AI Structured Summary
Not yet generated for this judgment
Judgment
Kalyan Jyoti Sengupta, J.—The above appeal u/s 260A of the income tax Act, 1961, (hereinafter referred to Act of 1961) is at the instance of the assessee-appellant against the judgment and order of the Income tax Appellate Tribunal, "B Bench" Calcutta in ITA No. 2547 (Cal)/1997), dated 9-10-2001, in relation to the assessment year 1992-93.
The above appeal was admitted by an order dated 30-7-2002 of this Court on the following substantial questions of law :-
(i) Whether the use of the verb "acquires" in section 27(iiib) of the income tax Act, 1961, which was introduced with effect from 1st April, 1988, relates to prospective operation, or to be more specific, the right which has been acquired on or after the relevant date of insertion of the provision, i.e., 1st April, 1988?
(ii) Whether section 27(iiib) of the income tax Act, 1961 relates back to past transaction, particularly when section 27(iiib) refers to transactions as contained in section 269UA(f) of the income tax Act, 1961, which itself has come into force with effect from 1st April, 1986?
During pendency of the instant appeal an application was made by the assessee urging additional two grounds to be formulated as being substantial point of law for hearing. Those two grounds are stated hereunder :-
(i) Whether rent from house property should be treated as income from business or as income from house property, particularly in case where the main business of the assessee is to acquire building on lease and let them out in rent?
(ii) Whether the proceedings u/s 148/147 of the income tax Act has been validly initiated?
This Court by order dated 29-8-2005 adjourned the hearing of the said application till the hearing of the appeal is taken up. In the said order it was decided that in future the aforesaid points suggested should be considered by the Court for formulation.
Since the matter was urged by the learned counsel for both the parties extensively on the applicability of the said section 27(iii)(b) of the income tax Act, 1961 (hereinafter referred to as the Act 1961) we think that only one additional ground being first one can be taken for hearing as being substantial question of law. Thus this Court is to decide this appeal on the aforesaid three substantial questions of law. We feel accordingly the short fact is required to be narrated as under :-
The appellant-assessee carries on business inter alia, of hiring and taking immovable properties on lease and sub-letting and/or under letting the said leasehold properties in accordance with its object clause of Memorandum of Association. In course of its business appellant company maintains and provides necessary service for proper up keep of such leasehold properties in order to earn income by sub-letting or sub-leasing the said properties. The appellant-company obtained leases of some buildings and properties in Calcutta in between 1967 and 1970. The appellant filed returns of income for the assessment year 1992-93 claiming inter alia, major part of its business income being generated from rental and/or licence fees received from the tenants/ occupants of the aforesaid leasehold properties held by the appellant. Accordingly, the said income was shown under the head "income from profits and gains of business and profession". However, the Assessing Officer did not accept this claim and classified the said income as being income from house property. The Assessing Officer held that by virtue of amended provision of section 27(iii)(b) the assessee was held to be deemed owner of the said property. The appellant being aggrieved by the said decision of the Assessing Officer preferred appeal to the Commissioner of income tax (Appeals) who on hearing and considering the points raised dismissed the appeal and upheld the findings and order of the Assessing Officer and further maintained the same view. The assessee thereafter carried the matter to the learned Tribunal and the learned Tribunal did not interfere with the decisions of the two authorities below by the impugned judgment and order.
Mr. J.P. Khaitan learned counsel appearing for the appellant submits that all the authorities below were in error in holding that the section 27(iii)(b) has got retrospective operation though the same came into force from 1-4-1988. Admittedly the leases were acquired in between 1967 and 1970 and the language mentioned in the said amended provision indicate the same will not have any retrospective operation. This will be clear from the definition (transfer) as mentioned in section 2(47) which was also amended for the purpose of capital gains.
He further submits that Memorandum explaining the provisions of Finance Bill, 1987 which has been noted by the Supreme Court in case of Commissioner of Income Tax, Bombay etc. Vs. M/s. Podar Cement Pvt. Ltd. etc., would evidently establish that the said section 27 was amended for the following purposes :-
(i) to rope in situations where transfer of property had been effected but there was no registered instrument,
(ii) to enlarge the meaning of "owner of house property" to include a person "who acquires any rights" by virtue of any transaction referred to in section 269UA(f) vide clause (iiib),
(iii) to enlarge the applicability of the clause to a member of a company or other association of persons in addition to a member of a Cooperative Society previously covered.
Prior to this amendment the lease for a term of 12 years or more was treated as transfer only for the limited purpose as provided in Chapter XXA (with effect from 1-7-1982) and Chapter XXC (with effect from 1-10-1986). Prior to 1-4-1988 grant of lease for a period of 12 years or more was not treated as "transfer" for the purpose of capital gains tax nor was the lessee treated as owner for house property for assessment.
