TMI Blog1993 (10) TMI 312X X X X Extracts X X X X X X X X Extracts X X X X ..... d/payable by Sri Doshi. In August, 1984, the assessee was appointed as a director. In January, 1986, the company transferred the ownership rights in the said flat and garage for a sum of Rs. 2,30,000 to the assessee. The Commissioner was of the view that the market value of the flat could be around Rs. 47 lakhs as the flat was situated in a posh and aristocratic locality in Bombay. The order of assessment for this year had been completed by the Income-tax Officer in the usual routine manner. In so far as this matter was not looked into by the Income-tax Officer while finalising the order, the Commissioner took the view that the order was erroneous and prejudicial to the interests of the Revenue. He, thereafter, passed an order under section 263 and set aside the assessment order. He considered that it would be reasonable to allow one more opportunity to the assessee to put forward his case in regard to the quantification of the value and the consequential quantification of addition to be made under section 2(24)(iv) of the Income-tax Act, 1961. This follows his perception that the difference between the market value and the consideration actually paid by the assessee would be liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Co. Pvt. Ltd., and the assessee's father right from the beginning was that of landlord and tenant and not that of an employer and employee, in so far as the assessee's occupation of the flat was concerned. In such circumstances, the Commissioner of Income-tax was not justified in relying on the passing remark made by the Delhi High Court in their decision in J. Dalmia v. CIT [1982] 138 ITR 653 to the effect that where the property belonging to the company was allowed to be used by a director, then it was not a case of letting out. It is then submitted that the Income-tax Officer assessing the company, namely, Walchand and Co., had written a letter as early as on August 29, 1964, to ascertain whether the rent received by the company from the late Ratanchand Hirachand, father of the assessee, was reasonable. The assessee had then explained to the Income-tax Officer that the flat was given on the basis of annual value which was determined in a fair and reasonable manner. Based on this letter, no action was taken by the Incometax Officer to increase the notional rent of the flat. This alone would support the case of the assessee. That the late Sri Ratanchand Hirachand was a tenant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d passed the order without any jurisdiction. It has to be remembered in this connection that this very Valuation Officer had written a letter to Messrs. Walchand and Co. Ltd. in which he informed that the fair market value of the flat had to be determined. The said letter was also forwarded by Sri Livingstone to the Inspecting Assistant Commissioner (Assessment). At that stage, no objection was raised by the Assessing Officer regarding the jurisdiction of the Assistant Valuation Officer. After rejecting the Assistant Valuation Officer's report, a fresh reference was made in connection with wealth-tax matters against Messrs. Walchand and Co. Ltd. The Valuation Officer determined the value of this flat as on March 31, 1984, and March 31, 1985, at Rs. 29.60 lakhs and 32.86 lakhs, respectively. The Commissioner of Income-tax has stated that on the day of transfer, the property's value was about Rs. 47 lakhs without properly disclosing the basis for such estimate. It would be evident from the facts surrounding the whole issue that the Valuation Officer, Unit III, was probably manipulated to submit a report to suit the whims of the Department. The learned Departmental Representative, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax on the difference between the actual cost paid by the assessee and the sale price realised. This would be totally inequitable and for that reason also, the order passed by the Commissioner of Income-tax cannot be upheld. We have heard the parties to the dispute and we are of the view that the order passed by the Commissioner of Income-tax cannot be upheld. The flat sold to the assessee, was no doubt purchased by Messrs. Walchand and Co. Ltd. and one of the factors that influenced the company to make an investment in the flat was the desire to provide accommodation to the late Sri Ratanchand Hirachand, father of the assessee, who was then a director of the company. But, it has to be remembered that the relationship between the late Sri Ratanchand Hirachand and Messrs. Walchand and Co. Ltd., as far as the flat was concerned was that of a landlord and tenant. This was made clear by the company in its letter to the Income tax Officer written as early as in 1964. This letter was in response to a letter by the Income-tax Officer wherein, inter alia, he had sought to convey as to why the income from property from this flat could not be assessed at a much higher figure. The compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nant. Thus, it would be difficult to agree with the contention of the Departmental Representative that the transfer of the flat in 1986 when the assessee was on the board of the company Messrs. Walchand and Co. Ltd., has resulted in an income within the meaning given to that expression in section 2(24)(iv) of the Income-tax Act. It may further be mentioned that at the time the flat was sold by Messrs. Walchand and Co. Ltd. to the assessee, the rent payable by him was a little over Rs. 600 per month. The asset in fact had become one which was non-productive. The