ORDER
G. Santhanam, Accountant Member
1. These appeals are by the assessee.
2. The original assessment for the assessment year 1986-87 was completed on 22-7-1987. The same was reopened under Section 147 of the IT Act to bring to tax capital gains stated to arise on the transfer of a flat at Maker Towers, Bombay to M/s. Coromandal Indag Products Ltd., Madras. The facts of the case may be stated briefly as follows :
3. The assessee entered into an agreement on 17-7-1984 with M/s. Coromandal Indag Products Ltd. for the sale of property situate on the 18th floor of Maker Towers, Cuffe Parade. Bombay, comprising 2340 sq. ft. for a total consideration of Rs. 25,74,000. The sale consideration was to be paid by the vendor in four equal instalments due on 12-7-1984, 12-10-1984, 12-1-1985 and the last instalment was to be paid on or before 30-6-1985. Interest at 15 per cent per annum was also payable along with the instalment as above. As per Rlause 3 of the agreement, the seller, viz., the assessee would continue to be in possession of the entire property till the sale transaction was duly completed. However, the seller agreed to give a licence to the buyer to use temporarily an approximate 2,000 sq. ft. area of the flat on payment of the first instalment. It was further stated that the seller does not thereby part with the possession of the said area and that they continued to be in possession and that the use by the party of the second part is purely in the capacity as licensee and that the said licence is liable to be revoked by the seller at any time for nonpayment of the Instalment as per clause 2. A portion of the building admeasuring 240 sq. ft. was already in the occupation of one M/s. Janso Exports Pvt. Ltd. and it was agreed between the seller and the buyer that M/s. Janso Exports Pvt. Ltd. will be in the occupation of the cabin admeasuring 240 sq. ft. till the payment of the last instalment together with the interest thereon by the buyer and the sale transaction was completed and possession handed over to the buyer. It was further stipulated that M/s. Janso Exports Pvt. Ltd. should be allowed to continue to occupy the cabin admeasuring 240 sq. ft. even after the transfer of property to the buyer on payment of rent of Rs. 17 per sq. ft. of the carpet area occupied by it. There was some delay in the payment of instalment and hence disputes arose between the assessee and the buyer, as a result of which the sale deed was not executed and registered under the Transfer of Properties Act read with the Registration Act. A compromise was made which was recorded by the Bombay High Court on 5-11-1990, in terms of which the assessee is reported to have paid Rs. 40,00,000 to the company and as per the; alternative clause in the compromise the vendee paid back Rs. 30.00,000 to the assessee on 31-3-1991 as approved by the Bombay High Court. Till 31-3-1991 obviously the property was not transferred under a deed of sale. The conveyance deed was executed only after 31-3-1991. On the basis of the agreement, the learned Dy. CIT (Assessment) held that the property stood transferred to the buyer for a sale consideration of Rs. 25,74,000 and brought the same to tax. Incidentally it must be noticed that he had not allowed any deduction towards cost or cost of improvements, though he had allowed deduction under Section 80-T of the Income-tax Act. Without prejudice to his holding that the sale had taken place de facto, he brought to tax a sum of Rs. 4,08,000 under other sources as a protective measure and that was calculated at the rate of Rs. 17 per sq. ft. on 2,000 sq. ft. comprised in the agreement, assuming that the assessee was the owner of the property and further assuming that the notional inclusion was in the nature of lease rent to be assessed under other sources. In addition, she brought to tax a sum of Rs. 1,65,389 being the interest at 15 per cent received by the assessee from the buyer in respect of the instalments under other sources. This is for the assessment year 1986-87. For the assessment year 1988-89 she calculated the rent at the rate of Rs. 25 per sq. ft. on 2,000 sq. ft. and included the same under other sources as lease rent. On appeal, the CIT(Appeals) held that the agreement was entered into in respect of an immovable property and there was no conveyance by a registered deed. Hence in the absence of any registered deed it cannot be held that the transfer of the said property took place during the relevant previous year. In this view of the matter, he deleted the addition of Rs. 25,74,000 made under the head capital gains. As for the alleged lease rent computed on notional basis in a sum of Rs. 4,08,000, the learned CIT(Appeals) held that as no transfer of property had taken place during the previous year the assessee continued to be the owner and, therefore, the appellant was rightly entitled to receipt of lease rent for actual possession and in this view of the matter, he sustained an addition of Rs. 4,08,000 as income from other sources. As for the inclusion of Rs. 1,65,389 under other sources towards interest the CIT(Appeals) held that under the agreement the assessee was entitled to receive interest on the unpaid consideration and thus the addition was upheld. Further he held that as the prospective buyer had to incur expenditure on maintenance etc. the assessee was not entitled to any deduction therefrom. Thus the appeal of the assessee was partly allowed. For the assessment year 1988-89, the CIT (Appeals) following his earlier order upheld the addition of Rs. 6,00,000 as lease rent assessed under the head other sources. The department is not on appeal against the order of the CIT (Appeals). The assessee is aggrieved against the inclusion of the alleged lease rent under the head other sources for both the assessment years and inclusion of Rs. 1,65,389 under other sources in respect of interest received from the buyer in the assessment year 1986-87.
