W.T.AS. NOS. 126(PB) AND 180(PB) OF 1995-96 VS W.T.AS. NOS. 126(PB) AND 180(PB) OF 1995-96
1997 P T D (Trib.) 286
[Income-Tax Appellate Tribunal Pakistan]
Before Fazalur Rehman Khan, Judicial Member and
Abdur Rehman Afridi, Accountant Member
I.T.A; No, 29(PB) of 1996-97, decided on 28/08/1996.
(a) Income Tax Ordinance (XXXI of 1979)----
----S.19(2)...Income from house property---Expression "of which the assessee is the owner" used in S.19(2), Income Tax Ordinance, 1979 is very significant and clearly shows that It is the owner of the land or building, in whose hands its Income is to be taxed.
(b) Income Tax Ordinance (XXXI of 1979)---
---Ss.19(2), 20(1)(f) &83(1)(3)...Transfer of Property Act (IV of 1882), S.58---Mortgage of property---Revocable transfer---Income from mortgaged house property---Taxability--Rental income in case of mortgaged property is to be taxed in the hands of mortgagor/owner.
A mortgage is essentially a revocable transfer and the provisions of subsection (3) of section 83 of the Income Tax Ordinance, 1979 is clear that where the assets remain the property of the transferor, the Income from the same shall be taxed in the hands of the transferor.
From the definition of mortgage as given in section 58, Transfer of Property Act, 1882 it is clear that a mortgage is a transfer of an interest in specific immovable property as security for the repayment of a debt and obviously, the transferor remains the owner of the property and only some interest, i.e. the right to temporary possession, etc. in the property is transferred to the mortgagee in lieu. of mortgage money. Conclusion that in the case of a mortgage, the rental income from the property is to be taxed in the hands of mortgagor/owner is supported by the fact that clause (t) of subsection (1) of section 20 of the Ordinance, allows to the mortgagor/owner an allowance/deduction equal to the interest, if any, paid on the mortgage money.
1991 PTD (Trib.) 847 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss.66-A & 59(1)---Self-Assessment Scheme---Powers of I.A.C. to revise Income Tax Officer's order---Proceedings under Self-Assessment Scheme being under the Income Tax Ordinance, 1979, provisions of S.66-A of the said Ordinance would be attracted.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Powers of I.A.C. to revise Income Tax Officer's order-- Scope ---Held, it was not necessary that the loss alleged to be suffered by the Revenue must be quantified--- What was necessary for the I.A.C. was that if he considered that any order, passed by the Assessing Officer was erroneous in so far as the same was prejudicial to the interests of revenue, he could re open the case.
Abdul Malik Khan, I.T.P. for Appellant.
Yousaf Ghaffar Khan, D.R. for Respondent.
Date of hearing: 25th August, 1996.
ORDER
This appeal is directed against the order, dated 10-6-1996 of the learned Inspecting Additional Commissioner, D.I. Khan Range, D.I. Khan, passed under section 66-A of the Income Tax Ordinance, 1979.
2. The brief facts giving rise to this appeal are that the appellant herein is the wife of Mr. Mir Adam Khan, Advocate, Bannu. In her return for the Assessment year 1992-93, she disclosed income from property at Rs.2,90,000. The return was filed under the Self-Assessment Scheme and was accepted as such. The income was shown to have been derived from Bungalow No. 56-C, 10-Gulmuhar Lane, University Town, Peshawar. During the relevant period, the property was let out to Daccar, an NGO, rendering services to the Afghan Refugees at Peshawar. On examination of the record, the learned IAC noted that the rent agreement with the Daccar had been made by the husband of the assessee and in fact, the property belongs to him. He was, therefore, of the view that the assessment made, in respect of the property-income, in case of the appellant was both erroneous as well as prejudicial to' the interests of Revenue and sought to correct the position under section 66-A of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance). Accordingly a show-cause notice was issued to the appellant. It would be profitable to reproduce the same below:---
"To
Mst. Riasat Begum w/o Mir Adam Khan, Advocate, Rehman Baba Road/Street, Dr. Alaf Khan, Lala Rukh, House No.7, Gali No.2, University Town, Peshawar.
Subject:
NOTICE UNDER SECTION 66-A OF THE INCOME TAX ORDINANCE, 1979---ASSESSMENT YEAR 1992-93.
Please refer to the above.
Examination of your assessment record shows that for the Assessment year 1992-93, you have declared rental income and assessed in your hands while as per agreement made with (Daccar) Peshawar by your husband Mr. Mir Adam Khan (available on record) and rental slip, shows that property Bungalow No.56-C, 10 Gul Mohar Lane, U/Town, Peshawar is owned to your husband.
