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Reference Case No. 168 of 1954, decided on 22nd February 1958.
, S. 2 (4‑A)‑"Capital asset" Any right or interest of assessee in any property comes within defini tion of "capital asset".
‑Ownership and possession‑Posses sion is either actual or constructive.
In respect of immovable property there are two notions, one is the ownership of the property and the other is the possession of the property, ownership consists of a bundle of rights includ ing possession of the property. Possession is both actual and constructive. The former is called physical possession and the latter is called juridical or legal possession.
, S. 12‑B (1), second proviso ‑"Possession" includes juridical and legal possession.
The possession mentioned in the second proviso of section 12‑B of the Income‑tax Act has been used in a juridical and legal sense and not in the sense of actual possession.
The scheme of the Income‑tax Act also shows that wherever the Legislature wanted to convey the meaning of property in the actual possession of the assessee they have used the words "occupa tion and in the use of the assessee".
Rowji Sofal v. Commissioner of Income‑tax Bombay A 1 R, 1957 Bom 294 and I T lit No. 39 of 1954 ref.
--‑ The Income‑tax Appellate Tribunal Pakistan has made this reference under section 66 (1) of the Income‑tax Act at the instance of the Commissioner of Income‑tax, Karachi, Sind and Baluchistan on 23rd October 1954. The following ques tion of law along with the statement of the case was referred to the former Chief Court of Sind for opinion,:‑
"Whether in the second proviso to section 12B (1) of the Income‑tax Act, the word possessed' means actually occupied' or it embraces constructive possession as well".
The dispute between the parties has arisen out of the assess ment made for the year 1948‑49 on 29th September 1951 by the income‑tax Officer, B' Division, Karachi, about the estate of the late Mr. F. E. Dinshaw. In the relevant year of assessment the assessee sold certain house properties of which he was the admitted owner. These properties were in the occupation of the tenants from whom the assessee or his parents were receiving rents for more than seven years. It is also common ground that the pro perties that were sold were properties "the income of which is chargeable under section 9". The Income‑tax Officer concerned came to the conclusion that as the property in question was not physically possessed by the assessee as contemplated under the second proviso of section 12‑B of the Income‑tax Act, the profit earned on the sale of the property should be assessed as income.
On appeal, the Appellate Assistant Commissioner also confirmed the decision of the Income‑tax Officer. The matter was taken to the Income Tax Appellate Tribunal Pakistan, and by an order dated the 16th of February 1954 they came to the conclusion that as the assessee was in possession of the property, the profit earned on the sale of the disputed property cannot be included as income for purposes of assessment of income‑tax. Thereupon the Com missioner of Income‑tax, Karachi made an application under section 66 (1) and it is under these circumstances that the above mentioned question of law has been referred to this Court for opinion.
On a reference to the documents produced on the record it would appear that the dispute in this case relates to the interpreta tion of section 12‑B of the Act, which reads as under:‑
"12‑B. (1) The tax shall be payable by an assessee under the head Capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 and before the 1st day of April 1949 and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place.
"Provided that where the amount of capital gains in the previous year does not exceed fifteen thousand rupees, the tax shall not be payable by the assessee and such amount shall not be included in his total income.
Provided further that the tax shall not be payable by an assessee in respect of any profits or gains arising from the sale, exchange of transfer of a capital asset, being property the income of which is chargeable under section 9 and which has been possessed by the assessee or a parent of his for not less than seven years before the date on which the sale, exchange or transfer took place ; and the amount of such profits or gains shall not be included in his total income;
Provided that . . . . . . . .
Provided that . . . . . . . .
(2)
(3) ..
