G. Santhanam, Accountant Member -
(1.) OF these appeals, one is by the assessee and the other two are by the revenue.
(2.) The assessee is a private limited company. It constructed a multi-storeyed building known as "Chandralok Apartments" and allotted the apartments to its shareholders. The shareholders continued to occupy the apartments constructed by the company. At least one of them has sold the flat allotted to him. However, the Assessing Officer was of the view that as the construction of the multi-storeyed building was done by the company with its own funds on the site purchased by it, the ownership of the building was with the company; even though the company did not derive any rental income from the shareholders who occupied the flats on allotment of such flats to them, the company could be assessed notionally under the head "Income from house property". In this view of the matter, he determined the income from house property as under and brought the same to tax:
The Assessing Officer did not agree with the contention of the assessee that the shareholders were in possession and enjoyment of the property and as one of the objects of the company was to enable the shareholders to have a flat in the metropolitan town, by receiving not only capital but also contributions from them for the construction of the flats and as the company further did not derive any rental income from the shareholders, there was no case for assessing the company on notional rent.
The assessee appealed and relied on the following decisions:
(i) CIT v. H.P. Sharma  122 ITR 675 (Delhi); and
(ii) Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee  122 ITR 700 (SC).
The learned CIT (Appeals) held that these decisions are not applicable to the facts of the case. He did not agree with the alternative contention of the assessee that the annual letting value even on notional basis should not exceed the annual municipal valuation, which was 34 paise per sq. ft. per mensem. He also did not accept the contention of the assessee that, in as much as, some of the shareholders have been assessed to tax under the head "Income from house property" in respect of the some of the flats in the apartments, there was no scope for assessing the company as such in respect of the flats comprised in the building. He did not see any reason to accept the contention of the assessee that in the case of one of the shareholders, by name Sri Vasantrai C. Shah, the annual letting value in respect of the flat occupied by him was fixed at Rs. 6,000 and computing on that basis the total annual letting value of the 28 flats would come only to Rs. 1,50,885. Thus, he confirmed the action of the Assessing Officer in-
(a) assessing the company in respect of the flats allotted to its shareholders;
(b) assessing the company on the annual letting value at the rate of Rs. 2 per sq. ft. per mensem as against Rs. 2.25 per sq. ft. per mensem adopted by the Assessing Officer;
(c) directed the Assessing Officer to grant deduction for the maintenance expenditure under Section 23(1)(c) of the I.T. Act, 1961;
(d) confirmed the levy of interest under Sections 139(8) and 217 of the I.T. Act; and
(e) cancelled the levy of interest under Section 217 in an order passed under Section 154 of the Act.
The department is in appeal against the reduction of the sq ft. rate and granting of deduction of maintenance expenditure and also against cancellation of interest under Section 217. The assessee is in appeal against the assessment made in respect of the "Income from house property" and also against the adoption of higher annual letting value in excess of the municipal valuation and against levy of interest under Section 139(8).
We have heard rival submissions at great length. The assessee relies on the following decisions:
(1) CIT v. The Bijli Cotton Mills Ltd.  23 ITR 278 (All.);
(2) Smt. Kala Rani v. CIT  130 ITR 321 (Punj. & Har.);
(3) Mrs. M.P. Gnanambal v. CIT[1982J 136 ITR 103 (Mad.);
(4) Addl. CIT v. Sahay Properties & Investment Co. (P.) Ltd.  144 ITR 357 (Pat.);
(5) P. Joseph Swaminathan v. CIT  145 ITR 198 (Mad.);
(6) Saiffuddin v. CIT  156 ITR 127 (Raj.);
(7) Nawab Sir Mir Osman Ali Khan v. CWT  162 ITR 888 (SC);
(8) Madgul Udyog v. CIT  184 ITR 484 (Cal.);
(9) Shree Nirmal Commercial Ltd. v. CIT  193 ITR 694 (Bom.).
Sri K.R. Prasad, the learned counsel for the assessee contended that the Finance Act, 1987, has amended Section 27 of the IT Act, 1961 and the Finance Minister in his Budget speech to the Parliament at para. 77 had stated that the amendment proposed was only clarificatory in nature in CIT v. Mussadilal Ram Bharose  165 ITR 14 (SC) and being a clarificatory amendment it is retrospective in operation. He referred to Section 6 of the Finance Act, 1987, which sought to substitute clause [HO to Section 27 of the I.T. Act - 166 ITR 7 (sic). Since it was only a "substitution", it amounted to clarificatory in nature and retrospective in operation and for this proposition he relied on the decision of the Karnataka High Court in the case of K.T. Venkatappa v. K.N. Krishnappa  173 ITR 678. Sri Prasad, the learned counsel for the assessee, alternatively submitted that in case the Tribunal took the view that the assessment in the hands of the company was justified on the notional income from house property, the annual letting value adopted should be scaled down as the annual letting value adopted by the Assessing Officer exceeded the municipal valuation and for this proposition he relied on the following decisions :
(1) CIT v. R. Dalmia  163 ITR 517 (Delhi);
(2) CIT v. R. Dalmia  163 ITR 519 (Delhi);
(3) CIT v. R. Dalmia  163 ITR 524 (Delhi); and
(4) CIT v. M.R. Alagappan  164 ITR 690 (Mad.).
Sri C. Abraham, the learned senior departmental representative on the other hand, submitted that the assessee continued to be the owner of the property and, therefore, the assessment was proper. He relied on the following decisions :
(1) CIT v. Union Land & Building Society (P.) Ltd.  83 ITR 794 (Bom.); and
(2) CIT v. Hans Raj Gupta  137 ITR 195 (Delhi).