valuation of the flat was referred to a Registered valuer and the sale consideration received by the company from the assessee was more than Rs. 1 lakh fixed by the Registered valuer. It may also be pointed out in this case that soon after the sale, the assessee had filed the requisite Form No. 37EE to the Competent Authority and no action seems to have been taken on the basis of such form. Thus, it is clear that at least a different wing of the Department did not consider that the sale had been made for a consideration which was below the market value. We may further mention that there is nothing in law in force which bars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts created in the flat were those of tenancy and not of a licence. The Commissioner has based his impugned order under section 263 on his finding that the flats were purchased for the use of the directors and the company had not acquired the flats for earning income from the house property. The purpose of making investment in the flats was not to earn income but to provide a facility to the directors. Viewed in this light, it was obvious that ordinarily giving by a company of its own flat for the use of a director does not tantamount to letting out the flat in the normal sense of the term and hence the director does not acquire any tenancy right. So the then director, Shri Ratanchand Hirachand (the assessee's father) did not acquire any tenancy right in the flat when it was given to him for use as a director by the company. The Commissioner was further of the view that on the death of Shri Ratanchand Hirachand in November, 1981, the question of transfer of tenancy could not arise at all inasmuch as Shri Ratanchand Hirachand himself had not acquired any tenancy rights. Support on this point was sought by the Commissioner from the observations of the Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his purpose, the following factors will have to be kept in mind, viz : (i) The substance of the document must be preferred to the form ; (ii) The intention of the parties must be looked at to find whether they wanted to create a lease or a licence ; (iii) If the document creates an interest in the property, it will be a lease and if it only permits the user of the property and the legal possession continues with the owner, it will be a licence ; and (iv) If exclusive possession has been handed over under a document, prima facie, it will be understood as a creation of a lease but the circumstances may establish which may also negative the intention for creating a lease. Various judicial authorities have consistently held that the mere use of the word "let out" or "rent" should not be considered as conclusive or determinative for the purpose of holding that the relationship created was that of tenancy and not of licence. All the surrounding circumstances will have to be looked into to ascertain as to what was the relationship sought and intended to be created. It would be evident from the board of directors minutes dated January 21, 1963, that those minutes were merely record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not have so adversely affected it as to reduce its market value from around Rs. 40 lakhs to Rs. 2 lakhs. It would be seen from clauses (f) and (g) of sub-section (1) of section 13 of the Rent Control Act that the company had statutory right available to it to have the premises vacated on either of the grounds specified therein. Since the flats were acquired for the use of the directors, any change in incumbency in the board of directors would have rendered it necessary for the company to require the present occupant, who has since ceased to be a director, to vacate the premises for use by a new director. In case of refusal or failure by the old director a right is available to the company under the aforesaid two clauses of the Rent Control Act to have the premises vacated. In view of this position of law it would not be correct to contend that the alleged tenancy rights of the assessee in the flat had grossly reduced the value of the flat and that it was this factor which was responsible for the sale of the flat at such a disproportionately low price. (c) At this stage, it would be necessary to discuss two other features of the case to which reference was made by the learned r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace during the accounting year relevant to the assessment year under appeal and, therefore, the action of the Commissioner under section 263 in relation to such sale cannot be held to be legally bad. The second argument made by the learned representative of the assessee was that the benefit, if any, to the assessee on account of the sale was of capital nature and since sub-clause (iv) of clause (24) of section 2 is not intended to cover the cases of benefits of capital nature that provision of law would not apply in the present case. Here again, I do not feel persuaded to accept this plea of the learned representative of the assessee. Sub-clause (iv) of clause (24) of section 2 of the Income-tax Act is a special piece of enactment, which covers benefits both of capital and revenue nature. This provision is intended to take care of passing of benefits by a company to its directors, who occupy the position of fiduciary relationship and hold an office of trust. The main object of this enactment is to prevent abuse/ misuse of official position by the directors of the company to their own advantage. No law or any decision of judicial authority has been cited in the present proceedings i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hirachand, was also a director in the said company. In February, 1962, the said company bought flat No. 33 in a building at Little Gibbs Road, Malabar Hill, Bombay, and two garages for Rs. 86,000 and Rs. 16,500, respectively. The said company took possession of the flat and garages in November, 1962, and in January, 1963, they were given by the said company to the father of the assessee on a rent of Rs. 440 per month. The assessee's father and the assessee were living together in that flat ever since as tenants by paying the rent as fixed. In November, 1981, the father of the assessee, Ratanchand Hirachand, died but the assessee continued to live in that flat after the demise of his father. There were some minor increases in the rent which were duly paid by the assessee. In August, 1984, the assessee was made a director of the said company. In January, 1986, as a consequence of a resolution passed by the board of directors of the said company, the said flat and two garages were transferred to the assessee for a consideration of Rs. 2,30,000. The said flat and the garages belonged to one co-operative society called the Las Palmas Co-operative Housing Society Ltd., in which the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration paid, i.e., Rs. 2.30 lakhs, be not brought to tax as a benefit within the meaning of section 2(24)(iv) of the Income-tax Act. In reply thereto, the assessee after tracing the entire history as to how his father became a tenant of this property and how after his demise, he became the tenant and how as a consequence of the resolution passed on January 27, 1986, the assessee purchased the rights in the said property, pointed out that the provisions of section 2(24)(iv) of the Income-tax Act were inapplicable to the facts of this case and that the Income-tax Officer rightly completed the assessment without resorting to this provision. The attention of the Commissioner of Income-tax was drawn to the valuation made by the valuer, wherein even though he arrived at the value of Rs. 19,000 and yet fixed the value at Rs. 1,25,000 and in spite of that the company had sold it for Rs. 2,30,000, which was more than fair and no advantage of any kind was conferred by the company on the assessee. It was also pointed out that the fair market value referred to by the Commissioner of Income-tax in his order was without any basis or evidence and was only a proposal made for a different purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejecting the contention of the assessee that the assessee's father as the original occupant had acquired tenancy rights and thereafter on his demise those rights devolved on the assessee by inheritance, the learned Commissioner pointed out that when the property was purchased and was given to the directors for their use on rental basis fixing the rent at a very low amount of Rs. 440 per month, the company was not making any business proposition to earn income. It should, therefore, be presumed that the flats were given to the directors as a facility and the provision of such a facility would not amount to acquisition of tenancy rights in the flats. He sought reinforcement for his view from a decision of the Delhi High Court in the case of J. Dalmia [1982] 138 ITR 653, which was relied upon by the assessee himself. The High Court had observed in this case at page 653, that when property belonging to a company is allowed to be used by a director, it would not be a case of letting. Having thus come to the conclusion that the assessee's father did not acquire any tenancy rights in the flat when it was given to him on rent for his use as a director, the question of the assessee acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancy rights were conferred decades ago, to contend now that such an act on the part of the company was taken with a view to provide some benefit to a director, which could be treated as income within the provisions of section 2(24)(iv) of the Act would be far fetched. He, therefore, held that the Commissioner was in error in holding that the transfer of the flat by Walchand and Co. P. Ltd. to the assessee had resulted in the provision of some income to the assessee. But the learned Judicial Member was totally opposed to this view. According to him, the relationship between the assessee and the company was not that of a landlord and tenant but was that of a licensee and licensor. Even though the word "rental" was used in the resolution, under which the flat was given on rent to the assessee's father in 1962, still it must be construed as bringing into existence the relationship of licensor and licensee and not that of a landlord and tenant. He agreed with the learned Commissioner's view that when the purpose of making investments in the flat was not to earn income but to provide a facility to the director, the director does not acquire tenancy rights in that property. When the fath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by pointing out that the provisions of section 2(24)(iv) are applicable alike both to revenue and capital receipts. He categorically held that the benefit that arose to the assessee was not at the time of creation of the alleged tenancy as was held by the learned Accountant Member, but only when the flat was sold by the company to the present assessee. He thus justified the action taken by the learned Commissioner in setting aside the assessment and directing the Income-tax Officer to invoke the provisions of section 2(24)(iv) of the Income-tax Act and to quantify the benefit for addition as income. I have heard