INTRODUCTION

The significance lay in giving fillip to transparent taxation without any ambiguities on the
identification of true assessee and thus, fix liability by determining the scope of Section 22 of the
Income Tax Act, 1961. The project imbibes practical significance by catching beneficiaries of
unregistered conveyances or transfer of property , until these Supreme Court judgments, used to
enjoy the receipts and income from house property and were still left untaxed for not being
included in the definition of owners in the eyes of law. The project aims to discuss the concept,
scope and test for determining ownership for taxation of the income from house property of the
assessee held in the Supreme Courts decision of R.B. Jodha Mal Kuthiala v. CIT and further
refinement and clarification of the issue in CIT v. Poddar Cement Pvt. Ltd. case.

OBJECTIVE

The project aims to discuss the concept, scope and test for determining ownership for taxation
of the income from house property of the assessee held in the Supreme Courts decision of R.B.
Jodha Mal Kuthiala v. CIT and further refinement and clarification of the issue in CIT v. Poddar
Cement Pvt. Ltd. case.

RESEARCH METHODOLOGY

The research method adopted is purely doctrinal in approach wherein content on the subject
matter has been obtained through various standard books and authorities, debates and newspaper
articles. It, in no way, employs statistical or empirical inclination.
RESEARCH ISSUES AND QUESTIONS

The chief research issue of R.B. Jodha Mal Kuthiala v. CIT (1971 82 ITR 570 SC) was
definition of ownership for assessee property and nature of amendment to Section 40(a)(ia).

The ratio aptly held that the in order to know who the assesee is it is very important to know
that whether he or she is entitled to the income incurring out of that property, and also whether
the person who claims the right exercise the right of owner as his own right

The chief research issue in CIT v. Poddar Cement Pvt. Ltd. ((1997) 5 SCC 482) was
interpretation of the meaning of the phrase of which the assessee is the owner under Section 22
of the Income Tax Act, 1961. Thus, the legal question of the meaning of the word owner so as
to determine whether the transferees in possession of any immoveable property (property in four
flats in this case) who do not have a legally perfected title and enjoy all benefits which a
proprietary right holder in a property would enjoy are liable for inclusion of the rents and profits,
accrued from such possession either by the transferee in possession himself or subsequent
transferees in possession, as income from house property under Section 22 of the Income Tax
Act, 1961.

The ratio crystallised the Supreme Courts decision in Jodha Mal and held in Poddar
Cement case that the meaning of the word owner under Section 22 of the Income Tax Act,
1961 did not warrant registration. The legal position on payment of income tax was clarified by
the Apex Court observing that such liability of tax payment as owner lies upon the person who
either receives income or is entitled to receive the income from the immoveable property in his
own right.

Overall research questions include:

Judicial Recognition of the Meaning and Scope of Ownership for taxation under the
scope of , Income from house property
Retrospective Application of Amendment to Section 40(a)(ia)
INCOME FROM HOUSE PROPERTY: TAXABILITY UNDER SECTION 22

Income is taxable under the head Income from house property, if the following conditions are
satisfied:

The property should consist of any buildings or land appurtenant thereto

The assessee should be owner of the property.
The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to income tax.

Unless, therefore, all the conditions are satisfied, the property income cannot be charged to tax
under the head Income from house property.

In other words, if all the aforesaid conditions are satisfied, property income is taxable under
Section 22 under the head Income from house property. It makes no difference if the assessee
is a company which has been incorporated with the object of buying and developing landed
properties.1

REFINED DEFINITION OF OWNERSHIP FOR TAXATION

For the definition of owner, the word owner means a legal owner. Section 22 very well states
who can be an owner, it may be an individual, firm, company, co-operative society, or
association of persons. Annual value of property is assessed to tax under Section 22; receipt of
income in the hand of owner is not a necessary criteria even if income is received by some other
person. The owner must be a person who can exercise the rights of the owner, not on behalf of
the owner but in his own right. To put it differently, owner for the purpose of Section 22 is a
person who is entitled to receive income in his own right and as such where a property is handed
over to a purchaser to enjoy fruits of that property by the builder, the purchaser is treated as
owner of that property even though no registered document has been executed in his favour.2

1Dr. Vinod Singhania, Dr. Kapil Singhania, Direct Taxes Law and Practice, 52nd edition, 2014-15,
Taxmanns Publications, page 190-192.

