1. This reference arises out of a common order passed by the Tribunal on 16th July, 1962, deciding five appeals before them. In two of those appeals, Income-tax Appeals Nos. 6036 and 6037 of 1961-62, the department was the appellant and in Appeals Nos. 5108-5111 of 1961-62, the Union Land & Building Society Ltd., the assessee, was the appellant. The circumstances under which these appeals arose and the reference was made are briefly as follows :
Messrs. Union Land & Building Society Ltd. is a public limited company which does the business of constructing houses for Government and also of constructing houses for private parties. In the income-tax year relative to the assessment year 1957-58, it constructed seven bungalows on the land belonging to it and sold them to various parties. The details of these sales are not before us except one sale, which 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 account 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 contentions of the assessee was that the amount of Rs. 1,38,868 was not receivable in the accounting year but only at some future date or dates and therefore the some 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 value computed on an accrual basis and not the full amount. In other words, the contention was that the amount of Rs. 1,38,868 being the unpaid balance of the consideration of the bungalows sold alone could be taxed. The contentions were all rejected by the departmental authorities and confirmed by the Tribunal who held that the whole of the balance of the sale price of Rs. 1,38,868 was rightly taken into consideration in computing the profits of the assessee for the year in question. This dispute between the assessee and the department is posed in question No. 1 referred to us and which is as follows :
'1. Whether, on the facts and in the circumstances of the case, the addition of Rs. 1,38,868 or any part thereof made by the Income-tax Officer to the total income of the assessee for the assessment year 1957-58 was justified ?'
2. The second, third and fourth questions are as follows :
'2. Whether, on the facts and in the circumstances of the case, the rental income arising from the bungalows, the possession thereof (whereof) was given to the intending purchaser along with the right to receive rent, without transferring ownership, is assessable in the hands of the assessee
3. Whether, on the facts and in the circumstances of the case, the interest credited to the interest account in respect of various person to whom the possession of the properties was given without transferring the ownership, was rightly excluded from the income of the assessee for the assessment years 1957-58 and 1958-59
4. Whether the sums of Rs. 12,866 and Rs. 14,598 being the realisations of the sale proceeds of the properties which were sold prior to April 1, 1956, were rightly included in the total income of the assessee for the assessment years 1958-59 and 1961-62, respectively ?'
3. In order to show how these questions arise it will be necessary to state some further facts. The assessee used to take from each intending purchaser of a bungalow an agreement agreeing to purchase the particular house and agreeing to aside by the terms and conditions mentioned on amount outstanding should not be taxed as the income of the assessee as there was no sale whatsoever and the assessee continued to remain the owner of the property which in the circumstances was never transferred to the purchaser. This question is, therefore, raised at the instance of the Commissioner.
4. As regards the fourth question it arises because, as we have said above, the assessee changed its system of accounting from the cash basis to the mercantile basis on 1st April, 1956. Two amounts of Rs. 12,866 and Rs. 14,598 were realised by the assessee in regard to properties which were in the possession of the purchasers. According to the assessee the properties were sold prior to 1st April, 1956, and, therefore, these amounts could not be included in the assessee's income for the assessment years 1958-59 and 1960-61.
5. As regard the first question, there appears to be no doubt or difficulty in the present case. Counsel on behalf of the assessee hardly put in any argument against the findings of the Tribunal in paragraphs 5 to 9. The question only pertains to the assessment year 1957-58. In the relevant year of account the assessee sold seven bungalows for Rs. 6,68,218. The assessee actually realised from the purchasers Rs. 5,29,350 leaving a balance outstanding of Rs. 1,38,868 from the several purchasers. No doubt, prior to 1st April, 1956, the assessee was maintaining its accounts on a cash basis, but from that date the assessee changed over to the mercantile system of accounts. The Income-tax Officer, therefore, treated this amount as having been actually received in the accounting year and took it into account for the purpose of determining the taxable amount of the assessee for the year in question, because the entire sale price must be deemed to have accrued to the assessee. It was contended before him and the Appellant Assistant Commissioner that the sum of Rs. 1,38,868 was not 'receivable' in the accounting year but only at a future date and should not, therefore, be included in the 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 to 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.
