Beneficial ownership under Income tax Act

[csarengarajan]

'BENEFICIAL OWNERSHIP''- NO MORE A NEW CONCEPT

IN INDIA: A COMMENT ON RECENT SPECIAL BENCH

DECISION OF TRIBUNAL IN CASE OF WTO

V. K.M.MISTRY [1995] 213 ITR 1 (BOM - TRIB.) V.Prabhakar*Special Bench of the Tribunal has held in the case of WTO v. K.M.Mistry [1995(82 TAXMAN 209 (Journal)] 213 ITR 1 (Bom.) that under the Wealth-tax Act, 1957, only the legal owner is liable to be taxed in respect of an immovable asset, even though he had sold away the same, received full consideration and delivered possession.  In this article, the author discusses the concept of legal ownership and beneficial ownership of property, especially with reference to the direct tax views and points out that deemed ownership or beneficial ownership has been recognised under the Wealth-tax Act right from the assessment year 1972-73.  In the author`s view, the Tribunal`s aforementioned decision analyses an error apparent from the record insofar as the legal position is concerned.  The author concludes with the remark that a direct tax is leviable irrespect of an income/property on the person who is the actual beneficiary of such income/property, unless a contrary intention is expressed by the legislature through special provisions.- EDITOR    Introduction 1.  The Tribunal, Bombay, Special Bench, recently held in a case namely, WTO v. K.M.Mistry [1995] 213 ITR 1 that under the Wealth-tax Act, 1957 the legal owner only was assessable to wealth-tax in spite of the fact that he had disposed of the property, received full consideration and also delivered possession.  The Special Bench, in reaching this conclusion, took support from the decision of the Supreme Court in the case of Nawab Sir Mir Osman Ali Khan v. CWT [1996] 162 ITR 888, wherein it was held that under the Wealth-tax Act, a legal owner only is assessable to tax. This legal position, prima facie, is correct in general, but several inroads have been made into the concept of legal (real) ownership and beneficial ownership in various Acts both by the Legislature and the Judiciary from time to time.  The current legal position under the Wealth-tax Act, for and from the assessment year 1972-73, is that the concept of beneficial membership has been recognised to a limited extent, if not fully.  One would like to suggest that on the facts of the above-mentioned case, the assessee is not liable to wealth-tax, even if he was the legal owner.  The following decision is intended to support this proposition.  ____________________ * The author is a practising Advocate.    

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Concept of Ownership  2.1   Priority of right of occupation - The concept of ownership is a bunch of rights which can be split into several parts such as lease, life interest etc.  The mode of acquiring immovable property as initially developed was 'right of occupation' and the MAXIM goes on to say -  ''Qui Prior Est Tempore Potior Est Jure”(He has the better title who was first in point of time).  Since ancient times and by law of nature, it was the priority of occupancy which alone constituted valid title.  This rule however, has been restricted by advancement of civilisation international law and by the civil and exclusive ordinances of every separate state.  In modern times, this doctrine had little practical application except in a rare case. 2.2 Changes brought about by legal codification - This right of 'proper occupancy' concerning the interests in realty underwent a big metamorphosis in the natural course after the advent of monarchy, colonial possessions, constitutions of Sovereign States, etc.  In the beginning of the 17^th century, people started recognising their rights and due to certain radical forces, thoughts of geographical segregation and fragmentation of immovable property have led to codification of various laws.                                                                                                     2.3    Transfer  of  Property  Act,  1882 - Ultimately,  almost  all  States  started  making  laws  to demarcate the rights of persons over immovable property.  Moving in that direction, the British enacted a law on the subject for British India, known as the Transfer of Property Act, 1882, and the same was made applicable even after India won independence in 1947.                        2.4  Other legislations - Rights and liabilities of persons in respect of the immovable property are determined with reference to this enactment in our country.  However, this legislation does not cover certain areas like adverse possession, possessory title, settled possession, etc.  For such matters, one may refer to various other Acts, viz., the Specific Relief Act, the Code of Civil Procedure, 1908, the Limitation Act, etc., for declaration of rights of persons claiming to be the owners through appropriate court of law.                                                                             2.5   Direct Tax laws and ownership - In this background of development, both statutory law and Judge-made law on the concept of ownership issues determining income or wealth arising under the direct tax laws have to be settled.  Moreover, these direct tax laws are only creatures of the Constitutions of various countries developed only in the recent past whereas the rights and liabilities of a person in connection with the property have evolved under various civilisations, Dharmas, laws etc. since ancient times. 2.6   Concept   of   ownership   in   India  -   One   may   briefly   summarise   the

