Law: Income Tax Act, 1961

Section: 56,63

Income-tax---Heads of Income---Agreement for sale of flats---Assessee given possession of Flats---Agreement providing for a right to re-enter and re-possess flats on breach by assessee of any of the conditions in the agreement---Agreement in substance was one for lease---Rent from flats received by assessee assessable as "income from other sources" and not "income from house property"---No revocable transfer of assets---Section 63 not applicable---Indian Income Tax Act, 1961, Ss.56 & 63---Indian Transfer of Property Act, 1882, S.111. The assessee purchased two flats from the company which had constructed the building. Under the sale agreement, the assessee had to pay to the vendor for perpetuity certain sums towards taxes, outgoings, expenses, municipal levies, cost of insuring the flats and had other obligations such as the requirement of the assessee becoming a member of a co-operative housing society or a limited company, if formed, at the instance of the vendor in the manner laid down in the agreement. Failure of any of the obligations would entitle the vendor to re-enter upon and reassume possession of the flats. No conveyance deed had been executed in respect of either of the flats but the assessee took possession of them and let them out to tenants and received rent from them. The Income-tax Officer assessed this income as "income from other sources". This was confirmed by the Tribunal. On a reference the assessee contended that the assessee was not liable to assessment on the rental income as no sale-deed had been executed or registered in his favour and in the alternative that there had been a revocable transfer of assets: Held, (i) that, in the instant case, there had been a transfer in the nature of lease for valuable consideration. There was no revocable transfer of assets and section 63 of the Income Tax Act, 1961, was not applicable. (ii) that a perusal of the agreement of sale showed that it was not a case of sale, but in true effect and import one of lease with the lessors right of re-entry upon breach of any of the covenants in the agreement. The right which the assessee had purchased was in substance a lease right governed by section 111…

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