Income from House Property And Case of R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu And Kashmir, Himachal Pradesh And Patiala 1971 (3) SCC 369
Introduction
Section 2(24) of the Income Tax Act,1961 defines the expression ‘income’[1] and “anything that can properly be described as income is taxable under the Act unless expressly exempted”[2]. Thus, not every money received by an individual is chargeable to income tax. Section 14 of the Act classifies all income under the following heads of income: — A. Salaries; C. Income from house property; D. Profits and gains of business or profession; E. Capital gains; F. Income from other sources.[3] In the Act, the income from house property have been dealt with from Section 22 to Section 27. Section 22 of the 1961 Act is the charging Section which states “the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head ―Income from house property.”[4]
Thus, to charge an income from a house property, there are certain conditions which should necessarily be fulfilled – (a) The said property should consist of any building or land appurtenant thereto, (b) The assessee must be the owner of the property, and (c) The property should not be used by the owner for the purposes of any business or profession carried on by him, the profits of which are chargeable to tax. The present discussion takes up these aforesaid important conditions and other provisions related to computing the income from house property. In the later part, the case of R.B. Jodha Mal Kuthiala vs. The Commissioner of Income Tax has been explained.
House Property
The phrase used in the S. 22 is “property consisting of any buildings or lands appurtenant thereto”. It is clarified that if the taxpayer has occupied the house property for the purpose of business or profession carried on by him (the profits of which are chargeable to income tax), or if any asset is let out which is not a building or land appurtenant thereto, annual value of such property is not taxable under S. 22.
In Black Law Dictionary, the term ‘building’ has been defined as ‘a structure or edifice enclosing a space within its walls, and usually, but not necessarily, covered with a roof’. ‘Building’ includes residential house (whether let out or self-occupied), office building, factory building, godown, flats, etc. as long as they are not used for business or profession by owner. Further, this term has not been confined to dwelling houses. In East India Housing & Land Development Trust Ltd. v. CIT[5], the Supreme Court held the income derived by the company from shops and stalls to be income received from property for purposes of S. 9. The Hon’ble Court stated that the character of that income was not altered because it was received by a company formed with the object of developing and setting up markets.[6] Thus, the existence of a building is an essential prerequisite and it does not make any difference at all if the property is owned by a limited company or a firm.
Owner
According to the Supreme Court, the word ‘owner’ in S. 22 means a person who is entitled to receive income from property in his own right.[7] In Jodhamal Kuthiala v. CIT[8], it was held that S. 9 of the 1922 Act[9] brings to tax the income from property and not the interest of a person in the property. Thus, the owner must be the person who can exercise the rights of the owner, not on behalf of the owner but in his own right. The Apex Court has further in Mysore Minerals[10] case held that anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded there from and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc.
Deemed Owner
For the purposes of sections 22 to 26, there is a certain category of persons who shall be regarded as ‘deemed owner’ of a given property.[11] The same includes an individual who transfers otherwise than for adequate consideration any house property to his or her spouse[12], the holder of an impartible estate[13], a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract[14], etc.
Determination of Annual Value of the Property
Under S. 22, the tax is imposed on the `annual value’ of the house property and not a tax on the house property itself. S. 23 provides the method of determining the annual value of a house property[15] and S. 24 further provides few deductions as to the same[16].
Self-occupied
As per S. 23 (2) of the Act, where a property consists of a house or a part of a house which is in the occupation of the owner for the purposes of his own residence; or which cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.[17] It is important to note that if such property is actually let during the whole or any part of the previous year; or if any other benefit therefrom is derived by the owner, then the said benefit can’t be availed.[18] Moreover, if the property consists of more than one house, then the provisions of S. 23(2) shall apply only in respect of one of such houses, which the assessee may specify in this behalf at his own option.[19]
Let Out House Property
When a property is let out, the annual value of the property shall be deemed to be— (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.[20] From this, the taxes levied by any local authority in respect of the property shall be deducted.[21]
Further, the deductions provided in S. 24 are (a) a sum equal to thirty per cent. of the annual value; (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.[22]
Thus, the annual income from a house property can be determined as followed: –
1st Rule: GAV (Gross Annual Value) of House Property – Municipal Taxes (House Tax, etc.) = NAV (Net Annual Value)
2nd Rule: NAV – Standard Deduction – Interest (if property is on bank loan) = Annual Value of House Property which is taxable
Here, the standard deduction is equal to 30% of the NAV.
GAV
Step 1: Compare Municipal Value and Fair Rent, whichever is higher is the FR1 (Fair Rent-I)
Step 2: Compare the FR1 with Standard Rent, whichever is lower is FR2 (Fair Rent-II)
Step 3: Compare the FR2 with Actual Rent, whichever is higher is the GAV.