Under this section an assessee is liable to pay tax under the head "Capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset after the 31st day of March 1946 and before the 1st day of April 1949. The properties in dispute were sold by the assessee from 1947 to 1948 and there fore the present case is covered by section 12‑B (1). The assessee, however, claimed exemption under the second proviso of the said provision of law and this plea found favour with the Income‑tax Appellate Tribunal. A perusal of this proviso wilt show that no tax shall be payable by an assessee in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset, if the income of the property is chargeable under section 9 of the Income‑tax Act, and the subject‑matter of the transfer has been possessed by the assessee or his parents for not less than seven years before the date on which the sale, exchange or transfer took place. The assessee contended that he was possessed of this property either by himself or through his parent for not less than seven years before the date of sale, and therefore any gains or profits arising from such transaction cannot be subjected to income- tax. The Income‑tax Officer and the Appellate Assistant Com missioner were of the view that the phrase "which has been possessed by the assessee" means that the property in dispute must be in the physical possession of the assessee before he can get the advantage of the first proviso of section 12‑B of the Income tax Act. This view was not accepted by the Income‑tax Appellate Tribunal and they were of the opinion that the possession men tioned in the proviso means both actual and constructive posses sion and as the property in dispute was leased out to tenants, the assessee was in constructive possession of the property and therefore he is entitled to take advantage of the above men tioned proviso of section 12‑B.
Therefore the question for determination in this reference is whether the possession of the assessee mentioned in the second proviso of section 12B means the actual physical possession or his legal and constructive possession. In our opinion the view taken by the Income‑tax Appellate Tribunal is perfectly justified and correct. Capital asset has been defined in section 2 (4‑A) of the Act and it means property of any Kind held by an assessee, whether or not connected with his business, profession or vocation. So, if the assessee has any right or interest in any property that will also come within the definition of "Capital asset". Now in respect of immovable property there are two notions, one is the ownership of the property and the other is the possession of the property.
Ownership consists of a bundle of rights including possession of the property. Possession is both actual and constructive. The former is called physical possession and the latter is called juridical or legal possession. If the Legislature wanted that the possession of the capital asset referred to in the second proviso should be the actual or physical possession then they would have used the words "in the occupation of the assessee or in the use of the assessee", but these words have not been used in this proviso. It therefore means that they have used the word "possession" in a wider sense, i.e., both physical and juridical. The scheme of the Income tax Act also shows that wherever the Legislature wanted to convey the meaning of property in the actual possession of the assessee they have used the words "occupation and in the use of the assessee". This will be borne out by a reference to sections 9 and 10 of the Income‑tax Act. In section 9 (1) it is stated :‑
"9 (1). The tax shall be payable by an assessee under the head Income from Property' in respect of the bona fide annual value of property consisting of any building or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him, the profits of which are assessable to tax, subject to the following allowances, namely :‑"
Under section 10 (2) (i) it is stated :‑
"10 (2). Such profits or gains shall be computed after making the following allowances, namely
(i) any rent paid for the premises in which such business, profession or vocation is carried on, provided that when any substantial part of the premises is used as a dwelling‑house by the assessee, the allowance under this clause shall be such sum as the Income‑tax Officer may determine having regard to the pro portional annual value of the part so used".
It is thus quite clear that the word "possession" in section 12‑B has not been used in a limited sense namely the actual possession of the assessee but in a general sense.
The learned counsel for the respondent has frankly conceded that it is not possible to support the view taken by the Department. It was admitted by him that any person having any right in any property can be both in physical possession and in constructive possession and will be entitled to claim the protection of the second proviso of section 12‑B. This view is also supported by two decisions of the Bombay High Court. Mr. Dingomal, the learned counsel for the assessee, has invited our attention to an unreported case known as I T R No. 39 of 1954 decided by a Division Bench of the Bombay High Court on 16th February 1955. In that case the learned Judges of the High Court were also considering the question whether the possession contemplated in the second proviso of section 12‑B is physical possession or juridical possession, and they also came to the conclusion "that an assessee will not be deprived of the exemption under this proviso merely because he was not himself in occupation of the property or the property was not being used by him so long as he was in legal or juridical possession of the property". The learned counsel for the assessee also invited our attention to a decision in Rowji Sojpal v. Commis sioner of Income‑tax Bombay (A I R 1957 Bom. 294). In this case also Chagla, C. J. and Tendolkar, J. have observed :‑
"It is clear that the expression possessed by the assessee used in the consent proviso means possession juristically. The pos session contemplated is a juridical possession and not actual possession".
On a careful consideration of the matter it appears to us that the possession mentioned in the second proviso of section 12‑B of the Income‑tax Act has been used in a juridical and legal Sense and not in the sense of actual possession. We will therefor answer the question in the affirmative. The Department to bear the costs of this reference.
K. M. A. Reference answered.
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