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income-tax Officer Vs. Lionel Edwards Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1984)10ITD534(Kol.)
Appellantincome-tax Officer
RespondentLionel Edwards Ltd.
Excerpt:
.....iac, the ito, however, computed the notional income of rs. 7,298 from the said property under the head income from house property' in the assessment order framed by himunder section 143(3)/144b.4. the matter was carried in appeal before the commissioner (appeals) before whom it was submitted that on an appraisal of the correct legal position the assessee was informed that it would not be liable to tax under the head 'income from house property' at all in respect of the said flat as the same was intended only to be given to its general manager for his residence. reliance was also placed on the decisions in cit v. delhi cloth & general mills co. ltd. [1966] 59 itr 152 (punj.) and jamshedpur engg. & machine mfg. co. ltd. v. cit [1957] 32 itr 41 (pat.). it was further submitted that.....
Judgment:
1. This appeal filed by the revenue relates to the assessment year 1977-78 and is directed against the order dated 19-2-1983 passed by the Commissioner (Appeals).

2. The first ground raised by the revenue states that on the facts and in the circumstances of the case the Commissioner (Appeals) erred in deleting the notional income of Rs. 7,298 under the head 'Income from house property'.

3. The assessee is a limited company. The accounting period for the assessment year with which we are concerned in this appeal is the calendar year 1976. The assessment was framed by the ITO under Section 143(3)/144B of the Income-tax Act, 1961 ('the Act'). It will be seen that the assessee purchased a flat at 4-H Rajashree, 6, Hastings Park Road, Alipore, Calcutta, from Ashoke Marketing Ltd. The deed of conveyance was executed and registered on 10-2-1978. This flat was purchased by the assessee with the intention of providing residence to its general manager. Before the ITO it was submitted on behalf of the assessee that it had no intention to let out this property. An amount equal to 10 per cent of the salary of the general manager was recovered from him and credited in the account. In the return filed by the assessee the net income of Rs. 235 was shown under the head 'Income from house property' with reference to the recovery made from the general manager. The ITO, in the draft assessment order prepared by him, took the view that the assessee was liable to tax on notional income in respect of this flat. Considering the prevailing rent in the neighbourhood, the ITO estimated a rent of Rs. 1,200 per month in respect of this property. As the assessee was in possession of the same in the accounting year for a period of 9 months, the income from this property was computed on the basis of rental income for 9 months at the rate of Rs. 1,200 per month at Rs. 10,800. After making allowance for outgoings net rental income was computed at Rs. 7,298. It further appears that against the draft assessment order proposing to bring to tax the notional income of Rs. 7,298 under the head 'Income from house property', no objection was filed on behalf of the assessee. The computation of income from this property as done in the draft assessment order was approved by the IAC vide his order dated 6-8-1979under Section 144B(4). A perusal of the order of the IAC goes to show that before him it was contended on behalf of the assessee that the income from the aforesaid property should be considered under the head 'Profits and gains of business or profession' and not under the head 'Income from house property'. It was also submitted that the assessee would be filing a revised return in accordance with their present claim. In accordance with the direction of the IAC, the ITO, however, computed the notional income of Rs. 7,298 from the said property under the head Income from house property' in the assessment order framed by himunder Section 143(3)/144B.4. The matter was carried in appeal before the Commissioner (Appeals) before whom it was submitted that on an appraisal of the correct legal position the assessee was informed that it would not be liable to tax under the head 'Income from house property' at all in respect of the said flat as the same was intended only to be given to its general manager for his residence. Reliance was also placed on the decisions in CIT v. Delhi Cloth & General Mills Co. Ltd. [1966] 59 ITR 152 (Punj.) and Jamshedpur Engg. & Machine Mfg. Co. Ltd. v. CIT [1957] 32 ITR 41 (Pat.). It was further submitted that rent receipt from the assessee's employee was only business receipt and was chargeable under the head 'Profits and gains of business or profession'. The Commissioner (Appeals) on the basis of the fact that the conveyance for the purchase of the flat was executed and registered only on 10-2-1978 held that the assessee cannot be charged this year to tax on any notional income from the said flat under the head 'Income from house property' on the basis of the ratio of the decision of the Calcutta High Court in CIT v. Ganga Properties Ltd. [1970] 77 ITR 637. The Commissioner (Appeals) further found that there is no evidence on record to dispute the assessee's submission that the flat was purchased by the assessee in order to provide residence to its general manager and that the flat has not been let out to any person who is not an employee of the assessee-company.

