1. These references under s. 256(1) of the I.T. Act, 1961, raise a very short point in regard to the computation of property income. They relate to the assessment years 1962-63, 1963-64, 1964-65 and 1965-66, the previous years being the relevant calendar years.
2. P. N. Sikand, the assessed, obtained plot No. 12, Block 39, Diplomatic Enclave, New Delhi, on perpetual lease from the President of India. Though it appears that a lease deed was executed in favor of the assessed by the President, that lease is not on record and the matters up to this stage have proceeded on the footing that the lease is subject to the terms and conditions set out in a memorandum of agreement dated December 30, 1954, between the President of India and one Vashesharan Devi. We shall, thereforee, only refer to the terms of this argument in deciding the question at issue.
3. Broadly speaking, under the agreement, the President agreed to lease out the said plot of land to the lessee on payment of Rs. 24,000 as a premium. There are stipulations in the agreement which require the assessed to put up buildings and execute certain works on the plot of land with which we are not here concerned. After the building was put up the following clauses of the agreement came into operation :
'XIII. During the period of this agreement the said land shall be used only for the purpose expressly stated in Clause II hereof and subject to the terms of the covenant in that respect to be contained in the lease, no part of the buildings to be erected on the said land shall at any time hereafter without the previous consent in writing of the Chief Commissioner be used or allowed to be used for any purpose whatsoever other than as a residential building consisting of a single or two residential flats in all nor shall any act be done or caused or suffered to be done on the said land or in the said building which in the Judgment of the Chief Commissioner, is likely to be or become a nuisance or a disparagement annoyance or inconvenience to the President or to the lessees or tenants of any other property in the neighborhood.
XIV. Upon the production by the said intended Lessee of a certificate which must be dated and signed by the said officer certifying that the said buildings have been completed in accordance with the provisions of clause II hereof and provided the other conditions of this Agreement out of the said security so deposited as aforesaid, upon payment by the said intended Lessee of such sum of as is required to make up the full sum of Rs. 24,400 (rupees twenty four thousand four hundred only) payable by the said intended lessee by way of premium as hereinbefore mentioned, the President will grant or cause to be granted to the said intended Lessee and the said intended Lessee shall accept a lease of the buildings to be erected as aforesaid and of the said piece of land hereinbefore described in perpetuity from the thirteenth day of March One thousand nine hundred and fifty three at the yearly rent of Rs. 600 (Rupees Six Hundred only) of such other sum as may hereafter be assessed under the covenants and conditions contained in the printed form of lease attached hereto payable half-yearly in advance on the fifteenth day of January and July, in each year. The first of such payments to be made on the July 15, 1953.
XIX. In case the said intended Lessee shall commit any breach or make default in the performance of all or any one or more of the covenents on his part hereinbefore contained it shall be lawful for the President or any officer in his employ on his behalf to enter into and upon and retain possession of the said land and of all such building erections and materials as may then be found upon the said land for the absolute use of the President and thereupon this Agreement so far as relates to the engagements of the President and thereupon this Agreement so far as relates to the engagements of the President shall be void and the said security so deposited as aforesaid shall belong to him absolutely but without prejudice to all other legal rights and remedies of the President against the said intended Lessee.
XX. No forfeiture or re-entry shall be effected except as herein provided, without the permission of the said officers of Delhi and he shall not permit such forfeiture or re-entry until the Lesser has served on the Lessee a notice in writing.
(a) Specifying the particular breach complained of,
(b) If the breach is capable of remedy, requiring the Lessee to remedy the breach.
And the intended lessee fails within a reasonable time from the date of service of the notice to remedy the breach, if it is capable of remedy and in the event of forfeiture or re-entry the said officer may in his discretion relieve against forfeiture on such terms and conditions as he thinks proper.
Nothing in this clause shall apply to entry for breach of covenants against unauthorised sub-division.'