6. As we have said, counsel on behalf of the assessee, beyond the said fats, 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 the be subjected to tax. From a mercantile point of view, there is no doubt that the amount had taken place on 28th August, 1956, and with the completion of the sale deeds the assessee must be deemed to have received the entire sale price the amount of the balance had arisen in its favour. Therefore, the amount of the balance had accrued or arisen in favour of the assessee and could be rightly included as the income of the assessee for the assessment year.
7. This alternative argument that only the present worth of the total balance, namely, Rs. 1,38,868, should be computed on an actuarial basis and should be charged to the assessee can hardly be sustained under these circumstances. The sale deeds and the assessee could have enforced the payment at the time when it become due. Therefore, the amount was clearly due to the assessee in the assessment year. If we were to hold that the 'present worth' alone is the income of the assessee then we would not be giving effect to the principle of assessment on the accrual basis. There is also nothing to show that these amount were unrealisable or unlikely to be realised when they were to become due according to the terms and conditions of the convence. Therefore, there is no scope for computing their present worth. The whole amount was realisable as per the contract of the assessee and the whole amount would, therefore, be deemed to the assessee's income. We agreed with the finding of the Appellate Assistant Commissioner and the Tribunal that 'there is absolutely no evidence in the present as to show that the amount due from the purchasers were not worth their face value'. In the result, we answer question No. 1 in the affirmative.
8. The question Nos. 2 and 3 pertains to a period prior to the date of the convenience, namely, 28th August, 1956. They may both be dealt with together because they both depend upon the question whether the assessee was the purchaser who had been put in possession without a formal convenience and was realising the rents from the bungalows. The second question poses the issue whether the rental income from the bungalow remains 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.
9. Section 9(1), which deals with 'income from property', ways that the tax shall be payable by an assessee in respect of the bona fide annual value of the property consisting of any building or lands appurtenant thereto 'of which he is the owner'. The Tribunal answered the question somewhat summarily by holding in paragraphs 11 :
'It is not in dispute that there is no convince 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 convenience there is no sale of the properties in question and the assessee would still to the owner of the properties within the meaning of section 9 of the Act. As such, in our opinion, the department rightly taxed the rental income in the hands of the assessee.'
10. We can hardly blame the Tribunal for thus dealing with this question, because it does not appear that the argument was advanced before it in the detailed manner in which it has been advanced before us and, therefore, the Tribunal had no opportunity to consider it.
11. Counsel has now contended that the word 'owner' in section 9 does not necessarily mean a legal owner of an immovable property as understood in general law or common law in India, that is to say, an owner with a legal title. He contended that, under the Income-tax law, that person is really the owner who had the use and enjoyment of the property and has the capacity to earn income from it. So long as he has such control on the property as will enable him to earn income or rent it out, he would be the owner and it is immaterial that he has not a full or completed title as required by the Transfer of Property Act. In this respect he relied upon two decisions, commissioner of Income-tax v. R. Jodhamal Kuthiala and Burma Railways Co. v. Secretary of State.
12. In the present case, the facts are clear. The purchasers had entered into the agreement in 1951 to buy the bungalows as and when they were constructed by the assessee-company. They had along with the agreement paid certain small sums of money by way of earnest money. The actual contains came to be executed only 28th August, 1956, but in the mean while the assessee having constructed the bungalows put the purchaser in possession. Why and how they were put in possession at that time has not been explained and there is a signal lack of evidences to the circumstances under which they thus came to be put in possession. The only thing alleged is that there was an oral agreement after the written agreements made in 1951 as stated in paragraphs 6 of the statement of the case that 'the intending purchasers should be entitled to receive the rentals in respect of these properties'. Accordingly, the purchasers took possession and it appears that the unglues were rented out. When the purchaser rented out the bungalows they had of course no legal title to it, as, under the ordinary law, the mere contracts in their favour would not create any title in their 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.
