Deemed ownership under tax law controls rental income when building space is allotted to shareholders and rent flows to them.

Rental income from a building allotted to shareholders could not be assessed in the company's hands where the company's memorandum and articles authorised allotment of constructed area, specific portions were allotted by resolution, and the shareholders received and reported the rent. Section 27(iii) of the Income-tax Act, 1961 creates a deeming fiction treating the allottee-member as the owner for tax purposes, and that fiction operates independently of the requirement of a registered conveyance under transfer law. On the facts, the company was only an ostensible owner and the lease was effectively on behalf of the shareholders, so the income was taxable in their hands, not the company's.

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Issues: Whether the rental income from the building allotted to the shareholders could be assessed in the hands of the company, or whether the shareholders had to be treated as the deemed owners for the purposes of taxation under the Income-tax Act.

Analysis: The company's memorandum and articles permitted allotment of constructed area to members, including commercial premises, and the resolution allotted specific portions to the shareholders. Section 27(iii) of the Income-tax Act, 1961 creates a deeming fiction by which a member to whom a building or part thereof is allotted is treated as the owner for income-tax purposes. That deeming provision is to be applied independently of the transfer law requiring a registered conveyance. The allotment, the subsequent receipt and distribution of rent and advance to the shareholders, and the filing of returns by the shareholders showed that the company did not retain the beneficial rental income. The company was therefore only an ostensible owner, and the lease executed by it was to be understood as on behalf of the shareholders.

Conclusion: The rental income could not be taxed in the hands of the company, and the question was answered in favour of the assessee.

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