concept of ownership applicable in India after the advent of the British regime on our soil, insofar as it is relevant for the purpose of direct tax legislations.  The Transfer of Property Act clearly stipulates legal ownership of immovable property    which    should    be     evidenced    by    a   legal   title   or   in   other

words,    a    registered      conveyance    deed.      The    Wealth-tax    Act    was   1995]                TAXMAN LITERATURE/GENERAL TOPIC                  211   brought into force from the year 1957 to levy wealth-tax on such properties acquired by title.  Section 2(m) of the Wealth-tax Act spoke of the ''net wealth'' ''belonging to'' an assessee.  The emphasis of this phraseology was analysed by the Supreme Court in the case of Nawab Sir Mir Osman Ali Khan (supra), wherein it was held that only legal ownership is the basis for charge under the Wealth-tax Act.  Under the Income-tax Act, 1961 also, the same principle was made applicable upto the assessment year 1987-88.     2.7  Beneficial ownership recognised in law - There seemed to have a doubt about levying taxes in the hands of such persons who had been already disposed of their properties without executing a deed of conveyance.  To overcome this difficulty, further legislation was made under the Income-tax, Wealth-tax and Gift-tax Acts, recognising beneficial ownership.  It is, therefore, necessary for one to know what this concept of beneficial ownership is.                                There was no concept known as 'equitable estate' recognised in India.  The concept had its origin in common law of England developed by the Courts of Chancery Division.  Authorities for this proposition can be seen (i) J.M.Tagore v. G.M.Tagore [1872] IA Supplement 47; (ii) Webb v. Mach person [1904] ILR 31 Cal 57; and (iii) Chhatra Kumari Devi v. Mohan Bikram Shah AIR 1931 PC 196.                                                                                               

Therefore, till such time as legislation was made in the direct tax laws, the concept of beneficial ownership or equitable estate was not applicable in the Indian context.  Even the legislation for charging income from property (effective from the assessment year 1988-89) covers only those cases where possession is enjoyed and consideration is paid or one becomes a member of a co-operative society, etc., but not areas where a person still enjoys property or has interest in property without any legal title.  For example, a person is in occupation of a property which does not belong to him.  Even when some other person who also does not have title comes to dispossess him, the former has a right to claim his possessory rights known as 'possessory title'.  Sir Subramania Aiyer in the case of Musthapha Saheb v. Santha Pillai ILR [1900] 23 Mad.179 stated succinctly in these words:     

 '' ………….. thus a party ousted by a person who has no better right is, with reference to the person so ousting, entitled to recover by virtue of the possession he had held before the ouster even though that possession was without any title''. (p 182) This was further explained and elaborated by the Supreme Court in Nair Service Society Ltd. v. K.C.Alexander AIR 1968 SC 1165.  Justice Hidayatullah, (as he then was) quoted the said principle with approval and applied a maxim - Adversus extraneous vitiose possessio prodessee solet (prior possession is a good title of ownership against all who cannot show a better).

This doctrine had its origin in time immemorial.