13. In Commissioner of Income-tax v. R. B. Jodhamal Kuthiala the firm of Rai Bahadur Jodhamal Kuthiala, the assessee, had purchaser a large property in Lahore known as 'Nedous Hotel' and the adjoining building 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 also 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 are into force the Pakistan (Administration of Evacuee Property) Ordinance of 1949 which directly governed the properties situated in Lahore. Therefore, under section 6(1) of this Ordinance the property was declared as evacuee property and vested in the Custodian and it continued to remain thus vested in the assessment year 1951-52. The departmental authorities held that the assessee had ceased to be the owner thereof within the meaning of section 9 of the Income-tax Act because the property had vested in the Custodian of Evacuee Property, Lahore, the Appellate Assistant Commissioner adding that the assessee was actually disputing his liability to pay interest which was neither likely to be paid nor recovered by the creditor in Pakistan. The Tribunal reversed this decision and held that the property, though it had vested in the Custodian, had only vested for the purpose of preserving and managing it but the title of the owner (the assessee) was not affected and, therefore, notwithstanding the provisions of evacuee laws in Pakistan, the assessee contained to be the owner and consequently entitled to claim the losses. The Full Bench of the Delhi High Court, however, reserved this decision of the Tribunal and held that the assessee was not the owner within the meaning of section 9, with the result that neither could the annual letting value be included in the income nor could the assessee be allowed deductions claimed under section 9. In coming to that conclusion the Full Bench interpreted the word 'owner' in section 9 and it is upon that interpretation on which Mr. Kolah relies. They first of all held that the term 'owner' in section 9 has not the meaning which it carries in general law under the Transfer of Property Act, because 'the scheme of the Act, shows that a person can be termed as an owner only if he has such control over property as may enable him to earn income therefrom'. Then they went on to state (Page 611) :
'The term 'owner' may have variety of meanings depending on the context in which it is used. Broadly, an 'owner' is one who has dominion over property which is the subject of ownership. It is well-accepted that the term 'owner' has no rigid meaning and its meaning may not be the same under all the circumstances. It is not a technical term, but rather one of wide application in various connections. It is comprehensive and generic term and must be contoured in the setting in which it is used. It may be used to convey a meaning, sometimes broad and 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 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.'
14. 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, much be regarded as the owners. In that case no doubt they held that the firm owning the property had vested in the Custodian under the Pakistan Ordinance.
15. 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 Ordinance in that case. It was pointed out there that under clause 6(1) of that Ordinance the effect was not to transfer the title vested in the evacuee as the owner of the property but only to give the Custodian certain powers enumerated in the Ordinance for the purpose of managing and administrating the evacuee property. This title of the evacuee still remained though it was merely in suspense and a decision of this court in Abdul Majid Haji Mohamed v. P. R. Nayak was referred to, but the Full Bench negatived the contention by holding (vide page 613) :
'That again shows that though the evacuee legislation may have contemplated return of properties ultimately to the evacuees, but their title remained in statutory suspense till it was restored. That, statutory suspension takes away the right of the assessee to claim to be the owner of the property during that period.'
16. Taking this view the full Bench held that, although there was only a statutory suspension of the assessee's title in that was, still it had destroyed his claim to be an owner of the property during that period. Therefore, the assessee could not claim that the annual letting value should be included in his income nor could the assessee be allowed deductions under section 9.
17. That the view taken by the Full Bench affected their decision, as to whether the assessee in that case was the owner under section 9 or not, would be clear when we consider a contrary view that has been taken in this court in Sir Currimbhoy Ebrahim Baronetcy Trust v. Commissioner of Income-tax, no doubt by a Division Bench. This court held that the Baronet for the time being, Sir Currimbhoy Ebrahim, had the right to occupy free of net two flats in the property known as Currimbhoy Manor in Bombay and another property known as Poona Bungalow No. 20 during the time that he was the Baronet under the Sir Currimbhoy Ebrahim Baronetcy Trust Act, IV of 1913. Under that Act a trust had been created and the trustees where the legal owners of the flats, but Sir Currimbhoy Ebrahim had the beneficial interest of occupying the flats free of rent. Sir Currimbhoy Ebrahim having left India the property was affected by the Ordinance No. 27 of 1949 and the Custodian of Evacuee Property had declared the flats and the bungalow as evacuee property. He had further declared that the right of residence given to Sir Currimbhoy Ebrahim had vested in the 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 although 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 owner of the property. The liability does not depend on the power of the owner to let the property and it also does not depend upon the capacity of the owner to receive the bona fide annual value.'
18. Counsel in that case had argued that under the provisions of the Administration of Evacuee Property Act, 1950, on the vesting of the interest of the Baronet in the Custodian, the Custodian was invested with the power of letting out the properties and turn them to income. The right to obtain income from the property thus belonging to the Custodian, the trustees' power to turn the property into income was gone and that, therefore, it should be held that the income from property would no longer be income assessable in the hands of the trustees. This argument was not accepted by this court. The Division Bench held :
'As we have already pointed out earlier, the criterion of assessment under section 9 is the ownership of the property and, so far as the ownership of property is concerned, there has been no change by the interest of the Baronet having vested in the Custodian. That the trustees are not in a position to obtain any rent from the properties is not, in our opinion, material since the liability of the trustees as owners of the properties does not depend upon their power to let the properties nor on their capacity to receive income therefrom.'
19. It will thus be clear that the decision of the Full Bench as also the decision of this court in Sir Currimbhoy Ebrahim Baronetcy case were induced by the respective view which the two courts took as to the effect of the evacuee property law. The full Bench took the view that the title of the assessee albeit statutorily suspended was virtually put an end to portent to whereas this court held that it was not so put an end to but continued despite the vesting of the property in the Custodian. Neither the Sir Currimbhoy Ebrahim Baronetcy case nor D. M. Vakil's case was referred to in the full Bench decision. Fortunately, in the present case we are relieved of the necessity of considering the effect of evacuee laws upon ownership of assessees. In the present case, on the facts, the case is quite different as we shall presently show.
20. It is upon this very ground that the Delhi full Bench case was distinguished in a recent decision of the Calcutta High Court in Commissioner of Income-tax v. Ganga Properties Ltd. With reference 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.'
21. 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.
22. The case which we have just referred to is very opposite 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 the 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 delivery of possession was given to the purchase on 29th March, 1956. The purchaser paid the whole consideration of the sale on 16th April, 1956, but no formal sale deed was executed. An agreement for sale was drawn up on 28th April, 1956, and a deed of conveyance transferring the property was executed on 17th March, 1958, and was registered on 8th July, 1958. The question was whether the income from the property prior to the deed of conveyance of 8th July, 1958, was assessable in the hands of the assessee, the seller or the purchaser. The Calcutta High Court posed the question before them as follows (at page 643) :
'The question is whether the expression 'of which he is the owner' envisages the case of a legal owner only or the case of a beneficial owner as well.'
23. The Division Bench points doubt that :
'It is well-known that where an instrument which purports to transfer title to property requires to be registered, the title does not pass until registration has been effected. Section 47 of the Registration Act does not create a new title. It only affirms a title which has been created by the deed.'
24. They also referred to section 54 of the Transfer of Property Act and held that 'title can pass only by execution of a registered instrument'.
25. Counsel for the assessee urged that this decision taken an extreme view and that it failed to consider what was the real connotation of the word 'owner' in the context of income-tax law and the several provisions of the Act, particularly section 3, 4 and 9 and the allowances mentioned in section 9(1). The argument could equally well be urged against the contention on behalf of the assessee that the word 'owner' is used in a broad sense to include anyone who has control or dominion over the property or who can realise the rent or income from the property. The allowance mentioned in sub-clause (i) of section 9(1) makes a distinction between propriety in the occupation of the owner and property which is let to a tenant and the owner had undertaken to bear the cost of repairs. The distinction between the owner on the one hand and a tenant clearly suggests that the owner in sub-clause (i) of section 9(1) is a legal owner. If the argument for which counsel for the assessee contends were to be accepted, the tenant who would have the right to sub-let would also be included in the definition of 'owner' for he would have the dominion 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, the 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 sent of occupation by a tenant and in the context the words of the opening clause 'of which is the owner' can only mean the legal owner.
