1993-VIL-165-ITAT-

Equivalent Citation: ITD 048, 439,

Income Tax Appellate Tribunal CALCUTTA

Date: 12.04.1993

PURANMALL NARAYAN PRASAD KEDIA (HUF).

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX

BENCH

Member(s)  : V. DONGZATHANG., R. V. EASWAR.

JUDGMENT

Per Shri R.V. Easwar, Judicial Member---These three appeals are directed against the orders passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. The appellants are the H.U.F., its karta and the son of the karta. The facts and circumstances leading up to the appeals are almost identical, subject to minor variations which are inconsequential. Since the appeals were heard together they are disposed of by a common order.

2. The assessees in the appeals had entered into separate documents styled as 'lease deeds' with M/s. Bharat Earthmovers Limited (BEML) a Government of India undertaking. These deeds were registered. Before discussing the details of the deed in detail, it will be sufficient at this juncture to state that the deeds were for the lease of 3 flats in Dover Lane, Calcutta, in favour of BEML. The leases were for 99 years. A monthly rent was reserved in the lease deeds. BEML had to pay a substantial sum to each of the lessors (assessees) as advance which was to be adjusted against the rent. The lessee, BEML, had an option to purchase the flats for the payment of a small amount at the termination of the lease. There were the other usual clauses generally found in lease deeds safeguarding the respective interests of both lessors and lessee. The lessee was put in possession of the flats. The flats, as per one of the terms of the lease deeds, were to be used for residential purposes only.

3. In the returns filed by the appellants, the rental income for the year under consideration was offered for tax and the returns were accepted by the Assessing Officer under section 143(1) of the Act.

4. The CIT thereafter initiated proceedings under section 263 for revising the assessments. In his opinion, the acceptance of the returns without scrutiny under section 143(1) was erroneous and prejudicial to the interests of the Revenue. He took the view, on an examination of the record, that the documents styled as lease deeds were in fact documents for the sale of the flats to BEML, that the advance paid by BEML represented the consideration for the sale and therefore the assessees were liable to tax on capital gains. Inasmuch as the Income-tax Officer had failed to bring to tax such capital gains, there was under-assessment which was prejudicial to the interests of the Revenue, according to the CIT. He sought to support his conclusion by relying on the McDowell doctrine (154 ITR 148).

5. The substance of the arguments of Mr. Singh, the ld. counsel for the appellants, is (i) that the CIT has no jurisdiction to invoke the provisions of section 263, and (ii) that the documents in question are in fact and law what they purport to be viz., lease deeds, and cannot be construed as sale deeds. Mr. Lahiri, for the Revenue, besides supporting the orders of the CIT on the ground that the ITO had not conducted any enquiry into the matter which involved substantial issues, contended that a reading of the documents as a whole points out to the conclusion that the parties have, by a drafting device, sought to pass off what in reality is a sale of the flats as a lease of the flats. He stressed on three aspects, which, according to him were clinching : (a) the duration of the lease (99 years), (b) the substantial amount paid as advance which approximates to the value of the flats, and (c) the option given to the lessee (BEML) to purchase the flat for a paltry sum on the termination of the lease.

6. Elaborating his first point, Mr. Singh drew our attention to (i) Instruction No. 1617, dated 18-5-1985, extracted from 38th report of the Public Accounts Committee (1985-86) at pp. 88 and 89 at para 438A, sub-para 3 thereof, and (ii) Circular No. 176 in F. No. RA/1/86-87/DIT issued by the Directorate of Inspection (Audit), New Delhi on 26-8-1987 to all Commissioners of Income-tax, and submitted that when no sort of checking of the return is envisaged by the provisions of section 143(1) and the CITs are not allowed to take remedial action under section 263 in respect of assessments completed under that provision, it was not open to the CIT in the present case to tamper with the assessments which were also made under section 143(1). We have to accept this contention. The relevant portion of the Instruction No. 1617 is as under :

"438A. Types of assessment to be completed under sub-section (1) and procedure to be followed by income-tax authorities :

1. During the Commissioners' Conference 1985, certain recommendations were made to speed up the disposal of income-tax assessments with the manpower available and to reduce the ever increasing back-log. The recommendations made in this Conference have been examined by the Board and I am directed to say that in supersession of all existing instructions on the subject, the following procedure will now be adopted :

2. Assessments in the following types of cases will be completed under section 143(1) on the basis of the returns after linking them with the assessment records :

--- All cases, other than company and trust cases with returned income/loss up to Rs. 1 lakh.

--- Company cases with returned income/loss up to Rs. 25,000 and paid-up capital not exceeding Rs. 5,00,000. However, the first assessment in all new company cases will be a scrutiny assessment.