2 Dr. Vinod Singhania, Dr. Kapil Singhania, Direct Taxes Law and Practice, 52nd edition, 2014-15,
Taxmanns Publications, page 190-194.
For past references the conceptual finding of ownership in respect of assessing property was
controversial. Initially,if one person was a registered user he is only liable to pay tax well this
was taken in an undue advantageous way and people started to develop an ability to avoid tax, in
spite of Section 27 of the IT Act deeming certain persons to be owners of property in the
circumstances enumerated there. But now Section 27 provides that besides the registered owners,
the following persons are also deemed owners for assessment purposes under Section 22 of the
IT Act 1961. They are:

An individual, who transfers house property to his or her spouse (the transfer not being in
connection with an agreement to live apart) or to his minor child (not being a married
daughter);

A member of a co-operative society, company or other association of persons to whom a

building or a part thereof is allotted or leased under a house building scheme of the
society, company or association;

Any person who is allowed to retain possession of any building in part performance of a
contract of the nature referred in Section 53A of the Transfer of Property Act or by virtue
of such transactions as are referred to in Clause (f) of Section 269UA, of the IT Act
1961.3

CASE BRIEF OF R.B. JODHA MAL KUTHIALA V. CIT

Facts

The concerned assessment years are 1952-53, 1955-56 and 1956-57, the relevant accounting
periods being financial years ending March 31, 1952, March 31, 1955, and March 31, 1956. The
assessee is a registered firm deriving income from interest on securities, property, business and
other sources. Sometime in the year 1946 it purchased the Nedous Hotel in Lahore for a sum of
Rs. 46 lakhs. For that purpose it raised a loan of Rs. 30 lakhs from M/s. Bharat Bank Ltd.,
Lahore, and a loan of Rs. 18 lakhs from the Raja of Jubbal. The loan taken from the bank was
3 Paying For Possession, September 11, 1997, Last Updated at 00:00 IST,
http://www.business-standard.com/article/specials/paying-for-possession-
197091101046_1.html.
partly repaid but as regards the loan taken from the Raja, the assessee came to an agreement with
the Raja under which the Raja accepted a half share in the said property in lieu of the loan
advanced and also 1/3rd of the outstanding liability of the bank. This arrangement came into
effect on November 1, 1951. After the creation of Pakistan, Lahore became a part of Pakistan.
The Nedous Hotel was declared an evacuee property and, consequently, vested in the Custodian
in Pakistan. In its return for the relevant assessment years, the assessee claimed losses of Rs.
1,00,723, Rs. 1,16,599 and Rs. 1,16,599, respectively, but showed the gross annual letting value
from the said property at nil. The loss claimed was stated to be on account of interest payable to
the bank. Since the property in question had vested in the Custodian of Evacuee Property, in
Pakistan.
Issue

The question for determination is whether the person in whom the property vests or the person
who is entitled to some beneficial interest in the property is the owner.

Held

The Income-tax Officer held that no income or loss from that property can be considered in the
assessee's case. He, accordingly, disallowed the assessee's claim in respect of the interest paid to
the bank. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer.
In second appeal the Tribunal came to the conclusion that the assessee still continued to be the
owner of the property for the purpose of computation of loss. The Tribunal held that the interest
paid is a deductible allowance under section 9(1)(iv) of the Act. In arriving at that conclusion, the
Tribunal relied on its earlier decision in the case of the assessee in respect of the assessment year
1951-52. Thereafter, at the instance of the assessee, the Tribunal submitted the question set out
earlier. The High Court on an analysis of the various provisions of the Pakistan (Administration
of Evacuee Property) Ordinance, 1949 (XV of 1949), (to be hereinafter referrred to as the
"Ordinance"), came to the conclusion that, for the purpose of section 9 of the Act, the assessee
cannot be considered as the owner of that property.
Relevant Extracts

It was held that Section 9 of the Income Tax 1922 brings to tax income from property and not
interest of a person in that property. The property cannot be owned by two persons each one
having independent and exclusive right over the property. Hence, for the purposes of Section 9,
owner must be that person who can exercise the right of the owner, not on behalf of the owner
but in his own right.

JUDICIAL ANALYSIS OF DECISION IN RB JODHA MAL KUTHIALA V. CIT

TThe Supreme Court in R.B. Jodhamal Kuthiala's case (supra) in which it was laid down as
under: the real question is, can that right be considered as ownership within the meaning of s. 9
of the Act. The receipt of income is the main criteria in determination of the right exercisable by
the ownership and the word owner has different connotation under various cases. In various
circumstances a lessee can be regarded as the owner of the property leased to him.

In R. B. Jodha Mal Kuthiala v. CIT4, the Supreme Court held that a provision, the objective of
which to make a provision effective necessitates to be treated with retrospective operation so that
a deduction which is reasonable can be given to the section as well. In view of the authoritative
pronouncement of the Supreme Court, this Court cannot decide otherwise. Hence the appeal is
dismissed.5 The Honble Supreme Court meant that a proviso which is inserted to remedy
anticipated consequences and to make the provisions effective requires to be treated with
retrospective operation so that an interpretation which is reasonable can be given to the section
as a whole.6 It is fascinating but not unexpected to note that so many amendments favoring
Revenue are proposed to be retrospective being clarificatory in nature and the one favoring
taxpayer which in real sense is clarificatory is propsed to be effective prospectively.
4 (1971) 82 ITR 570 (SC)

5Sameer Dayal and Sanjukta Chowdhry, Direct Taxes, High Court,

http://www.aiftponline.org/journal/May_2012/High%20Court.html.

6Amendment To Section 40(A)(Ia) Is Remedial, Curative And Retrospective, June 3, 2012, http://taxguru.in/income-
tax-case-laws/amendment-section-40aia-remedial-curative-nature-retrospective-effect.html.
CASE BRIEF OF CIT V. PODDAR CEMENT

Facts

M/S Malabar Industries Pvt. Ltd., the owner and transferor of the property in four flats of a
building named Silver Arch in Bombay entered into an agreement of sale with the assessee-
cooperative society company (the transferee in possession after payment of consideration in
August 1973) without conveying the title of the said flats (property). All the four flats were let
out (rented) to various persons. The IT Authorities included in the returns of the assessee-
company and transferee under Section 53-A TPA, rental income for the assessment year 1975-76
and 1976-77. The transferee (the assessee-company) had contended that the rental income from
the property in the four flats was not taxable from him in the capacity of a legal owner of the
property under the head owner of the house property under Section 22 of the Income Tax
Authorities Act, 1961 but as income from other sources under Section 56 of the IT Act because
the transferee-assessee held no active title to the property in the four flats.

Issue

The chief issue was interpretation of the meaning of the phrase of which the assessee is the
owner under Section 22 of the Income Tax Act, 1961. Thus, the legal question of the meaning
of the word owner so as to determine whether the transferees in possession of any immoveable
property (property in four flats in this case) who do not have a legally perfected title and enjoy
all benefits which a proprietary right holder in a property would enjoy are liable for inclusion of
the rents and profits, accrued from such possession either by the transferee in possession himself
or subsequent transferees in possession, as income from house property under Section 22 of the
Income Tax Act, 1961.

Held

The legal position on payment of income tax was clarified by the Apex Court observing that such
liability of tax payment as owner lies upon the person who either receives income or is entitled to
receive the income from the immoveable property in his own right. It was further held that the
meaning of the word owner under Section 22 of the Income Tax Act, 1961 did not warrant
registration. The assessee company- the transferee in possession of the property in the four flats
rented to various persons was considered as owner for the purposes of taxation as owner of
the house property under Section 22 of the Income Tax Act, 1961 despite no perfected
conveyance and no active title to the property, at law.