26. 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 received 'inter alia' a substantial income and the question was whether in respect of that income the assessee was chargeable as an individual. The assessee had contended that such income was only chargeable as income of the Hindu undivided family of which he was the karta or managing member. The Privy Council ruled at page 699 :
'The learned judges of the High court have rejected the claim of the Commissioner to tax the assessee as an individual upon the income of the house property under section 9 of the Act. The ground of their decision is that 'the owner' of the buildings and lands appurtenant thereto is not the assessee but the Hindu undivided family. With this reasoning their Lordships agree. They think that the learned judges were right in refusing to follow the Bombay case wherein it was held that the words 'property of which he is the owner' are to be read as meaning 'of which annual value he is the owner' : Commissioner of Income-tax v. Abubakar Abdual Rehman (the reference is to an earlier decision of this court). However difficult it may be in some case to apply the simple and ordinary phrase 'owner of property' to the facts, it is not permissible to substitute a phrase which is of dubious and noticeably different meaning. Again, the distinction between property owned by an individual Hindu and property owned by a Hindu undivided family must be made by applying the Hindu law and if the distinction in certain cases be somewhat fine and difficult to draw it is all the more necessary to keep close to the Hindu law. Their Lordships cannot accept the suggestion that because the statute to be interpreted is an Income-tax Act, broader or more general notions of ownership than the Hindu law affords are to determine the matter.'
27. The portion we have underlined clearly indicates that the word 'owner' must be understood in its ordinary meaning of a legal owner under the general law. Counsel urged that this case was decided upon the basis of the secular provisions of the Hindu law and particularly the Hindu law as modified by the law governing impartible estates. It seems to as that their Lordships emphasized that Hindu law must be applied in order to ascertain who was the owner and not in order to interpret the expression in section 9 'of which he is the owner'. Having found that under the Hindu law relating to impartible estates 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.
28. 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 Currimbhoy Ebrahim Baronetcy case and D. M. Vakil's case, but also tacitly assumed by the Delhi Court in the full Bench Case, Commissioner of Income-tax v. R. B. Jodhamal Kuthiala, when they remarked that :
'The said provision shows that section 9 merely prescribes the notional method of arriving at the income from property on which an assessee has to be taxed......'
29. Of course, the Full Bench went on to hold that in any event the income from property is basically a tax on income. We would rather say that it is upon a notional income, namely, the annual letting value. The same view has also been taken in Commissioner of Income-tax v. Biman Behari Shaw Shebait, where both D. M. Vakil's case and Sir Currimbhoy Ebrahim Baronetcy's case, were followed and the following remarks from the judgment of Chief Justice Kania, in D. M. Vakil's case, were reproduced :
'The legislature has, therefore, expressly provided that the tax shall be payable by the assessee in respect of the bona fide annual value irrespective of the question whether he receives that value or not. Section 9(2) provides that, for the purposes of this section, the expression 'annual value' shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year. It is again significant to note that the word used is 'might' and not 'can' or 'is'. Reading these two paragraphs of section 9 together, it is clear that the income from property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. It is further provided in the section that if the owner occupies the property he has to pay tax calculated in the manner provided therein. Therefore, by reason of the fact that the property is not let out, the assesses does not escape taxation.''
30. The other learned judge, Chagla J. (as he then was, late Chief Justice) put the matter even more forcefully (vide pate 304) :
'The only question is : what is income from property or how is it to be computed And for that purpose one must turn to section 9 of the Indian Income-tax Act. The scheme of the Income-tax Act is that the income from property which is made liable to tax is not the actual income but an artificial or statutory income as defined in section 9 and that artificial or statutory income is the bona fide annual value of the property. Therefore, the fact that the owner of the property receives no income in fact or 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 firm property. The test and the only test laid down in the Act is the bon 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 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.'
