D.L.F. United Ltd. vs Commissioner Of Income-Tax, New ...
1983 Latest Caselaw 384 Del

JUDGMENT

S.S. Chadha, J.

1. In this reference under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act") at the instance of the assessed, the following question has been posed for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 5,000 by was of annual letting value of the property, could be assessed in the hands of the assessed company as it income from house property ?"

2. The statement of case relates to the assessment year 1963-64, the accounting period ending on September 30, 1962. M/s. D. L. F. Housing and Construction (P.) Ltd. is the assessed-company which has now been amalgamated into M/s. D. L. F. United Ltd. It carried on business of colonisation and one of the colonies developed was the Kailash Colony. While developing the colony, the assessed company reserved a plot of five acres for construction of a school and for other subsidiary purposes. A school knows as Summer field School was also put up on this plot of land and the same was placed under the management of a person who was formerly a Principal of Delhi Public School. On May 13, 1953, the managing agents of the assessed company put up a proposal for the consideration of the assessed-company's board of directors. The proposal was considered by the board of directors in the meeting held on June 13, 1953, who considered that the suggestion would assist in the development of the assessed-company and would be in the interest of the company. They accordingly authorised agents to give the land and building of the school to the Trust, namely, D. L. F. Lal Chand Trust, on a perpetual lease of Re. 1 per year. The board of directors of the assessed-company appointed six persons named therein as the first trustees and a formal declaration of trust was drawn up and executed on October 24, 1953. The D. L. F. Lal Chand Trust was brought into existence. A copy of the trust deed along with the annexures dated October 24, 1953, made between the assessed-company and the trustees forms part of the statement of case. On January 6, 1954, a lease deed was executed by the assessed-company in favor of the Trust.

3. The ITO made an estimate of Rs. 5,000 representing the net (annual) income from property and included the same in the assessment. According to him, the assessed had not ceased to be its owner and could suspend the lease on the terms settled, that the assessed had leased it out as an owner and not in the capacity of a trader, that the assessed was liable to be assessed on the bona fide annual letting value of the property, that there is nothing to show that the ownership of the property has been transferred and that the property has been given on concessional rent on considerations of charity. The assessed went in appeal to the AAC. It was claimed that the establishment of the school had benefited the business and as such it must be considered as an essential prerequisite of the business, that the lease is perpetual one, that the assessed is not the owner of the property within the meaning of s. 22, that a building capable of being used as a school can certainly have an annual letting value but a building which has been originally set apart for a trust running a school and is already used and occupied by a school, can have no annual letting value and that, relying on CIT v. R. B. Jodha Mal Kuthiala [1968] 69 ITR 598 (Delhi) [FB], no rights of ownership could be considered as being vested in the assessed. The AAC accepted these contentions of the assessed and deleted the addition of Rs. 5,000 made by the ITO in this regard.

4. The Department went in appeal before the Income-tax Appellate Tribunal (for short, called "the Tribunal"). Before the Tribunal, the assessed also relied upon the decision of the Supreme court in R. B. Jadha Mal Kuthiala v. CIT [1971] 82 ITR 570, to contend that the assessed cannot exercise any rights in the property on the facts and circumstances of the case and the residual benefits rights cannot be considered ownership for the purpose of s. 22 of the Act. The Tribunal also considered the other contention of the assessed that the amount spent on construction of the property as well as on the land was really an outgoing of the assessed's business though it has not been claimed as such in earlier assessments. The Tribunal repelled the latter contention for the reason that the assessed had not claimed it as such in the earlier assessments and it was not know how the expenditure incurred on the land and building in question constituted business expenditure of the assessed and the running of the school could be treated as incidental to the assessed's business of colonisation. The Tribunal held that the grant of perpetual lease of the school building to the trust which was running the school could not be described as the assessed's business of colonisation.

5. So far as the main question was concerned, the Tribunal gave reasons for the inclusion of the property income in the hands of the assessed after considering the case of R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). In that case, the assessed was technically a person in whom the ownership of the property vested but he was not in a position to deal with the property in any manner. He could not take possession of it, or lease it, or sell it, or mortgage it or to realise its income. He had only a residual interest which was also of doubtful value and for these reason a distinction was drawn. The Tribunal recorded the following findings of fact :

(1) The very process of letting out is a process of exploitation of the property and deriving income there from; it is not an act of divesting itself of all rights in the property.

