COMMISSIONER OF INCOME-TAX VS MESSRS MEHRAN ASSOCIATES LIMITED, 1992 PTD-KARACHI-HIGH-COURT-SINDH 719 (1992)

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 12(13)---Subsection (13) of S.12 has been couched in unambiguous terms---Question whether the assessee was the owner of a building, was a pure question of fact which would depend upon the circumstances o f each case.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.12(13)---Lease agreement showed that although the plot of land remained the property of Auqaf Department the structure raised thereon became the property of the assessee for ten years or for any extended term under the agreement---Except for the fact that assessee could not sell the property, it held a complete domain over it as it could sublet the structures built on the plot and could receive rents or advances which were non-refundable and non adjustable---Assessee, though, according to the lease agreement was bound to hand over the possession of the structure to the Auqaf Department at the expiry of the term of the lease and apparently it had not been vested with power to take away the superstructure or anything attached to the earth, but short of such authority, assessee was vested with complete power and authority over the property which could only be enjoyed by its owner---Held, lessee was the owner of the structure and was accountable under S.12(13) as owner of the property for any advance received from the tenants over and above the rent payable for the said tentments till such time as the possession thereof was retained by it ---Assessee, under the peculiar circumstances would be deemed to be the owner of the building during the agreed or extended term of lease and could be taxed under S.12(13) of the Ordinance.

Bachu Bai F.E. Dinshaw v. Commissioner of Income Tax. 1967 PTD 170; Gooptu Estates Limited v. Commissioner of Income Tax, Bengal 4 I.T.C. 146; Sri Ganesh Properties Ltd. v. Commissioner of Income Tax, West Bengal (1941) I.T.R. 695 and S.G. Mercantile Corporation (P.) Ltd. v. Commissioner of Income Tax Calcutta (1972) 831.T.R. 700) distinguished.

Ballygunge Bank Ltd., Calcutta v. Commissioner of Income Tax Bengal (1946) 14 I.T.R. 409; Commissioner of Income Tax, Lucknow v. Chandra Agro (P) Ltd. (1979) 117 LT.R. 251; Commissioner of Income-Tax, Poona v. Alpana Talkies (1983) 139 I.T.R. 1055 and Additional Commissioner of Income Tax, Bihar v. Lawlys Enterprises (P) Ltd. (1975) 100 I.T.R. 369 ref.

(c) Interpretation of statutes---

---- Fiscal statutes---Provisions of fiscal statutes were to be subjected to strict construction and their scope could not be enlarged and such statutes were to be interpreted for the benefit of the subject rather than the State.

Shaikh Haider for Appellant.

Sirajul Haq for Respondent.

Date of hearing: 18th December, 1991.

JUDGMENT

MAMOON KAZI, J.---The respondent is a private limited company which had constructed with its own funds a building on Plot No.B.R.5/34, situated on Newnaham Road, Karachi which was owned by Auqaf Department, Government of Sindh. The building was constructed in pursuance of a lease agreement, dated 1-11-1974 executed by the respondent and the Auqaf Department. The respondent thereafter filed its return of income-tax for the assessment year 1980-81, showing a loss of Rs.12,735. However, the Income -Tax Officer discovered that the respondent had received non-refundable and non-adjustable payments to the tune of Rs.3,02,000 from the tenants of the said building, therefore, by invoking the provisions of subsection (13) of section 12 of the Income Tax Ordinance, 1979 he subjected the said amount to tax. The order of the Income Tax Officer was also confirmed by the learned Appellate Commissioner on appeal filed by the respondent. However, on further appeal to the learned Income-tax Tribunal, the order passed by the Appellate Commissioner was reversed as the Tribunal found that the respondent was not the owner of the property in question. Consequently, it allowed the appeal by knocking off the addition of Rs.3,02,000 made under section 12(13) of the Income Tax Ordinance. The Department was, however,

aggrieved and consequently, the Tribunal has referred the following question of law for determination by this Court:-

"Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that the assessee was not the owner of building when the assessee was holding lease which was renewable periodically and was enjoying all rights of ownership of the said building."