--- All trust cases and cases of charitable institutions having income below Rs. 1 lakh before applying the provisions of section 11, provided the corpus of the trust does not exceed Rs. 5 lakhs. However, the first assessment in all trust cases will be a scrutiny assessment.

3. In the above cases, the arithmetical accuracy of computation of total income and taxes will be ensured and liability for penalty, interest, compulsory deposit, etc., if any, will be checked. No other checking of any sort will be necessary. All pending assessments in such cases will also be completed in the same manner along with the current assessments.

4. However, cases assigned to Inspecting Assistant Commissioners (Assessment), Central Circles, Special Investigation Circles, Special Circles, search and seizure cases, cases re-opened under section 147 and those selected for scrutiny on a random sample basis, etc., will not come under the purview of this scheme."

The rationale behind the Board's view that no action can be taken under section 263 against assessments made under section 143(1) is elaborated in the Circular cited above which is as below :

                                       "TAX MONITOR
                                        (April 1989)
                                   (Page No. 6.76 - 6.77)
                                      CIRCULAR No. 176
                                    F. No. RA/1/86187/DIT
                         DIRECTORATE OF INSPECTION (INCOME-TAX & AUDIT)
                            4th Floor, Mayur Bhawan, New Delhi-110001
                                                                        26th August, 1987
  All Commissioners of Income-tax
  Sub :   Summary Assessment Scheme --- Scope of remedial action Clarification regarding
         This Directorate had received several references from different Commissioners seeking
guidance as to whether remedial action under section 263 could be taken in cases completed
under 'Summary Assessment Scheme' where glaring and apparent mistakes in computation of income
have been detected resulting in substantial loss of revenue. For instance, CIT Poona had cited 
a case where a partnership firm had claimed a wrong deduction of Rs. 2.34 lakhs in respect of 
medical expenses on the treatment of partner. In another case a totally incorrect deduction in 
respect of investment allowance was claimed by a firm and allowed under section 143(1). On a 
reference made by the Directorate to the Board seeking clarification as to whether provision of 
section 263 should be invoked in such cases the Member (R & A) has observed as under :
         'No remedial action is necessary in summary assessment cases, as the revenue loss if any 
is consciously suffered by the Government to utilise resources for scrutiny and investigations 
of larger cases. In such cases, CIT should only inform Audit that the cases are completed under 
the Summary Assessment Scheme.'
         The above observations of the Member (R & A) reflect the views of the Board on the 
subject and are being brought to the notice of all the Commissioners of Income-tax for their 
information and guidance.
                                                                    Yours faithfully,
                                                                   Sd/-- V.K. Sachdeva
                                                                 Director of Inspection (Audit)
                                                                        New Delhi."

It is therefore clear that the Government is prepared to suffer the loss of revenue by making summary assessments under section 143(1) on the ground that the time and effort involved in unearthing the loss is not commensurate with the benefit likely to be obtained and they may be better channelised in scrutiny of cases involving larger revenue. A monetary limit of Rs. 1 lakh has therefore been fixed and returns showing income or loss up to that limit will be accepted under section 143(1). In view of the circular, which contains the view of the Board on the matter, the proceedings under section 263 must be held to be without jurisdiction. Mr. Lahiri contended that the circular was not binding on the CIT. We do not see how such a contention can be countenanced. The circular expressly states that the observations of the Member (R & A) on the question of taking remedial action under section 263 against assessments made under section 143(1) "reflect the views of the Board on the subject". If that is the view of the Board, surely it cannot be said that the CIT is not bound by the view. The CIT is an income-tax authority under section 116 of the Act bound by the orders, instructions and directions issued by the Board for the proper administration of the Act, under section 119 of the Act. That section also makes it mandatory for the income-tax authorities to observe and follow such instructions. It is therefore beyond question that such instructions have binding effect and the taxpayer is entitled to enforce their application in his favour (Pl. see cases of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 (SC), (ii) in the case of Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC), and (iii) in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC).

7. Mr. Lahiri drew our attention to the decision of the Rajasthan High Court in the case of Kanhaiyalal v. CIT [1982] 136 ITR 243. We have gone through the same. The observations of the High Court at page 250 of the report show that the circular and the instructions cited and relied on before us were not before the High Court. The High Court did not therefore have occasion to adjudicate upon their applicability to the question posed before it for decision. That decision is therefore not helpful to the revenue.