(2) It is open to the assessed to sell the property subject to the rights of the lessee or to otherwise alienate it though no doubt, practically speaking, it may not be able realise much because of the nature of the encumbrances created on the property.

(3) The true significance of the position will be appreciated when the nature of the receipt of a small amount by the assessed is analysed. The amount is the income which the assessed derives from the property as an owner.

(4) A lease of the property, even though it is a perpetual lease, is a right subordinate to the right of ownership of the property.

(5) The lease deed itself also contained a provision whereby the assessed could re-enter on the property.

With these findings, the Tribunal construed the provision of s. 22 of the Act, and came to the conclusion that what the ITO has done in the present case was rightly done by him.

6. Mr. Bishamber Lal, the learned counsel for the assessed, has again taken us through the proposal for the consideration of the assessed-company's board of directors at their meeting held on June 13, 1953, the minutes of the meeting held on June 23, 1953, the copy of the trust deed dated October 24, 1953, the copy of the lease deed dated January 6, 1954, and the nature of the interest in the property left in the hands of the assessed. Great reliance is again placed on the decision in R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). He reiterated the arguments before us which found favor with the AAC.

7. We have referred to the findings of the Tribunal extracted above with the purpose of showing that, on those findings, the inference is irresistible that the assessed is the owner within the meaning of s. 22 of the Act. The assessed continues to be the owner of the property. In the case of immovable property of the value of Rs. 100 and above, its transfer can be effected only by means of an instrument in writing duly stamped and registered. It is not the case of the assessed that there is any such transfer. The assessed's claim that he can be longer be considered the owner for the purpose of s. 22 as he was bereft of all rights of management and control does not appear to be correct on the facts and circumstance of the case. The tribunal had found as a fact the various acts exercised or sought to be exercised by the assessed as owner. The assessed remains the owner of the property irrespective of the fact that he was earning only a nominal income of Re. 1. Before the Tribunal, the question whether the determination of the annual letting value of the property at Rs. 5,000 was excessive or unreasonable, was not canvassed. In fact the Tribunal records that "there is no dispute before us that the determination of the annual letting value of the property at Rs. 5,000 was excessive or unreasonable".

8. The counsel for the assessed does half-heartedly argue that the expenditure incurred on the land and building in question constituted business expenditure of the assessed. Suffice it to say that the amount spent on construction of the property as well as on the land was not claimed as an outgoing of the assessed's business in the year in which it was incurred or even subsequently. The Tribunal is certainly right when it came to the conclusion that a perpetual lease of the school building to a trust which runs the school cannot be described as incidental to the assessed's business of colonisation.

9. The observations made in R. B. Jodha Mal Kuthiala's case [1971] 82 ITR 570 (SC), must be construed to be confined to the context of that case. The issue in that case was whether the displaced persons from the area now comprising Pakistan continue to be the owner of the property left behind by them in Pakistan within the meaning of s. 9 of the 1922 Act notwithstanding the evacuee legislation in force in Pakistan. The Supreme Court held that, in view of the provisions of Pakistan (Administration of Evacuee Property) Ordinance, 1949, the property vested in the Custodian of Evacuee Property and the assessed had only a residual beneficial interest. That residual beneficial interest was in a sense ownership but could not be considered ownership for the purpose of s. 9 of the 1922 Act. The property, having vested in the Custodian, who had all the powers of the owners, could not be considered to be the legal ownership of the assessed. The Custodian was considered to be the legal owner of the property in the eye of law.

10. In CIT v. Hans Raj Gupta [1982] 137 ITR 195, a Division Bench of this court held that is was too well-settled that the title to lands and buildings could not pass till a conveyance deed is executed and duly registered and the assessed remains the owner of the property irrespective of the fact that he was not earning any income there from for the purpose of the inclusion of the income from the house property under s. 22 of the Act.

11. Accordingly, we answer the reference against the assessed and in favor of the department with no order as to costs.