The judgment of the court was delivered by
SRINIVASAN J. - The assessee is a prominent film artiste. In the account year relevant to the assessment year 1960-61, he constructed a house at a cost of over Rs. 1,25,000. This property stands in the name of his wife. It was found as a fact in the assessment proceedings that the assessee had given a sum of Rs. 75,000 to his wife for the purpose of this construction. The Income-tax Officer took the view that since that was a transfer of this volume of an asset to the wife and that transfer was not for adequate consideration, the proportionate income from the property should be included in the income of the assessee. He computed three-fifths of the income as so includible in the assessment of the assessee. The assessee appealed. One of the points raised was that there was no transfer of any asset to the wife which could be brought under section 16(3) of the Act. The Contention was that the assessee had only advanced funds for the purpose of construction and that could not be construed as a transfer of an asset. This argument prevailed with the Appellate Assistant Commissioner, who directed the deletion of any part of the income from the house from the total income of the assessee.
The department took the matter in appeal to the Tribunal. The Tribunal found as a question of fact that the assessee did transfer a sum of Rs. 75,000 to the wife without any adequate consideration and that this sum was utilized for the construction of the house. The Tribunal took the view that even if it was only money that was transferred, it could still be brought within the scope of section 16(3) of the Act. The further contention advanced was that there was no receipt of any real income from the property, for the owner, the wife of the assessee, was actually residing therein, and it was urged that it is 'real' income as opposed to 'notional' income that could be brought within the scope of section 16(3) of the Act. This contention was also negatived by the Tribunal. Lastly, it was urged that section 9 of the place an upper limit in the matter of taxation of residential property, and since the income assessed, as being derived from this property has to be limited to 10 per cent. of the income of the owner, the amount can be included in the assessees income, as the owners income in the relevant year was nil. This contention will be elaborated in due course, but it would suffice to say that that was also rejected.
On the application of the assessee, the following question was referred by the Tribunal for the determination of this Cour :
'Whether any part of the income from the house property could be included in the hands of the assessee, and if so, what par ?'
Mr. R. M. Seshadri, learned counsel for the assessee, cannot at this stage dispute the finding of fact that a sum of Rs. 75,000 was in fact provided by the assessee for the construction of this house, and since the house as ultimately constructed stands in the wifes name and this property is admittedly owned by her, the sum contributed by the assessee for the construction cannot but be regarded as an asset transferred to her. Notwithstanding this, Mr. Seshadri argues that section 16(3) of the Act has no application, and even if it applies, it has to be read along with section 9 of the Act which brings to tax income from property; if so done, no part of the income from this property can be included in the income of the assessee.
The relevant part of section 16 of the Act reads thu :
'16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included....so much of the income of a wife.....of such individual as arises directly or indirectly -
(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart.'
This provision accordingly requires that where any asset has been transferred to the wife in such circumstances as indicated and the wife derives an income from that asset, that income shall be included in the total income of the assessee. The finding of fact here are that the sum of Rs. 75,000 was in fact transferred by the assessee to his wife and that with this sum, the house was constructed. That the transfer was not for adequate consideration or in connection with an agreement to live apart is also not denied. If so much is established, then if any income is derived by the wife from the asset so transferred, it has under law to be included in the total income of the assessee. In disputing the applicability of section 16(3) of the Act, Mr. Seshadri urges that no income is in fact derived by the assessees wife from the property. According to the learned counsel, it is only income which is actually derived - the expression used in the section is 'arises' - that can be brought within the scope of section 16(3). It is claimed that the owner of the property, that is, the wife of the assessee, lives in the house and that being so, she does not derive any income. If at all, it is only notional income that can be said to be received by the wife when she personally occupies the house in question. Mr. Seshadris contention is that only a real income and not a deemed or notional income that can be the subject-matter of section 16(3).
It is true that in commissioner of Income-tax v. Sir Homi Mehtas Executors, a Bench of the Bombay High Court laid down that income should be a real income before it can be brought to tax. In that case, the assessee and his sons formed a private limited company and transferred to that company shares in several joint stock companies which they held. The cost price of these shares was in the region of Rs. 30,00,000 while the transfer to the private limited company was at the prevailing market value of about Rs. 40,00,000. The income-tax authorities purported to hold that the difference represented a profit and levied income-tax. The learned judges point out that the transfer of the shares to the private limited company, though it was the object of earning a profit. The same persons who held the shares previously continued to hold them even after the transfer and the sale was merely a procedure adopted to adjust their position as holders of shares. In the commercial sense, therefore, there was no profit or gain by reason of the transfer. The learned judges observe at page 93 :
'It is a trite saying that in income-tax matters, one must look at the real nature of the transaction. Whatever legal or technical form a transaction may take, a court must try and determine what the real transaction was and not the form which the transaction took. It is equally true to say that a transaction for the purposes of income-tax must be looked at from a commercial point of view... In trying to determine whether a certain transaction resulted in profit, profits which from the commercial point of view meant a gain to the person who entered into the transaction, not profits from any narrow, technical or legalistic point of view.'
