal heirs. The Tribunal noted that the correct share under Muslim Law would be 25% for the husband and 37.5% for each daughter, but this was not followed in the MOU.

3. Applicability of Muslim Personal Law in Determining Fiscal Liability:
The Tribunal referred to precedents from the Gujarat High Court and Calcutta High Court, which held that personal law principles are not applicable in determining fiscal liability under the Income Tax Act. The provisions of the Income Tax Act take precedence, and the rental income must be assessed as per the Act, not personal law. The Tribunal agreed with the lower authorities that the provisions of the Income Tax Act are clear and do not require consideration of personal law for tax assessment purposes.

4. Provisions of Section 60 of the Income Tax Act:
Section 60 of the Income Tax Act states that income arising from a transfer of an asset, where the asset itself is not transferred, should be included in the income of the transferor. The Tribunal found that the assessee had not transferred the property but only the rental income through the MOU. Therefore, under Section 60, the entire rental income should be assessed in the hands of the assessee. The Tribunal concluded that the assessee's argument for dividing the rental income according to Muslim Law was not valid, as the MOU did not transfer the property itself.

Conclusion:
The Tribunal dismissed the appeal, affirming the orders of the lower authorities. It held that the entire rental income should be assessed in the hands of the assessee, as per the provisions of the Income Tax Act, and not divided according to the MOU or Muslim Personal Law. The Tribunal emphasized that the legal principles of Muslim Personal Law cannot override the clear provisions of the Income Tax Act in determining fiscal liability.

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