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Shrigopal Rameshwardas v. Additional Commissioner Of Income Tax, M.P., Bhopal
Factual and Procedural Background
This reference under Section 256(1) of the Income-tax Act, 1961, was made at the instance of the assessee. The referred question asked whether the Tribunal was right in holding that Rs. 29,550 was liable to tax under the head "Capital gains" and was not exempt under Section 54 of the Income-tax Act, 1961.
Facts set out in the opinion: The assessee is a Hindu Undivided Family (HUF) consisting of Radheshyam Agrawal and his two minor sons. Radheshyam had been adopted by Smt. Radhabai (the widow of late Shri Radhakishan Agrawal) by a registered adoption deed dated 11 August 1948; the will of Radhakishan had permitted the widow to make the adoption. House No. 175 at Andherdeo in Jabalpur was owned by the assessee (the HUF) and was being used by Smt. Radhabai as her residence until it was sold by Radheshyam on 25 April 1963 for Rs. 45,000.
Procedural history described in the opinion: In the return for assessment year 1964‑65 (accounting period ending on Diwali 1963) the assessee mentioned the sale and included Rs. 29,550 under "Capital gains". The return (showing income of Rs. 46,203.92) was filed on 11 July 1964. The Income Tax Officer (ITO) rejected the assessee's claim for exemption under Section 54 by order dated 6 September 1968 and assessed Rs. 29,550 as capital gains. On appeal the Assistant Commissioner (AAC) allowed the exemption by order dated 28 January 1970 on the basis that the assessee had constructed and occupied a house in Moballa Corakhpur with effect from 25 April 1963. The Department appealed to the Income-tax Appellate Tribunal, which, by order dated 5 February 1972, rejected the exemption on the ground that Section 54 applied only to an individual and not to a HUF; the Tribunal referred the question of law to this Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 29,550 was liable to tax under the head "Capital gains" and was not exempt under Section 54 of the Income-tax Act, 1961.
- Whether the word "assessee" used in Section 54 of the Income-tax Act, 1961, applies only to a living person (an individual) and does not extend to an artificial juridical person such as a Hindu Undivided Family (HUF) or a partnership firm, having regard to the general definitions in Sections 2(7) and 2(31) of the Act and the context of Section 54.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Calcutta Stock Exchange Association Ltd., In re [1935] 3 ITR 105 (Cal) | Construction of the word "residence" in the proviso to s.9(2) of the Indian I.T. Act, 1922 — held in ordinary meaning as place where a human being eats, drinks and sleeps; proviso applies to dwelling houses of human beings and not fictional persons unless an extended meaning is warranted. | The Court relied on this decision to support the proposition that "residence" and related phrases in Section 54 should ordinarily be read as referring to living persons, and that an extended meaning for fictional persons is not warranted in Section 54. |
| King v. Inhabitants of North Curry (quoted) | Authoritative statement that "residence" ordinarily denotes where an individual eats, drinks and sleeps. | Quoted in the Calcutta Stock Exchange decision and used to reinforce the ordinary meaning of "residence" as applicable to human beings in construing Section 54. |
| De Beers Consolidated Mines Ltd. v. Howe [1906] AC 455 (HL) | Authority that a company can be treated as "residing" for purposes of income‑tax when it "keeps house and does business"; supports an extended meaning of "residence" for corporations in the context of carrying on business. | Recognised by the Court as an instance where an extended meaning has been given, but distinguished on the basis that such extended meaning relates to carrying on business and not to provisions like Section 54. |
| Calcutta Jute Mills Co. Ltd. v. Nicholson [1876] 1 TC 83; Cesena Sulphur Co. Ltd. v. Nicholson [1876] 1 TC 88 | Principle that a company "resides" for tax purposes where its real business is carried on. | Cited (via Calcutta Stock Exchange) to show circumstances in which courts have given an extended meaning to "residence" for fictional persons in the context of business activity; Court used this to delimit the applicability of such extensions to Section 54. |
| Rowji Sojpal v. CIT [1957] 31 ITR 721 (Bom) | Construction of proviso to s.12B of the Indian I.T. Act, 1922: possession "of the assessee or a parent of his" does not include possession by a HUF composed of the assessee and his sons; the provision contemplates exclusive and juridical possession of the assessee or a parent. | The Court treated this decision on a provision similar to Section 54 as supportive of the view that "assessee" in Section 54 refers only to living persons and not to HUFs. |