He also found that the activity of letting out the flat to the assessee's employee has a definite nexus with its business and so the income received by the assessee in such a circumstance is the income received in the course of carrying on of the business. Consequently, the Commissioner (Appeals) recorded a finding that the assessee is not liable to be assessed in respect of any notional income from the flat under the head 'Income from house property' and that rent received from the general manager is to be regarded as taxable business receipt. The ITO was, accordingly, directed to include the said receipt in computation of business income. In accordance with these findings the Commissioner (Appeals) deleted the inclusion of Rs. 7,298 in the total income as 'Income from house property'. Aggrieved, the revenue has come up in appeal before us.

5. Shri S.P. Chaliha, the learned departmental representative, has contended before us that as full consideration for the flat had been paid by the assessee and it had been put in possession thereof and was in full enjoyment of the property, for all practical purposes, it became the owner of the property within the meaning of Section 22 of the Act, with the result that notional income in respect of the property was chargeable to income-tax under the head 'Income from house property'. In support of this contention reliance has been placed on behalf of the revenue on the decision of the Supreme Court in R.B.Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 and the decision of the Patna High Court in Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd. [1983] 144 ITR 357. Reliance has also been placed on the decision of the Calcutta High Court in the case of CIT v. Salkia Transport Associates [1983] 143 ITR 39. It was further submitted that in the return filed by the assessee itself income from the flat purchased by it was shown under the head 'Income from house property'. In this connection, it was further pointed out that against the draft assessment order prepared by the ITO, no objection was filed on behalf of the assessee, regarding the proposed inclusion of the income from the flat under the head 'Income from house property'. In this connection it was further pointed out that in the balance sheet also this property has been shown as house property of the assessee. It was, thus, submitted that the ITO was justified in bringing to tax notional income from this property under the head 'Income from house property'.

It has also been submitted before us that in the case of Ganga Properties Ltd. (supra) relied upon by the Commissioner, the Supreme Court decision in R.B. Jodha Mal Kuthiala's case (supra) has not been considered and that, therefore, the Calcutta High Court decision in the aforesaid case should not be considered as laying down a good law.

6. Shri R.N. Bajoria, the learned authorised representative for the assessee, has made two-fold submissions before us. It was sumitted that in view of the fact that the assessee did not become the legal owner of the flat in question in the accounting year relevant to the assessment year under appeal, income from this property is not chargeable under the head 'Income from house property'under Section 22. In support of this contention reliance has been placed on two decisions of the Calcutta High Court in Ganga Properties Ltd. (supra) and S.B. (House & Land) (P.) Ltd. v. CIT [1979] 119 ITR 785. It was also pointed out that the Calcutta High Court in its decision in the case of S.B. (House & Land) (P.) Ltd. (supra) has considered the Supreme Court decision in the case of R.B. Jodhamal Kuthiala (supra). It was further submitted that in the case of Salkia Transport Associates (supra), cited on behalf of the revenue, the question involved related to allowance of depreciationunder Section 32 of the Act on motor vehicles and that the ratio laid down in that case by the Calcutta High Court does not at all support the contention advanced on behalf of the revenue.

7. The second limb of the argument advanced on behalf of the assessee by Shri R.N. Bajoria, is that the income derived from the flat let out to the assessee's general manager for his residence has to be assessed as business income. Elaborating, it was submitted that the flat purchased by the assessee with the intention of providing residence to its general manager constituted its business asset and, therefore, the income derived therefrom accrued to the assessee, while carrying on its business activity, the income so derived in the course of carrying on of the business is taxable as business income. In support of this submission reliance was placed on the decision of the Patna High Court in Jamshedpur Engg. & Machine Mfg. Co. Ltd.'s case (supra), the decision of the Punjab High Court in Delhi Cloth & General Mills Co.

Ltd.'s case (supra) and the decision of the Madhya Pradesh High Court in CIT v. National Newsprint & Paper Mills Ltd. [1978] 114 ITR 388.

8. Shri R.N. Bajoria then contended that even if no objection was filed by the assessee against the draft assessment order to the proposed inclusion of notional income under the head 'Income from house property' the assessee was not debarred from assailing the order of the ITO on the point in the appeal filed before the Commissioner (Appeals).

In support of this contention reliance has been placed on the decision of the Tribunal, Bombay Bench 'C' (Special Bench), in ITO v. Sippy Films [1982] 1 ITD 1031.

