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TMI Blog1971 (2) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... h the parties agree should be taken as a typical sale and regarding which we will presently state the facts. These seven bungalows were sold for a sum of Rs. 6,68,218 and the assessee received Rs. 5,29,350 leaving a balance of Rs. 1,38,868. It may be mentioned here that prior to 1st April, 1956, the assessee maintained its accounts on the cash basis but on and from that date the assessee changed over from the cash system to the mercantile system of accounting relevant to the assessment year 1957-58, in which the above sales took place. The department, therefore, held that the amount of Rs. 1,38,868 had accrued to the assessee and was, therefore, liable to tax as having been actually received in the accounting year and can be taken into account for determining the taxable profits of the assessee. The contention of the assessee was that the said amount of Rs. 1,38,868 was not receivable in the accounting year but only at some future date or dates and therefore the same should not be included in the assessment year. Alternatively, it was contended that only that part of the amount should be included in the assessment for the assessment year 1957-58 as represents the present realisable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with a sum of Rs. 5,000 by way of earnest money. The balance of the purchaser's share " shall be paid on his/her selecting type of house desired to be built." Term No. 7 provided that if the balance amount payable by the purchaser is not paid within one month of the allotment of a plot to him/her, then the money paid by the purchaser will be forfeited without any further notice. It seems that the bungalows took a considerable time to be constructed after these agreements were entered into. In the case of the purchaser, Pran Sikand, the actual conveyance of the building took place on 28th August, 1956 (vide annexure " C "). This is a tripartite agreement between the assessee-company called the " vendors ", Pran Sikand called " the purchaser " and the Empire of India Life Assurance Co. Ltd. called the " mortgagees ". The agreement shows that the sale was for a sum of Rs. 95,000 the consideration of which was paid as follows : Rs. 25,000 by Pran Sikand and the rest borrowed by the purchaser, as follows : Rs. 27,050 was agreed to be paid by the assessee-company as a loan which was to be returned by the assessee. Rs. 42,950 was loaned by the mortgagees the Empire of India Life As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the department before us. The second question relates to the rental income realised by the purchasers after the date on which they were put in possession. In the case of Pran Sikand, the bungalow which he purchased was completed on 1st October, 1954, and on the same day placed in his possession. Most of the purchasers also were put in possession of their bungalows in the year 1953 or 1954, but all the sale deeds or conveyances came to be executed only on 18th August, 1956, except in the case of bungalow No. 10 belonging to N. N. Bhatt where the contract was broken and the amount of earnest money forfeited. The questions Nos. 2 and 3 relate to a period anterior to the actual date of conveyance during which time the purchasers had possessed their bungalows. From the facts we have stated, it is clear that they were put in possession under the oral agreement found by the Tribunal though no formal conveyance or sale deed was executed in their favour and they were realising the rents of the bungalows rented out by them. The second question raises the issue whether this rental income was the income of the assessee or whether it was the income of the purchasers who had let them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment for the relevant year. Before the Appellate Assistant Commissioner another contention was alternatively urged that if at all any sum can be included in the assessment for the assessment year 1957-58, it could only be the present realisable value computed on an actuarial basis of the sum of Rs. 1,38,868. The Appellate Assistant Commissioner turned down both the contentions, holding on the alternative contention that there was no evidence to show that the amounts due from the purchasers were not worth their face value. The Tribunal has substantially confirmed these findings. As we have said, counsel on behalf of the assessee, beyond the said facts, hardly advanced any particular submission. He left it to the court to determine this question. We have no doubt that it was correctly decided by the income-tax authorities as also by the Tribunal. The question is whether this amount of Rs. 1,38,868 can be said to have been received by the assessee although in fact it has not been paid to him in cash. For the period under assessment, the assessee's accounts were being maintained on the mercantile basis or accrual basis, and, therefore, it is not necessary that the amount shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins the income of the assessee because the assessee continued to be the owner despite : (1) the transfer only of possession but coupled with ; (2) the agreement of sale. The third question pertains to the interest credited by the assessee in its books to each purchaser on account of the unpaid balance of the purchase price. If the assessee still continued to be the owner, of course the assessee could not charge interest to the purchasers. Thus, both questions are interrelated and depend upon the finding on the question whether the assessee was the owner having regard to the provisions of section 9 of the Income-tax Act. Section 9(1), which deals with " income from property ", says that tax shall be payable by an assessee in respect of the bona fide annual value of the property consisting of any buildings or lands appurtenant thereto " of which he is the owner ". The Tribunal answered the question somewhat summarily by holding in paragraph 11 : " It is not in dispute that there is no conveyance and completed sale in respect of the properties which are the subject-matter of this contention. It is well-settled that in the absence of conveyance there is no sale of the properties in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any title in their favour having regard to the provisions of section 54 of the Transfer of Property Act. They had also no claim---and none has been advanced in the present case by way of part performance under section 53A even to defend their possession. They would, therefore, clearly not be owners within the ordinary acceptation of that term in general law. The question is whether they were " owners " within the meaning of section 9(1) of the Income-tax Act. In Commissioner of Income-tax v. R. B. Jodhamal Kuthiala the firm of Rai Bahadur Jodhamal Kuthiala, the assessee, had purchased a large property in Lahore known as " Nedous Hotel " and the adjoining buildings for a sum of Rs. 46 lakhs in February, 1946. In