| K.I. Viswambharan & Brothers v. CIT [1973] 91 ITR 588 (Kerala Full Bench) | Held that the benefit conferred by Section 54 could not be given to a partnership firm, though it is a unit of assessment. | The Court cited this Full Bench decision as indicating that artificial juridical persons (e.g., partnership firms) are not to be treated as included within the scope of "assessee" in Section 54. |
| Kapurchand Shrimal v. TRO [1969] 72 ITR 623 (SC) | Held that a HUF is a distinct taxable entity apart from individual members; manager of HUF cannot be equated with the assessee (HUF) for purposes of arrest/detention in recovery proceedings. | Used by the Court by analogy to support that the "residence" of individual members of a HUF cannot be treated as the "residence" of the HUF for the purposes of Section 54. |
Court's Reasoning and Analysis
The Court's analysis proceeded by focusing on the meaning of the word "assessee" in Section 54 in its statutory context. Section 54 grants exemption where the property "was being used by the assessee or a parent of his mainly for the purpose of his own or the parent's own residence." The Court identified the following interpretive steps explicitly from the opinion:
- Literal and contextual meaning: The words "parent of his" and "his own or the parent's own residence" point to an ordinary‑language understanding of "residence" — the dwelling place of a living person where one ordinarily lives, eats and sleeps. Such language, the Court held, naturally suggests reference to living persons rather than fictional entities.
- Definitions in the Act and contextual limitation: Although the statutory definitions in Sections 2(7) and 2(31) of the Income‑tax Act are broad (defining "assessee" and "person" to include artificial juridical persons such as HUFs and firms), Section 2 contains the saving "unless the context otherwise requires." The Court emphasised that the context in which the defined word occurs must be considered; thus the broad definition does not automatically determine the meaning in every provision.
- Distinction under Section 6: The Court pointed to Section 6 which treats "residence" differently for an individual (dwelling place) and for a HUF/firm/association (place from where affairs are controlled and managed). That difference shows that "residence" for a fictional person is a concept distinct from the ordinary dwelling‑place meaning and is tied to the place of control/management rather than the dwelling of individual members.
- Use of parallel provisions and precedents: The Court examined Sections 22 and 23 (income from house property and computation of annual value) and the earlier case law construing similar words in the 1922 Act. It relied on Calcutta Stock Exchange and associated authorities to confirm that the ordinary meaning of "residence" is that of a human dwelling and that courts have only in specific contexts given an extended meaning to fictional persons — typically when connected with carrying on business.
- Precedential support for limited construction: Decisions such as Rowji Sojpal and K.I. Viswambharan & Brothers were invoked to show that provisions phrased in the manner of "of the assessee or a parent of his" or Section 54's language have been construed to require exclusive or juridical possession/residence of a living person, and that partnership firms or HUFs have been held not entitled to comparable benefits under similar provisions.
- Analogy from Kapurchand Shrimal: The Supreme Court's holding that a HUF is a distinct taxable entity and cannot be equated with its manager was used by analogy to conclude that the "residence" of the individual members of an HUF cannot be treated as the "residence" of the HUF for the purpose of Section 54.
- Conclusion of construction: Taking the ordinary meanings of the significant words in Section 54 together with the contextual indicators and the cited authorities, the Court concluded that the word "assessee" in Section 54 must be read as referring only to living persons/individuals and not to artificial juridical persons such as a HUF.
Holding and Implications
Holding: The referred question is answered in the affirmative — the Tribunal was right; Section 54 of the Income‑tax Act, 1961, applies only to individuals or living persons and not to fictional or artificial juridical persons (such as a HUF).
Direct implications: The decision is in favour of the revenue and against the assessee — the sum of Rs. 29,550 held by the Tribunal to be chargeable to tax as capital gains and not exempt under Section 54. The Court directed that the parties bear their own costs of the reference.
