Estate of Ambalal Sarabhai vs Commissioner of Income Tax

R.K. Abichandani, J.—The Tribunal, Ahmedabad Bench ""A"", has referred the following questions in respect of the asst. yrs. 1972-73 and

1973-74 for the consideration of the High Court under s. 256(1) of the IT Act, from the Tribunal''s order dt. 18th August 1981, and 20th August

1983, the later being question on the ground which was raised but through oversight not decided in the earlier order by the Tribunal.

At the instance of the Revenue :

Asst. yr. 1972-73

Ref. Appln. No. 970/Ahd/1981

(1) ""Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the reopening of the

assessment for the asst. yr. 1972-73 under s. 147(b) was not legal ?

At the instance of the Assessee :

Asst. yr. 1973-74

Ref. Appln. No. 961/Ahd/1981 :

(1) ""Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the ITO was justified in reopening the

assessment on the basis of the information received from the Revenue audit party ?

(2) ""Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the information given by the Revenue

audit party regarding the ratio laid down in the case of Currimbhoy Ebrahim Baronetcy Trust Vs. Commissioner of Income Tax, Bombay City I,

constituted ""information"" within the meaning of s. 147(b) of the IT Act, 1961 ?

In Ref. Appln. No. 709/Ahd/1983 :

(1) ""Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the action of the ITO of assessing the

applicant as ""owner"" in respect of income from house property in question was justified when the applicant as the executors were holding the

property in question merely as trustees for and on behalf of the beneficiaries and, therefore, the property income was rightly assessed in the original

assessment in the hands of Smt. Saraladevi Sarabhai, the beneficial owner ?

(2) ""Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that applicant was not entitled to deduction

under s. 23(2) of self-occupancy allowance when Tribunal itself having held that the applicant was liable to be assessed in respect of income from

house property in question as the owner ?

The assessees are the executors and trustees of the estate of late Shri Ambalal Sarabhai. In the original assessment order, income from the

house property known as ""Main bungalow"" in Retreat Compound at Ahmedabad was not taxed in the hands of the said assessee for the years in

question on the ground that the income from the said house property was included in the total income of Smt. Saraladevi, widow of Shri Ambalal

Sarabhai, to whom right to reside free of rent in the property for her life was given under the will by Shri Ambalal Sarabhai and that she had

exercised that right w.e.f. 1st April, 1971.

For the asst. yr. 1972-73, the ITO reopened the assessment under s. 147(b) of the said Act, on the ground that the income from the said

property was required to be taxed in the hands of the ""owner"" of the house property i.e., the executors and trustees of the estate of late Shri

Ambalal Sarabhai. The original assessment was completed on 31st March, 1975, for the said asst. yr. 1972-73. In the said order which is at

Annexure ""I"" in the paper-book, it is recorded that the assessee had filed a revised return on 9th September, 1973, excluding the income from the

two properties situate in the Retreat Compound, as the income from the Main Bungalow was included in the total income of Smt. Saraladevi

Sarabhai to whom the right to reside free of rent was given under the will. In the revised assessment made under s. 147(b) of the Act, the ITO by

his order dt. 19th March, 1978, held that the assessee''s estate being the owner of the property, even if right to reside was given to the widow,

was liable to be assessed for the property income as the real owner of the house property, in view of the provisions of s. 22 of the said Act. The

ITO relied upon the decision of the Bombay High Court in Currimbhoy Ebrahim Baronetcy Trust Vs. Commissioner of Income Tax, Bombay City

I, for the proposition that income from the property can be taxed in the hands of the owner. He was also impressed by the fact that the assessee

had not produced any written option exercised by Smt. Saraladevi Sarabhai, and presumed that no such option was exercised.

As regards the asst. yr. 1973-74, the ITO had reopened the assessment under s. 147(b) of the Act, on the ground that income from the

property can be taxed in the hands of the owner, as per the ratio laid down in the case of Sir Currimbhoy Ebrahim Baronetcy Trust (supra) and

that the liability to tax arises from the fact that the assessee was the owner of the property being the executors and trustees of the estate of late Shri

Ambalal Sarabhai. It was also noted that this mistake was pointed out by the Revenue audit party of the Auditor General. On the basis of this

information, according to the ITO, he had reason to believe that the income of the assessee was underassessed.