31. This being the nature of the tax, namely, that it is only on the bon 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 reviving 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 tad 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 been done in the Full bench case.
32. Three other cases to which reference was made in the arguments may be mentioned here though we do not think that they add much to the question posed by Chagla C.J. The decision in Bai Hamabhai J. K. Mehta v. Commissioner of Income-tax merely decided that the beneficiary under a trust is entitled to the benefit of section 9(2) if as a beneficiary he has been assessed to tax under section 9(1), but the prices question which has been argued before us was not raised in that case. The Advocate-General on behalf of the revenue had argued in the at case that the assessee who was the beneficiary was not the owner of the property and that the owners of the property were trustees and, therefore, sub-section (2) of section 9 would have no application in the case of the assessee who was the beneficiary. The Division Bench did not answer the point but merely said :
'But the Advocate-General overlooks the patent fact in this case that the assessee has been assessed under section 9 to the property tax as the owner of the property......... If the assessee is an owner for the purpose of section 9(1), it is difficult to see why he is not an owner also for the purpose of section 9(2).'
33. There was thus no decision in that case whether the beneficiary under the circumstances was an owner. He had already been assessed under section 9(1) as an owner and therefore their Lordships held that he would also be an owner under section 9(2). On the merits of the controversy, however, it is clear that the Division Bench kept the matter open as can be seen from the penultimate paragraph of their judgment where they stated that :
'...... and Sir Jamshedji has also argued that the expression 'owner' in section 9(1) means not the legal owner but the beneficial owner. We do not think it necessary to decide either of these two questions raised by Sir Jamshedji and we confine our decision to the narrow point that as the beneficiary has been assessed to tax under section 9(1) he is entitled to the benefit under sub-section (2) in the same capacity, viz., that of the owner of the property.'
34. The decision in In the Matter of Official Assignee for Bengal : Estate of Jnanendra Nath Pramanik, merely decided the question whether upon a property vesting in the official assignee on the assessee becoming an insolvent it was still susceptible to taxation. It was held that the official 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.
35. 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.
36. 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 receive a guaranteed rate of interest on their share capital and a certain share in the surplus profits. On the termination of the contract the railways were to be handed back to the Secretary of State, the company receiving back their capital in full. The railways claimed the allowances in respect of the property income under section 9 and the question was whether they were the owners within the meaning of section 9. The learned Chief Justice, Sir Sydney Robinson, posed the question as follows :
'The question we have to decide is what is the meaning to be given to the expression 'owned', that is to say, must the assessee show that the full ultimate legal title rests in him or was it intended that the allowance should be granted to an assessee holding only some lesser degree of ownership ?'
37. The learned Chief Justice, with whom Mr. Justice Maung Kin concurred, held that the Burma Railways Co. were the owners of the railway system and all its premises for the purpose of the allowance climbable under section 9(2)(i) of the Income-tax Act, but they were not partners with the Secretary of State for India as they had claimed. Held J. dissented and held that the company were not owners of the premises within the meaning of section 9(2)(i).
38. The majority decision was pressed upon us. The reasoning in the main judgment of the learned Chief Justice was this : He first of all referred to the rule of interpretation of such statues and particularly to the rule :
'Whether the object and intention of the legislature is clear and undoubted, that meaning should be given when possible to the words used which will best carry out the clear object and intention.'
39. Then he presumed that when the legislature had enacted section 9 it must have been aware of the expressions 'owner', 'ownership' and the verb 'to own' in various Acts and that they can be used in varying meanings in different Acts and yet they have not been defined in the Income-tax Act. Therefore, it was with reference to the object of the Act that the word 'owner' should be countered. From the provisions of the Act the majority judgment deduced the principle that where buildings must be used to payable profits to be made or increased, it is recognised that an allowance for them is just and reasonable and that :
'The justness of the claim to such an allowance of annual value in no way depends on absolute ownership and would be equally just when arising out of a lesser degree of ownership.'
40. They therefore held treat 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'.
41. 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 wood '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'.