 There  is another concept of adverse possession which may not be strange to us.  If  any   person   is   in   possession   continuously   for   a  period  12  years  (30    212                             TAXMAN – MAGAZINE                            [Vol.82  years in case of Government property) to the exclusion of legal owner and such legal owner does not assert his rights and title, the possessor can obtain a title of declaration through the appropriate court of his possessory right. Still one more concept of 'settled possession' has been recognised by the courts in India, including the Apex Court.  This concept may be phrased as follows: ''Even the possession a trespasser over a considerable length of time may become settled possession in certain circumstances''.  Cases in which this concept was detailed are:            (i)                 Ram Rattan v. State of U.P. AIR 1977 SC 619;(ii)               Krishna Ram Mahale v. Shoba Venkat Rao AIR 1989 SC 2097; and (iii)             B.T.Sakku v. Bangalore Development Authority AIR 1995 Kar. 192 at 208 para 29.         Thus, these cases and other legislations made inroads into the general concept of legal ownership applicable in India which culminated ultimately in recognition of equitable estate or beneficial ownership.  The direct tax laws also recognised the same, though only recently, but the other two concepts discussed above are yet to be considered for tax purposes.          It would be worthwhile to have a quick look at some of the provisions of the Direct Tax laws vis-à-vis legal ownership and beneficial ownership.                                                                    Income-tax Act and concept of ownership 3.1 Income from business/profession - Section 32:  For the purpose of depreciation, legal ownership was necessary up to the assessment year 1987-88; from the assessment year 1988-89 onwards, beneficial ownership is recognised in the 4^th proviso to clause (ii) of sub-section (1), only to a limited extent.                          3.2  Income from property - Section 27: For the purpose of definition of owner of house property, legal ownership was necessary up to the assessment year 1987-88; from the assessment year 1988-89 onwards, beneficial ownership is recognised in clauses (iii), (iiia) and (iiib).             3.3  Capital gains - Section 2(47) and 45: For the purpose of transfer of any capital asset entailing levy of capital gains, legal ownership was necessary up to the assessment year 1987-88; from the assessment year 1988-89 onwards, beneficial ownership is recognised in clauses (v) and (vi) of section 2(47).                                                                                                   3.4  Pre-emptive purchase by Central Government - Section 269 UA(d) and (f): For the purpose of definitions of 'immovable property' and 'transfer', Chapter CC-C is applicable from October 1, 1986 and beneficial ownership is recognised. Wealth-tax Act and concept of ownership         4.1   General   provisions  -  (a) Section 2(e)(2)(iii):  This   section  speaks  of  an 1995]                   TAX LITERATURE/GENERAL TOPIC                          213  interest in property where it is available  for a period  not  exceeding six  years from the date the interest vests in the assessee; it may take into its fold beneficial ownership.  (This provision is inapplicable from the assessment year 1993-94).  (b) Section 2(m): For the purpose of ascertaining one`s net wealth - net of all assets belonging to an assessee - legal ownership was necessary up to the assessment year 1987-88; from the assessment year 1988-89 till 1992-93, beneficial ownership was recognised, corresponding to the amendment made in the Income-tax Act.  (c) Section 2(e)(a): For and from the assessment year 1993-94, the definition of asset specifies only certain enumerated assets.  4.2  Deeming provisions - Section 4(7) - and clause (c) to Explanation thereof - recognised beneficial ownership from the assessment year 1972-73.  In view of the amendments in section 2(m) (applicable from the assessment years 1988-89 to 1992-93), the provisions of section 4(7) become redundant for those years.  Gift-tax Act, 1958 and concept of ownership  5.  Section 2(xxiv) - For the purpose of definition of 'transfer of property', both legal and beneficial ownership was recognised.                                            Section 2(xii) - For the purpose of definition of 'gift', legal ownership was necessary up to the year 1987-88; for and from the assessment year 1988-89, beneficial ownership was recognised at par with the provisions of the Income-tax Act.                                                                  The Andhra Pradesh High Court in the case of G.V.Krishna Rao v. First Addl. GTO [1968] 70 ITR 812 held while interpreting section 2(xii) that a registered conveyance is not necessary even in cases of transfer of immovable property valuing more than Rs.100 under the Gift-tax Act, because may acts and transactions which do not amount to gift under section 123 of the Transfer of Property Act, amount to gift under the Gift-tax Act.  There are decisions of other High Courts to the contrary, but this aspect is not very relevant for us.                                                             Legislative intent    6.  On a close scrutiny of the above-mentioned provisions, it is abundantly clear that in all the different Acts, the meaning of 'ownership' for the purpose of 'transfer' is intended to be different, depending upon the nature of charge.  That does not mean that one cannot apart from the general law of the Transfer of Property Act which takes into its fold only the determination of rights of persons inter se.  Had it been the intention of the Legislature to mean only legal ownership as codified in the Transfer of Property Act to be applied to all the Acts referred to above, separate definitions would not have given in each Act.  It could have simply incorporated the relevant provisions of the Transfer of Property Act in all the Acts, like the incorporation of the definition of 'firm' and  'partner' from the Indian Partnership Act, 1932 into the Income-tax Act.  Thus, one can say with caution that special enactment shall prevail over the general enactment, unless the legislative intention is contrary.                                                     214                               TAXMAN – MAGAZINE                        [Vol.82 Change triggered by Supreme Court`s observation   7.  Unfortunately, some people, especially officers of Court who have a role to play in the administration of justice, mistook the concepts of legal ownership and strictly went by the letter of law, irrespective of the contemporaneous legal position in other statutes.                         