He further submits that in the amended provisions word "acquires" is applicable to rights acquired on or after the date of amendment i.e., 1-4-1988 and has no application to the assessees case for the reasons as stated earlier and it will also be clear that it has got no application in this case as section 27(iii)(b) contains a reference of section 269UA(f) which itself came into force with effect from 1-10-1986. In the Budget speech it would be evident that the coverage of transactions as referred to in section 269UA(f) which include a lease for 12 years or more was by way of enlarging the meaning of the expression "owner of the house property" and that such amendment took effect from 1-4-1988. In support of his submission he has relied on number of decisions of the Supreme Court in case of Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., at page 320/64 Taxman 442; in case of Karanpura Development Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, and in case of S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta,
In the alternative he submits that if it is held section 27(iii)(b) retrospectively operates and the assessee is treated to be owner, having regard to its object clause in the Memorandum of Association and in view of the judgment of the Hon''ble Supreme Court in Karanpura Development Co. Ltd.s case (supra) the income from sub-leasing is required to be assessed under the head "business".
Learned counsel for the respondent revenue submits that the said amendment in section 27 intends to enlarge the meaning of "owner of building" given in clause (iii) by providing that a person who comes to have control over the property by virtue of the transactions as are referred to clause (f) of sub-section (2) of section 269UA, will also be deemed to be the owner of the property. The amendment also seeks to enlarge the applicability of this clause to a company or other association of persons. According to him, since the amendment takes effect from 1-4-1988, it will apply in relation to the assessment year 1988-89 and the subsequent years also.
He submits that in the Memorandum explaining the provisions in the Finance Bill, 1987 reported in 1987 165 ITR 161, it contemplates the simplification and rationalization of provisions enlarging the meaning of owner of house property as enshrined in section 27 of the said Act.
He further contends that main purpose of amending the provisions however, is to resolve the pending disputes of the legal as well as the beneficial owners who are assessed to tax in respect of the same income therefrom. As a measure of rationalization the amendment seeks to enlarge further meaning of the expression "owner of house property" in clause (iii) of section 27 by providing that a person who comes to have control over the property by virtue of such transaction as referred to clause (f) of section 269UA will also be deemed to be the owner of the property.
On careful reading of the memorandum explaining the Finance Bill it would be crystal clear that the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word "owner" in section 22 of the said Act. The language of clause (iii)(b) of section 27 of the said Act shall be deemed to be declaratory and clarificatory and not substantive in nature. It is well settled in law he contends, referring to couple of decisions of Supreme Court in Commnr. of Income Tax-I, Ahmedabad Vs. Gold Coin Health Food Pvt. Ltd., , if a statute is curative or merely declaratory of the previous law retrospective effect is generally extended.
He contends citing Supreme Court decision in State of Andhra Pradesh Vs. Vallabhapuram Ravi, that it is also well settled that a deeming provisions should be carried to its logical conclusion. According to him, the word "acquires" contemplates that the assessee is still acquiring the right and also the right having already vested upon the assessee.
His next contention is that in absence of expressed provision for retrospective operation of any statutory provision the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed intention giving statutes retrospectivity. Hence, decisions of all the authorities that income from sub-lease will certainly be classified as income from house and property as the assessee being lessee is deemed to be the owner of the building.
After hearing the respective contention of the learned Counsel in this matter and reading the decisions of all the authorities below it seems to us that pivotal points involved in this case are as follows :
(i) Whether the amendment of section 27(iii), (iib) and (iiic) is clarificatory and/or declaratory in nature or not?
(ii) Whether the income derived from this property as being the owner can be treated profit and gains of business or not?
It is settled by several judicial pronouncements that any amendment is made though apparently for prospective operation, intending to clarify and further explain the provision of existing law is always retrospective in its operation. This proposition of law is explained in the recent decision of the Supreme Court in the case of Gold Coin Health Food (P.) Ltd. (supra). In this judgment the Supreme Court considering large number of previous decisions of the same Court explained the law relating to the interpretation of statutes. The Supreme Court in the judgment held that Explanation (4) to section 271(1)(c) is clarificatory and not substantive. In that case the Supreme Court found the provision of section 271(1)(c) is not substantive provision of law rather a procedural. The Supreme Court in that case has recognized the cannon of interpretation of statutes as opined by the various authors of various text books. In "Principle of Statutory Interpretation, 11th Edition, 2008", Justice G.P. Singh has elucidated the position regarding retrospective operation of statutes as follows :
The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court : For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word "declared" as well as the word "enacted". But the use of the words it is declared is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is to explain an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language shall be deemed always to have meant or shall be deemed never to have included is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law.
In this Judgment the earlier decision of Supreme Court in case Zile Singh v. State of Haryana 2004 8 SCC 1 has been noted with approval. In that judgment of Zile Singhs case (supra) it was observed as follows :
It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only -nova Constitutio futuris formam imponere debet non praeteritis - a new law ought to regulate what is to follow, not the past. (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438). It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440).
The presumption against retrospective operation is not applicable to declaratory statutes. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is to explain an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect (ibid., pp. 468-69).
Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant : (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv)what it was the legislature contemplated. (p. 388) The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p. 392).
In the context of the aforesaid exposition of law of interpretation we now need to explain whether in the present case substitution of clause (iii) and addition of clause (iiia) and further (iiib) can be said to be a clarificatory and/or declaratory in nature or not? In order to examine this the previous provision of clause (iii) prior to amendment needs to be read closely. The said clause runs as hereunder :
(iii)a member of a co-operative society, to whom a building or part thereof is allotted or leased under a house building scheme of the society, shall be deemed to be the owner of that building or part thereof.