42. 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 words used which will best carry out its clear object and intention. We should rather think that the words in the statute by themselves should first be attempted to be construed and it is only in the event of doubt or difficulty that the object and intention of the legislature should be brought into play. As Maxwell has put it :
'The first and most elementary rule of construction is that it is to be assumed that the words and phrases of technical legislation are used in their technical meaning, if they have acquired one, and, otherwise, in their ordinary meaning; and, secondly, that the phrases and sentences are to be construed according to the rules of grammar........... The rule of construction is 'to intend the legislature to have meant what they have actually expressed'. The object of all interpretation is to discover the intention of Parliament, but the intention of Parliament must be deduced from the language used, for it is well-accepted that the beliefs and assumptions of those who frame Acts of Parliament cannot make the law.' (See page 28, 12th edition).
and again :
'However difficult it may be to believe that Parliament ever really intended the consequences of a literal interpretation, we can only take the intention of Parliament from the words which they have used in the Act, and, therefore, the question is whether these words are capable of a more limited construction. If not, then we must apply them as they stand, however unreasonable or unjust the consequences, and however strongly we may suspect that this was not the real intention of Parliament.'
43. We do not thin, therefore, that it was a correct approach that the object and intention of the legislature being clear and undoubted according to the learned Chief Justice, it should be allowed to prevail in the interpretation of the words 'owner' from the very inception.
44. Secondly, it was held in that case that the assessees, the Burma Railways company had 'possession, control and management of the Railway system' and that it supplied the capital. It was not held to be the owner or have even 'the lesser degree of ownership'. In that case all the property of the railway was expressly declared to be the property of the Secretary of State but only subject to the use and management thereof by the company during the continuance of the contract. Thus the company was in no better position than that of managing agents and its obvious to us that they could not have been the owners.
45. 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.'
46. If that was the position of the Burma Railways company we fail to see haw they could possibly have been held 'owners' even assuming that the word included within it not absolute ownership but 'a lesser degree of ownership'.
47. On the other hand, we think that the view expressed by the learned dissenting judge, Held J., is very much to be preferred. He pointed out that the assesses' 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 over the railways and held that the railways were taken over and worked by the Burma railways company under a contract with the Secretary of State. The main terms of that contract were that the railways, as they then existed and all subsequent extensions and everything connected with the working of the railways or extensions were to continue to be owned by the Secretary of State, that the entire capital of the company was to be paid to him to be used for the purposes of the railways and was to belong to him, that he was to supply all the capital required for extensions or capital works either out of the purposes of the railway and was to belong to him, that he was to supply all the capital required for extensions or capital works either out of the capital of the company or out of his own funds, that the company were to have possession of all railway lands and take over and manage the railways and to construct, equip and manage such extensions as the Secretary of State might approve or direct and, lastly, that on the termination of the contract the railways should be handed back by the company to the Secretary of State and the company should receive back their capital in full. He, therefore, held that the company were not the owners of the railways and the premises, but were merely the managing agents. As regards the contention that the railways would be entitled to be regarded as owners of the premises for the purpose of section 9, the learned judge held :
'It is, I think, clear that their position as managing agents, although it gives them possession of the premises, cannot give them ownership in any sense of the word. As managing agents they may, of course, be treated for many purposes as if they were owners, that they can be so treated only as representing their principle, and although they might, on behalf of their principal, be allowed to claim the deduction allowed by the section if the profits from the business of the railways were being assessed, they cannot, in my opinion, be allowed to claim that deduction on their own amount when only the income from their own business and not that of the undertaking as a whole is under assessment. It may be true that if the income from the business of the railways were being assessed, a deduction of the annual value of the premises would have to be made, but it is not that income but the income of the company which is being assessed, and there is, in my opinion, a clear distinction between the business of the company, which is the management of the railways, and the business of the railways, which is mainly the business of carriers.'
48. 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 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.
49. 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 be. In this view, we must hold that Pran Sikand and the other purchasers were not 'owners' within the meaning of section 9 in the present case. The assessee continued to be the owner of the bungalows agreed to be sold. We answer the question No. 2 in the affirmative.
