By TIOL News Service

KOLKATA, MAY 07, 2015: THE issue before the Bench is - Whether income arising out of a property belonging to joint owners by doctrine of blending, is liable to be treated as 'income from house property' u/s 22 and not income from other sources u/s 56. YES is the answer.

Facts of the case

The assessee is an individual. A residential house situated at Premises No.47, Golf Links, New Delhi was purchased by Sardar Pratap Singh on 16th April, 1958 at a cost of Rs.34,600/-. Thereafter, he died on 29th June, 1968 and the said property devolved on her widow Bhajan Pratap Singh. She also died on 16th September, 1999. Thereafter, assessee and her three sisters being the daughters of the deceased Bhajan Pratap Singh succeeded to the property in equal shares. During the F.Y 2003-2004, the property was sold at a sum of Rs.12 crores, wherein, the share of the assessee in the sale proceeds came to Rs.3 crores. The AO noticed that the concerned property was valued by the registered valuer as at 1st April, 1981 at a sum of Rs.73,60,975/-. Therefore, the share of the assessee worked out to a sum of Rs.18,40,244/-. The AO however, in exercise of power u/s 55A referred the matter to the departmental valuer who valued the property at a sum of Rs.46,62,280/- and thus, the share of the assessee was worked out a sum of Rs.11,65,570/-. The assessee accordingly challenged the competence of the AO to refer the matter to the departmental valuer u/s 55A. On appeal, the Tribunal held that the reference made u/s 55A was incompetent and, therefore, the valuation provided by the assessee on the basis of the valuation made by the registered valuer valuing the share of the assessee at a sum of Rs.18,40,244/- was accepted. During the relevent year, there was one another piece of land belonging jointly in the name of assessee and her husband, upon which a building was constructed. The cost of construction was shared in the ratio of 1/3rd and 2/3rd and the income was proportionately distributed. The AO upon perusal of the same treated such income as 'income from other sources' u/s 56.

Having heard the parties, the High Court held that,

++ the counsel for revenue is correct in submitting that the benefit of cost inflation index should be available to the assessee from the year 1999 when she inherited the property which was in fact the first year of her inheritance. That can certainly be one way of looking at it. But if a harmonious construction is to be given then reference has to be made to the other provisions contained in the Act. Section 49 provides for various circumstances including acquisition by succession, inheritance or devolution. Therefore, the period for which the asset was held by the previous owner, namely, the mother of the assessee can also be included to the period of holding of the property by the assessee. The mother held the property since 1968 as indicated above. Here is, as such, the reason why the assessee in the case before us can be said to have held the property since 1968. In order to ascertain the cost of acquisition to the assessee reference can also be made to Section 55(2)(b)(ii) which reads that where the capital asset became the property of the assessee by any of the modes specified u/s 49, and the capital asset became the property of the previous owner before the 1st April, 1981, it means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st April, 1981, at the option of the assesse. Based on the said provision, the cost of acquisition of capital asset at the option of the assessee is the fair market value of the asset on 1st April, 1981. When that is permissible in law, indexation on the fair market value as on 1st April, 1981 until the date of transfer has to be allowed. Any other interpretation will not only lead to absurd result but shall also cause immense prejudice to the assessee. If the previous owner that is to say the mother had not died and if she herself had sold the property in the year 2003, she would have got the benefit of indexation on the fair market value as at 1st April, 1981;

++ as regards income from house property, it is seen that Section 27 provides an inclusive definition of the expression "owner", but, it is also clear that an inclusive definition is not an exhaustive definition in law. There can be situation where a person can be the owner of the land and another can be the owner of the structure. This is permissible in law because in joint ownership, unity of title is not required. In the present case, the land admittedly belonged to the husband. He has raised the building with the joint funds belonging to himself and his wife. Therefore, one inference which can be drawn is that the land belonging to the husband has been thrown into the common stock of joint property between the husband and the wife. Both of them thus became the joint owners by operation of the doctrine of blending. They admittedly have borne the cost of construction in the ratio of 1/3rd and 2/3rd. Therefore, the income arising out of the property is in fact an income arising out of house property which has to be taxed u/s 22 rather than as an income arising out of other sources u/s 56.

(See 2015-TIOL-1163-HC-KOL-IT)