The return of the income for the asst. yr. 1973-74 was filed on 14th August 1973. By the assessment order dt. 22nd November, 1975, the ITO

held that in Indian law beneficial ownership is unknown and that there is, but one owner namely, the legal owner, both in respect of vendor and

vendee as well as trustee and cestui que trust, and, therefore, the house property was assessable in the hands of the legal owner i.e., executors and

trustees of the estate of late Shri Ambalal Sarabhai as the ""owner"" of the building and appurtenant thereto, within the meaning of s. 22 of the said

Act.

The assessee challenged the orders of the assessment before the AAC, who by his order dt. 25th March, 1980, came to the conclusion that

reopening of the assessment for the two years, cannot be held to be illegal and that if on becoming aware of the mistake of law committed in the

original assessment, the ITO considers the facts of the case and forms his own reason to believe that the taxable income had escaped assessment,

then he can open reassessment under s. 147(b) of the said Act. The AAC also held that the income from the house property had to be assessed in

the hands of the assessee executors as ""owner"" of the property.

The assessee approached the Tribunal against the order of the AAC. The Tribunal took note of the fact that in the reasons which were recorded

for reopening the assessment for the asst. yr. 1972-73, the ITO had only mentioned that he had information that the income from property was to

be taxed in the hands of the owner, while, for the year 1973-74, in the reasons recorded, there was a specific mention of the ratio of the decision

in Sir Currimbhoy Ebrahim Baronetcy Trust''s case (supra) and to the fact that there was an audit note pointing out the mistake. The Tribunal found

that on perusal of the reasons recorded by the ITO for reopening the assessment for the asst. yr. 1972-73, it appeared that the decision of the

Supreme Court in (1976) 102 ITR 287 (SC) , was treated as information, on the basis of which the ITO had reopened the assessment. It was

held that the ITO had applied the law laid down in the case of Kalyanji Mavji & Co. (supra) to the facts of the case, which proposition of law he

knew even at the time of the original assessment and, therefore, he had no information on the basis of which he could have reopened the

assessment for the year 1972-73. The opening of assessment for the asst. yr. 1972-73 was, therefore, held to be illegal.

As regards asst. yr. 1973-74, the Tribunal was of the view that the in reasons recorded by the ITO for reopening the assessment, decision in Sir

Currimbhoy''s case (supra) was mentioned and the audit note which had pointed out the mistake of not considering the law laid down in that case

was also referred to. The Tribunal, therefore, held that the information given by the Revenue audit party of the ratio in Sir Currimbhoy Ebrahim

Baronetcy Trust''s case (supra) constitutes information on the basis of which the ITO was justified in reopening the assessment under s. 147(b) for

the asst. yr. 1973-74. The Tribunal, therefore, allowed the assessee''s appeal for the year 1972-73 and dismissed for the asst. yr. 1973-74, by its

order dt. 18th August 1981. In that order, the Tribunal had omitted to consider the question on merits in context of the provisions of s. 22 of the

said Act in respect of the asst. yr. 1973-74 for which it upheld the reopening. The assessee, therefore, made an application being Misc.

Application No. 112/1981 in respect of the asst. yr. 1973-74, pointing out the grounds raised by the assessee which were not considered by the

Tribunal in its earlier order. By its order dt. 20th August 1983, the Tribunal partly allowed the appeal by holding that the AAC was right in holding

that the assessee was the owner of the property in question within the meaning of s. 22 of the said Act and that it was not material that Smt.

Saraladevi, widow of the testator, was entitled to reside in the property for life. As regards the claim of the assessee under s. 23(2) of the said Act,

the Tribunal held that it was not allowable because as per that provision, it was necessary that the property should be in the occupation of the

owner for residence. On this count also, the Tribunal confirmed the order of the AAC. On other aspects, the findings of the Tribunal are not

material, as they do not relate to any of the questions which are referred to us.