2. Subsection (13) of section 12 around which the entire controversy revolves provides as under:

"(13) Where an assessee, being the owner of a building receives from any person to whom such building or any part thereof is let out on rent any amount which is not adjustable against the rent payable by such person, such amount shall be deemed to be the income of the assessee and chargeable to tax under the head income from house property in the income year in which such amount is received and the none income year next following the said income year in equal proportion, and the amount so 'allocated to each income year shall be deemed to be to rent received in respect of such building or a part thereof."

3. When the question, whether the respondent being only a lessee of the building, could be taxed under the said subsection, was raised before the learned Tribunal, the Tribunal after considering the import of the terms "owner" and "ownership" as given in Ayer's Law Terms and Phrases, 5th Ed., reached the conclusion that the respondent was a lessee and not the owner of the building and consequently, his case clearly fell outside the purview of section 12(13) of the Income-tax Ordinance. The term -owner" has been defined therein as "A person who has got the dominion over property". The definition of "ownership" in the same book is as under:--

"Ownership".-- A really satisfactory and comprehensive definition of the right of ownership, equally exhaustive and exclusive, has not been attempted so far because of its obvious difficulties in consequence of changing situations varying with altered circumstances. But the concept of ownership presents no difficulty of general comprehension. The well-known and widely understood rights which are exercisable by an owner are---(1) `jus utendi .... the right to the use of the thing; (2) `Jus possidendi' the right to possess a thing; (3) `Jus abuntendi' the right to consume or destroy a thing; (4) `Jus despondeni vel transfcrrendi,; the right to dispose of a thing or to transfer it as by sale, gift, exchange, etc.; (5) `Jus sibi hapendi': the right to hold a thing for oneself; (6) `Jus alteri non habendi' or `Jus prohidendi'; the right to exclude others from its use:'

4. Supporting the order of the learned Appellate Tribunal, Mr. Sirajul Haq, learned counsel for the respondent, has argued that, since the statute in question is a fiscal statute, the provisions of section 12(13) which apply only to "owner" of a building, cannot admit within their mischief a lessee of a building. Reliance has been placed by him on a number of cases, the first being reported as Bachu Bai F.E. Dinshaw v. Commissioner of Income Tax 1967 PTD 170. In this case a question arose, whether a purchaser of a property in possession of the same by virtue of the doctrine of part performance and having right to enjoy the rental income therefrom, could be taxed under the provisions of section 9(1) of the Indian Income Tax Act, 1922, on account of "income from the property". The question was answered in the negative as it was held that no owner enjoying possession of the property under the provisions of section 53-A of the Transfer of Property Act, including its beneficial owner, could be taxed under the said section as "owner" of the property. In Gooptu Estates Limited v. Commissioner of Income Tax Bengal (4 I.T.C. 146), once again the provisions of section 9 together with those of sections 10 and 11 of the Indian Income Tax Act came under discussion before the Calcutta High Court and it was observed in this case as follows:--

"In a case of this character much may depend upon the particular head of charge under which the assessees are being brought, and the question before us not to be decided under section 9, 10 or 11 of the Act. Where the assessee is the owner of the property consisting of any buildings or land appurtenant thereto, the statute charges him upon the basis of a notional income the amount of which is computed by finding the bona fide annual value and making the deductions therefrom which are allowed by section 9. As the assessees in this case have only a limited interest, namely, the interest of a lessee for fifty years, the Income-tax Authorities may well be right in regarding section 9 as inapplicable to the case."