R.B. Jodha Mal Kuthiala vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala 1971 (3) SCC 369
Facts of the Case
The assessee is a registered firm deriving income from interest on securities, property, business and other sources. Sometime in the year 1946, it purchased the Nedous Hotel in Lahore for a sum of Rs. 46 lakhs. For the same, it raised a loan of Rs. 30 lakhs from M/s. Bharat Bank Ltd., Lahore and a loan of Rs. 18 lakhs from the Raja of Jubbal. The loan taken from the bank was partly repaid but as regards the loan taken from the Raja, the assessee came to an agreement (to be effected on 1.11.1951) with the Raja.[23] After the creation of Pakistan, declared an evacuee property and consequently vested in the Custodian in the Pakistan.
In its return for the relevant assessment years[24], the assessee claimed losses of certain amounts on account of interest payable to the bank but showed the gross annual letting value from the said property at Nil. Since the property in question has vested in the Custodian of Evacuee Property, in Pakistan, the Income-tax Officer[25] held that no income or loss from that property can be considered in the assessee’s case. Accordingly, he disallowed the assessee’s claim in respect of the interest paid to the bank. The Appellate Assistant Commissioner confirmed the order of the ITO. In second appeal, the Tribunal came to the conclusion that the assessee still continued to be the owner of the property for the purpose of computation of loss. The Tribunal held that the interest paid is a deductible allowance under S. 9(1)(iv) of the Act[26]. In arriving at that conclusion, the Tribunal relied on its earlier decision in the case of the assessee in respect of the assessment year 1951-52. Thereafter at the instance of the assessee, the Tribunal submitted the question set out earlier. The High Court on an analysis of the various provisions of the Pakistan (Administration of Evacuee Property) Ordinance, 1949 (XV of 1949)[27] came to the conclusion that for the purpose of S. 9 of the Act, the assessee cannot be considered as the owner of that property. The present appeal was filed by the Income Tax Department against the decision of the High Court.
Legal history
S.9 of the Act states “(1) The tax shall be payable by an assessee [under the head “Income from property”] in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of [any business, profession or vocation carried on by him the profits of which are assessable to tax], …”.[28]
Moreover, the preamble of the Ordinance providing for the administration of the evacuee property in Pakistan says that “whereas an emergency has arisen which renders it necessary to provide for the administration of evacuee property in Pakistan and for certain matters incidental thereto”. The Ordinance provided that all such evacuee property shall vest in the Custodian[29], the Custodian has power to take possession of the such property[30], any amount due or payable in respect of any such property to be paid to the Custodian[31], etc.
Main legal issue
The only question arose for decision in the present case is: “whether on the facts and in the circumstances of the case, the assessee continued to be the owner of the property for the purposes of computation of income under Section 9 of the Income-tax Act, 1922”.
Judgement
The judgement in this case was delivered by K.S. Hegde, J. It was held that the assessee was not the owner of Neadous Hotel during the relevant assessment years for the purpose of S.9 of the Act. The Court stated that for the purpose of S. 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right.
The Hon’ble Court considered the Calcutta High Court decision in a similar matter of In Re the Official Assignee for Bengal (Estate of Jnanendra Nath Pramanik)[32]. In that case, on the adjudication of a person as insolvent under the Presidency Towns Insolvency Act, 1909, certain house property of the insolvent vested in the Official Assignee. The question arose whether the Official Assignee could be taxed in respect of the income of the property under S. 9. The High Court held that the property did not by reason of the adjudication of the debtor cease to be a subject fit for taxation and in view of the provisions of S. 17 of the Presidency Towns Insolvency Act[33], the Official Assignee was the “owner” of the property and he could rightly be assessed in respect of the income from that property under S. 9. The Court noted that the powers of the Custodian are no less than that of the Official Assignee under the Presidency Towns Insolvency Act, 1909.
The Court stated that no one denies that an evacuee from Pakistan has a residual right in the property that he left in Pakistan, but the real question is, can that right be considered as ownership within the meaning of S. 9 of the Act. About the said section, it was stated that –
“the section seeks to bring to tax income of the property in the hands of the owner. Hence, the focus of that Section is on the receipt of the income. The word “owner” has different meanings in different contexts. Under certain circumstances a lessee may be considered as the owner of the property leased to him. In Stroud’s Judicial Dictionary (3rd Edn.), various meanings of the word “owner” are given. It is not necessary for our present purpose to examine what the word “owner” means in different contexts. The meaning that we give to the word “owner” in S. 9 must not be such as to make that provision capable of being made an instrument of oppression. It must be in consonance with the principles underlying the Act.”
Analysis and Conclusion
The present case primarily discusses the meaning of owner of the house property whose income is taxable under the law. It has been observed 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 Section 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right. The Court very diligently held it to be true that equitable considerations are irrelevant in interpreting tax laws, but these laws have to be interpreted reasonably and in consonance with justice like all other laws.