As regards the asst. yr. 1972-73, on going through the reasons recorded by the ITO, it appears that there was a reference made to Kalyanji

Mavji''s case (supra) and the reasons do not disclose whether the ITO had in mind Sir Currimbhoy Ebrahim Baronetcy Trust''s case (supra). The

decision in Kalyanji Mavji''s case laid down that the word ""information"" in s. 34(1)(b) of the Act of 1922 was of the widest amplitude and

comprehended a variety of factors. Information may come from external sources or even from the materials already on record or may be derived

from the discovery of new and important matter or fresh facts. Listing the categories of cases to which s. 34(1)(b) of the Act of 1922 would apply,

the Supreme Court laid down that where the information was as to the true and correct state of the law derived from relevant judicial decisions that

would constitute an information. In the reasons which were recorded for the asst. yr. 1972-73, there was no mention of any such information on

the basis of any decision of the Court. Reference to Kalyanji Mavji''s case did not constitute any such information because Kalyanji Mavji''s case

was not in context of s. 9 of the Act of 1922 and the aspect of ownership of the property was not an issue in Kalyanji Mavji''s case. That was a

case which laid down the law as to what constituted ""information"". Therefore, the Tribunal was right in holding that the reasons did not disclose that

the ITO had reason to believe that income had escaped assessment, on the basis of any information. The ITO referred to information from outside

source, which is not disclosed in the reasons recorded. We, therefore, hold that the Tribunal was right in law in coming to the conclusion that the

reopening of the assessment for the sst. yr. 1972-73 under s. 147(b) was not legal and the question No. 1 for the asst. yr. 1972-73 is accordingly

answered in favour of the assessee and against the Revenue.

As regards the asst. yr. 1973-74, on going through the reasons it is clear to us that the ITO did refer to the information, which he obtained as

regards the ratio of the decision of Sir Currimbhoy Ebrahim Baronetcy Trust''s case (supra), which is specifically mentioned in the reasons

recorded. He also referred to the fact that the Revenue audit party of the Auditor General had pointed out the mistake. It is clear that it was not on

the strength of any suggested interpretation of the audit party that the ITO had acted. He had acted on noticing the ratio in Sir Currimbhoy Ebrahim

Baronetcy Trust''s case, which was rendered in context of s. 9(1)(iv) of the Indian IT Act, 1922. It was held therein that income from property

was an artificially defined income and that the liability arose from the fact that the assessee was the owner of the property and the liability did not

depend on the power of the owner to let the property and also it did not depend upon the capacity of the owner to receive the bona fide annual

value. The facts before the High Court were that the trustees of a Baronetcy Trust created by a statute were the owners of certain properties.

Under the statute, the incumbent for the time being to the office of Baronetcy was entitled to reside free of rent in two flats and a bungalow which

formed part of the trust properties. In 1949, the then Baronet was declared an evacuee and the Custodian of Evacuee Property passed an order

declaring the flats and the bungalow to be evacuee property and the right of residence of the Baronet free of rent to vest in him. The question was

whether the trustees could thereafter be assessed to tax on the annual rental value of the flats and the bungalow under s. 9 of the Indian IT Act of

1922. The High Court held that as the trustees were the owners of the flats and the bungalow, their annual value was liable to be assessed in the

hands of the trustees under s. 9 of the Act. Neither the vesting of the interest of the Baronet in the Custodian nor the inability of the trustees to

realise rent from the flats and the bungalow affected this position. It was held that the fact that the trustees were not in a position to obtain any rent

from the properties was not material since the liability of the trustees as owners of the property did not depend upon their power to let the

properties nor on their capacity to receive income therefrom. As noted above, the Supreme Court in Kalyanji Mavji''s case (supra) had laid down

that where the information was as to the true and correct state of the law derived from relevant judicial decisions, that would constitute an

information for the purpose of invoking the provisions of s. 34(1)(b) of the Act of 1922. In our view, therefore, the Tribunal was right in holding

that the ITO was justified in reopening the assessment for the asst. yr. 1973-74 on the basis of the information received from the Revenue audit

party and on the basis of the ratio of the decision of the Bombay High Court in Sir Currimbhoy Ebrahim Baronetcy Trust''s case (supra). The

above questions No. 1 and 2 referred at the instance of the assessee in this regard are, therefore, answered in the affirmative in favour of the

Revenue and against the assessee.

We now take up the question raised by the assessee contending that reassessment of the income from the house property in the hands of the

assessee could not have been done in view of the beneficial ownership having vested under the will in Smt. Saraladevi Sarabhai, in whose hands,

according to the assessee, the income from the house property was already assessed. The provision of s. 22, which falls for our consideration

reads as under :

""Income from house property. - The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is

the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits

of which are chargeable to Income Tax, shall be chargeable to Income Tax under the head ""Income from house property"".