4. Sri Nair submitted that the assessee is not the owner and was not in receipt of any benefit and, therefore, the notional income cannot be taxed in his hands either under the head house property or under the head other sources. For this proportion he relied on a number of decisions such as
(i) CIT v. Batata Trading Co. (P.) Ltd. [1989] 45 Taxman 363 (Punj. and Har.)
(ii) Nawab Mir Barkath Ali Khan v. CIT [1988] 171 ITR 541 36 Taxman 317. (AP)
(iii) Addl. CITv. Sahay Properties & Investment Co. (P.) Ltd. [1983] 144 ITR 357 14 Taxman 25. (Pat.)
(iv) Smt. Kala Rani v. CIT [1981] 130 ITR 321 6 Taxman 226. (Punj. & Har.)
He also relied on the decision of the Supreme Court in R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 and also the observations of the Full Bench of the Kerala High Court in the case of Parthas Trust v. CIT [1988] 169 ITR 334 at page 346. Further reliance was placed on the Andhra Pradesh High Court’s decision in the case of CIT v. Sahney Steel & Press Works (P.) Ltd. [1989] 177 ITR 354 42 Taxman 168 (Bom.). and also the decision of the Hon’ble High Court of the Calcutta in CIT v. Steelcrete (P.) Ltd. [1983] 142 ITR 45 13 Taxman 24. Sri Nair further submitted that even assuming that the assessee is the owner of the property, inasmuch as, the agreement holder was in actual possession and enjoyment of the property, the property itself is incapable of being let out and, therefore, the computation of annual value even on notional basis cannot be done. He relied on the decision of the Bombay High Court in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694. Further he submitted that even if the assessee is considered as the owner and the asset is capable of being let out, only the standard rent could be the basis of assessment as has been held by the Supreme Court in Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435.
5. Sri C. Abraham, the learned senior departmental representative contended that not even the possession was given by the appellant to the agreement holder. Only licence was granted. In the absence of a registered document of sale, the ownership rested with the appellant. As only licence to occupy the premises was granted to the agreement holder, possession also continued to rest with the appellant. Therefore, the rent which it would fetch if let out can be included in the income of the appellant. He relied on the following cases :
(i) Ramkumar Mills (P.) Ltd. v. CIT [1989] 180 ITR 464 (Kar.);
(ii) CIT v. Sultan Bros (P.) Ltd. [1982] 142 ITR 249 [1982] 11 Taxman 49. (Bom.) ;
(iii) CIT v. Hans Raj Gupta [1982] 137 ITR 195 10 Taxman 127. (Delhi);
(iv) CJT v. Syed Saddique Imam [1978] 111 ITR 475 (Pat.)(FB);
(v) CIT v. Zoroastrian Building Society Ltd. [1976] 102 ITR 499 (Bom.); and
(vi) CIT v. Tamil Nadu Agro Industries Corporation Ltd. [1987] 163 ITR 61 (Mad.).
To a question from the Bench that the assessment has been made under other sources as regards the rental income and not income from house property he submitted that if the income cannot be assessed under other sources at least it should be assessed under income from house property. He had also reservations about the passing of possession to the vendee though the authorities below had proceeded on the basis that the possession was handed over to the vendee. In this connection, he referred to the agreement between the appellant and the other party and emphasised that possession was not given but only a licence was granted. As for the other contention of Sri Nair that the assessee had only a husk of a title and his interest in the property was in the nature of a residuary interest which is not capable of being evaluated, he submitted that he did not accept the view of the Bombay High Court in the case relied on by the learned counsel for the appellant. Further in this case not only the title rested with the assessee but also the possession was not parted with and hence the ratio laid down by the Bombay High Court is not attracted. As for the argument of the learned counsel for the assessee that at any rate only the standard rent is assessable, he submitted that it need not be so in all cases and the reasonable rent can always be estimated. In this case, the estimate was made on the basis of Rs. 17 per sq. ft. that was given by a sister concern occupying about 240 sq. ft. in the same area. In his reply, Sri Nair submitted that the Full Bench decision of the Kerala High Court was 011 the issue of depreciation and not on income from property. Further the Gujarat High Court in CIT v. Narendra Ceramics [IT Appeal No. 54 of 1991] took a different view from that of the Full Bench of the Kerala High Court on the question of depreciation claimed by an assessee who did not have the conveyance deed in his favour and the Supreme Court refused the Special Leave Petition against that judgment as reported in 195 ITR 138 (Statutes). Thus, he submitted that, in any view of the matter, the income as computed by the Income-tax Officer under the head other sources cannot be sustained.