9. We have considered the rival submissions and facts on record. We have also gone through the various authorities cited before us on behalf of the parties. In Ganga Properties Ltd.'s case (supra), it has been held by the Calcutta High Court that in the case of sale of immovable property a registered document is necessary to give effect to the sale and the sale takes effect only from the date of execution of the document. It was further held that in Indian law beneficial owner is unknown. There is but one owner, namely, the legal owner both in respect of vendor and purchaser. It was further held that the expression 'Income from house property' used in Sections 6 and 9 of the Indian Income-tax Act, 1922 ('the 1922 Act'), refers to the i ncome of the legal owner of the property and he is the only person assessable to tax on the basis of bonafide annual value thereof. The ratio laid down is this authority is fully applicable to the facts of the case in hand.

In the instant case, since the deed of conveyance in respect of the flat in question was executed and registered only on 10-2-1978, i.e., beyond the accounting period relevant to the assessment year under appeal, notional income from this property was not chargeableunder Section 22 under the head 'Income from house property' simply for the reason that during that period the assessee was not the legal owner of this property. Income from this property cannot be assessed under the head 'Income from house property' only because during the relevant accounting period or any part thereof, the assessee was in possession and enjoyment of this property.

10. In the case of S.B. [House & Land) (P.) Ltd. (supra) their Lordships of the Calcutta High Court did take into consideration the decision of the Supreme Court in R.B. Jodha Mal Kuthiald's case (supra) relied upon by the assessee. In that case it was found that there has been only a transfer by way of Sub-lease and not a sale divesting the transferor of all rights of ownership in the property. It was, thus, held by the Calcutta High Court that the assessee remained the owner of the property and was assessable as such. This authority also goes to support the submissions made before us on behalf of the assessee.

11. The Patna High Court in the case of Sahay Properties & Investment Co. (P.) Ltd. (supra) has no doubt taken a view which is favourable to the assessee. However, as we are bound by the decisions of the Calcutta High Court in the cases referred to above, we hold that for the assessment year under appeal, notional income from the flat purchased by the assessee cannot be assessed under the head 'Income from house property'.

12. From the facts found by the Commissioner (Appeals) it is evident that the assessee purchased the aforesaid flat with the intention of providing a residence for its general manager. Till today this property has not been let out to any person other than an employee of the assessee-com-pany. The dominant purpose of letting out this property by the assessee to its employee is to carry on its business more efficiently and smoothly. In view of these facts, we are in agreement with the finding of the Commissioner (Appeals) that the activity of such letting out has a definite nexus with the business carried on by the assessee-company and so income received by the assessee from this property is the income received in the course of carrying on of its business. In Jamshedpur Engg. & Machine Mfg. Co. Ltd.'s case (supra) it was held by the Patna High Court that as the letting out of residential quarters by the assessee to its employees was subservient to and incidental to the main business, Section 9 of the 1922 Act did not apply and the expenditure incurred by the assessee for repairs and maintenance of the residential quarters was allowable as a deduction from the profits of the business of the assessee-companyunder Section 10(2)(xv) of the 1922 Act. In Delhi Cloth & General Mills Co. Ltd.'s case (supra) the assessee company owned several buildings, most of which were let out to its employees. It was held that the income of the assessee from the buildings rented out to its employees was income from business and fell for assessmentunder Section 10 as 'Income from business' and notunder Section 9 as 'Income from house property'. In the case of National Newsprint & Papers Mills Ltd. (supra), it has been held by the Madhya Pradesh High Court that rent received by the assessee-company from residential quarters of employees is to be treated as business income. So all these authorities cited on behalf of the assessee support its claim that the income from the aforesaid flat is to be assessed as business income and not as income from house property.

13. It is true that during the assessment proceedings, it was stated on behalf of the assessee that the income from the flat should be assessed under the head 'Income from house property' as it was de facto owner of the same. However, before the assessment could be finalised, the assessee took up a stand before the IAC that income from the flat should be assessed as business income. Moreover, even if inclusion of income from the flat under the head 'Income from house property' was not objected to by the assessee before the ITO, it was not prevented from doing so before the appellate authority. The Special Bench of the Tribunal in Sippy Films' case (supra) has held that the assessee's right to appeal against the order passedunder Section 143(3) could not be taken away or abrogated on the ground that no objection was filed by the assessee against the draft assessment order prepared by the ITO under Section 144B. We are, thus, clearly of the opinion that nothing turns on the fact that at the initial stage the assessee itself asserted that the income from the flat should be assessed under the head 'Income from house property' and that it did not file any objection on this point against the draft assessment order prepared by the ITO under Section 144B. In view of what has been said above, ground No. 1 is rejected.

14 to 27. [These paras are not reproduced here as they involve minor issues.] 28. For the foregoing reasons, the appeal filed by the revenue stands dismissed.


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