order to do that they had borrowed a sum of Rs. 30 lakhs from the Bharat Bank Ltd. In the previous year relevant to the assessment year 1951-52 the assessee had credited the amount of interest payable to the bank and had claimed a loss with respect to the said property by showing the gross annual letting value as nil. The loss was on account of interest payable to and credited to the Bharat Bank Ltd. Prior to that year there had been the partition of the country and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be construed in the setting in which it is used. It may be used to convey a meaning, sometimes broad and sometimes quite restricted. In some statutes it may mean a person in whom the property is for the time being beneficially vested and who has the occupation or control or usufruct of it. It may also be used to describe a person not having a full title but only a bare legal title. Again, in a given context the term 'owner' may signify any person having any estate or interest in the land, no matter how slight." Counsel, therefore, urged that having regard to this connotation of the word " owner " in section 9 of the Income-tax Act, in the present case the purchasers who were put in possession by the assessee, who had full dominion and control over the property, could let it out and had in fact done so, must be regarded as the owners. In that case no doubt they held that the firm owning the property in Pakistan was not the owner because they held that the property had vested in the Custodian under the Pakistan Ordinance. It seems to us that the decision in the Delhi Full Bench case was primarily induced by the view which the Full Bench took of the provisions of the Pakistan Ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Custodian. In the assessment proceedings pertaining to the trustees the Income-tax Officer held that the trustees continued to be the owners of the flats and assessed the income from the two properties as their income upon the annual letting value. The Appellate Assistant Commissioner reversed the decision of the Income-tax Officer, but the Tribunal reversed the Appellate Assistant Commissioner's order and held that a though the interest of the evacuee had vested in the Custodian, the ownership of the properties still continued to vest in the trustees and the income from the properties could be computed under section 9 and was liable to be assessed in the hands of the trustees. This court upheld the decision of the Tribunal relying upon the previous decision in D. M. Vakil v. Commissioner of Income-tax and held : " The income of property which is to be computed under section 9 is the income of the owner of the property and, therefore, of the trustees in whom the ownership was vested. As has been held by our court in D. M. Vakil v. Commissioner of Income-tax, the income from property is an artificially defined income and the liability arises from the fact that the assessee is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to the Full Bench case the Calcutta High Court said at page 641 : " It should be pointed out that under section 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 the 1st day of March, 1947'. In these premises, there could be no question of any 'owner' apart from the custodian during the period the property remained so vested. " In view of these considerations the remarks of the Full Bench as to what really constitutes ownership under section 9 would be very largely obiter. The case which we have just referred to is very apposite in the context of the facts in the present case and we think would apply with great force here. In the Calcutta case the assessment year was 1957-58. The assessee claimed that for that year the bona fide annual value of the premises involved in that case, No. 17B, Gurusaday Road, Calcutta, was not assessable in their hands as the property had been sold. The facts regarding the sale were these : On 27th March, 1956, an oral agreement to sell the property to the purchaser took place and in accordance with the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or control over the property and the right to the usufruct of it. The same argument would apply in the case of the allowance mentioned in clause (ii). Clause (vii) grants allowance in respect of vacancies to the extent of that part of the annual value which is proportional to the period during which the property is wholly unoccupied or, where the property is let out in parts, that portion of the annual value appropriate to any vacant part, which is proportional to the period during which such part is wholly unoccupied. It is clear that this right is given to the owner in the strict sense of the term as against vacancies caused by his own want of occupation or the want of occupation by a tenant and in the context the words of the opening clause " of which he is the owner " can only mean the legal owner. This view is further reinforced by the remarks of their Lordships of the Privy Council in Commissioner of Income-tax v. Dewan Bahadur Dewan Krishna Kishore. In that case the assessee was an individual who had succeeded to an impartible estate as its holder by virtue of the rule of primogeniture prevailing in his family governed by the Mitakshara law. From the impartible estate he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the rule of primogeniture the holder of the estate is the legal owner, they held that he is the owner within the meaning of section 9 and that it is not permissible to determine the matter upon broader and more general notions of ownership than the Hindu law affords. We do not think that the case is distinguishable upon the ground mentioned. One important point which is common to all the cases to which we have referred and which deserves to be emphasized in this context is the fact that section 9 deals with income from property and the income from that source is an artificially defined income. The liability to income-tax on property depends on the fact that the assessee is the owner of the property. The assessee is made liable to pay the income-tax on the annual value of the property computed in the manner prescribed. That liability does not depend either on the power of the owner to earn the income therefrom or on the power or capacity of a person to let it out or his own power to receive rent or income from the bona fide annual value. We have already pointed out that this is made clear in Sir Currimbboy Ebrahim Baronetcy case and D.M. Vakil's case, but also tacitly assumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even that there is no possibility of his receiving an income is irrelevant for the consideration of the question as to what the artificial or statutory income of an assessee is from property. The test and the only test laid down in the Act is the bona fide annual value of the property, and in the case of every property that test can be complied with and the annual value of the property can be determined. Therefore, what the Act does is to make the annual