6. We have thus heard rival submissions and perused the records. The agreement dated 17-7-1984 between the parties is as follows :
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement arrived at today on this the Seventeenth day of July, 1984 between Mr. J. Rajmohan Pillai, residing at Vasanth Vihar, Kochupillamudu, Quilon (hereafter be referred to as party of the 1st part) and Messrs. Coromandal Indag Products Pvt. Ltd., having its registered office at No. 29 Police Commissioner’s Office Road, Egmore Madras-600009 (hereinafter be referred to as Party of the II Part).
Whereas the party of the 1st part is in possession and absolute owner of 18th floor comprising of 2340 sq.ft. with all the buildings, structures, erections, fittings and fixtures situated at Tower ‘E’ Maker Towers at Plot Nos. 73-A, 74, 83, 84 and 85 of Block V, Backbay Reclamation, Cuffe Parade, Bombay-400 005 (hereinafter be referred to as the ‘said property’). Whereas the party of the second part is interested in buying the said
property and the party of the first part is interested in selling the said property to the party of the second part and now this Agreement witnesseth and the parties hereto have mutually agreed to as follows :
1. That the party of the first part shall sell the said property and the party of the second part shall purchase the said property with all rights and maintenances free of all encumbrances for the price of Rs. 25,74,000 (Rupees twenty-five lakhs and seventy-four thousands only) at the rate of Rs. 1100 per sq.ft.
2. The said consideration shall be paid by the party of the second part in four equal instalments which will fall due on 12-7-1984, 12-10-1984, 12-1-1985 and the last instalment on or before 30-6-1985. On the remaining principal amount interest at 15 per cent per annum shall be payable by the party of the second part along with the principal amount on the due dates indicated above. If default in instalment payments is made by the party of the second part then the instalment is if any paid already shall stand forfeited subject to clause 8.
3. The party of the first part shall continue to be in possession of the entire property and buildings as before till the last instalment is paid and the sale transaction is duly completed. But however, the party of the first part hereby agrees to give a licence to the party of the second part to use temporarily approximately 2000 sq.ft. area of buildings on payment of the first instalment. It is hereby made clear that the party of the first part does not thereby part with possession of the said area, that they continue to be in possession and that the use by the part of the second part is purely in the capacity as licensees and that the said licence is liable to be provoked by the party of the first part at any time for non-payment as per clause 1 above.
4. That the party of the first part take steps for completion of the sale of the said property in favour of the party of the second part upon receipt of the entire sale consideration and the interest thereon as provided in Clause 2 above and hand over immediate possession thereon. The party of the first part undertake to execute necessary papers and documents effectuating the transfer of said property.
5. It is agreed between the parties hereto that the one cabin comprising approximately 240 sq.ft. area of the building will be used by M/s. Janso Exports Private Ltd. till the payment of the last instalment, together with interest thereon as provided in Clause 2 is paid by the part of the second part and the sale transaction is completed and possession handed over to the party of the second part.
6. If M/s. Janso Exports Private Ltd. would like to continue the occupancy of the whole cabin aforementioned after the entire sale documents are executed after receiving full consideration they will continue to occupy the cabin on paying a rent of Rs. 17 per sq.ft. of the carpet area occupied by them if mutually agreed upon.
7. During the subsistence of this Agreement and thereafter the transfer of the said property to the party of the second part all the outgoings in respect of the said property payable to Maker Tower ‘E’ shall be paid by the party of the second part.
8. That the party of the first part hereby agrees to indemnify the party of the second part for all the losses, expenses, demands that may arise in the event of the sale not being completed in favour of the party of the second part within the stipulated time due to any fault or latches on their part or the sale of the said property being challenged by anyone.