In view of the above, the rental income assessed for the Assessment year 1992-93 by the Income Tax Officer in your hands is wrong, illegal and prejudicial to the interest of revenue. Therefore, I intend to cancel the assessment for the Assessment year 1992-93.
You are requested to explain as to why assessment for the Assessment year 1992-93 may not be cancelled.
Compliance should be made by 29-2-1996 positively. In case of failure to comply with this notice adverse inference will be drawn.
(Sd.)
Zafar Iqbal,
IAC, I. Tax & W. Tax, D.I. Khan
Range, 1/B, The Mall,
D. I. Khan."
3. The show-cause notice was responded to and in reply, dated 27-2-1996, it was stated that;
"It is submitted that property (Bungalow No.56-C) Gul Mohar Lane, U/Town, Peshawar is mortgaged with possession with me vide Mortgage Deed, dated 5-2-1989. Accordingly my husband Mr. Mir Adam Khan is receiving the rents for the said `property since then on my behalf. (Copy of Mortgage Deed enclosed). Therefore, the assessment for the year 1992-93 is correct.
It may be mentioned further that the ITO, Circle 15, Bannu have also issued notices No. 805, dated 4-2-1996, under section 56 and for filing complete accounts from Assessment year 1993-94 up to 1995-96 in my name as well as in the name of my husband Mr. Mir Adam Khan. As the case is under consideration in the Bannu Circle Office, therefore, I would request you to withhold your action till the case is properly explained to the local ITO, as' simultaneously proceedings will create complications."
4. After examination of the reply of the appellant, the learned IAC concluded that the real owner of the property, in fact, is Mr. Mir Adam Khan who was himself borne as taxpayer on NTN 17-15-0090734 and was also assessable to rental income from this property. According to the learned IACC, the appellant, Mst. Riasat Begum is not in fact the owner of the property and rental income had, therefore, been wrongly assessed in her hands. Accordingly, he cancelled the assessment made in her name and gave directions to the Assessing Officer that proper treatment should be given to this income in the hands of Mr. Mir Adam Khan, Advocate, in accordance with law. According to the appellant, the order passed by the learned IAC is against the law and facts of the case. Hence she has filed the present appeal.
5. We have heard Mr. Abdul Malik, ITP alongwith the husband of the appellant as well as the learned D.R. and have also perused the record.
6. The learned A.R. for the appellant contended that no doubt, Mr. Mir Adam Khan, the husband of the appellant, is the actual owner of the property but during the relevant period, the same was mortgaged with possession to the appellant through a Mortgage-Deed, dated 5-2-1989 and it was the appellant who was receiving the rental income, as such, she has correctly shown the same in her return and the order of the learned IAC is wrong and illegal. He further contended that the provisions of section 66-A of the Ordinance are not attracted to proceedings completed under Self Assessment Scheme and in support of this contention, he relied upon 1991 PTD (Trib.) 847. He further contended that the show-cause notice issued to the appellant was defective on the ground that the same had not quantified the loss allegedly suffered by the Revenue. We are unable to pursuade ourselves to agree with the arguments of the learned A.R. for the appellant. So far as, the first objection of the appellant is concerned, it would be profitable to reproduce here the relevant portion of the unregistered Mortgage-Deed, dated 5-2-1989:---
(1) That the first party has purchased Bungalow/Plot No.56-C, 10-Gul Mohar Lane, U/Town, Peshawar for Rs.300,000 (three lacs only).
(2) That in lieu of the said advance money the first party has mortgaged the said bungalow/property to the second party and had given the possessory and proprietary rights to the second party.
(3) That the rent of the said property will be taken by the second party who is authorised for it.
7. The above relevant portion of the mortgage-deed would show that the deed is defective inasmuch as it does not specifically state as to, iron; whom, the mortgage-money of Rs.3,00,000 was obtained, for which, the property was mortgaged to the appellant. Even, if it is considered that the mortgage money of Rs.3,00,000 was paid by the appellant to her husband. who is the actual owner of the bungalow, even then under section 49 of the Registration Act, 1908, it will not create, declare or assign any right or interest in the bungalow in favour of the appellant on the ground that the deed required compulsory registration under section 17 of the Act but the same has not been registered. Moreover, even if the mortgage is held to be a valid mortgage in favour of the appellant (which is not conceded) even then under section 19 of the Ordinance the rental income from the bungalow is to be taxed in the hands of her husband and under clause (f) of subsection (1) of section 20 of the Ordinance, he is only entitled to an all9wance/deduction equivalent to the amount of interest, if any, paid on the mortgaged money For facility, it would be appropriate to reproduce below the provisions of section 19 and clause (t) of subsection (1) of section 20 of the Ordinance
"S.19. Income from house property.---(1) The annual value of property shall be chargeable under the head income from house property.
