COMMISSIONER OF INCOME TAX Vs. NANDANAM CONSTRUCTIONS

JUDGEMENT

(1.) The Tribunal has referred the following question of law to this Court for consideration under s. 256(1) of the IT Act, 1961 :

(2.) The assessee is a registered firm dealing in real estate business. It constructs and sells flats on ownership basis. Its method of accounting for profit is by treating the date of handing over the possession of the flat to the owner as the date of sale irrespective of the date of registration of the sale deed. In respect of the asst. yr. 1979-80, previous to the accounting year 1978-79, the assessee returned an income of Rs. 1,33,166 on the basis of its books and the ITO expressed the view that the profit should have been higher and estimated the same at Rs. 1,73,000 making a net addition of Rs. 39,830. The CIT(A) was of the prima facie view that the property income till the date of registration was liable to be assessed in the hands of the assessee. When the matter was pending decision of the CIT(A), the Administrative Commr. issued notice under s. 263 of the Act calling upon the assessee to show cause why the income from house property should not be assessed in his hands for the period between the date of handing over of the possession and the date of registration of flats in favour of the purchasers. After hearing the assessee, he set aside the assessment so as to include the income from the property in the total income of the assessee. Aggrieved by that, the assessee preferred an appeal to the Tribunal. The Tribunal after considering the case law on the aspect of ownership and possession, the concept of ownership under the Transfer of Property Act, and the liability of a person to pay the tax by virtue of his being in possession of the property, held that the assessee could not be subjected to tax in respect of the property for the interregnum between the date of handing over the possession and the date of registration for the flats sold. At the instance of the Revenue, the above question was referred to this Court for consideration.

(3.) Having regard to the decision of the Supreme Court in R. B. Jodha Mal Kuthiala vs. CIT (1971) 82 ITR 570 (SC), we are of the view that the answer to the question must be in the affirmative and in favour of the assessee. In the case before the Supreme Court, the assessee was owner of certain property in Pakistan and the same was vested in the Custodian of Evacuee Property by virtue of s. 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949. The assessee claimed certain losses by way of payment of interest to a bank on the ground that it arose out of income from the property in respect of which the income was nil as the property has been taken over by the Custodian of Evacuee. The ITO disallowed the claim as the property itself did not belong to the assessee and he cannot claim any such deduction. The Tribunal came to the conclusion that the assessee continued to be the owner of the property for the purpose of computation of loss. The Supreme Court discussed the question as to who is the owner referred to in s. 9 of the Indian IT Act, 1922, corresponding to s. 22 of the present Act as under : "The question is who is the 'owner' referred to in this section ? Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property ? It must be remembered that s. 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of s. 9, the owner must be that person who can exercise the right of the owner, not on behalf of the owner but in his own right. For a minute, let us look at things from the practical point of view. If the thousands of evacuees who left practically all their properties as well as businesses in Pakistan had been considered as the owners of those properties and businesses as long as the 'Ordinance' was in force, then those unfortunate persons would have had to pay income-tax on the basis of the annual letting value of their properties and on the income, gains and profits of the businesses left by them in Pakistan though they did not get a paisa out of those properties and businesses. Fortunately, no one in the past interpreted the law in the manner Mr. Mahajan wants us to interpret. It is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice."