TMI Blog1980 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... nstance of the assessee, namely, the D.L.F. Housing Construction (P.) Ltd., New Delhi, and the other on reference by the Commissioner. The assessment year involved was 1960-61, the previous year of which ended on 30th September, 1959. The assessee is a private limited company carrying on business in colonization with its registered office at New Delhi. After purchasing lands, it develops them into suitable plots, makes provision for roads, parks, etc., and then sells-the plots. One controversy germane to the present reference pertains to income from property bearing No. 14, Aurangzeb Road, New Delhi. This property had been purchased by the assessee-company from one Mr. B. D. Meattle on 27th December, 1957, under a registered sale deed. The vendor was in terms thereof allowed to use the premises till 31st May, 1959, as a licensee without payment of any fee. He, however, did not vacate the premises even after that date and as such the assessee had to file a civil suit against him., This was compromised on 18th February, 1961, in terms of which Mr. B. D. Meattle was allowed to occupy the property up to 31st December, 1962, as a licensee. However, he was enjoined to pay Rs. 1,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question whether he receives that value or not. Section 9(2) provides that for the purposes of this section, the expression 'annual value' shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year. It is again significant to note that the word used is 'might' and not 'can' or 'is'. Reading these two paragraphs of section 9 together, it is clear that the income from property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. It is further provided in the section that if the owner occupies the property he has to pay tax calculated in the manner provided therein. Therefore, by reason of the fact that the property is not let out, the assessee does not escape taxation." The Tribunal declined to draw any support from the decision of the Delhi High Court in the case of CIT v. R. B. Jodhamal Kuthiala [1968] 69 ITR 598 [FB], on which the assessee primarily placed reliance for asserting that a person could be termed an owner for the purpose of s. 9 only if he has such control over the property as to enable him to earn income therefrom, and that the assessee must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase of the said land under the said agreement and both the said partners are entering into a new agreement of sale with the said Pt. Lila Ram in supersession of the first agreement between the said firm and the said Pt. Leela Ram." In other words, it was agreed that the purchase was to be effected by this new partnership and the business was of joint enterprise to purchase and develop lands into a residential colony and then sell the plots. Under one of the clauses of this new partnership, the assessee-company was to pay to Pt. Lila Ram a sum of Rs. 2 lakhs towards the purchase of land, as had been already done by the L.M G. Colonisers and Traders, of similar sum. On the same day, the newly constituted partnership entered into a fresh agreement with Pt. Lila Ram to buy lands from him. However, before this partnership could carry out the purpose for which it came into existence and before the purchase of any land from Pt. Lila Ram was effected, there was a dissolution of the partnership on June 11, 1958. The deed then executed recited that the sum of Rs. 4 lakhs paid by the purchasers to the seller on account of earnest money under the said agreement dated January 2, 1957 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... halla whereunder the latter was to be allowed brokerage on the land purchased by the assessee from Lila Ram nor the sale deed recited so. Statement of Moti Ram Bhalla recorded on March 8, 1965, by the ITO was referred to in some detail. He had then stated that he had to leave the partnership with the assessee as their schemes were not being passed by the authorities and further he took the commission as the deal between the assessee and Pt.Lila Ram was arranged through him. The assessee, in the circumstances, pleaded that even if the payment to Shri Moti Ram Bhalla was in consideration of his retirement from the firm, it should be treated as revenue expenditure. This was negatived and in support reliance was placed upon the decision in the case of R.Guruswamy Naidu v. C.I.T [1952] 21 ITR 188 (Mad.). The decision in the case of V.N.V. Devarajulu Chetty Co. [1950] 18 ITR 357 (Mad), on which the assessee relied, was distinguished on the the ground that the retiring partner's rights with regard to certain valid contracts entered into during the period of partnership had been kept alive and the continuing firm was obliged to pay sums later received on the basis of those contracts. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's claim and delete the addition of Rs. 10,901 in the assessment. " It is as such that the revenue has now obtained reference of question No. 2 for the opinion of this court. With this background of the facts, we have heard the parties and given our careful consideration to all the circumstances. So far as the income from property at 14, Aurangzeb Road, New Delhi, is concerned, it has been vigorously pleaded from the side of the assessee that although it had effected its purchase on December 29, 1957, the possession thereof was not handed over by the seller, and in terms of the sale deed, the assessee was obliged to allow him to remain in possession as a licensee up to the end of May, 1959, without payment of any rent or licence fee. It had no immediate right of obtaining possession under the sale deed and in the circumstances its ownership remained inchoate. It was only from June, 1959, that the assessee for the first time became entitled to a licence fee of Rs. 1,000 per month under the compromise decree passed by the civil court, and, therefore, from that month onwards the assessee started disclosing income from this property. In this regard reference has been made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hiala v. CIT [1971] 82 ITR 570). That court upheld the view taken. After considering the various provisions of the Pakistan Administration of Evacuee Property Ordinance, it was found that in the eye of the law the custodian was the owner of the property. The following observations made in this decision, may be reproduced here with advantage : "The question is who is the 'owner' referred to in this section ? Is it the person in whom the property vests or is it he who is entitled to some beneficial interest in the property ? It must be remembered that section 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of section 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right. " From the side of the revenue, on the other hand it has been asserted that the present assessee had of its own volition allowed the seller to remain in possession even after the sale and chose not to charge any rent or licence fee from him. It has been asserted that there is basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty nor is it dependent on the capacity of the owner to receive the bona fide annual value. Basically it is the sum for which the property might reasonably be expected to let from year to year. The determining factor thus is the reasonable expectancy of rent from the property. A sort of hypothetical situation has to be created as if the property is being let out and what rent it would fetch in the open market. The contract of sale which the assessee settled with Mr. B.D. Meettle for the purchase of this property was in terms, mutually agreed upon, of their own volition. The assessee had thereby voluntarily agreed to take the seller as a licensee of the property up to the end of May, 1959, without payment of any licence fee or rent. For this unusual clause in allowing the seller to remain in possession, the assessee must have seen some advantage either in the form of some concession in the sale price or as forestalling any apprehension of prospective competition from other buyers who might have come forth to pay higher price if sale was effected at time when the seller was in a position to hand over vacant possession. Be that as it may, the execution of the sale deed had the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rights in the same. This was pleaded to be irrespective of whether he had stated so in his statement before the ITO. After all it was not that he was misconstruing the nature of the payment but the real character of the transaction had to be kept in view. But for Moti Ram Bhalla's conduct allowing the assessee to exclusively effect the purchase of the entire lands, this stock-in-trade, it was pleaded, would not have come to the assessee's avail. That land itself was not capital in nature as the nature of business involved its development into plots and their sale. The same, it was urged, had to be treated as its stock-in-trade and, therefore, any expenses incurred for its acquisition were revenue in nature. So far as the services rendered by Moti Ram Bhalla, it was not disputed that in the agreement of sale which the assessee entered into with Pt. Lila Ram on June 11, 1958, there was no mention that he had acted as a broker. In the final sale deed which was later executed in the assessee's favour, there was again no mention of his having so acted. There was no other document executed which could show that he was required to act as broker or did act as such. However, it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire aspect. In deciding such cases one should avoid the temptation to decide by matching the colour of one case against the colour of another. Now, a careful perusal of the background of the facts of the present case shows that initially it was Moti Ram Bhalla and Prem Raj who had agreed to embark upon the colonization business and effect purchase of land from Pt. Leela Ram for developing that into plots. So far as Leela Ram was concerned he had agreed to sell and his course of conduct shows that he was too keen to dispose of the land whosoever was the buyer. Subsequently when the assessee joined in partnership with Moti Ram Bhalla and Prem Raj, Leela Ram had no reservation in executing an agreement of sale in favour of this partnership. Later, when both Moti Ram Bhalla and Prem Raj Sharma decided to walk out from the partnership, Leela Ram readily agreed to effect the sale of land in favour of the assessee. The agreement of sale was executed in the assessee's favour on the same day when both Moti Ram Bhalla and Prem Raj came out of the partnership by dissolving the firm. Immediately on the execution of the agreement of sale in favour of the assessee, the latter acquired an inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . S. RANGANATHAN J.-Of the two questions referred to this court concur with the answer proposed by my learned brother to the first question. But I regret that I am unable to agree with the answer proposed by him to the second question. So far as the first question is concerned, the facts have been set out in the judgment of my learned brother and need not be repeated. There can be no doubt that when the sale deed was executed and registered the assessee became the owner of the property in question. Shri Bishamber Lal referred to a passage in Mulla's Transfer of Property, 6th edn., p. 305, and submitted that even in the case of a sale of immovable property it could be the intention of the parties that the title should pass at future date. But in the present case our attention has not been drawn to any clause or condition of the sale deed which postponed the vesting of the property in the assessee. The assessee, therefore, became the owner of the property and was, therefore, liable to be assessed in respect thereof under the provisions of s. 22 et seq. Counsel for the assessee placed reliance on the decisions of this court and the Supreme Court in the case of R. B.Jodhamal Kuth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though he has dominion or control over the property. The present case falls within these exceptions. The clause permitting the vendor to continue to live in the property, though contained in the sale deed itself, is nothing more than the result of a voluntary arrangement between the vendor and the assessee for which, as pointed out by my learned brother, there could have been a number of considerations. The position can be no different than in a case where, subsequent to the sale deed, the assessee enters into an agreement with the previous owner to permit him to reside in the property free of rent for a limited period of time. The clause or licence given to, the previous owner to occupy the property free of rent is only a mode of exercise by the assessee, in a particular manner, of his right of exploitation of the property. Even in a case where the owner of the property is under a legal, superimposed disability from letting out the property and deriving any income therefrom, it has been held that the liability to tax subsists (See D. M. Vakil v. CIT [1946] 14 ITR 298 (Bom), Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT (1963] 48 ITR 507 (Bom), and CIT v. Biman Behari Shaw Shebait ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id by the purchasers to the sellers on account of earnest money under the agreement dated January 2, 1957, is refunded by the sellers to the purchasers. (iii) The assessee-company enters into an agreement with Pt. Lila Ram to purchase the lands in question. (iv) The assessee-company writes a letter to Prem Raj stating that, in lieu of his services in connection with the execution of the agreement to sell dated June 11, 1958, between the assessee-company and Pt. Lila, Ram, the assessee agrees to allot to him 22 plots of land in the proposed colony, charging a price of Rs. 9 per square yard including the cost of development. 11-4-59: The assessee-company pays Bhalla a sum of Rs. 43,861.50 at 2% on Rs. 21,93,058 which was the total consideration for which the company has purchased the land from Pt. Lila Ram. The receipt dated April 11, 1959, states that the payment was on account of full and final payment of Bahapur land purchase commission account. The amount paid by the assessee-company to Bhalla has been disallowed by the ITO on the ground that it had been paid to make Bhalla surrender his interest in the partnership. It has been disallowed by the AAC on the ground t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the son of Pt. Lila Ram. But Bhalla's help and co-operation at the various stages of the transaction which eventually culminated in the acquisition by the assessee of its stock-in-trade, namely, the lands, which Pt. Lila Ram was in a position to sell, was equally indispensable. Long before the company entered into the picture, Bhalla and Prem Raj had acquired an option to purchase the lands from Pt. Lila Ram. From the fact that the earnest money was stipulated in the form of promissory notes it appears that these two were only intermediaries through whom Pt. Lila Ram could sell the plots to his best advantage. But, whatever it may be, by virtue of the agreement to purchase, both Bhalla and Prem Raj had a valuable right which could defeat the interests of any other person who may subsequently acquire the property. This right of theirs was subsequently pooled into a partnership first between themselves and, later on, between them and the assessee-company. It was at this stage that the assessee entered into the transaction and by entering into the partnership and then into an agreement with Pt. Lila Ram, the company was able to acquire a right to purchase the property along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the same date, i.e., June 11, 1958, the assesseecompany entered into an agreement with Pt. Lila Ram to purchase the land in question. Can it be said that this is a wholly independent transaction between the company and Lila Ram and that the help of Bhalla and Prem Raj was not needed by the company for this? Can it be said that they agreed to remove themselves or help the assessee without any consideration or co-operation ? I do not think it would be a reasonable inference in the circumstances to say so. The dissolution of the partnership, the cancellation of the agreement dated January 2, 1957, and the drawing up of the agreement dated June 11, 1958, with Pt. Lila Ram are all simultaneous. This shows that all these transactions have been concurrently decided upon. The parties, it is clear, decided that the assessee-company should be enabled to purchase the property and that Bhalla and Prem Raj should move out of the picture. Immediately prior to June 11, 1958, Bhalla and Prem Raj had rights which were an obstacle in the path of the company and they agreed to remove themselves so as to make the way open for the company to purchase the property. But for their agreeing to do so, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em Raj for selling the lands with Bhalla and Prem Raj executing promissory notes for Rs. 2 lakhs shows that these two persons were introduced as intermediaries in the process of sale. When these two persons entered into a partnership with the assessee, it was considered necessary by the parties to state that the partnership had been formed with the concurrence of Pt. Lila Ram. This and the payment of Rs. 2 lakhs by the company as earnest money shows that Pt. Lila Ram was agreeable to sell the land to the company only in view of its having entered into a partnership with Bhalla and Prem Raj. The simultaneity of the transactions put through on June 11, 1958, clearly show that it was a joint deal by all of them. To me the conclusion seems irresistible that the company could not have acquired exclusive rights in respect of these lands but for the fact that Bhalla and Prem Raj agreed to walk out of the picture having received a certain amount of compensation. Whether that compensation is described as a commission or brokerage or remuneration for services, as pointed out by the Tribunal, the fact remains that it is nothing but a payment made by the company in order to acquire its stock-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the second question has to be answered in the affirmative and against the revenue. I agree with the order of my learned brother that there should be no order as to costs. V. S. DESHPANDE C.J.