Relying upon this decision, Mr. Seshadri contends that only real income can be brought to tax, and it is his argument that, in the circumstances of the present case, no income at all resulted to the assessees wife.
It is difficult to follow the line of reasoning adopted. As has been found by the department, it was not the case of the assessee that there was no transfer of any amount at all or that the title to the property, that is, the house, which is in the wifes name, is benami for the assessee himself. The sum which the assessee gave to his wife represented an asset which he had transferred to her. The question however is whether any income arose to the wife from the assets so transferred. The asset transferred has taken the shape of house property. The contention that we are to examine is whether section 16(3) requires that the income arising from the property should be an income in the shape of money. It is true that because the wife resides in the house, she is not in actual receipt of any income represented by rents or the like. But would it be true to say that no income at all arises to her from the property in questio We are unable to say that the expression 'income, as arises directly or indirectly' cannot include the benefits arising from the enjoyment of the property. The use of the expression 'indirectly' is broad enough to take in an income which is not received in specie but represents such advantages as the enjoyment of the property might secure, the value of which advantages could be translated in terms of money. On the section as it is worded, we are unable to agree with Mr. Seshadri that where the wife resides in the house property and does not receive any rents from the property it is only notional income that can be said to arise and that such notional income is not within the scope of section 16(3).
Mr. Seshadri elaborates his point further by reference to section 9 of the Act. Section 9 deal with the tax payable by the assessee under income from property. Broadly stated, the tax is payable on the bona fide annual value of the property. Section 9(2) provides that the annual value of a property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. The proviso to this section deals with cases where the property is in the occupation of the owner for the purposes of his own residence and it lays down that in such a case the annual value as determined shall be reduced in a particular manner and the reduced amount shall be taken to be the income from the property for the purposes of tax. Mr. Seshadri urges that section 9(2) itself creates a fiction when it says that the annual value of any property shall be 'deemed' to be a particular sum, and if it is only a deemed income within the meaning of section 9, that cannot be brought within the scope of section 16(3). We are unable to accept the contention of the learned counsel that it is only a deemed income and not a real income that is contemplated by section 9(2) or the first proviso thereto. Section 9(1), which defines the taxable income in respect of property, lays down that the tax shall be payable in the case of all properties in respect of the bona fide annual value of the property of which he is the owner. The property and its ownership are the only two criteria that are taken into consideration, and what is brought to tax is the annual value of the property. It is the presumption of the taxing enactment that every property is capable of yielding income, and the law lays it down that it is the annual value of the property that shall be the amount upon which tax is to be levied. What section 9(2) endeavors to lay down is only the determination of the annual value of the property. In the wording employed 'annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year', the 'deeming' is only for the purpose of the computation. The section does not lay it down that the income itself is a deemed income. As we observed, the ownership of property carries with it the enjoyment of the property, and the measure of that enjoyment is the measure of the income derivable from the property, and it is the quantification of that measure of income that is contemplated by section 9(2) of the Act. We do not agree with the learned counsel that it is not a real income that is contemplated by section 9(2).
Reference has been made by the learned counsel to Tennant v. Smith. That was a case where the question arose whether the value of a residence provided by the employer is not an emolument of office in respect of which the employee is chargeable to income-tax. Further details of that case are not necessary except to observe that the question went upon a consideration of the various Schedules to the English Act under one or other item of which any item of receipt of income is taxable. Learned counsel refers to the following passage at page 17 :
'No doubt, if the appellant had to find lodgings for himself, he might have to pay for them. His income goes further because he is relieved from that expense. But a person is chargeable for income tax under Schedule D as well as under Schedule E, not on what saves his pocket but on what goes into his pocket, and the benefit which the appellant derives from having a rent-free house provided for him by the bank brings in nothing which can be reckoned up as a receipt, or properly described as income.'
It is equally argued by Mr. Seshadri that the only manner in which a person occupying his own house can be said to receive any income is upon the view that if he did not occupy it, he would have to pay rent for another premises. In the light of the observations extracted above, Mr. Seshadri urges that it cannot be regarded as income as nothing 'comes in'. We are unable to apply this decision to the facts of the case for, in our view, section 9 of the Act brings to tax a certain class of income, though such incomes do not always 'come in' in the sense indicated in the decision. Mr. Balasubrahmanyan, learned counsel for the department, refers to Simons Income Tax, volume I (2nd edition). At page 502 dealing with income from property, which is dealt with under Schedule A in the English Act, it is observe :
'The theory behind Schedule A is that the possession of an interest in property gives rise to income, a theory which is not always borne out in fact. That there may be no income in fact is disregarded when the assessment is made. The actual or hypothetical income has to be measured by some standard for the purpose of taxation and the standard prescribed is the annual value. The principle has been subject to adverse comment, but once the theory is appreciated, the method may be understood, and any confusion of thought created by the words of the charging section dispelled...'
Earlier it is pointed out that in Shanks v. Commissioners of Inland Revenue, the phrase 'property in land' was held to include any right of occupation which gives the occupier the benefit of the annual value. This accords with the view that we have expressed that the benefit arising from the enjoyment of the property is really what is brought to tax and not the receipt of any income in terms of money.
