1. The question which has been referred to us by the Appellate Tribunal under s. 66(1) of the Indian I.T. Act, 1922, is as follows :
'Whether, on the facts and in the circumstances of the case, the national income in respect of the flat in question returned by the assessee for the two years under reference was liable to be assessed as income under the head 'property' under section 9 of the Act ?'
2. We are concerned in this reference with the assessment of the assessee in respect of the assessment years 1960-61 and 1961-62. The State of Bombay had originally granted a lease in favour of a company by name Karimjee Properties Limited of an open plot for construction of a building. This lease was assigned on November 6, 1950, by the said company in favour of one Khetan. Khetan formed a company by name Khetan Estate Ltd. with an issued capital of Rs. 17.50 lakhs on November 24, 1950. This company started construction of a building on the land and the building was completed in September, 1952. In October, 1952, the company allotted flats to its shareholders in proportion to the shares held by the shareholders. The assessee was one such shareholder to whom a flat was allotted. The assessee and the company also executed an under-lease on March 17, 1958. According to this under-lease, the assessee was to pay a monthly rent of Rs. 85 to the company for the flat allotted to him and he had to bear the municipal and other taxes levied in respect of this flat. The assessee personally occupied the flat allotted to him for residential purpose. In respect of the assessment year 1960-61, the assessee in his returns disclosed Rs. 2, 779 as property income. This was accepted by the ITO.
3. The CIT, however, in exercise of his powers under s. 33B of the Indian I.T. Act, 1922, issued a notice because he took the view that the income returned under the head 'property income' and assessed as such should have been assessed under the head 'Other sources' and the correct amount, according to the Commissioner, was Rs. 6,167. He accordingly passed an order holding that Rs. 6,167 should be treated as income from other sources in place of the income from property determined at Rs. 2,779. We may at this stage indicate the view taken by the Commissioner in his own words. In his orders, which are identical for both the years, he observed :
'Since the assessee is not the owner of the flat, the Income-tax Officer erred in assessing the income from the flat under the head 'property'. The head under which this income falls is 'Other sources' since it is not assessable under any of the other heads. The arguments that since it is a notional income it cannot be assessed under 'Other sources' is not tenable. Once it is conceded that it represents income and is an exempted item (sic) it has to be assessed to income-tax and if it is not assessable under the residuary head 'Other sources'. In this case there cannot be any doubt that the benefit the assessee received by the free use of the flat is income. It is not necessary that income should always be in cash. Benefits which are in kind do constitute income.'
4. We may at this stage point out that there are two glaring infirmities in the observations made by the Commissioner. Firstly, it is difficult to appreciate his observation that it was conceded that the amount returned represented income. As a matter of fact, the limited case of the assessee is that it is income from property and it could not be found on record that there was at any stage any concession made that the amount returned was conceded as being income in any general sense. The second glaring infirmity is that he has assumed that the benefit which the assessee got was in the form of free use of the flat. Here again, it is difficult to see on what material the Commissioner has reached that conclusion because the assessee was a shareholder of the company and to that extent he had invested moneys in that company. Obviously, it was in lieu of his investment that he was allotted a flat. The use of the flat was, therefore, in no sense free as understood by the Commissioner, but it was in the form of return for the investment made by the assessee.
5. We may also point out that there is no basis disclosed in the orders of the Commissioner as to how he came to the conclusion that the amount of income should be determined at Rs. 6,167.
6. The assessee carried the matter to the Tribunal by filing two appeals both of which were disposed of by a common order. The Tribunal first considered the question as to whether the Commissioner was justified in including a sum of Rs. 6,167 as income under the head 'Other sources'. The Tribunal has observed : 'The question how any income not earned by the assessee can be included under s. 12 on notional basis has remained unanswered,' and the Tribunal has taken the view that s. 12, unlike s. 9, did not permit inclusion of notional income. An argument was raised before the Tribunal on behalf of the revenue that if the assessee were to lease out the flat on rent, he would have earned income therefrom and by occupying the flat himself, the assessee has denied the income to himself. This argument was rejected and, in our opinion, rightly by the Tribunal when the Tribunal observed that the ITO cannot tax the assessee on the basis that if he had permitted other persons to use the flat, he would have earned income. An argument was also advanced before the Tribunal that income from the property of the assessee should be taxed as dividend because the definition of dividend in s. 2(xxii) was an inclusive definition. This argument was also rejected by the Tribunal, because, according to the Tribunal, dividend, in its normal and popular sense, meant distribution out of the profits earned by the company. The Tribunal has also further taken the view that the assessee had not received any income in the form of dividend. The Tribunal took recourse to the doctrine of piercing the corporate veil and came to the conclusion that the assessee was the owner of the flat and, therefore, the income was rightly included under the head 'Property'. The Tribunal, therefore, set aside the orders of the Commissioner for both the years and restored the orders of the ITO so far as the income under the head 'Property' was concerned. It is from this order of the Tribunal that the question reproduced earlier has been referred to us.
7. Having heard Mr. Joshi, the learned counsel for the revenue, it appears to us wholly unnecessary to go into controversy as to whether s. 12 contemplates any notional income. The matter before us can be disposed of on the short ground that when the Commissioner sought to exercise his jurisdiction under s. 33B of the Act, he proceeded to do so only on the footing that the free use of the flat brought the case under s. 12 of the Act. We have already pointed out that the assessee when he was occupying the flat by virtue of the allotment in his favour by the company could not be said to be using the flat without any consideration. He had already paid consideration for the use of the flat when he became the shareholder of the company and invested his moneys in the company. It is obvious, therefor, that the Commissioner had proceeded to exercise his jurisdiction on an entirely erroneous assumption that the assessee was getting a free use of the flat. Since this was the only ground on which the income which was shown under the head 'Property' was sought to be brought in under the head 'From other sources', it is obvious that the Tribunal was more than justified when it decided to set aside the orders of the Commissioner.
8. In our view, on the facts of this case, no further discussion is necessary and we are satisfied that the Tribunal acted rightly in setting aside the orders of the Commissioner. Accordingly, the question referred to us is answered in the affirmative and in favour of the assessee. The assessee to get the costs of this reference.