4. The assessed put up a bungalow on the above plot of land and let out the property to the trade representative of the German Democratic Republic. The said tenant used only the first floor of the bungalow for his residence while the ground floor was being used by him as an office. The Land and Development Officer, New Delhi, raised an objection to the user of a part of the premises for non-residential purposes in view of clause XIII of the agreement of lease earlier referred to. However, subsequent correspondence shows that the Land and Development Officer was willing to 'regularise temporarily the change of purpose' on certain payments to be made by the assessed. This correspondence may now be referred to.
5. By a letter dated June 21, 1961, addressed by the Land and Development Officer to the lessee it was pointed out that the entire ground floor was being used as an office contrary to the provisions contained in clause XIII of the agreement. The lessee was, thereforee, required to stop the use against the terms of the agreement 'or to get it regularised within 15 days from the date of issue of this letter'. This was followed by a reminder dated December 22, 1961, in which it was alleged that the area under misuse had increased. On January 22, 1962, the lessee expressed his willingness to get the matter regularised. Consequent on this the Land and Development Officer by his letter dated April 7, 1962, stated that the Chief Commissioner, Delhi, 'will be pleased to allow the change of purpose in the premises mentioned above temporarily' provided certain terms and conditions were complied with. One of the terms and conditions (with which alone we are concerned here) was that the lessee should make payment of additional charges of Rs. 3,351 per annum with effect from the date of change of purpose up to March 31, 1963. The lessee's plea that the additional charges had been erroneously worked out was rejected in the subsequent correspondence and so by the letter dated December 13, 1962, the assessed sent a cheque for Rs. 3,351 as payment against the change of purpose up to March 30, 1963. Again, by a letter dated March 25, 1963, the lessee was asked to pay the additional charges with effect from March 30, 1960, to June 30, 1963, Rs. 3,351 per annuum, the cheque of Rs. 3,351 sent earlier being adjusted against the amounts so due. By a letter dated February 18, 1964, a fresh notice was given on behalf of the Govt. of India calling upon the assessed to show cause why the lease should not be forfeited for breach of clause XIII. But again by the letter dated May 14, 1964, the Chief Commissioner, Delhi, was stated to have 'temporarily condoned the breach of clause XIII of the agreement for lease conditional upon (the lessee) paying damages and penalty and rectification of breach by March 30, 1963, for use of premises of officer', but asking why action under the lease deed should not be taken for the assessed's failure to rectify the breach. On December 31, 1964, the Land and Development Officer informed the lessee that 'the change of purpose' would be regularised up to January 14, 1965, on compliance by the lessee, inter alia, with the condition that damages should be paid with effect from July 1, 1963, to January 14, 1965, and these were worked out at Rs. 31,148.55. Again, by a letter dated May 17, 1966, the breach was condoned temporarily up to January 14, 1966, on payment of 'additional charges of Rs. 20,194 per annum'. The lessee was asked to furnish an undertaking 'to regularise the breach beyond January 14, 1966, on the rates that may be fixed by the Government from time to time'.
6. In this assessment for the assessment years under consideration, the assessed claimed deduction of Rs. 3,351 in respect of assessment years 1962-63 and 1963-64, of Rs. 11,775 in respect of assessment year 1964-65 and Rs. 20,200 in respect of assessment year 1965-66, which had been paid to the Land and Development Officer in due course as a deduction in the computation of the income from the above house property. This claim was rejected by the ITO, allowed by the AAC but again disallowed by the Income-tax Appellate Tribunal. The aggrieved assessed has sought a reference to this court on the following question of law :
'Whether, on the facts and in the circumstances of the case, the claim for deduction of Rs. 3,351 (in each of the assessment years 1962-63 and 1963-64) and Rs. 11,775 (in assessment year 1964-65) and of Rs. 20,200 (assessment year 1965-66), paid to the Land and Development Officer against income from property, has been rightly disallowed ?'
