1996 (9) TMI 168 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the unregistered lease agreement.
2. Ownership of the building constructed by the assessee.
3. Classification of the building as stock-in-trade.
4. Valuation of the building for wealth-tax purposes.

Detailed Analysis:

1. Validity of the Unregistered Lease Agreement:

The primary issue in this case is the validity of the unregistered lease agreement between the assessee and the lessor. The agreement was not registered under the Registration Act, which is a common ground. According to Section 107 of the Transfer of Property Act, a lease of immovable property for a term exceeding one year must be made by a registered instrument. The memorandum of agreement for lease in this case was for 30 years, making it void due to non-registration. The Tribunal referenced the judgment of the Privy Council in G.N.C Ariff v. Jadunath Manjumdar Bahadur AIR 1931 PC 79, which held that if registration is compulsory, the lease is void if not registered. Additionally, the agreement lacked a present demise and a clear date of commencement, further invalidating it as a lease. Therefore, the assessee could only be considered a tenant from month to month, terminable by 15 days' notice under Section 106 of the Transfer of Property Act.

2. Ownership of the Building Constructed by the Assessee:

The next issue is whether the assessee can be considered the legal owner of the building constructed on the leased roof. According to Section 108(h) of the Transfer of Property Act, a lessee is the legal owner of structures or fixtures put up by them on leased land and can remove them upon lease termination. The Tribunal cited several judgments, including CIT v. Madras Cricket Club [1934] 2 ITR 209 (Mad.) and Ballygunge Bank Ltd v. CIT [1946] 14 ITR 409, affirming that the lessee is the owner of the buildings they construct. The Tribunal concluded that the assessee, having constructed the building with the lessor's permission and having the right to assign or transfer its interest, is the legal owner of the building. This satisfies the ownership condition for wealth-tax as expounded in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888.

3. Classification of the Building as Stock-in-Trade:

The Tribunal addressed whether the building could be classified as stock-in-trade. The Wealth-tax Officer (WTO) argued that the building did not constitute stock-in-trade as the assessee was not dealing in real estate or property development. The Tribunal agreed, stating that merely letting out an asset does not make it stock-in-trade. They referenced H. Mohmed & Co. v. CIT [1977] 107 ITR 637, which distinguishes between a trader's stock-in-trade and capital assets. The assessee was not engaged in buying/selling flats or buildings, so the structure could not be considered stock-in-trade. The CIT(A) was wrong in invoking the proviso to Section 40(3).

4. Valuation of the Building for Wealth-Tax Purposes:

The final issue is the valuation of the building for wealth-tax purposes. The CIT(A) did not adjudicate this matter as she held the building was not includible in the assessments. The Tribunal restored the question of valuation to the file of the CIT(A) for a decision in accordance with the law and after giving the assessee adequate opportunity to be heard.

Conclusion:

The Tribunal concluded that the building was rightly included as an asset in the assessee's assessment for the years under appeal, reversing the CIT(A)'s orders to that extent. The valuation of the building was remanded to the CIT(A) for proper adjudication. The appeals by the revenue were partly allowed.