the very vehement opposition to the view taken by the Revenue and supported by the learned Judicial Member put forth by Shri B. K. Khare, appearing for the assessee, and the very lucid arguments presented with all his might and persuasive skill for the Department by Shri Keshav Prasad supporting the order of the learned Judicial Member and opposing the view taken by the learned Accountant Member. The blind faith in the definitions as given in the Bombay Rent Control Act, particularly of the words "tenant", "licence" and "landlord" reposed by Shri B. K. Khare was matc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed they are consistent with the provisions of the Bombay Rent Control Act (section 12). A landlord can recover possession of the premises only on the satisfaction of certain conditions imposed by the Act in the following circumstances : (a) A landlord can become entitled to recover possession if the tenant has committed any act contrary to the provisions of clause (a) of section 108 of the Transfer of Property Act, 1882. This clause provides that the tenant must not use or permit another to use the property for a purpose other than that for which it was let or fell or sell the timber, pull down or damage the buildings, etc., etc. (b) If the tenant has without the landlord's consent in writing erected in the premises any permanent structure. (c) If the tenant or any person residing with the tenant has been guilty of conduct which is a nuisance or annoyance to the adjoining or neighbouring occupiers or has been convicted of using the premises or allowing the premises to be used for immoral or illegal purposes or the tenant has in respect of the premises been convicted of an offence of contravention of any provision of clause (a) of sub-section (1) of section 394 of the Bombay M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship of tenancy or licensee, I would like to mention here that the learned Judicial Member has opined that since no action was taken by the company for the eviction of the tenant, it could not be assumed that the company was hamstrung or hemmed in by these regulations of the Rent Control Act so as to diminish its value. Unless any one of these circumstances exists, it is not possible for the landlord to go to the court and seek eviction of the tenant and recover possession of the premises. This argument is therefore not available to any one claiming under this argument that there was no diminution in the value of the property. It is now seen that this property was in the continuous occupation ever since it was purchased by the company either for the assessee's father or for the assessee. There was no break in the occupation except that the assessee occupied the property as a tenant paying the rent till he became a director of the company. If the assessee is a tenant, directorship was what was imposed upon the assessee without in any manner affecting the rights of tenancy. It is something like a tenant acquiring the benefit of a lottery, which has nothing to do with the tenancy. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y residing together, a person in the service or employment of the licensor, or a person conducting a running business belonging to the licensor, or a person having any accommodation for rendering or carrying on medical or para-medical services or activities in or near a nursing home, hospital or sanatorium, or a person having any accommodation in a hotel, lodging house, hostel, guest house, club, nursing home, hospital, sanatorium, dharamshala, home for widows, orphans or like premises, marriage or public hall or like premises or in a place of amusement or entertainment or like institution, or in any premises belonging to or held by an employee or his spouse who on account of the exigencies of service or provision of a residence attached to his or her post or office is temporarily not occupying the premises, provided that he or she charges licence fee or charge for such premises of the employee or spouse not exceeding the standard rent and permitted increases for such premises, and any additional sum for services supplied with such premises, or a person having accommodation in any premises or part thereof for conducting a canteen, creche, dispensary or other services as amenities b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the tenant at the time of his death, any heir of the deceased tenant will also become a tenant. Now, a landlord is a person, who is receiving or entitled to receive the rent in respect of any premises, whether on his own account or on account or on behalf, or for the benefit of any other person. Under these definitions of "tenant", "landlord" and " legal representative" as given above, I think it is extremely difficult even by overdrawing of what little legal acumen I possess, to say that the assessee's father was not a tenant and the company was not the landlord under the Bombay Rent Control Act. The licensee is a person who is in the occupation of the premises under a subsisting agreement for licence given for a licence fee or charge but does not include a person in the service or employment of the licensor. The resolution passed by the board of directors on January 21, 1963, when it purchased flats to let it out to the father of the assessee clearly shows that the flat was purchased for the use of the director on rental basis. The resolution dated January 21, 1963, provided : " The board was informed that the company had purchased three flats for the use of the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even otherwise, the expression " leases" has been defined in section 105 of the Transfer of Property Act as follows : " A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions, to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. '' The relationship of lessor and lessee is one of contract. A licence is defined in section 52 of the Indian Easements Act (5 of 1882) as follows : " A licence is defined in section 52 of the Indian Easements Act 5 of 1882, as a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property. The distinction between a licence and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1981. Shri Ratanchand Hirachand, the father of the assessee, thus became the tenant of the company by virtue of the provisions of section 15A of the Bombay Rent Control Act. Now, by operation of law in terms of the definition of the word "tenant" as given in clause (11)(c), which came into force from 1978, the assessee who was continuously residing with his father and also as his legal representative, became the tenant. That the assessee was residing continuously with his father in the same premises and that he is the legal representative were not issues in dispute at all. They were admitted facts. Therefore, by operation of law, the assessee became the tenant under the Bombay Rent Control Act and it is not possible to say that he is only a licensee. As the assessee is shown to be a tenant all the consequences in law should follow. The first consequence is the near impossibility of evicting him and the recovery of possession of the premises by the landlord. This acted as a great limiting factor in the valuation of the property. The resolution passed by the board of directors, under which this property was offered to the assessee for sale, shows that a statement was prepared s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Bombay Rent Control Act, 1947. In view of what I have said earlier that by operation of law, namely, section 15A of the Bombay Rent Control Act, even a licence gets converted into a tenancy with effect from February 1, 1973, I do not think it is necessary for me to discuss and comment upon the tests laid down to differentiate a lease from a licence. The learned Judicial Member referred to section 13 of the Bombay Rent Control Act only to show that the landlord could recover possession of the premises subject to the satisfaction of the conditions laid down therein, which spoke of the tenant being in the service or employment of the landlord. It is no doubt true, as I mentioned in the beginning of my opinion, that this is only an enabling provision providing for a right in the landlord to recover possession but recovery of possession is not so easy or free from difficulties and problems and hazards of litigation. This provision should not therefore be construed as bringing into existence the relationship of licensor and licensee or to take the view that even the relationship of landlord and tenant had come to an end. Assuming for the sake of argument that the employment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne should guide the value of the perquisite in the hands of the director. While explaining the position in law as to how the rent should be fixed in the case of a company giving its own premises for use to an employee or director, the High Court, relying upon a decision of the Allahabad High Court in the case of Lakshmipat Singhania v. CIT [1974] 93 ITR 162, held that when property belonging to a company is allowed to be used by a director, then it is not a case of letting out in the sense of hiring it out for rent. So the value of the rent-free accommodation has to be determined keeping in view the law laid down by the Supreme Court in this behalf, namely, the standard rent will have to be determined and adopted. The standard rent has to be fixed because of the provisions of the Rent Control Acts. The observation that when property belonging to a company is allowed to be used by a director, then it is not a case of letting out has to be understood in the context of the property owned by the company being allowed by the company to be used by the directors without charging any rent. This observation does not mean or even remotely suggest that the relationship between the landlord, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art performance of the contract of the nature referred to in section 53A of the Transfer of Property Act and every transaction whereby a person acquires any rights in or with respect to any building or part of a building, shall be reduced to writing in the form of a statement and such statement shall be in the prescribed form setting forth such particulars as are prescribed and verified in the prescribed manner and registered with the Competent Authority in such manner and within such time as may be prescribed, by each of the parties to such transaction. Form No. 37EE was the form prescribed under section 269AB. This is therefore a statutory form. The purpose of the submission of the statement to the Competent Authority is to give notice to the Competent Authority about the transaction and then to enable him to make up his mind as to whether the transaction of the transfer of the property is genuine, bona fide and whether the apparent consideration stated therein is real and genuine or understated. This has therefore certain legal consequences to follow. When no action was taken on the submission of this form, which was submitted long before the transfer took place, it has to be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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