Relevant Extracts

a) What is ownership after all? Read from the Roman law up to the English law at the
present stage, medieval stage having been interspersed with different formulae the
position that now juristically emerges is this. The full rights of an owner are now
recognized as this:

(a) the power of enjoyment (e.g., the determination of the use to which the res is to be
put, the power to deal with the produce as he pleases, the power to destroy),

(b) Possession which includes the right to exclude others,

(c) power to leave the res by will

One of the most important of these powers is the right to exclude others. The property
right is essentially a guarantee of the exclusion of other persons from the use or
handling of the thing...But every owner does not possess all the rights set out above - a
particular owners powers may be restricted by law or by an agreement he has made with
another.

b) The views of Dias on Jurisprudence, (4th Edn., at p.400) quoted in the judgment hold
that:

"The position, therefore, seems to be that the idea of ownership of land is essentially one
of the 'better right' to be in possession and to obtain it, whereas with chattels the concept
is a more absolute one. Actual possession implies a right to retain it until the contrary is
proved, and to that extent a possessor is presumed to be owner."

Analysis

In the opinion of the author, the case shakes the largely construed fact that ownership is
paramount title. Howsoever differing in its decision that even unperfected conveyance at law
shall create an owner recognised in the Indian jurisprudence, this case deserves merit for
upholding a realistic, logically prudent and equitable approach towards the ownership versus
property right debate. Had the judgment been decided otherwise, blindly following the
generalised legal position, equitable owners and transferees would have realised absolute power
over all the income received without any accountability for such enjoyment of possession before
the government. Thus, logical, balanced and practical prudence demands recognition of the
proprietary nature of such equitable ownership to which they are not only accountable for
taxation purposes but also legally entitled to protection and equitable relief against the whole
world. The case recognises equitable interests are proprietary in nature and that equitable estates
exist in Indian property law conditions applying that equitys darlings rights are safeguarded.

JUDICIAL ESTABLISHMENT OF TEST OF OWNERSHIP IN CIT V. PODDAR

CEMENT

The case deals with acquiring of rental income generated out of four flats the contention was
regarding putting of the income out of the head of Income from House property, the claim was
that the owner was not legal owner and the income id from other sources and not from house
property. The holding of SC was different from the IT Tribunal, In the courts view, the juristic
principle from the view of each one is to decide the true meaning of the term owner within the
meaning of Section 22, leaving the prevalent meaning of the legal title beyond the ambit of
ownership for the purpose of this statutory provision. Because in the end the main connotation is
who should be taxed more accurately? A person who receives money having real control over the
property, with no other person having better right to defeat his claim, or a person who, in legal
parlance, may remain a remainder man even at the end of the period of occupation after, say, a
thousand years?

If the decision is in favour of the assessee, it would be doing injustice but would also cause an
unnecessary inconvenience. One cannot plausibly visualise why a person i) in actual physical
control of the property, receiving the entire income and usufructs of the property, claiming
absolute power of disposal of the income so received, should not be held liable to tax merely
because a evidence of legal ownership may, in the long run, clothe another person with the power
of residual ownership.
Hence, the court has decided that a person who receives or is entitled to receive income from the
property in his own right bears the liability under Section 22. The requirement of registration of
the sale-deed is not warranted.7

7Paying For Possession, September 11, 1997, Last Updated at 00:00 IST,
http://www.business-standard.com/article/specials/paying-for-possession-
197091101046_1.html.
 CONCLUSION

The Honble Supreme Court has gracefully concluded that the liability under Section 22 is on the
person who is in charge of receiving of income or is entitled to receive it and that too in his own
right. The obligation which prescribes the registration of sale deed is not warranted. If in case
there are two different interpretations follow then one which favors the assesee is take into
consideration. One more clarificatory section (Sec. 27) also hold up this view. The provisions are
retrospective in nature. In the conclusion it can be shortly stated that ownership directly depends
upon the receipt of income.