Broader implications: The opinion confines itself to statutory construction of Section 54 and relies on existing authorities to support that construction. The opinion does not discuss broader implications beyond the parties in this reference; it does not purport to set out any novel principle beyond answering the referred question on the proper construction of Section 54 in the circumstances presented.
S. Verma, J.
1. This reference under Section 256(1) of the I.T. Act, 1961, is at the instance of the assessee referring to this court for its decision the following question :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 29,550 was liable to tax under the head 'Capital gains' and was not exempt under Section 54 of the Income-tax Act, 1961 ?"
2. The assessee, a HUF, consists of Radheshyam Agrawal and his two minor sons. Radheshyam Agrawal was adopted by Smt. Radhabai, widow of late Shri Radhakishan Agrawal, on August 11, 1948, by means of a registered adoption deed. Radhakishan Agrawal had executed a will, whereby he had permitted his widow to make the adoption after his death. House No. 175, at Andherdeo in Jabalpur, admittedly, was owned by and was the property of the assessee, i.e., the HUF. Shrimati Radhabai, the adoptive mother of Radheshyam Agrawal, was also a member of the HUF. The said house No. 175 was being used by Smt. Radhabai as her residence until the same was sold by Radheshyam on April 25, 1963, for a sum of Rs. 45,000. In the return of income for the assessment year 1964-65 for which the accounting period ended on Diwali of 1963, the assessee had mentioned the fact of sale of the said house and had included a sum of Rs. 29,550 under the head "Capital gains" on sale of house property subject to further" deduction, if any. The return was filed showing the income of Rs. 46,203.92 on July 11, 1964. At the time of assessment before the ITO, however, the assessee claimed exemption from " Capital gains " on the sale of the house property under Section 54 of the Act. The ITO, by his order dated September 6, 1968, rejected the assessee's claim for exemption under Section 54 of the Act and brought to tax the sum of Rs. 2,9,550 under the head " Capital gains ".
3. The assessee filed an appeal before the AAC. At that stage the assessee had constructed a house in Moballa Corakhpur at Jabalpur, which was occupied with effect from April 25, 1963. On that basis the AAC held that the claim of the assessee for exemption under Section 54 of the Act was justified. He accordingly, deleted the addition of Rs. 29,550 holding it to be exempt from tax by his order dated January 28, 1970.
4. On further appeal by the department to the income-tax Appellate Tribunal, the Tribunal by its order dated February 5, 1972, has rejected the assessee's claim for exemption under Section 54 of the Act on the ground that no exemption could be given to a HUF under Section 54, which provision, it was held, applies only to an individual. On that view the assessee's contention was rejected. The Tribunal, however, felt that the question relating to the proper construction of Section 54 of the Act raises a question of law and accordingly, it has referred the above question for the decision of this court.
5. The real question for our decision is whether the word "assessee" used in Section 54 is applicable only to a living person and not to an artificial juridical person even though, for the purpose of the I.T. Act, the word " assessee " as defined in Section 2(7) of the Act includes every person, who is a "unit of assessment" and the definition of "person" in Section 2(31) of the Act is wide enough to include every artificial juridical person, including a HUF, a partnership firm, etc. In other words, even though for the purpose of the I.T, Act, a HUF or a partnership firm is a "unit of assessment" and for that reason an "assessee" as defined in Section 2(7) of the Act, the question is whether the word " assessee " used in Section 54 has to be construed equally widely. This question is to be answered, naturally, by finding the meaning to be given to the word "assessee" in the context in which it appears in Section 54 of the Act.