In the amendment the Company or any other association or person have been added and it was not then within the scope of clause (iii).
Clause (iiia) provides "a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof;"
Clause (iiib) deals with "a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof."
The basic object of the section as stood originally is to define owner of house with an intention to levy tax on income from house property. It will appear that originally one class of person was deemed to be owner. Subsequently by way of amendment ownership of various classes has been explained and/or clarified. When it is clarificatory in nature, it cannot change the basic character of the said section for one of the objects of classification is to keep basic purpose of original statutory provision untouched. Hence following the established principle of law relating to interpretation of statutes, we hold that the said provision with amendment has retrospective operation though it has been inserted on 1-4-1988. Moreover, as rightly pointed out by the learned Counsel for the revenue that in the case of Podar Cement (P.) Ltd. (supra) the Supreme Court while considering the Memorandum explaining the provision in the Finance Bill, 1987 at page 653 of the report as follows :
From the circumstances narrated above and from the Memorandum explaining the Finance Bill, 1987 [See (1987) 165 ITR (St.) 161], by which the amendment is brought about, it is crystal clear that the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word "owner" in section 22 of the Act. We do not think that in the light of the clear exposition of law by judicial pronouncement as above, it is unnecessary to seek for help of other Authorities. We, therefore, unhesitatingly hold that the amendment introduced by the Finance Bill, 1987, was declaratory/clarificatory in nature so far as it relates to section 27(iii), (iiia) and (iiib) also. Indeed it is clarified with the word "deemed" being one of method to understand intention of legislature, consequently, these provisions are retrospective in operation.
22.In view of this legal position we do not see any escape to hold that the appellant/assessee is deemed owner for holding the leasehold interest.
Now dealing with the question whether income from sub-lease to third parties can be assessable under the heading of income from house property or not?
We think in case of a company unlike individual, definition and meaning of "owner" has to be applied for the purpose of imposition of tax in two ways. It can be done upon examining the object Clause in the Memorandum of Association and further the way the business is actually carried on. If it is found that the property owned by the company in the manner as mentioned in section 27 of Act 1961, itself is utilized without retaining real control ownership interest therein for the purpose of carrying on business, the income derived therefrom cannot be treated to be income from house property and it shall be treated to be income from business activities. This proposition of law is well explained long time back by Three Judges Bench of the Supreme Court in the case of Karanpura Development Co. Ltd. (supra), Justice Hidyatullah speaking for the Bench explained this distinction as regard dealing of the property by the company at page 377 of the report :
Ownership of property and leasing it out may be done as a part of business, or it may be done as land owner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader.
Again in case of S.G. Mercantile Corpn. (P.) Ltd. (supra) the Supreme Court reiterated the aforesaid principle. At page 708 of the report the Supreme Court observed while taking note of the observation of Karanpura Development Co. Ltd.s case (supra) as follows :
The above observations have a direct bearing. It is not necessary for the purpose of this case to say anything, beyond what has already been said while dealing with section 9 of the Act, about the view expressed in the above passage regarding the rental income of an owner being treated as business income in case it is received as part of trading activity, because we are concerned in the instant case with an assessee who is a lessee and not the owner of the property in question. The assessee, in the cited case of Karanpura Development Co. Ltd., too was lessee of the coal-fields. So far as such assessees are concerned who as part of their essential trading activity take lease of property and sublet parts thereof with a view to make profits, the dictum laid down above, in our opinion, would hold good and the profits would have to be treated as business income.
In the case of Tinsukia Development Corporation Ltd. Vs. Commissioner of Income Tax, the Division Bench of this Court had followed and accepted principle laid down in the two decisions of the Supreme Court in case of Karanpura Development Co. Ltd. (supra) and S.G. Mercantile Corpn. (P.) Ltd. (supra), to hold as follows :-
Distinction between income which is earned in the course of business and income which is earned as incident to the ownership of property is important. Apart from computation and assessment of such income, other consequences may follow from such distinction.
In view of the aforesaid discussion we think it is possible in this case the assessee/appellant though might be an owner by applying the deeming provision in section 27(iiib), having regard to the nature of activity of the company as mentioned in the object Clause of the Memorandum of Association, to classify appropriately the income fetched in connection with house property. In other words whether the income derived from this property is part of the business activity or not? Before us enough material has not been placed to find the nature of the activity of the business of the company in relation to this property. We think that the matter should be restored to the file of the Assessing Officer to come to findings with reference to the object clause of the Memorandum of Association and also the accounts whether this income fetched by way of sublease is part of the business activity or not? On examining closely if it is found that it is part of the business activity obviously the income fetched therefrom should be classified under the heading income from and profit and gains of business, and not from the income from house property.
We accordingly direct that this should be completed by the Assessing Officer within a period of ten weeks from the receipt of the copy of the judgment and order. Obviously for this the Assessing Officer shall call for all the documents from the appellant and will give opportunity of hearing.
The appeal is thus disposed of without awarding any costs.