It will be seen from the above provision that the annual value of house property i.e., the buildings or lands appurtenant thereto of which the

assessee is the owner, is chargeable to Income Tax under the head ""income from house property"". Section 23 lays down how such annual value of

the house property is to be determined. The cases where the assessee is both the legal and beneficial owner do not pose any problem. The

question is whether the concept of ownership of house property in s. 22 accommodates the dichotomy of a legal owner and a beneficial owner in

context of the fact that it is the annual value of such property which is made chargeable to Income Tax. The statute has adopted the formula of

annual letting value"" of such property to work out the notional income from it. Under the amended s. 23(1) (after the asst. yr. 1976-77), where

the annual rent exceeds the sum for which the property might reasonably be expected to let from year to year, the annual rent is deemed to be the

annual value of the property.

In R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, the Hon''ble

Supreme Court construed the provisions of s. 9 of the Act of 1922, in context of the question whether the assessee whose property vested in the

Custodian of Evacuee Properties by virtue of s. 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, as evacuee property,

continued to be the owner of the property for the purpose of computation of income under s. 9 of the Act of 1922. The Supreme Court held that

such an assessee cannot be assessed under the said head of ''income from house property'' since the word ""owner"" must mean in the context of s.

9, a person who can exercise rights of the owner and is entitled to the income from the property. It was held that a property cannot be owned by

two persons each one having independent and exclusive right over it. Therefore, for the purpose of s. 9 of the Act of 1922, 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. The Supreme Court observed that like all other

laws, even the tax laws are to be interpreted reasonably and in consonance with justice.

In Commissioner of Income Tax, Bombay etc. Vs. M/s. Podar Cement Pvt. Ltd. etc., , while construing the provisions of s. 22 of the said Act,

and considering the effect of the decision in R. B. Jodha Mal Kuthiala''s case (supra) the Supreme Court held that the observations in R. B. Jodha

Mal Kuthiala''s case clearly fixed the liability on the person who receives or is entitled to receive the income from the property in his own right. It

was in terms held that in the context of s. 22 of the said Act, having regard to the ground realities and further having regard to the object of the IT

Act, namely ""to tax the income"", a person who is entitled to receive income from the property in his own right is the owner contemplated by the

said provision. This view was taken after noticing that the settled position under the common law as to the meaning of ""owner"" was that owner

means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act,

Registration Act, etc.

The attributes of ownership of property are an aggregate of rights, powers, liberties or privileges, conveniently called bundle of rights. The

important rights are the right to have and to get possession (jus posidendi); the right to prevent interference by others with his exercising the

attributes of ownership and to exclude others from control, use or enjoyment of the object owned (jus prohibendi or excludendi). The powers

consist of the power to alienate the object or of granting to others rights or liberties or privileges with respect to it (jus disponendi); and the liberties

are of using the object according to one''s will (jus utendi), the liberty of enjoying the fruits and avails of the object owned (jus fruendi), the liberty

of changing its form or even destroying it (jus abutendi). See ""Jurisprudence"" by Roscoe Pound (1959 End). Vol. V, pt. 8 at p. 128.

That which a man owns is in all cases a right and when one speaks of ownership of a particular object it is a convenient expression for the kind

of rights owned in the object. One who held such interest for life, owned that particular estate for life. Such life interest in house property i.e.,

Habitatio, which means use of a house for life where the house could be let but not alienated by sale or gift, would still be an important right owned

in the immovable property of its exclusive use and to its usufruct, to the exclusion of others till life.

Who is then the ""owner"" of house property in a case like the present one where the testator has bequeathed under the Codicil dt. 15th

February, 1963, in favour of his widow right to reside and occupy and enjoy free from payment of rent or compensation during her lifetime the

premises in question and to receive rents and profits thereof as she wishes and subject to this right the ""trustees"" under the will were entitled to sell

the property in accordance with para 9 of the will ? According to the Revenue, the executors and trustees of the will being the legal owners of the

property, its annual value was to be treated as income in their hands while according to the executors and trustees of the estate, since the widow

was given the right to enjoy the house property for her lifetime to the exclusion of all others, she was the beneficial owner thereof in whose hands

the property was rightly assessed.