Along the lines of judicial dicta, the Legislature also sailed swiftly without mending the laws till the Supreme Court suggested in Nawab Sir Mir Osman Ali Khan`s case (supra) through Justice Sabyasachi Mukherji (as he then was) in these words:                                                      ''…..The concept of reality in implementing a fiscal provision is relevant, and the Legislature in this case has not significantly used the expression 'owner' but used the expression 'belonging to'.  The property in question legally, however, cannot be said to belong to the vendee.  The vendee is in rightful possession only against the vendor.  Speaking for myself, I have deliberated long on the question whether in interpreting the expression 'belonging to' in the Act, we should not import the maxim that 'equity looks upon a thing as done which ought to have been done' and though the conveyance had not been executed in favour of the vendee, and the legal title vested with the vendor, the property should be treated as belonging to the vendee and not to the assessee.  I had occasion to discuss thoroughly this aspect of the matter with my learned brother and since in view of the position that legal title still vests with the assessee and the authorities, we have noted, are preponderantly in favour of the view that the property should be treated as belonging to the assessee in such circumstances, I shall not permit my doubts to prevail upon me to take the view that the property belongs to the vendee and not to the assessee.  I am conscious that it will work some amount of injustice in such a situation because the assessee would be made liable to bear the tax burden in such situations without having the enjoyment of the property in question.  But times perhaps are yet not ripe to transmute equity on this aspect in the interpretation of law - much as I would have personally liked to do that.  As Benjamin Cardozo has said, 'The judge, even when he be free, is not wholly free'.  The judge cannot innovate at pleasure.''  [Emphasis supplied] (p.900) This judgement was rendered on October 21, 1986.  The Parliament took due note of it and amended the direct tax laws immediately by the Finance Act, 1987.                                              Leaving aside this chequered history of 'beneficial ownership', the Wealth-tax Act has contained provisions since April 1, 1972 itself for bringing to tax certain categories of deemed owners which include beneficial owners also to a limited extent.   Keeping this legal position in view, the Special Bench decision of the Tribunal Bombay Bench, in the case of K.M.Mistry (supra) is analysed herein below. Analysis of case before Tribunal 8.1    Facts  of  case  -  The   assessee   in   this   case   owned   1/3^rd   share   of undivided    interest    in   'Bhaktawar   Building'  (a   multi-storeyed   complex)   1995]                TAX LITERATURE/GENERAL TOPIC                 215  which is equivalent to 12 flats.  The assessee disposed of these flats on March 12, 1975 and received full consideration.  The assessment year under consideration was 1980-81 for which the relevant valuation date was March 31, 1980. The assessee, along with other owners, executed a declaration on March 11, 1975 (and lodged for registration with the Sub-Registrar of Assurances of Bombay under S.No.645 of book No.1 on March 14, 1975), submitting the said property to the provisions of the Maharashtra Apartment Ownership Act, 1970 (MAO Act).  This declaration was in pursuance of the provisions of section 2 of the MAO Act.  Because the property involved in this case was a multi-storied complex, the same could be governed by the MAO Act at the option of the flat owners for the purpose of overall administration of the complex.   Before executing a declaration and submitting it to Registrar of Assurance, it is a condition precedent to form an Association of Apartment for flat owners or a society, through which only all the flat owners can submit the property for governance under the MAO Act. On the facts set out by the Tribunal, it is nowhere mentioned as to who purchased the property and what happened in his assessment (if at all he was assessable to wealth-tax).  Once a declaration under the MAO Act was admittedly executed and submitted for registration before the Sub-Registrar of Assurances on March 11, 1975, there should exist a society or AOP and the bye-laws (providing for administration of multistoried complex) of such society or AOP must have been annexed to the declaration as prescribed by the MAO Act.  If that be the case, as a natural corollary, every person who purchases an undivided share of property shall become a member of such society or AOP and then only shall he become a flat owner for the purpose of the MAO Act. This is so because the MAO Act is made applicable only if all the owners submit the property for governance of the Act which was intended to promote the interests of flat owners to avoid certain practical inconvenience faced by owners of such flats.  It was further provided under the MAO Act that all the flat owners together may withdraw a property from the provisions of the MAO Act by an instrument executed to that effect. In the present case, apparently no such withdrawal was ever made by the flat owners.  Therefore, one can come to the conclusion that the provisions of section 2 and 13 of the MAO Act are applicable to every owner and also applicable to subsequent purchasers who can purchase flats only subject to both the declarations presented before the Sub-Registrar and also the bye-laws of the society or AOP in which he/she shall become a member. 8.2     Legal  position – subsequent  purchasers  become  beneficial  owners -  On the   basis   of   this   position,   purchasers   who   possessed   the  flats,   by   an agreement or whatever conveyance, seemed to have become on March, 12, 1975,   which   was   much   earlier   to   the   valuation   date   March   13, 1980, beneficial   owners   and   acquired   equitable   estate   in   the   undivided  share     216                             TAXMAN – MAGAZINE                            [Vol.82  of 'Bhatkawar Building'.  Nobody proceeded on these lines and, without presentation of these facts, one cannot merely say that the Tribunal has not correctly decided the said case.  This is only a different aspect explored from the angle of beneficial ownership as incorporated in the Wealth-tax Act.                                    On the basis of the legal position and statutory requirements of the MAO Act, it could be said that the persons who had purchased the property had become deemed owners by virtue of the provision of section 4(7) of the Wealth-tax Act, which was applicable from the assessment year 1972-73.      