-On a difference of opinion between Ranganathan and Khanna JJ.: The question The question referred to me for consideration under the, proviso to s. 66A of the Indian I.T. Act, 1922, corresponding to s. 259(1) of the I.T. Act, is as follows: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 10,901 paid by the assesseecompany to Shri Moti Ram Bhalla was an expenditure of revenue nature and hence allowable in the computation of the total income of the assessee-company? " The relevant facts and circumstances of the case are as follows: 2-1-57. (I) A firm called L.M.G. Colonizers consisting of two partners, Prem Raj and Moti Ram, entered into a partnership with the assessee-company, Delhi Land and Finance Housing Construction Private Ltd., for the purpose of buying land from one Lila Ram as a part of the general business of buying, developing and selling land. (II) The newly constituted partnership entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the agreement of June 11, 1958, between the assessee-company and Lila Ram. The receipt dated April 11, 1959, states that the payment was on account of full and final payment of Bahapur land purchase commission account. The Income-tax Appellate Tribunal in the statement of case, para. 9, also referred to the oral evidence of Moti Ram before the ITO stating that Moti Ram took commission from the D.L.F. and left the partnership. Moti Ram further stated as follows: " I charged commission on account of deal with D.L.F. D.L.F. paid me commission and agreed to give 22 plots to Mr. Prem Raj as compensation." In the final order of the Tribunal in the appeal before it, in para. 14, it is stated as follows : " According to the sworn statement of Moti Ram Bhalla recorded by the Income-tax Officer on March 8, 1965, he and Prem Raj left and D.L.F. alone executed the agreement with Pt. Lila Ram for purchasing the land for surrendering my interest to D.L.F.. The D.L.F. paid him brokerage and similarly D.L.F. also agreed to give 22 plots to Prem Raj. " On these facts and circumstances the decision of the Tribunal was as follows : " In the instant case the net result of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into an agreement with Lila Ram for the purchase of land. This agreement of the new firm with Lila Ram was an asset or property of the partnership. In view of s. 54 of the Transfer of Property Act, the agreement of purchase did not create an interest in the land in favour of the purchaser, but even as an agreement it conferred a valuable right on the firm to the purchase of this land from Lila Ram. This agreement could have been specifically enforced against Lila Ram under the Specific Relief Act if that became necessary. On June 11, 1958, the L. M. G. Colonizers acting by its two partners, Prem Raj and Moti Ram, on the one side, and the assessee on the other side, entered into another agreement with Pt. Leela Ram, the seller of the land, and all of them cancelled the previous agreement among the same parties which had been entered into on January 2, 1957. This cancellation was immediately followed by the dissolution of the firm of the L.M.G. Colonizers and the assessee and also by the assessee entering into a new agreement of purchase with Pt. Leela Ram for the exclusive benefit of the assessee and to the total exclusion of Prem Raj and Moti Ram. The sum total of these tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Voluntary compensation paid on April 11, 1959, for consideration which was received on June 11, 1958. If any question had arisen whether the contract between the assessee and Moti Ram for the payment of this amount of April 11, 1959, was with or without consideration, then in view of the definition of consideration in s. 2(d) and s. 25(2) of the Contract Act, such a contract would have been valid. For, under the Indian law, as contrasted with the English law, past services can constitute valid consideration for a future agreement for compensation for such past service. (2) Such payment may also be regarded as, an ex gratia payment meaning that while the assessee was under no legal obligation to pay anything to Moti Ram, nevertheless he had moral obligation to pay him something for the good turn he did to the assessee on June 11, 1958, even though Moti Ram and the assessee had then agreed that nothing was to be paid by the assessee to Moti Ram. (3) The payment of April 11, 1959, can be regarded as a donation or a gift by the assessee to Moti Ram. Whichever of the three alternatives expresses the correct nature of the payment made by the assessee on April 11, 1959, it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 547 (SC), the Supreme Court has dealt with the meaning of standard formula under which income-tax references are made by the Tribunal to the High Courts. This formula is in the facts and circumstances of this case " what is the correct legal inference to be drawn ? The division between the functions of the Tribunal and the High Court is this: The Tribunal gives the findings of fact. The inferences from these facts are at first drawn by the Tribunal, but a reference to the High Court is made to enable the High Court to correct the Tribunal, if necessary, by considering whether the inferences drawn by the Tribunal are correct or some other inference should be drawn by the High Court. This division of functions is based on settled law, which was reviewed recently by a five judges Bench of this court in S. L. Kapur v. Shri Jagmohan, Lt. Governor, Delhi, C.W. No. 404 of 1980, decided on May 9, 1980 [FB]. Briefly, the law is that the findings of fact are confined to the primary facts. Whether these findings of primary facts amount to something in law or not is variously described as a finding of a secondary fact or of a finding of law. This is so because the law is applied in the proces ..... X X X X Extracts X X X X X X X X Extracts X X X X
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