As for the relief granted to the assessee in respect of the square feet rate the learned senior departmental representative submitted that such relief was given without any material. He also submitted that, inasmuch as, the assessee was granted deduction for repairs, there was no need to give any further deduction in respect of maintenance charges. The cancellation of interest under Section 217 was not called for and that too in an order under Section 154.
(3.) THUS we have heard rival submissions and perused the records. One of the main objects of the assessee-company, as seen from its Memorandum of Association, is as follows :
To acquire by purchase or otherwise plot or plots of land, develop, build houses, housing flats, shops, offices, accommodation, facilities for recreation and public utilities or similar other facilities for the use and benefits of its members in the first instance.
One of the objects incidental to the attainment of the main object of the company is as follows:
To allot or allocate properties of the company to its members under ownership basis or otherwise and to make rules and regulations on that behalf and for the management of the Company's buildings and other properties.
In the Articles of Association of the assessee-company clause 9 is as follows:
Members who are allotted shares in the above company shall rank in priority for the allotment of flats, apartments, offices, or shops though as between members of equal duration such members holding the larger number of shares shall be given preference and as between members equally qualified, if the circumstances so necessitate their right to allotment shall be determined by lot.
In pursuance of the above-mentioned clauses found in the Memorandum of Association and Articles of Association of the assessee-company, the company obtained share capital, raised loans from its members and also received contribution from the members which were kept in building fund account. The company called (owners) entered into an agreement with Arihant Construction Company called (developers) and the agreement is found at page 28 of the paper book. The task of constructing the multi-storeyed building consisting of apartments, flats, etc., for the benefit of the members of the assessee-company was entrusted to Arihant Construction Company. The latter was allowed to enter into separate agreements with prospective members for the allotment of the said flats/shops/offices/ garages/open parking spaces and collect proportionate amounts from them directly in lump sum or instalments at the rates determined by the company and appropriate the amounts towards the cost of construction of the project. The construction company was obliged to render accounts for the money received by it towards allotment of flats from prospective members. Some of the clauses in the agreement are as follows:
3. The prospective members will not be admitted as members of the Owner Company until the building is completed and prospective members have paid the full contribution to the Developers when due possession of the flat will be delivered to them.
4. On receipt of appropriate intimation from the Developers the Owners shall admit the prospective buyers as members of the Owners Company and shall not withhold consent to such applications without any valid or justifiable reason.
6. The Developers while allotting the flats etc. to the prospective members shall obtain an express undertaking that they shall become members of the Owners Company on completion of the building and abide by the Memorandum and Articles of Association of M/s. Ranka Constructions Pvt. Ltd. and also the Bye-Laws and Regulations framed thereupon. The Developers shall also collect from the prospective members such sum not exceeding Rs. 6,000 (Six thousand only) each towards share money, entrance fee and other expenses incurred for the purpose of the registration of the company and such collections or the unutilised portion thereof, as the case may be, shall be paid over to the Company.
7. Unless and until all the amounts payable as herein provided are received or realised by the Developers the physical as well as the legal possession of the said land described in the schedule hereunder and the building and/or buildings and other structures thereon shall remain with the Developers.
8. It is agreed by and between the Owners and Developers that the Developers shall have the first lien and paramount charges over the said land as well as the building and/or buildings for any sums outstanding in respect of this agreement.
In the above manner, flat owners became members of the company. They have paid the full cost of the flat or space to the developers and have thus obtained possession. Flats cannot be allotted to them unless they agreed to become members of the company. In other words, the flats or the space in the multi-storeyed building stand allotted to the members only and not to any outsiders. The assessee has furnished before us the agreement to sell executed between Sri K.V. Shah as vendor and Smt. Kantidevi and Smt. Sushama M. Jain as vendees. The agreement to sell is dated 11 -4-1985 and is at page 36 of the paper book and the same is as follows:
Whereas Vendor is the absolute owner and in possession of a Flat bearing No. 61, in the VI Floor, Chandraloka Apartments, No. 27-28, V Cross Gandhinagar, Bangalore-9, having purchased the same from its owners Arihant Construction Co., under an agreement dated 18-10-1980.
And whereas the Vendor is in possession and enjoyment of the said flat since the date of purchase.
And whereas the Vendor has decided to sell the aforesaid flat, more fully described in the schedule herein to the purchasers for a consideration of Rs. 2,50,000 (Rupees two lakhs fifty thousand only) free from all encumbrances to which the purchasers have agreed to purchase.
And whereas the parties desire that the terms of this Sale be reduced to writing this agreement is executed on the day, month and year first abovementioned.
NOW THE PARTIES WITNESSETH AS FOLLOWS:
1. The Vendor hereby agrees to convey, transfer and sell the Flat No. 61, VI Floor, No. 27-28, V Cross, Chandraloka Apartments, Gandhinagar, Bangalore, more fully described in the schedule herein to the purchasers for a sum of Rs. 2,50,000 (Rupees two lakhs fifty thousand only) free from all encumbrances.
2. The Vendor agrees to transfer his membership and shares in the Ranka Constructions P. Ltd., the Builders of Chandraloka Apartments pursuant to their agreement between the Vendor and the purchasers.
3. The Vendor hereby acknowledges and reports receipt of the entire sale consideration of Rs. 2,50,000 (Rupees two lakhs fifty thousand only) from the purchasers by means of bank draft issued by the New Bank of India for Rs. 2,50,000 (Rupees two lakhs fifty thousand only) No. 003648/35/85-dated 1-4-1985 in full and final satisfaction. The Vendor has this day put the purchasers in possession of the flat No. 61, VI Floor, Chandraloka Apartments, No. 27-28, V Cross, Gandhinagar, Bangalore, agreed to be sold under this deed.;