1968 (11) TMI 16 - HC - Income Tax

Tax liability upheld on property income despite settlement deed transferring only income rights.

The court held that the assessee was liable to pay tax under section 9 as he remained the owner of the property despite a settlement deed transferring ... Assessee executed a settlement by which the settled in favour of his father, his house property - income from the property - assessee continues to be the owner of the property and the transfer of income is not by overriding title the income from the said property is taxable in the hands of the assessee Issues Involved:1. Whether the assessee was liable to pay tax under the head 'income from property' under section 9 of the Indian Income-tax Act, 1922.2. Whether the settlement deed executed by the assessee transferred ownership of the property or merely the income.3. Applicability of section 16(1)(c) and its third proviso to the income from the property in question.Issue-wise Detailed Analysis:1. Liability to Pay Tax under Section 9:The primary issue was whether the assessee was liable to pay tax under the head 'income from property' under section 9 of the Indian Income-tax Act, 1922, concerning the property at 1/21 Asaf Ali Road, New Delhi. The Tribunal and the court concluded that the tax under section 9 is based on the ownership of the property and not on the actual income derived from it. The court affirmed that the assessee continued to be the owner of the property despite the settlement deed, and thus, the income was taxable in his hands under section 9.2. Ownership vs. Income Transfer through Settlement Deed:The court examined the settlement deed executed by the assessee in favor of his father. The deed transferred the right to the usufruct and income of the property but retained the ownership with the assessee. Key clauses in the deed indicated that the grantee (father) had rights to the income and certain powers of an owner but could not sell, mortgage, or gift the property, which would revert to the grantor (assessee) or his heirs after the grantee's lifetime. The court held that the assessee did not divest himself of the ownership but only transferred the income, thus remaining the owner for tax purposes under section 9.3. Applicability of Section 16(1)(c) and Third Proviso:The assessee argued that the income should not be taxed in his hands due to the irrevocable settlement deed, invoking the third proviso to section 16(1)(c). The court clarified that section 16(1)(c) deals with the transfer of income and its taxation in the hands of the transferor unless the income is diverted by an overriding title at the source. The court found that the income from the property was not diverted at the source but was an application of income after it accrued to the assessee. Therefore, the third proviso did not apply, and the income remained taxable in the assessee's hands.The court further explained that section 16(1)(c) does not apply to income from property under section 9, as the latter imposes tax based on ownership and not actual income. Even if the income was diverted, the owner must pay tax on the notional income represented by the annual letting value of the property.Conclusion:The court concluded that:1. The assessee was liable to pay tax under section 9 as he continued to be the owner of the property.2. The settlement deed transferred only the income and not the ownership of the property.3. Section 16(1)(c) and the third proviso did not exempt the income from being taxed in the assessee's hands as the income was not diverted by an overriding title but was merely an application of income.The judgment affirmed that the assessee must pay tax on the property income, and the question was answered in the affirmative, in favor of the revenue. The assessee was also ordered to pay costs fixed at Rs. 250.