We have already indicated the next line of argument. Mr. Seshadri contends that section 16(3) itself is a deeming provision and it can only mean that an income which is not that of the assessee but that of his wife is in certain circumstances deemed to be the income of the assessee himself. His argument is that what is not a real income, but a deemed income, in the hands of the wife cannot once against be deemed to be that of the assessee liable for assessment in his hands. Turning to section 9, he claims that section 9 itself, in so far as it brings to tax the annual value of the property, deems a certain sum to be the income from the property, so that it is not a real income that is dealt with under section 9. It is thus his contention that what is only a deemed income under section 9 cannot be brought within the scope of section 16(3) which, according to him, deals only with a real income of the transferee, which is assessed in the hands of the transferor, the assessee. Firstly, we may point out that it is not a deemed income at all that is dealt with under section 16(3), that is to say, the law does not say that the income of the wife shall be 'deemed' to be the income of the assessee. What in effect it provides for is that an income received by the wife in certain circumstances shall be taxed in the hands of the assessee. Section 16(3) sets out the mode of computation of the income of a person who has transferred certain assets to his wife, and in certain specified circumstances the income arising from the transferred asset is taxed in the hands of the husband himself. It may be said in a manner of speaking that the income of the wife is deemed to be that of the husband, but the section itself does not say so. Even apart from that, we have already pointed out that section 9 itself does not create an artificial income. The fact that in respect of the property the income is not received in rupees, annas and pies does not lead to the position that no income at all is derived therefrom. The section clearly postulates that an owner of property is in receipt of a certain income therefrom which is computed for the purpose of tax in terms of the bona fide annual value of the property. The taxability of any income statutorily presumed to arise from the ownership of property is the basis of this provision. When once it is taken as an established proposition that every owner of property derives a measure of income from the property - in certain cases it will be an actual receipt of income realised by letting out the property, while in certain others it will be a notional income resulting from the enjoyment of the property by the owner himself - the law provides for the manner of computation of that income, and it states that the annual value of the property shall be deemed to be the sum for which the property is let, and that annual value is taken as the income liable to tax. It is true that this income in the case of a person occupying the property is notional, but nevertheless the law regards it as an income which is liable to tax. It is none the less real income and the argument of Mr. Seshadri that, since it is a deemed income, it cannot come within the scope of section 16(3), fails to convince us.
The next question which arises is, what is the extent of the income from the property which can be assessed in the hands of the assesse In dealing with this, the Tribunal said that the upper limit provided for the taxability of the income under section 9 of the Act would be relevant in the case of an assessment on the owner of the property and could not be taken into consideration when the income of the owner is sought to be taxed in the hands of the assessee and her husband. Mr. Seshadri contends that this conclusion is erroneous. The first proviso to section 9(2) of the Act is important in this context. While section 9(1) imposes a tax on the bona fide annual value of the property, the mode of the computation of the bona fide value of the property is laid down in sub-section (2). The proviso to section 9(2) deals with a case where the property is in the occupation of the owner for the purposes of his own residence. In that case, the annual value is first determined as in a case where a property is let out to a tenant and that amount is reduced by one-half or by Rs. 1,800, whichever is less, and the reduced sum is taken to be annual value of the property liable to tax under section 9(1) of the Act. There is the further limitation imposed, that is, if the sum so arrived at exceeds 10% of the total income of the owner, the annual value of property shall be deemed to be 10% of such total income. According to Mr. Seshadri, it is this income, that is to say, the sum as reduced, or 10% of the owners income, whichever is less, that can be taken in for assessment under section 16(3) of the Act, for, according to the learned counsel, the sum so reduced, or 10% of the total income of the owner, is, by virtue of the provisions contained in section 9, regarded as the annual value of the property, that is to say, the income that can be brought to tax. It seems to us that this contention has to be accepted. Under section 6 of the Act, among the various heads of income chargeable to tax is income from property. That is dealt with in section 9 and this section determines the measure of the income derived from the property in a variety of circumstances. The law accordingly presumes that the owner of the property is in receipt of that income as determined by the application of section 9(2) of the Act, and if that is the income which the owner of the property derives, it is only that income which can be brought in for inclusion under section 16(3) of the Act. We are unable to see how in so far as the assessment of the assessee is concerned or the computation of his total income by the application of section 16(3) of the Act requires, any higher income in respect of the property could be brought in, than what the law by a particular mode of computation determines as the income from that property. Whether it is in the assessment of the owner of the property or the assessment of the assessee in respect of the income from that property by reason of section 16(3) of the Act, the mode of determination of the income from the property is equally applicable. It would follow therefore that the sum that can be included in the total income of the assessee in respect of the property in question must be the sum which is arrived at on the application of section 9(2) and the first proviso thereto. It would be for the departmental authorities to determine the amount on the lines indicated above.
The question is accordingly answered thu : The income from the house property is includible in the total income of the assessee, but the measure of the income to be so included will be subject to the first proviso to section 9(2) of the Act. Since the assessee has succeeded in part, there will be no order as to costs.