6. Section 54 provides for exemption from tax where the property " was being used by the assessee or a parent of his mainly for the purpose of his own or the parent's own residence ". It is in this context that the real meaning of the word " assessee " is to be found out. The use of the words "parent of his" and "his own or the parent's own residence" are significant. The meaning of the word " residence ", as it is understood in ordinary parlance, has also to be borne in mind. " Residence ", ordinarily, means the place where one resides or the dwelling place, i.e., where he ordinarily lives, eats and sleeps, etc. Ordinarily, " residence " is, therefore, associated with a living person. Similarly, it is only a living person or an individual who can have a parent and not a fictional person, e.g., a HUF or a firm. These words used in Section 54, therefore, indicate that giving the ordinary meaning to the words used in the provision, the word "assessee " should normally refer to a living person and not to an artificial juridical person or a fictional person. The question, however, is whether in view of the wide definition of the word " assessee " in the I.T. Act, which includes even a fictional person such as a HUF or a partnership firm, this meaning of the word " assessee " as defined in the Act should be cut down to mean only a living person for the purpose of Section 54 of the Act. It would be useful to remember that Section 2 of the Act, which contains the definitions, expressly says that the words used in the Act are to be construed according to these definitions, " unless the context otherwise requires ". The context in which the defined word occurs has, therefore, to be borne in mind when its meaning has to be found.
7. Section 6 of the I.T. Act, 1961, shows that while the concept of " residence " in the case of an assessee, who is an individual, is the same as conveyed by the word " residence " understood in its ordinary parlance, it is not the same in the case of an " assessee " which is a HUF, firm or other association of persons. According to this provision, in the case of an individual, his residence is determined with reference to his dwelling place, while in the case of a HUF, firm or other association of persons, it is determined with reference to the place from where its affairs are controlled and managed. It is significant that the residence of a HUF, firm or other association of persons, is not to be determined with reference to the dwelling place of the individuals constituting such a fictional person. " Residence " of partners or of individual members of a HUF is immaterial for; the purpose of determining the residence of the firm or the HUF except in so far as such residence affects the control and management of the affairs of the firm or the HUF. (See Kanga and Palkhivala's The Law and Practice of Income-tax, 7th edn., at pp. 187-188).
8. Some other provisions, which may throw light on the problem before us, may now be noticed. Section 22, which deals with " Income from house property ", lays down that the annual value of the said property, of which the assessee is the owner, shall be chargeable to income-tax under the head " Income from house property ", other than such portions of such property as may be occupied by the assessee for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. Section 23 lays down the mode for computing the annual value of any such property for the purpose of Section 22 of the Act. Some words occurring in Section 23 are similar to the significant words in Section 54, indicated earlier. These words in Section 23 are " in the occupation of the owner for the purpose of his own residence". It may be mentioned that Sections 22 and 23 of the I.T. Act, 1961, correspond to Sub-Sections (1) and (2), respectively, of Section 9 of the Indian I.T. Act, 1922. The decision on these provisions of the 1922 act construing these words are, therefore, helpful in the present case.
9. In Calcutta Stock Exchange Association Ltd., In re [1935] 3 ITR 105 (Cal), the word " residence " in the proviso to Sub-section (2) of Section 9 of the Indian I.T. Act, 1922, was construed by the Calcutta High Court in its simple and ordinary meaning signifying the place where a human being eats, drinks and sleeps, etc., and the expression " where the property is in the occupation of the owner for his own residence" in the said proviso was held to apply only to dwelling houses of human beings and not to fictional persons such as limited companies. It was stated as under (p. 110) :
" In my opinion, the word ' residence' in its simple and ordinary meaning signifies the place where a human being eats, drinks and sleeps or where Ms family and servants eat, drink and sleep, and where there is some permanence or continuance of such eating, drinking and sleeping, and the statement of Bayley J. in the case of King v. Inhabitants of North Curry [1825] 4 Bern, and Cress 953 is, in my opinion, an authority for that proposition. In that case, the learned judge said that 'where there is nothing to show that it is used in a more extensive sense, the word " residence " denotes the place where an individual eats, drinks and sleeps, or where his family or his servants eat, drink and sleep'. It is true that in certain circumstances and in certain statutes, a more extended meaning has been given to the word ; for example, it has been held that a limited liability company can ' reside ' for the purpose of income-tax legislation. That was decided by Lord Loreburn in the case of De Beers Consolidated Mines Ltd. v. Howe [1906] AC 455 (HL), wherein it is stated that 'A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. The decisions of Chief Baron Kelly and Baron Huddleston in Calcutta Jute Mitts" Co. Ltd. v. Nicholson [1876] 1 TC 83 and Cesena Sulphur Co. Lid. v. Nichol-son [1876] 1 TC 88, now 30 years ago, involved the principle that a company resides for purposes of income-tax where its real business is carried on.' Moreover, it has been decided, that a company is a person who can reside within the meaning of the word 'reside' as used in the Income-tax Act and other statutes. But, in my opinion, a company can only ' reside' within that extended meaning of the term, when it resides for the purpose of carrying on business and it cannot reside apart from carrying on business. Thus, in both sections 4 and 42 of the Indian Income-tax Act, it is clear that the word ' reside ' is only used in connection with the carrying on of a business and not otherwise.