Gauging by the provisions of the Ordinance, the Court has observed that the firm (evacuee) had no power whatsoever to deal with the property in question. It did not have the powers to sell, lease, enter possession or mortgage the said property without the consent of the Custodian. Instead, all those powers were neatly vested in the Custodian. Consequently, the Court held that the Custodian was the legal owner of the property.
The Court did acknowledge that an evacuee from Pakistan has a residual right in the property that he left in Pakistan but the real question was, can that right be considered as ownership within the meaning of S. 9 of the Act. For the same, the court said that the word “owner” has different meanings in different contexts but further deemed it unnecessary to examine the meaning in those contexts. This stance of the court made it quite clear that the interests of the owner “who is actually receiving the income” was to be finally protected so that S. 9 is not capable of being made an instrument of oppression.
In conclusion, the essential element for an income to be charged under the head ‘income from house property’ is that the assessee must be the owner of such house property. The ownership does cover under its ambit – a right to receive income from such property, right to enjoy, alienate or dispose such property. The mere ownership on the papers is not sufficient to impose tax liability for the income from such house property. Through this pronouncement the Apex Court has clearly highlighted the fact that, though the main aim of the Act is to generate maximum revenue but at the same time the provisions of the Income Tax Act 1961 are not there to impose tax liabilities vexatiously.
Bibliography
Statutes
– The Income Tax Act, 1961.
– Pakistan (Administration of Evacuee Property) Ordinance, 1949.
– The Income Tax Act, 1922.
– The Presidency Towns Insolvency Act, 1909.
Books
– GIRJESH SHUKLA, TAX LAW-I (1st ed. Lexis Nexis 2015).
Websites
– Laksheyender, Assessment of income from House Property, LEGAL SERVICE INDIA (last visited Nov. 20 2022), http://www.legalservicesindia.com/article/754/Assessment-of-Income-From-House-Property.html.
– Pranit Kulkarni, B. Jodha Mal Kuthiala vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, LINKEDIN FEED (Mar. 31 2020), https://www.linkedin.com/pulse/rb-jodha-mal-kuthiala-vs-commissioner-income-tax-punjab-kulkarni/.
[1]The Income Tax Act, 1961, § 2(24).
[2] Gopal Saran Narai Singh v. CIT, (1935) 3 ITR 237 (PC).
[3] The Income Tax Act, 1961, § 14.
[4] The Income Tax Act, 1961, § 22.
[5] (1961) 42 ITR 49.
[6] Id.
[7] CIT v. Podar Cement P. Ltd., [1997] 226 ITR 625 (SC).
[8] (1971) 82 ITR 570 (SC).
[9] The Income Tax Act, 1922.
[10] Mysore Minerals Ltd., M.G. Road v. CIT, (1999) 239 ITR 775 (SC).
[11] The Income Tax Act, 1961, § 27.
[12] The transfer should not be in connection with an agreement to live apart, or to a minor child not being a married daughter. See, The Income Tax Act, 1961, § 27(i).
[13] The Income Tax Act, 1961, § 27(ii).
[14] The Income Tax Act, 1961, § 27(iv).
[15] The Income Tax Act, 1961, § 23.
[16] The Income Tax Act, 1961, § 24.
[17] The Income Tax Act, 1961, § 23(2).
[18] The Income Tax Act, 1961, § 23(3).
[19] The Income Tax Act, 1961, § 23(4).
[20] The Income Tax Act, 1961, § 23(1).
[21] The Income Tax Act, 1961, § 23(1) proviso.
[22] The Income Tax Act, 1961, § 24.
[23] Under the agreement, the Raja accepted a half share in the said property in lieu of the loan advanced and also 1/3rd of the outstanding liability of the bank.
[24] The concerned assessment years are 1952-53, 1955-56 and 1956-57.
[25] Hereinafter referred to as ITO
[26] Hereinafter referred to as the Act.
[27] Hereinafter referred to as the Ordinance.
[28] The Income Tax Act, 1922, § 9.
[29] The Income Tax Act, 1961, § 6(1).
[30] The Income Tax Act, 1961, § 9.
[31] The Income Tax Act, 1961, § 11.
[32] [1937] 5 ITR 233(Cal).
[33] The Presidency Towns Insolvency Act, 1909.
Submitted by- Naincy Mishra | 7th Semester, B.A.LL.B. (Hons.) | HPNLU, Shimla
a very unique case law. Thanks for sharing with all the references. Felicitations for excellent write up. However, it is not clear whether Interest deductibility was allowed or not since actually paid to a bank but on a property not owned by the assessee. My guess is that it would be disallowed as capital loss.