9. Any dispute arising under this Agreement shall have the jurisdiction of Bombay High Court.
In witness whereof the parties hereto have set their respective hands and signature on the day, month and year first above written in the presence of:
Merely because the expression ‘licence’ is used by both parties, it cannot be held that possession was not handed over. Factually M/s. Coromondal Indag Products Pvt. Ltd., Bombay, had entered the premises and was in physical possession of it. It is the usual practice in metropolitan cities to use the term ‘licence’ as against the expression ‘possession’. It should also be seen in what context the expression ‘licence’ is used. It is used in this case in the context of an agreement to sell the property on payment of consideration in instalments. Further the presence of Clauses 5 and 6 lend support to the view that possession was given to the vendee. Therefore, the real intention of the parties under the agreement is to deliver possession by the vendor and to take possession by the vendee in spite of it being described as a licence. In fact, this is how the Income-tax Officer had understood the document as also the first appellate authority and in the circumstances we reject Sri Abraham’s contention that possession was not given to the vendee.
7. There is no dispute that the property was not conveyed to the vendee during the relevant previous year. In law the assessee continues to be the owner though possession and enjoyment rested with the other party. In such circumstances, the question is whether the income could be assessed under the head other sources. In our considered opinion it cannot be assessed under the head other sources as has been done by the authorities below. For an income to fall under other sources first there must be an income either received by the assessee or accrued to him. In this case, the vendee who had occupied the premises had not paid any rent to the assessee nor was there a stipulation for any monthly payment even as a licence fee. Therefore, no income arose to the assessee or accrued to him which can be taxed under the head other sources. Hence we set aside the order of the CIT (Appeals).
8. Sri Abraham pleaded that if it is not taxable under other sources, at least it should be considered under the head income from property. We find force in his plea and we proceed to examine the issue in that angle. In this case, obviously there was only an agreement of sale coupled with handing over of possession. No coveyance deed was executed and registered during the previous year. In such a case, some Courts have refused to recognise the transferee as the owner in the absence of a registered deed and the case laws cited by Sri Abraham are in this region. Some other Courts have taken a contrary view and the case laws cited by Sri C.K. Nair are on this line. The Full Bench of the Kerala High Court in the case of Parthas Trust’s case (supra) held that “a mere agreement of sale will not do duty for a proper sale deed duly executed. The content of Section 32 of the Income-tax Act would not clothe with ownership a mere possessor of some beneficial interest. Section 53A of the Transfer of Property Act, 1982, which only furnished an equipment of enquiry is not effective enough for the acquisition of title or obtaining of the ownership. When such a vital condition regarding the ownership of the asset is not satisfied, the claim for deduction is bound to be rejected”. Dealing with the Allahabad High Court decision in the case of Addl. CIT v. U.P. State Agro-Industrial Corporation Ltd. [1981] 127 ITR 97 which proceeded to decide the issue under Section 32 by applying the ratio laid down by the Supreme Court in the case of R.B. Jodha Mal (supra) the Hon’ble High Court of Kerala at page 346 was of the view that the decision of the Supreme Court was rendered in the context of Section 9 of the Income-tax Act which corresponds to Section 22 of 1961 Act and the things stated therein do not contain anything which would induce them to take a different view of the construction of Section 32. At this stage it is necessary to refer to the decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888 28 Taxman 641. At page 895 the Supreme Court observed as follows :
We are not concerned with the expression ‘owner’. We are concerned whether the assets, in the facts and circumstances of the case, belonged to the assessee any more.
This court had occasion to discuss Section 9 of the Indian Income-tax Act, 1922, and the meaning of the expression ‘owner’ in the case of R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). There it was held that for the purpose of Section 9 of the Indian Income-tax Act, 1922, the owner must be the person who can exercise the rights of the owner, not on behalf of the owner but in his own right. An assessee whose property remained vested in the Custodian of Evacuee Property was not the owner of the property. This again, as observed, dealt with the expression of Section 9 of the Indian Income-taxAct, 1922. At page 575 of the report, certain observations were relied upon in order to stress the point that these observations were in consonance with the observations of the Gujarat High Court which we shall presently notice. We are, however, not concerned in this controversy at the present moment. It has to be borne in mind that in interpreting the liability for wealth-tax, normally equitable considerations are irrelevant. But it is well to remember that in the scheme of the administration of justice, tax law like any other laws will have to be interpreted reasonably and whenever possible in consonance with equity and justice. Therefore, the fact that the Legislature has deliberately and significantly not used the expression ‘assets owned by the assessee’ but ‘assets belonging to the assessee’, in our opinion, is an aspect which has to be borne in mind.
Further waydown at page 898, the Supreme Court held as follows :
The Punjab and Haryana High Court in the case of Kala Rani v. CIT [1981 ] 130 ITR 321 (Punj. and Har.) had occasion to discuss this aspect of the matter. But the Punjab and Haryana High Court was construing the meaning of the expression ‘owner’ under Section 22 of the Income-tax Act, 1961. Therefore, the Division Bench of the Punjab and Haryana High Court held that the assessee occupied the property after the execution of the agreement of sale deed in his favour and after completion of the building, he was in a position to earn income from the property in April 1969. It was held that the assessee was ‘owner’ in terms of Section 22 of the Income-tax Act, 1961.
The Madras High Court had occasion to discuss this aspect in M.P. Gnanambal v. CIT [1982] 136 ITR 103 (Mad.). There the facts were entirely different and the Madras High Court held that the rights with reference to the properties in question in that case could only be described as a delusion and a snare so long as the sons continued to occupy the property which they were entitled to under the will and to describe the assessee’s right as owner of the property would be a complete misnomer. Therefore, the court was construing a will and Section 22 of the Income-tax Act, 1961, as to who were the owners of the will.
In all these cases, as was reiterated by the Calcutta High Court in S.B. (House & Land)(P.) Ltd. v. CIT [1979] 119 ITR 785, the question of ownership had to be considered only in the light of the particular facts of a case. The Patna High Court in Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd. [1983] 144 ITR 357 was concerned with the construction of the expression ‘owner’ in Section 22 of the Income-tax Act, 1961. There, the assessee had paid the consideration in full and had been in exclusive and absolute possession of the property, and had been empowered to dispose of or even alienate the property. The assessee had the right to get the conveyance duly registered and executed in its favour, but had not exercised that opinion. The assessee was not entitled to say that because of its own default in having a deed registered in its name, the assessee was not the owner of the property. In the circumstances, it was held that the assessee must be deemed to be the owner of the property within the meaning of Section 22 of the Income-tax Act, 1961, and was assessable as such on the income from the property. This is only an illustrative point, where in certain circumstances, without any registered conveyance in favour of a purchaser, a person can be considered to be ‘owner’.
At page 900, the Hon’ble Supreme Court held :
The concept of reality in implementing a fiscal provision is relevant and the Legislature in this case has not significantly used the expression “owner” but used the expression “belonging to”….
It may be said that the Legislature having designedly used the expression “belonging to” and not the expression “owned by”….
9. The Punjab and Haryana High Court in the case of Smt. Kala Rani’s case (supra) is in favour of the assessee and this decision has not been overruled by the Supreme Court in Nawab Sir Mir Osman’s case (supra).
10. As a result of these observations, it is our considered view that the assessee cannot be considered as the owner for purpose of Section 22 of the IT Act, 1961.
11. Even assuming that the assessee is the owner of the property, we hold that as has been held by the Bombay High Court in the case of Shree Nirmal Commercial Ltd. ‘s case (supra) at page 712, the property owned by the assessee is of such nature that it is inherently incapable of being let out and, therefore, the charge under Section 22 of the Act cannot arise. This view we hold because in pursuance of part performance of the contract, the assessee has handed over possession. This is a flat situated in a metropolitan city and it is very difficult for any person who has occupied the premises to get evicted. The person who has occupied the premises is a prospective vendor governed by an agreement. Therefore, even if the assessee wanted he could not have let it out. Even assuming that it could be let out what is it that could be let out when the space is occupied by a person under an agreement ? Therefore, we hold that the property is inherently incapable of being let out and hence Section 22 would not be attracted.
12. Even assuming that the property is capable of being let out and the assessee is the full owner thereof, notwithstanding the agreement, we hold that it is not the rent as calculated by the authorities that could be the subject-matter of tax. In such cases, where tenancy laws are in force or the Rent Control Act is in force only the standard rent under the Municipal Laws or under the Rent Control Act that is relevant for purpose of computation of income as has been held by the Supreme Court in the case of Amolak Ram Khoslav. CIT [1981] 131 ITR 589 7 Taxman 51. In this view of the matter also there is no justification to bring to tax the impugned amounts either under other sources or under house property. Thus, the amount of Rs. 4,08,000 and Rs. 6,00,000 respectively for the assessment years 1986-87 and 1988-89 are deleted.
13. Another point at dispute is about the taxability of Rs. 1,65,389 under other sources for the assessment year 1986-87. The appellant had received interest on the payments from the vendee and it was this that was brought to tax.
14. We have heard rival submissions. We do not accept the contention of the assessee that the interest paid by the vendee would become part and parcel of the sale consideration. The interest was received in the year under an agreement and, therefore, it is in the nature of income. Accordingly, we uphold the addition of Rs. 1,65,389 for the assessment year 1986-87.
15. In the result, the appeal for the assessment year 1986-87 is partly allowed; while the appeal for the assessment year 1988-89 is allowed.