8. The CIT has also held that the Income-tax Officer should not have completed the assessments under the summary assessment procedure whereunder returns with income/loss up to Rs. 1 lakh will be accepted and finalised under section 143(1) as there was no scope for any investigation or enquiry. This view is opposed to the instructions extracted above by which ITOs have been directed to accept such returns. By completing the assessments of the appellants under section 143(1) the Income-tax Officer had only followed the instructions of the Board to the letter and cannot be found fault with for having done so. In the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229. The Calcutta High Court held that the Income-tax Officer cannot be said to have committed an error if he has followed an order of the Tribunal. The true ratio or principle of the decision is that whenever there is a decision of a higher or superior authority, the subordinate authorities are bound to follow the same. In the present case, the CIT could not have possibly entertained the view that the assessments completed under section 143(1) were erroneous and prejudicial to the interests of the revenue merely because they were so completed as per the Board's instructions.

9. We now proceed to a consideration of the question as to whether the documents executed by the parties in the present case are documents conferring the rights of a lessee on BEML or are documents by which the property in the flats can be said to have been transferred to BEML for a price so as to constitute BEML the absolute owner of the flats. The answer to the questions involves an examination of the terms and conditions of the documents from which the intention of the parties can be gathered. We may briefly refer to a few authorities on the question of construction of documents. In the case of CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692, the Hon'ble Supreme Court held that in the absence of any suggestion of bad faith or fraud, the taxing statute has to be applied in consonance with the legal rights of the parties to the transactions and when the transaction is embodied in a document, the liability to tax depends upon the meaning and context of the language used in accordance with the ordinary rules of construction. In the case of Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613, the Hon'ble Supreme Court held that in ascertaining the legal effect of a transaction, the Court should in the first instance seek to ascertain the intention of the parties and if ambiguous expressions are used in the document the Court should normally adopt that interpretation which upholds the deed, if parties thereto have acted on the assumption of its validity. In the case of CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66, the Hon'ble Supreme Court held that the Court has to look to the substance or essence of the document rather than to its form and that a party cannot escape the consequences of law merely by describing the document in a particular form though in substance it may be a different transaction. In the case of CIT v. B.M. Kharwar [1969] 72 ITR 603, Hon'ble Justice Shah, speaking for the Supreme Court, cautioned that the legal effect of a transaction cannot be displaced by probing into the substance of the transaction and that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the 'substance' of the matter. Bearing these principles in mind, we may take a look at the documents in question. Any suggestion of bad faith or lack of bona fide would be preposterous, if regard is had to the fact that one of the parties to the transaction is a Government of India undertaking. It cannot certainly be suggested that BEML was prevailed upon to be party to a transaction by which the assessees have sought to describe the document as one granting a lease of the flats, when in reality it confers rights of absolute ownership on BEML on those flats. It would be impossible for BEML to accept such a course at the suggestion of the appellants since before entering into any transaction likely to have legal overtones there would be a whole lot of formalities to be complied with, approvals to be obtained, clearances to be secured etc. from a hierarchy of officials. It would certainly be against the interests of BEML to describe the transaction as a lease in the documents if it had really obtained full rights of ownership on the flats. It is difficult to imagine that an undertaking of the Government of India would be persuaded to take such a risky step. In this background, we may examine the documents in question. The appellants have granted a lease of the flats for a period of 99 years. It is not a perpetual lease as made out by the CIT. A perpetual lease has to be granted either expressly or by a presumed grant. There must be words which suffice themselves to import permanency of the lease. But a lease where the duration is fixed --- however long the duration may be --- is not a perpetual lease. Duration or the term or the period of a lease is an essential element under section 105 of the Transfer of Property Act, 1882. In the present appeals, the parties have agreed that the lease shall be for a period of 99 years. The other elements of a lease, viz., the parties thereto, the subject-matter thereof, the transfer of the right to enjoy the flats for a period of 99 years and the consideration for transfer are all present in the case. The monthly rent reserved in the document is the consideration for the transfer of the right to enjoy the property. It has not been suggested that the monthly rent fixed is too low and did not reflect the market rent. Even if it were so, that may only entitle the taxing authorities to enhance the annual let value while computing the income from property. It was however said that the advance given by BEML is the price for the flats, since it approximates to the market value of the flats at the relevant time. But clause (K) states that the advance will not bear interest, that the advance is towards payment of rent and that it is to be adjusted against the monthly rent as and when the same falls due. This is further made clear in clause II(2). Therefore, the view of the CIT that the advance must be taken to represent the market price for the flat and therefore the sale consideration cannot be accepted. Clause II(7) lists out the various duties and responsibilities of the lessee (BEML). The lessee is to use the flats for residential purposes only. Previous consent of the lessor is required if the purpose is to be changed. The lessee shall permit the lessor or his agents or workmen access to the flat for inspection of the condition of the flat or to carry out any repairs. The lessee is to carry out any repairs at the request of the lessor in writing, within a month thereof. Under clause II(9) the flats are to be used only for the residence of the employees of the BEML. The lessee has no right to demolish the flat or any part thereof. The aforementioned conditions are inconsistent with the position that BEML is the owner of the flats. Again, provision has been made for payment of rents and taxes respecting the flats by BEML if the appellants do not pay the same; BEML may, on such payment, recover the same from the lessors. It is therefore clear from a reading of the documents in question as a whole that they contain a transfer of the right to enjoy the flats in favour of BEML within the meaning of section 105 of the Transfer of Property Act. The documents contain all the essential ingredients of a lease and have rightly been described as 'lease deeds'. There is no transfer of ownership of the three flats in favour of BEML so that the transaction embodied in the documents could be described as 'sale' within the meaning of section 54 of the aforesaid Act.

