House property ownership and income diversion: mere settlement of usufruct did not avoid taxation on notional annual value.

A settlement deed that transferred only the usufruct and income of house property, while preserving the grantor's reversionary interest and control over the corpus, did not divest ownership for purposes of section 9 of the Indian Income-tax Act, 1922; the owner remained liable to tax on the notional annual value of the property. The third proviso to section 16(1)(c) did not relieve liability where the arrangement amounted only to an application of income after accrual, because a mere diversion of actual receipts does not displace the charging scheme under section 9. The house property income therefore remained taxable in the owner's hands.

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Issues: (i) Whether the assessee had divested himself of ownership of the house property by the settlement deed so as to escape taxation under section 9 of the Indian Income-tax Act, 1922; (ii) Whether the third proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 excluded the assessee from liability where the settlement amounted only to an application of income from house property.

Issue (i): Whether the assessee had divested himself of ownership of the house property by the settlement deed so as to escape taxation under section 9 of the Indian Income-tax Act, 1922.

Analysis: The settlement deed transferred only the usufruct and income of the property for the beneficiary's lifetime and did not transfer the corpus. The deed preserved the grantor's dominion in material respects, including the reversion of the property and the prohibition against alienation of the corpus. On a true construction of the instrument, the assessee remained the owner of the property for the purpose of section 9, which taxes the owner on the notional annual value of house property.

Conclusion: The assessee did not cease to be the owner and remained assessable under section 9.

Issue (ii): Whether the third proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 excluded the assessee from liability where the settlement amounted only to an application of income from house property.

Analysis: Section 16(1)(c) was treated as operating where income is diverted by an overriding title so that it becomes the income of the transferee, but it does not apply to a mere application of income after accrual. In the case of house property, however, taxation under section 9 is on the owner and on the notional annual value, subject only to deductions allowed by that section. A diversion of the actual income does not displace the owner's liability under section 9, and the third proviso to section 16(1)(c) cannot override that scheme.

Conclusion: The third proviso did not protect the assessee, and the property income remained taxable in his hands.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue, affirming liability to tax on the house property income under section 9.

Ratio Decidendi: Tax on house property under section 9 is attracted to the owner on the notional annual value, and a mere settlement or application of the income without transfer of ownership does not avoid that liability or bring the case within the protection of section 16(1)(c) and its third proviso.

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