However, in Sri Ganesh Properties Ltd. v. Commissioner of Income Tax, West Bengal (1941) I.T.R. 695, where the lessor remained the owner of the subject matter of the lease but the terms of lease deed showed that the ownership of the superstructures vested in the lessee while the ownership of the site remained in the lessor, it was held that the lessee could be assessed in respect of the income from the superstructures under section 9 of the Indian Income Tax Act. In another case decided by the Supreme Court of India and reported as S.G. Mercantile Corporation (P.) Ltd. v. Commissioner of Income Tax, Calcutta (1972) 83 I.T.R. 700 a company had taken on lease a market place for an initial term of fifty years, undertaking to spend Rupees Five Lacs for the purpose of remodelling and repairing the structure on the site. It was also given the right to sublet the different portions. The appellant's activity during the period covered by the assessment years in question consisted of developing the property and letting out portions thereof shops, stalls etc. The question arose, whether the appellant's income from subletting was assessable under section 9 of the Indian Income-tax Act, 1922. It was held that since the appellant's company was not the owner of the property or any part thereof, no question of making assessment under section 9 would arise.

5. Mr. Shaikh Haider, learned counsel for the applicant, has, however, invited our attention to various cases also from the Indian jurisdiction, where the proposition now canvassed by Mr. Sirajul Haq before us was not accepted. In Ballygunge Bank Ltd., Calcutta v. Commissioner of Income-tax, Bengal (1946) 14 I.T.R. 409, a company obtained lease of property for a fixed term on a condition that houses constructed thereby would belong to the company till the expiry of the term. It was held that the assessees were owners of the building until the period of lease expired and they were, therefore, assessable under section 9 of the Indian Income Tax Act in respect of rents derived from the buildings. The next case relied upon by Mr. Shaikh Haider, is reported as Commissioner of Income-Tax, Lucknow v. Chandra Agro (P) Ltd. (1979) 117 I.T.R. 251. In this case the main business of assessee-company was taking house property on lease, repairing and remodelling, it, and letting it out to tenants. During the assessment years in question, the assessee incurred expenditure on construction of partition walls, fitting tiles in some portions of the building and converting some portions of the building into mosaic floors. The company claimed depreciation on the expenditure incurred as such. The I.T.O., rejected the claim taking' the view that the improvements belonged to and vested in the lessor. The Appellate Tribunal took the view that the improvements belonged to the assessee for the duration of the lease and allowed the claim. On reference made to Allahabad High Court it agreed with the view taken by the Tribunal holding as follows:-

"The controversy centres around the requirement of section 32(l) of the Act which deals with depreciation. Under the section depreciation was allowable in respect of buildings, machinery plant, etc., owned by the assessee and used for the purposes of business or profession. We are in agreement with the view taken by the Tribunal that for the duration of the lease, which was for a fixed period of ten years, the assessee was in fact and in law the owner of the improvements of permanent nature effected by the assessee. The purpose for effecting improvements was to earn a better return from the property. It was a business investment in the shape of making permanent improvements in the buildings. The assessee was, in the eye of law, the owner of these improvements so long it had the right to retain the building as tenant. The fact that, on the expiry of the lease, the improvements would go with the building does not alter the relevant material aspect that during the duration of the lease the assessee continued to remain the sole owner of the improvements."

A somewhat similar view was held by the High Court of Bombay in Commissioner of Income Tax, Poona v. Alpana Talkies (1983) 139 I.T.R. 1055, while interpreting similar provisions of the law. In Additional Commissioner of Income Tax, Bihar v. Lawlys Enterprises (P) Ltd. (1975) 100 I.T.R. 369, the question once again before the Court was as to the entitlement of the assessee to depreciation on account of additions and alterations made to a building to be handed over to the lessor after expiry of the lease. It was held that, according to the terms of lease, the assessee had to remove the additions before handing back possession of the building at the end of the lease, and, therefore, the assessee was the owner of the floor in question. It was further held that full ownership for a period does not militate against the concept of ownership in the jurisprudence. It was, therefore, held that the assessee was entitled to depreciation in respect of a part of the building which was owned by it and used for the purpose of his business.