The executor gets a representative title as provided in s. 211 of the Indian Succession Act, 1925, and all the property of the deceased person

vests in him as such legal representative, except any property which would otherwise have passed by survivorship to some other person, On the

other hand, if a legacy is given in general terms without specifying the time when it is to be paid, the legatee has a vested interest in it from the day

of the death of the testator as per s. 104 of the Indian Succession Act. The assent of the executor which is necessary to complete a legatee''s title

to his legacy to a specific bequest will be sufficient to divest his interest as executor therein and to transfer the subject of the bequest of the legatee,

unless the nature or the circumstances of the property require that it shall be transferred in a particular way, as provided by ss. 332 and 333 of the

Indian Succession Act. Such assent may be verbal and it may be either express or implied from the conduct of the executor. The assent of the

executor to a legacy gives effect to it from the death of the testator as laid down by s. 336 of the Indian Succession Act.

The specific legacy bequeathed by the testator in the present case was of right to occupy and enjoy the rents or profits of the house property.

Subject to this right which the legatee could enjoy at any time during her lifetime, the right to sell this property was kept with the executors and

trustees of the testator. The words ""as such"" in sub-s. (1) of s. 211 of the Indian Succession Act indicate that an executor is not the absolute owner

of the property of the deceased but the property only vests in him for the purpose of representation. He holds the property for giving effect to the

intention of the testator and an executor has no beneficial interest in the property of the deceased. As soon as he gives assent to a specific bequest,

he gets divested of his representative interest in such specific bequest, such as of life interest devised under the Codicil in the house property in

question. If the statute requires the assessment of income from such house property to be made to the owner thereof, it cannot be taxed to a

person who is in possession, but is not the owner. The owner of the house property is liable for tax although it may be in the possession of some

other person. However, in case of executors in whom all the property of the deceased person vests as his legal representative under s. 211 of the

Indian Succession Act, the liability to pay the tax is governed by the provisions of s. 168 of the Act and subject to other provisions contained in s.

168, the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor. As provided in sub-s. (4) of s. 168, in

computing the total income of any previous year, which would include income classified under head ""income from house property"" under s. 14 of

the Act, in the hands of the executors, any income of the estate of that previous year distributed to or applied to the benefit of any specific legatee

of the estate of that previous year shall be excluded; but the income so excluded shall be included in the total income of the previous year of such

specific legatee. Thus, notwithstanding the fact that the executor is the legal owner of the estate property, the law, in a case where any income of

the estate of the previous year is distributed to or applied to the benefit of the specific legatee, treats it as income in the hands of the specific

legatee. This would mean that where the income from house property is so applied to the specific legatee, he is to be treated as the beneficial

owner of the house property so far that income from the house property is concerned, for the purpose of s. 22 of the Act. Therefore, on a

combined effect of s. 22 and s. 168(4) of the said Act, the notional income from the house property, which was not let out, on the basis of its

annual value would become taxable in view of the life interest of the nature mentioned in the Codicil having devolved on the widow Smt. Saraladevi

Sarabhai as a specific legatee, in her hand, the executors having assented to the title to her legacy which gave effect to the legacy from the death of

the testator. The notional income from the house property on the basis of annual value stood applied to the benefit of the widow by the very nature

of the legacy which entitled her to lifelong residence to the exclusion of all others and also to the exclusive right to the rents and profits from the said

house property. The income from the house property was not received by or on behalf of or accrued or arisen or deemed to have accrued or

arisen to the executors and trustees of the estate under s. 5 of the said Act, since it was applied by virtue of the nature of legacy under the Codicil

to the said beneficiary. The ITO had, therefore, earlier rightly assessed it in the hands of the legatee Smt. Saraladevi Sarabhai as the beneficial

owner of the right to reside and receive rental income from the house property during her life. The Tribunal, therefore, erred in holding that the

action of the ITO of assessing the applicant as owner in respect of the income from the house property was justified. The aforesaid question No. 1

arising from R.A. No. 709/1983 for the asst. yr. 1973-74 is, therefore, answered in the negative in favour of the assessee and against the Revenue.

In view of our finding on the above question, the question No. 2 in R.A. No. 709/83 referred above, is left unanswered, as it does not survive

for our consideration.

The reference stands answered accordingly. There shall be no order as to costs.