1997 (5) TMI 2 - SC - Income Tax

Interpretation of Rental Income Taxation: 'Owner' Defined for Property Income

Commissioner of Income-Tax Versus Podar Cement Pvt. Limited And Others

The court held that rental income from flats should be assessed as 'income from house property' under Section 22 of the Income-tax Act, 1961, rather than ... Case of the assessee is that the rental income from the flats was assessable as 'income from other sources' u/s 56 of the Act inasmuch as the assessee-company was not the 'legal owner' of the property in the flats - Whether Tribunal was justified in law in holding that the income derived by the assessee-company from flats from the building known as ' Silver Arch ' of Bombay is taxable under the head ' Income from other sources ' u/s 56 and not income from ' house property ' u/s 22 - Held, no Issues Involved:1. Scope of Section 22 of the Income-tax Act, 1961.2. Whether rental income from flats should be assessed as 'income from other sources' under Section 56 or 'income from house property' under Section 22.3. Determination of 'owner' under Section 22.4. Impact of the amendment to Section 27 by the Finance Act, 1987.Issue-wise Detailed Analysis:1. Scope of Section 22 of the Income-tax Act, 1961:The primary issue in all cases revolves around the interpretation of Section 22 of the Income-tax Act, which deals with the taxation of income from house property. The court examined whether the income derived from flats should be assessed as 'income from house property' under Section 22 or 'income from other sources' under Section 56 of the Act. The court noted that Section 22 charges the income arising from house property and not the ownership of house property. The focus is on the receipt of income from the property.2. Whether rental income from flats should be assessed as 'income from other sources' under Section 56 or 'income from house property' under Section 22:The respondent-assessee in various cases contended that the rental income from the flats should be assessed under Section 56 as 'income from other sources' because they were not the 'legal owners' of the property. The court, however, upheld the view that the income should be assessed under Section 22 as 'income from house property.' The court emphasized that the person who receives or is entitled to receive the income from the property in his own right should be taxed under Section 22.3. Determination of 'owner' under Section 22:The court extensively discussed the concept of 'ownership' under Section 22. It referred to the judgment in Jodha Mal Kuthiala's case, which held that the owner must be the person who can exercise the rights of the owner in his own right. The court agreed with the High Courts of Punjab and Haryana, Patna, and Rajasthan, which interpreted 'owner' to include persons who have acquired possession and control over the property, even if the legal title has not been formally transferred through a registered deed. The court rejected the view that only the legal owner with a registered sale deed could be taxed under Section 22.4. Impact of the amendment to Section 27 by the Finance Act, 1987:The court examined the amendment to Section 27 by the Finance Act, 1987, which expanded the definition of 'owner' to include persons in possession of the property under certain conditions, such as under Section 53A of the Transfer of Property Act. The court concluded that this amendment was declaratory and clarificatory in nature, intended to remove doubts and clarify the meaning of 'owner' under Section 22. Therefore, the amendment had retrospective effect, supporting the view that persons in possession and control of the property should be deemed owners for tax purposes.Conclusion:The court held that the views taken by the High Courts of Allahabad, Patna, Rajasthan, and Punjab and Haryana were correct, and the contrary view taken by the Delhi High Court was incorrect. The court emphasized that the 'owner' for the purposes of Section 22 should be the person entitled to receive income from the property in his own right, regardless of whether a registered sale deed has been executed. The amendment to Section 27 by the Finance Act, 1987, was clarificatory and had retrospective effect, further supporting this interpretation. Consequently, the income from the flats should be assessed under Section 22 as 'income from house property.'