10. Both the CIT and Mr. Lahiri relied heavily on the presence of a term in the lease deed conferring an option to BEML to purchase the flats for a paltry sum (Rs. 5,000) on the termination of the lease. If anything, the presence of this clause itself shows that the documents are not sale deeds, since no transfer of ownership is envisaged when they were executed. Further, we cannot decide the nature of the document in question merely on the presence of this term, which is to come into effect after a period of 99 years. This term does not per se convert the document granting lease to one of sale. In the case of Narayan Prasad Vijaivargiya v. CIT [1976] 102 ITR 748, the Calcutta High Court laid down the principle to be followed in such cases. At page 754 of the report, it was held as under :

"Now, the question is whether the rest of the deed must be coloured by or read in the light of the said two provisions or only the provision (ii) stated above. That is the controversy between the parties to the reference. According to the revenue provision (ii) mentioned above is the dominant clause and would govern other clauses of the deed while according to the assessee the rest of the deed must be governed by both the provisions mentioned above. In our view a deed is to be read and construed as a whole and, if possible, effect should be given to all parts thereof. In other words, the general intention is to be collected from the instrument as a whole and that intention should be inferred from the general form of the deed --- See Odger's Construction of Deeds and Statutes, fifth edition, page 55. This would be more so when a deed is to be construed reasonably. The way in which the learned counsel for the revenue wants us to read the deed would amount to deletion of the parties to the deed. Unless a part of a deed is so inconsistent with the rest of it that no effect can be given to it, that part should be read and given effect to while construing a deed. Further, while construing a deed, one should bear in mind the principle of construction as stated in Odger's Construction of Deeds and Statutes, fifth edition, at page 54. It is stated thus :

'The law is anxious to save a deed if possible. This is sometimes expressed in the maxim utnes magis valeat quam pareat. If by any reasonable construction the intention of the parties can be arrived at and that intention carried out consistently with the rules of law, the court will take that course'."

Applying these principles, it cannot be stated that the general intention of the parties to the documents in the present case is to make an outright sale of the flats; it is only to grant and take a lease of those flats for 99 years.

11. The conduct of the parties to the documents also shows that they have intended the documents to be only granting lease of the flats and that they have not considered them as documents transferring the title and ownership in the flats to BEML. This will be clear from the papers filed in pages 83 to 116 of the paper book. From these papers, it appears that in response to summons issued by the CIT in the course of the proceedings under section 263, BEML had furnished certain details. A parawise reply to the points raised by the CIT appears at pp. 107 and 108. The reply by BEML to the first point is as below :

"We have taken on long lease of 99 years two flats of 1700 sq. ft. as also one flat of 2093 sq. ft. (approx.) at Rs. 400 per sq. ft. along with car parking/servant quarters for each flat at an additional lump sum price of Rs. 20,000 as per our CMD's approval vide Note No. MDS/011/Cal/135 dated 1-2-1983. The Lease Deeds entered into between the Lessors and BEML have already been furnished to Income-tax Officer during April 1984. After the expiry of lease period of 99 years, we are entitled to exercise our option to purchase the flats from the lessors at or for a lump sum amount of Rs. 5,000 in such condition as will be existing at that time. The terms and conditions of the lease deed clearly shows that this is a transaction of a perpetual lease of 99 years and not a 'Sale' absolute. It is also confirmed that the Lessors are the legal owners of this immovable property."

The above reply makes it clear that BEML, whom the CIT considers to have purchased the flats outright and not as mere lessee of the flats, does not think so. It has confirmed that the lessors are the legal owners of the flats and there was no sale of the flats in its favour.