6. Turning to the provisions of section 12(13) of the Income-tax Ordinance, there can hardly be any doubt that the subsection has been couched in unambiguous terms, referring only to the `owner' of a building. We cannot be oblivious of the fact that provisions of a fiscal statute arc to be subjected to strict construction and their scope cannot be enlarged if one adheres to the incontestable principle that fiscal acts must be interpreted for the benefit of the subject rather than the State. However, the question, whether the assessee is the owner of a building, is a pure question of fact, which would depend upon the circumstances of each case. In the present case the terms of the lease agreement dated 1-11-1974 executed between the Administrator Auqaf, Sindh, and the respondent, therefore, requires minute examination. The pertinent provisions of the agreement for the purpose of resolving the present controversy which have been reproduced by the learned Appellate Tribunal in its order, dated 26-9-1984 show that:--

(1) the respondent acquired from the Department of Auqaf leasehold rights of the plot in question over which nine shops and an Islamic Madrassa in Pucca and Katcha construction were already in existence;

(2) the respondent acquired the right to dismantle and demolish the existing structures and to raise a new construction in their place in accordance with the plan approved by the concerned authorities such as the K.M.C. and the KDA.;

(3) the building so constructed, after its completion was to be handed over to the Auqaf Department and the respondent was to secure leasehold rights of the entire building from the Auqaf Department for a period of ten years, renewable by a fresh agreement between the parties;

(4) during the said period, the respondent was to pay a sum of Rs.25,000 annually to the Auqaf Department as rental for the said property;

(5) during the subsistence of the lease, the respondent was given a right to sublet the tenements to tenants and to receive rents or un-adjustable advances from them;

(6) at the expiry of the lease, the respondent was bound to hand over peaceful possession of the building to the Auqaf Department in case the lease was. not extended further.

Admittedly, as has been pointed out earlier, the present proceedings-arose as the Income-tax Officer subjected the non-refundable and non-adjustable advance received by the respondent from its tenants to the tune of Rs.3,02,000 to tax. It is, therefore, clear from the terms of the lease agreement that although the plot of land remained the property of the Auqaf Department, the structures raised thereon became the property of the respondent for ten years or for any extended term under he lease agreement. Except for the fact that the respondent could not sell the property, it held a complete remain over it as it could sublet the structures built on the plot and could receive rents or advances which were non-refundable and non-adjustable. No doubt, according to the terms of the agreement, the respondent was bound to hand over the possession of the structure to the Auqaf Department at the expiry of the term of the lease and apparently it had not been vested with power to take away the superstructure or anything attached to the earth, but short of such authority, the respondent was vested with complete power and authority over the property which can only be enjoyed by its owner. Consequently, in. our view, the lessee was the owner of the structures and was accountable under section 12(13) as owner of the property for any advances received thereby from the tenants over and above the rent payable for the said tenements till such, time as the possession thereof was retained by it. No doubt, as it has been pointed out earlier, reference in subsection (13) of section 12 of the Income-tax Ordinance is clearly to the `owner' of a building, but under the peculiar circumstances enumerated by us, the respondent would be deemed to be the owner of the building during the agreed or extended term of lease. The learned Appellate Tribunal appears to have based its decision purely on the definition of the words "owner" and "ownership" reproduced earlier in this judgment, but the question was not whether the respondent was owner of the property in question but the question which required determination was, whether the respondent in view of the circumstances of the case could be taxed under the aforesaid provisions of the Income-tax Act. The Tribunal appears to have overlooked this fine distinction. The cases, support from which has been sought by Mr. Sirajul Haq, are also distinguishable because, there the question was, whether the assessee could be taxed under section 9 of the Indian Income-tax Act. Under the said section which corresponds with the similar provisions of our own repealed Income-Tax Act, an assessee could be taxed under the head, "Income from house property" on the annual rental value of the property, and the same being a notional income, it was held that the lessee, who only possessed a limited interest in the property, could not be taxed under the said section. The facts of the instant case are, therefore, clearly distinguishable, because, the respondent was charged tax on the income actually received by it.

7. In the result, we are of the view that the learned Appellate Tribunal was not justified in holding that the assessee was not the owner of the building in question.

M.B.A./C-252/.KAppeal accepted.