rental value of the property the income of the owner of that property and it is that income that has got to be taxed under the Act." This being the nature of the tax, namely, that it is only on the bona fide annual value of the property, that it has no reference to income in fact and that it can be assessed even where there is no possibility of an assessee receiving an income, must necessarily affect the question what is the connotation of the word " owner " in the opening clause. If this is the nature of the tax the word " owner " cannot certainly imply a person who has the capacity to earn profit from property or to rent it out. It cannot be correlated to the person who is earning income, profit or gain from the property as has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial assignee was the owner of the property and he could rightly be assessed. Nothing turns upon the decision in that case so far as the present case is concerned. Kishanchand Lunidasing Bajaj v. Commissioner of Income-tax was cited only to show that the registered owner of a share was the legal owner ; yet the share-income can be taxed in the hands of the real owner. The case was not decided under section 9 but under the provisions of section 16(2) and section 18(5) of the Act with which we are not concerned. There then remains to be considered a decision relied on, on behalf of the assessee, in Burmah Railways Co. v. Secretary of State. The facts were simple. The Burma Railway Company were the managing agents of the railway system under a contract entered into with the Secretary of State for India. They had been put in possession, management and control of the entire railway system. The contract provided that the existing railways and the subsequent extensions were to continue to be owned by the Secretary of State and if fresh capital was needed, the company were to obtain it primarily from the Secretary of State, who undertook to supply the same. The company were entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ownership and would be equally just when arising out, of a lesser degree of ownership. " (The underlining is ours.) They therefore held that in that case " the use of the premises by the railways was essential to the earning of the profits and applying the rule of the construction laid down by them the word " owner " must be interpreted in a wide and popular sense and having regard to the object and intention of the legislature, it is, I consider, clear that the railway comes within the rule granting this allowance ". It would be clear from the passages which we have quoted above that even the majority of the judges in that case did not define what was meant by the word "owner " in section 9. After saying that it should be interpreted in a wide and popular sense they merely observed that " the Railway comes within the rule granting this allowance ". We are unable to follow the reasoning of the majority in that case. In the first place, it seems to us that the very principle of interpretation with which the judgment commenced was not correct, namely, that where the object and intention of the legislature is clear and undoubted, that meaning should be given, when possible, to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f managing agents and it is obvious to us that they could not have been the owners. Thirdly, the learned Chief Justice himself in the penultimate paragraph of his judgment held, when it was argued that the Burma Railways Company was a partner of the Secretary of State, that : " The relationship is, in my opinion, not that of partners but of principal and agent. The agent may have full and wide powers of management and control, but he has none of the equal rights that a partner has and can be compelled to any line of conduct the Secretary of State may decide to be proper. " If that was the position of the Burma Railways Company we fail to see how they could possibly have been held " owners " even assuming that the word included within it not absolute ownership but " a lesser degree of ownership ". On the other hand, we think that the view expressed by the learned dissenting judge, Heald J., is very much to be preferred. He pointed out that the assessees' case was not a claim that the company were owners of the railway premises and was not in fact a claim under section 9(2) of the Act at all. He referred in detail to the terms and conditions of the contract under which they took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys, and the business of the railways, which is mainly the business of carriers." With respect, we are inclined to agree with this view. The majority decision was induced by the fact that there was at least some sort of " a lesser ownership " in the Burma Railways Company. This is clear from the third paragraph of the judgment of the learned Chief Justice. Upon the findings given in that judgment we cannot see how there could be any degree of ownership vested in the Burma Railways Company especially when it was found that the relationship of the Burma Railways Company with the Secretary of State was that of principal and agent. With respect, it seems to us that the minority view is preferable. In the Delhi Full Bench case also the Full Bench had taken the view that in view of the vesting in the Custodian of Evacuee Property, the assessee had no vestige of ownership left. While that view may be correct or not (at least the Bombay case suggests the contrary), it is clear upon all these cases that unless there is some vestige of ownership in the assessee he cannot be called the owner, within the meaning of section 9 of the Income-tax Act, however wide the connotation of that word may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which they had accrued to the assessees. This argument assumes that the assessees' accounts were, in the year in which the agreement was made, on accrual basis. In fact the assessees' accounts was on a cash basis until 1956, and it was only after 1st April, 1956, that the question of accrual could arise. The contention on behalf of the assessees is that as soon as the contract of sale took place the accrual of these amounts took place. On that date the system of accounting of the assessees was the cash system and there was thus no question of any amount accruing or arising to the assessees which was not in fact paid to the assessee. Even for the purposes of the mercantile system of accounting, the amount would normally be taxable when actually paid unless it had accrued earlier. We have shown that in this case these amounts did not accrue to the assessees earlier and, therefore, they must be taxable in the assessment year in question. Moreover, it has to be noticed that these amounts have never borne tax in the past, and, therefore, they could be taxed on the date on which they were actually paid to the assessees even though the assessees were maintaining their accounts on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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