12. The ld. Departmental Representative referred to the decision of the Hon'ble Supreme Court in the case of R.K. Palshikar (HUF) v. CIT [1988] 172 ITR 311 and submitted that the lease of the flats gives rise to liability to tax on capital gains. That decision is however distinguishable. In the case before the Hon'ble Supreme Court, the plots were leased out for 99 years and the assessee received a salami or premium for parting with the rights of the possession and enjoyment of the property. In the present case, however, there is no salami or premium received by the appellant for parting with the possession or enjoyment of the property. What was received by the assessee, was only advance rent which was to be adjusted against the monthly rent reserved by the document. There is a distinction between premium or salami on the one hand and rent on the other hand. This distinction has been brought out by the Hon'ble Supreme Court in the case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422. At page 425 of the report, the Supreme Court after referring to section 105 of the Transfer of Property Act held as under :

"The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties."

In the present appeals, the advance rent paid by BEML to the appellant, under the terms of the Lease Deed, is to be adjusted against the monthly rent, as noticed by us earlier. Therefore, the decision of the Hon'ble Supreme Court in the case of R.K. Palshikar (HUF) has no application to the facts of the present case. It may also be noticed that in Lachmandas Bansilal Rathod v. Zumberlal Surajmal Gandhi AIR 1974 Bom. 115, the Bombay High Court has held that the expression "Lease" in section 105 of the Transfer of Property Act covers a lease accompanied by payment of advance rent. Therefore, there can be no doubt that the documents in question in the appeals before us are documents granting lease hold rights in favour of BEML and not documents of sale.

13. The ld. counsel for the assessee also referred to the plaint filed by BEML in Suit No. 87 of 1989 against one of the appellants in the present appeals. The plaint appears at page 90 of the Paper Book. In the plaint, the claim of BEML is that it is in occupation of the flats as lessee under Registered Lease Deed dated 20-6-1983, that it had paid an advance of Rs. 7,03,296 being advance rent for the flat @ Rs. 592 p.m., that the Defendants (assessee in the appeals) cannot by notice dated 23-10-1989 put an end to the tenancy and stop supply of electricity, generator facility, use of lifts, supply of water and other benefits to which BEML was entitled to under the documents of lease. The Plaintiff (BEML) has prayed for a declaration that the appellants had no right to terminate the lease and for a perpetual injunction restraining the defendants from disturbing the peaceful possession of BEML under the Lease Deed. Nowhere in the plaint as BEML alleged that it is the owner of the flats in question and therefore the assessee have no right to put an end to the tenancy. If, as contended by the CIT, BEML is the owner of the flats, the first allegation in the plaint would naturally be that the assessee had no right to put an end to the so-called tenancy, since there was no tenancy at all as in that case BEML would be occupying the premises as owner of the flats and not as lessee of the flats. That, however, is not the allegation of BEML. Even the notice dated 23-10-1989 issued on behalf of the assessee brings out the nature of the relationship between the BEML and the assessee clearly and it is in response to this notice that BEML filed the suit. Thus, the subsequent conduct of the parties, which can always be looked into for the purpose of ascertaining the true relationship between the assessee and the BEML, also shows that with the relationship between the appellants and BEML is that of landlord and tenant. It is therefore not possible to construe the documents in question as documents conferring full rights of ownership on BEML over the flats at Dover Lane, Calcutta.

14. The CIT has made a reference to the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. We have already noticed that BEML is a Government of India undertaking and it cannot be imputed with the motive of helping the appellants in their pursuit of evading tax. The transaction of lease has been done at arm's length. It is also not possible to construe the documents in question as conferring ownership rights on BEML, for the reasons stated earlier in our order. As held by the Hon'ble Supreme Court in the case of B.M. Kharwar, the legal character of the transaction which is the source of the receipts cannot be ignored by the taxing authorities in their attempt to get at the substance of the matter. The taxing authorities are bound to determine the true legal relation resulting from the transaction. The CIT has taken the view that in strict legal terms, the ownership of the flats may be with the assessee, but he goes on to say that factually and as per the existing laws of tenancy in the State, the lessee cannot be evicted from the flats and, therefore, the transaction is practically a transaction of sale. This view of the CIT is directly opposed to the observation of the Supreme Court in the decision cited above. Similarly, in the case of CWT v. Arvind Narottam [1988] 173 ITR 479, the Supreme Court has held that where the true effect on the construction of the deed is clear, the appeal to discourage tax evasion based on the McDowell doctrine is not a relevant consideration.

15. We are therefore of the considered opinion that the CIT was not justified in taking the view that the assessments made on the appellants under section 143(1) of the Act were erroneous and prejudicial to the interests of revenue. The orders of the CIT are set aside.

16. In the result, the appeals are allowed.

 

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