(2) For the purposes of subsection (1);
(a) house property means any property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, but does not include any such property (or any portion thereof) which is occupied by the assessee for purposes of any business or profession carried on by him, the profits thereof are chargeable to tax under this Ordinance;
(b) annual value' of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year:
Provided that where the property is let on rent, the annual value shall not be less than the rent payable by the tenant.
(3) Nothing contained in this section shall apply in the case of any such property which is in the occupation of the owner for purposes of his own residence.
20. Deductions. ---(I) In computing the income under the head 'income from house property' the following allowances and deductions shall be made, namely:---
(a)....................
(b)....................
(c)....................
(d)....................
(e)....................
(ee)....................
(f) where the property is subject to mortgage or other capital charge, the amount of interest paid on such mortgage or charge. "
8. In clause (a) of subsection (2) of section 19 of the Ordinance, as reproduced above, the expression, "of which the assessee is the owner", is very significant and clearly shows that it is the owner of the land or building, in whose hands, the income from which is to be taxed. In section 58 of the Transfer of Property Act, 1882, mortgage has been defined as---
"a mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary interest."
9. From the foregoing definition of mortgage, it is clear that a mortgage is a transfer of an interest in specific immovable property as security for the repayment of a debt and obviously, the transferor remains the owner of the property and only some interest, i.e. the right to temporary possession, etc. in the property is transferred to the mortgage in lieu of mortgage money. Our conclusion that in the case of a mortgage, the rental income from the property is to be taxed in the hands of mortgagor/owner is supported by the fact that clause (t) of subsection (1) of section 20 of the Ordinance, as reproduced earlier, allows to the mortgagor/owner an allowance/deduction equal to the interest, if any, paid on the mortgage money. Such provisions like section 19 and section 20 of the Ordinance, also existed in section 9 of the repealed Act of 1922 and in a case reported in (1948) ITR 123; it was held by the Patna High Court that---
"where the property is mortgaged, it is the mortgagor alone and not the mortgagee who can be charged as the owner. Even in the case of a mortgage in English form executed in India, the charge under this section must be on the mortgagor and that the mortgagor is the person liable to tax under this section is clear from the provisions of subsection (1)(iv)."
10. Even section 83 of the Ordinance, has made the matter more clearer, subsection (1) of which says:
"All income arising to any person by virtue of revocable transfer of assets shall be chargeable to tax as the income of the transferor and shall be included in his total income:"
Subsection (3) of the section 83 of the Ordinance further says:
"All income arising by a transfer, whether revocable or not, and whether effected before or after announcement of the Ordinance shall, where the assets remain the property of the transferor be chargeable to tax as income of the transferor and shall be included in his total income."
11. A mortgage is essentially a revocable transfer and the above provisions of subsection (3) is clear that where the assets remain the property of the transferor, the income from the same shall be taxed in the hands of the transferor. In view of the above situation, we are of the considered view that in the case in hand, the rental income from the bungalow is to be taxed in the hands of the husband of the appellant and not the appellant. The first objection, therefore, being without merit is hereby rejected.
12. So far as the second objection of the appellant that the provision of section 66-A of the Ordinance are not attracted to the proceedings under the Self-Assessment Scheme is concerned, it is also without force. Self Assessment Scheme is framed under subsection (1) of section 59 of the Ordinance, as such, the proceedings under it are to be considered as proceedings under the Ordinance and section 66-A of the Ordinance clearly provides that, "the Inspecting Additional Commissioner may call for and examine the record of any proceedings under the Ordinance, and if he considers that any order passed therein by the Deputy Commissioner is erroneous in so far as it is prejudicial to the interests of revenue, he may, after giving the assessee an opportunity of being heard and after making, or causing to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify". The authority relied upon by the learned A.R. for the appellant is distinguishable on the ground that no such issue was involved therein.
13. As far as the third objection of the appellant that the show-cause notice does not quantify the alleged loss to be suffered by the Revenue is concerned, the same also appears to be without force. Under section 66-A of the Ordinance, it is not necessary that the loss alleged to be suffered by the Revenue must be quantified. What is necessary for the IAC is that if he considers that any order passed by an Assessing Officer is erroneous in so far as the same is prejudicial to the interests of Revenue, he can reopen the case. In the case in hand, if the rental income is taxed in the hands of the husband of the appellant, he then had certainly to pay income-tax at a higher rate and there would be surely loss to the Revenue. The third objection is, therefore also rejected.
14. As a result of the above discussions, the appeal of the appellant fails and is hereby dismissed.
M.B.A./274/Trib. Appeal dismissed.