Now, it is true that the assessee comes within the terms of the proviso to section 9(2) if the extended meaning of the word ' residence', to which I have referred, is given to that word in this particular section. In my opinion, there is no justification for giving to the word 'in this particular section that extended meaning, nor do I think the legislature intended that such an extended meaning should be given to it.
In this connection, it is to be noticed that the word ' own' has been inserted between the words 'his' and 'residence'. I think that the object of inserting that word was to indicate that the phrase applied only to a human person or persons and not to a fictional person, such as a limited liability company."
10. In Rowji Sojpal v. CIT [1957] 31 ITR 721 (Bom), the question related to exemption of property that was "possessed by the assessee or a parent of his" for the purpose of section 12B{1) of the Indian I.T. Act, 1922. Chagla C.J., speaking for the Division Bench, held that " the possession of a HUF composed of the assessee and his sons is not 'possession of the assessee or a parent of his ' within the meaning of the proviso to section 12b of the indian i.t. act and that provision contemplates exclusive and juridical possession of the assessee or a parent of his ". This decision, on a provision similar to Section 54 of the I.T. Act, 1961, with which we are concerned, also supports the view that the word " assessee " used in Section 54 of the I.T. Act, 1961, refers only to living persons and not to fictional or artificial juridical persons also, which may be included within the definition of the word " assessee " contained in Section 2(7) of the Act.
11. A Full Bench of the Kerala High Court in K.I. Viswambharan & Brothers v. CIT [1973] 91 ITR 588 took the view that the benefit conferred by Section 54 of the I.T. Act, 1961, could not be given to a partnership firm, even though it was a unit of assessment for the purpose of the Act. That decision also indicates that fictional or artificial juridical persons are not to be treated as included within the scope of the word " assessee " used in Section 54 of the Act.
12. The decision of their Lordships of the Supreme Court in Kapurchand Shrimal v. TRO [1969] 72 ITR 623 is also helpful for deciding the aforesaid question. The question before their Lordships was whether the manager of a HUF assessed to tax under the I.T. Act, 1961, could be arrested and detained in the course of proceedings for recovery of tax due from the assessee, i.e., the HUF. Their Lordships held that under the I.T. Act, 1961, a HUF is a distinct taxable entity apart from the individual members who constitute that family and on that view it was held that the manager of a HUF could not be equated with the assessee, i.e., HUF, for the purpose of recovery of tax treating him as an assessee in default under the provisions of the Act. On the same analogy, it can be said that the " residence " of the individual members, who constitute the HUF, cannot be treated as " residence " of the " assessee ", where the assessee is a HUF,
13. We have already indicated that the plain and ordinary meaning of the significant words used in Section 54 of the I.T. Act, 1961, indicates that the word " assessee " used in the section, construed in its context, refers only to living persons or individuals and not to fictional or artificial juridical persons. The aforesaid authorities, which throw light on the problem also suggest the same construction. No authority indicating a contrary view has been brought to our notice. Accordingly, we do not find any cogent reason to , take a different view on this question. It must, therefore, be held that the Tribunal was right in holding that Section 54 of the I.T. Act, 1961, applies only to individuals or living persons and not to fictional or artificial juridical persons.
14. As a result of the discussion aforesaid, the question referred to us is answered in the affirmative, in favour of the revenue and against the assessee. However, we direct the parties to, bear their own costs of this reference.
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