7. Learned counsel appearing for the assessed submits that the amounts which the assessed had to pay to the Land and Development Officer which are described as additional charges or damages for misuse really represented the additional ground rent payable by him in respect of the property and was, thereforee, permissible as a deduction under s. 24(1)(v) of the I.T. Act, 1961. In the alternative, he cosntended that since under clause XIII, the Land and Development Officer could proceed against the property in the event of non-payment of rent or additional charges, the amounts in question were allowable as 'annual charges' in respect of the property within the meaning of s. 24(1)(v). He also referred to the decision in the case of Gulab Singh and Sons P. Ltd. v. CIT : 94ITR537(Delhi) . On the other hand, on behalf of the department, it was contended that the amounts paid by the assessed were not fixed amounts and that they really amounted to penalty or damages for a contravention of the provisions of the lease deed and to stave off the forfeiture of the above property by the Lesser. Reference was invited to the description of the amounts in question as penalty and damages in the letters dated May 14, 1964, and December 13, 1964, written on behalf of the Govt. of India. It was, thereforee, contended that the amounts could not be described as additional rent allowable under s. 24(1)(v). It was pointed out that as a result of the misuse the assessed could not be said to have incurred any annual liability nor was there any charge in respect of the property in regard to such a liability and that, thereforee, the amounts could not be allowed under clause (iv) either.
8. We are of opinion that the assessed is entitled to the amounts claimed under s. 24(1)(v) of the I.T. Act, 1961. The decision in the case of Gulab Singh and Sons P. Ltd. : 94ITR537(Delhi) is not directly in point because, in that case, there was a revised lease deed and the amounts which were paid were described as additional premium and additional ground rent. In the present case, however, there is no such specific description and the question is whether the payments made by the assessed are really in the nature of rent or not. To us it appears that the payments answer this description. Clause XIII of the lease deed does not absolutely prohibit the use of the building erected on the land for other than residential purpose. It envisages the use of the premises for different purposes but with the previous consent in writing of the designated officer of the Land and Development Department. Again, clause XIV refers to two types of payments to be made by the lessee in respect of the property, one is the premium amount of Rs. 24,400 and the other is 'the yearly rent of Rs. 600 or such other sum as may hereafter be assessed under the covenants and conditions contained in the printed form of lease attached hereto'. Our attention has not been drawn to any other type of payment which the lessee is liable to pay to the Government under the covenants and conditions referred to above other than the payment of the type with which we are at present concerned. Even cls. XIX and XX do not make the forfeiture of the lease an automatic consequence of use of the property for other than residential purposes. Clause XX clearly envisages that the lessee could be relieved against forfeiture on such terms and conditions as the concerned officer may think proper. A proper construction of the memorandum of agreement, thereforee, clearly shows that what was envisaged by the agreement was that the assessed should pay a rent of Rs. 600 per annum in the event of the property being used as contemplated in clause XIII. But the agreement also envisaged that the yearly rent could vary and could be assessed from time to time provided the use of the building for other purposes was 'permitted' or 'condoned' or, again, 'regularised' by the Land and Development Officer. It was no doubt described in some of the correspondence between the parties as damages and penalty, but it is clear that the payment was nothing more than by way of an enhanced rent for using the property in a manner different from that for which the rent of Rs. 600 was fixed. The payments merely represent additional payments which the lessee was called upon to pay in respect of the user of the property. A payment received by the landlord from his tenant for the use of the property is clearly nothing but rent. There is, thereforee, no doubt in our minds that the amounts which the present assessed was called upon to pay to the Land and Development Officer constituted nothing but ground rent within the meaning of s. 24(1)(v). In this view, it is unnecessary to consider the tenability of the claim under s. 24(1)(iv).
9. We, thereforee, answer the question referred to us in the negative and in favor of the assessed. The assessed will be entitled to his costs of this reference. Counsel's fee Rs. 200 in one set.
10. Question answered in the negative.