50. The third question is as regards the interest and it is interconnected with the answer which we have just given to question No. 2. If the assessee is held to be the owner of the bungalows until the sale deeds were actually executed on August 28, 1956, then the interest credited to the interest account in respect of the various purchasers who had not paid the full consideration was legitimately due to the assessees and could not be excluded from the income of the assessees. The assessees where entitled to charge the interest and could, therefore, be taxed on the amount. The Tribunal answered the question rather summarily in paragraph 11 without giving any reasons. We answer question No. 3 in the negative.
51. Turning to question No. 4, it relates to the two amounts of Rs. 12,866 and Rs. 14,598, being the realisations of the sale proceeds of the properties which were agreed to be sold prior to 1st April, 1956. The actual sale deeds as we have said took place on 28th August, 1956. Counsels on behalf of the department has pointed out from the audited statements of accounts of the assesses that these amounts have been shown to have been received by the assessee-company in the years of account pertaining to the assessment years 1958-59 and 1959-60. In the profit and loss account for the year ended 31st March, 1958, an amount of Rs. 12,866 was shown as received by the assessee 'by contract price as per agreement' and similarly in the profit and loss account for the year ended 31st March, 1960, an amount of Rs. 14,598 has been shown to have been received 'by contract price as per agreement.' Thus, there is no doubt that both these amounts were received in the years of account relative to the assessment years in question, and normally would be taxable in the hands of the assessee in the relevant assessment years. Mr. Kolah, however, argues that these amounts must be deemed to have accrued to the assesses earlier when the agreements of sale took place, i.e., in the year 1951 and that, therefore, they cannot be taxed in the assessment years with which we are concerned and should have rightly been taxed in the year in which they bad accrued to the assessees. This argument assumes that the assesses accounts were, in the year in which the agreements was made, on actual 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 event hours the assessees were maintaining their accounts on that day on the mercantile system.
52. The Tribunal referred to this fact and then observed that '........ good faith requires that the assessees should not be allowed to escape payment of tax in respect of these amounts by a change of method in accounting'. There is no question of good faith or equity in the matter a assessment to tax. The assessees in our opinion received these amounts in the assessment years in question and even though the accounts are on a mercantile basis they would be liable to pay tax on these amounts. Since the assessees have shown these amounts as having been realised in the income-tax years in question relevant to the assessment years with which we are concerned, we can see no reason why the department should not assess the assessees upon their own accounts. The Judicial committee of the Privy council in commissioner of Income-tax v. Sarangpur Cotton . at page 40, held with reference to section 13 of the Act as follows :
'......... the section relates to a method of accounting regularly employed by the assessee for his own purposes - in this case for the purposes of the company's business - and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom. The simplest case would be where it appears on the fact of the accounts that a stated deduction has been made for the purpose of a reserve. But, there may well be more complicated cases in which, nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income-tax Officer as a discretionary power.'
53. Thus it is not a mere question of exercising desecration on the part of the Income-tax Officer, but it is his duty to assessee in accordance with the method of accounting regularly employed by the assessee. This statement was verbatim approved by the supreme Court in Commissioner of Income-tax v. A. Krishnaswami Mudaliar, where the Supreme Court exhaustively dealt with the provisions of section 13. In commissioner of Income-tax v. Kameshwar Singh, the Privy Council also observed with reference to section 13 that :
'What the officer is directed in compute is not the assessee's receipts but the assessee's income and in daub what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it.......'
54. That was also a case where the assessee kept his books of account on a hybrid system. This is precisely what happened in the present case. In view of the clear evidence furnished by the assessees' own accounts showing the receipt of these two amounts in the relevant income-tax years relevant to the assessment years in question we hold that these two amounts were taxable in the years in question in the hands of the assessees. We answer question No. 4 in the affirmative.
55. In the result we answer question No. 1 in the affirmative, question No. 2 in the affirmative, question No. 3 in the negative and question No. 4 in the affirmative. The assessees will pay the costs of the Commissioner.