 

Section 4(7) reads:-               "(7) Where the assessee is member of an association of persons, being a co-operative housing society, and a building or a part thereof allotted or leased to him under a house building scheme of the society, the assessee shall, notwithstanding anything contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part shall be included in computing the net wealth of the assessee, and, in determining the value of such building or part, the value of any outstanding instalments of the amount payable under            such scheme by the assessee to the society towards the cost of such building or part and the land appurtenant thereto shall, whether the amount so payable is described as such or in any other manner in such scheme, be deducted as a debt owed by him in relation to such building or part''.    8.3  Deemed ownership recognised in Wealth-tax Act - When deemed ownership has been recognised by the Wealth-tax Act since April, 1971 to cover cases of allottees of flats or purchasers of flats in co-operative housing societies, such persons only shall be assessed to wealth-tax and not the real or legal owner like the one in the present case.                                                                                                                                                                             8.4   Existence of a 'scheme' - A doubt may arise in one`s mind as to whether allotment or purchase should be through a scheme.   The word 'scheme' is nowhere defined in the Wealth-tax Act nor should one confine oneself to schemes normally adopted by Housing Boards.  A scheme, according to the Chambers Concise Dictionary, means - a plan for building operation of various kinds, or the buildings etc., constructed or the area covered (e.g. housing scheme, irrigation scheme).  Generally, these multistoried complexes are developed or built by persons known as 'promoters' with the money of purchasers of flats.  So, such a modus operandi can be termed as a 'self-financing scheme', since these promoters enter into an agreement with a purchaser and mention that the property shall be constructed for him/her along with other members.  Once the property is constructed and handed over to purchasers, they become co-owners for all purposes.  The rights of flat owner under the MAO Act are transferable and heritable.      

 

Therefore, one cannot rule out the existence of a scheme on the facts in the above-mentioned case.  The CBDT also clarified a similar position in Circular No.672, dated December 16, 1993, though for capital gain purposes.                                                  1995                                TAXMAN – MAGAZINE                               217                                                                     8.5  A mistake apparent from record in Tribunal`s order? - If no further material is necessary and all these facts are borne out by the record and considered by the Tribunal while construing the provisions of the MAO Act, one may convince the Bench that non-application of a statutory provision clearly constitutes a mistake apparent from record.  Please see (i) M.K.Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143 (SC); (ii) ITO v. Asok Textiles Ltd. [1961] 41 ITR 732 (SC); (iii) T.Manickavasagam Chettiar v. CIT [1983] 143 ITR 269 (Mad.); (iv) CIT v. Quilon Marine Produce Co. [1986] 157 ITR 448 (Ker.) and (v) Addl. CIT v. India Tin Industries (P.) Ltd. [1987] 166 ITR 454 (Kar.). Conclusion 9.  One may conclude by saying that a direct tax is levied only on the income/property of every individual etc., who should necessarily be the beneficiary of such income/property in the real sense, unless a different intention is expressed by the Legislature through special provisions applicable to any special category of persons like trustees, AOP, BOI, representatives etc.