Calcutta H.C : The assessee was not entitled to the deduction of Rs. 46,867 being the interest on debenture loans under s. 24(1) of the IT Act, 1961, in The computation of the assessee’s income from house property

High Court Of Calcutta

Clive Buildings (Calcutta) Ltd. vs. CIT

Sections 23(1), 24, 27(v)

Asst. Year 1971-72

Ajit K. Sengupta & K.M. Yusuf, JJ.

IT Ref. No. 101 of 1979

28th June, 1988

Counsel Appeared

Dr. Pal & Manisha Seal, for the Assessee : H.M. Bhar, for the Revenue

AJIT K. SENGUPTA, J. :

In this reference under s. 256(1) of the IT Act, 1961, the following questions of law have been referred at the instance of the assessee :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was not entitled to the deduction of Rs. 46,867 being the interest on debenture loans under s. 24(1) of the IT Act, 1961, in The computation of the assessee’s income from house property ?

2. Whether, on the facts and in the circumstances of the case and on a correct interpretation of the first proviso to s. 23(1) of the IT Act, 1961, the Tribunal was correct in holding that the deduction on account of municipal tax was allowable only to the extent of Rs. 1,20,909 as claimed by the assessee ? “

The facts relating to the first question are that the assessee owns a house property and derives income by way of rent and service charges from the tenants. In the assessment for the asst. yr. 1971-72, the assessee claimed deduction of a sum of Rs. 46,867 on account of interest on debentures in the computation of its income from house property. This deduction was claimed under s. 24(1)(iv) of the Act. The ITO disallowed the claim on the ground that the charge created under the trust deed dt. June 24, 1936, was a capital charge and was created thereunder voluntarily.

In the appeal before the AAC, the assessee challenged, among others, the aforesaid disallowance of deduction of Rs. 46,867 in the computation of the income from house property. The AAC held that the finding of the ITO that the charge was created voluntarily and was a capital charge remained unrebutted. He, accordingly, confirmed the disallowance of the deduction of Rs. 46,867 claimed by the assessee in the computation of the income from house property.

The aforesaid disallowance was challenged in further appeal before the Tribunal. The Tribunal, on a consideration of the facts and circumstances of the case, held that the security or charge was created voluntarily by the assessee and, accordingly, the assessee was not entitled to the deduction claimed under s. 24(1)(iv) of the Act. Accordingly, the disallowance was confirmed.

5. In this case, a charge was sought to be created by the trust deed dt. June 24, 1936. This deed of trust was not produced before the Tribunal. It was contended by the assessee before the Tribunal that the interest on debentures formed part of the secured loan and that, therefore, the interest on the debentures should be treated as an annual charge, not being a charge created by the assessee voluntarily. In support of this contention, the attention of the Tribunal was drawn to Schedule III of the balance sheet as on December 31, 1970, in which the interest on debentures appeared under the sub-heading “Secured loan”.6. Sec. 24(1)(iv) provides that where the property is subject to an annual charge, not being a charge created by the assessee voluntarily or a capital charge, the amount of such charge shall be allowed as deduction in computing the income from house property. “Annual charge”, according to s. 27(iv), means a charge to secure an annual liability. In other words, it means an annual payment payable by the owner of the house property to a third party which is secured by the creation of a charge on the property the income from which is chargeable under the head “Income from house property”. The property must be subject to a valid and legal charge which can be enforced in a Court of law under which the assessee was bound to pay certain amount recurring annually. But an annual charge created by the assessee voluntarily will not qualify for deduction. An annual charge which is a capital charge cannot also be claimed as a deduction. According to s. 27(v), capital charge means a charge to secure the discharge of a liability of a capital nature. As indicated earlier, the charge was created by the trust deed dated June 24, 1936. This fact would indicate that the charge was created voluntarily by the assessee under the said deed. It is not a charge created by operation of law or under a decree passed by the Court or by some other means not attributable to the volition of the assessee. Even if the contention of the assessee that the charge is an annual charge, not being a capital charge so far as liability to pay interest is concerned is accepted, the benefit of s. 24(1)(iv) is not available if the charge is created by the assessee voluntarily. Merely because the charge related to a secured debt, does not make it an involuntary charge. A secured debt means a debt secured by a charge over some property. Admittedly, the debentures in the present case are secured loans. The question is how the security or charge was created in this case, was it created voluntarily, i.e., by the assessee’s own volition or involuntarily, say under a Court decree or by operation of any statute. The onus is on the assessee to prove that the charge was created involuntarily. The assessee has failed to discharge that onus. Even the trust deed which allegedly created the charge was not produced. In that view of the matter, the assessee is not entitled to deduction under s. 24(1)(iv).

For the reasons aforesaid, the first question is answered in the affirmative and in favour of the Revenue. The facts relating to the second question are that the assessee claimed deduction of Rs. 1,20,909 in the determination of the annual value of the property on account of municipal tax. It was the case of the assessee that the entire property known as “Clive Buildings” had been in the occupation of tenants, that the tax levied by the Calcutta Municipal Corporation in respect of the property was Rs. 1,55,938 per year up to the first quarter of 1969-70 that under the terms of the leases with the tenants, it was agreed that the tax liability should be borne in the ratio of 50 : 50 by the assessee and the lessees, that by a notice dt. May 28, 1969, the municipal corporation enhanced, subject to objection, the annual value of the property w.e.f. 1969-70 in the course of the general revision of the valuation of the property and that as a result, the tax payable in respect of the property was enhanced to Rs. 2,41,818 per year. As the assessee agreed to bear half of whatever tax was levied, it claimed deduction of Rs. 1,20,909 being half of the enhanced tax of Rs. 2,41,818 in the computation of its income from house property for the assessment year under consideration under the proviso to s. 23(1). The ITO did not accept the claim of the assessee. He allowed deduction of Rs. 77,969 only, being half of Rs. 1,55,938 which was the tax payable in respect of the property as it stood prior to the enhancement. The AAC also did not accept the assessee’s claim for deduction of Rs. 1,20,909 in the computation of the income from house property. The aforesaid disallowance was disputed, among others, in the further appeal filed by the assessee before the Tribunal.

The Tribunal rejected the contention of the Revenue that the deduction claimed by the assessee could not be allowed, in any case to the extent the liability was not provided for in the accounts of the relevant previous year. The Tribunal also did not accept the contention of the Revenue that there was no fresh levy of tax by the municipal corporation for the year under consideration and that the levy in force prior to the general revision w.e.f. the first quarter of 1969-70 must be deemed to be the levy in force for the year under consideration.

The Tribunal was of the view that although the annual value was revised and the tax was enhanced from the first quarter of 1969-70 “subject to objections” and that pending appeal by the assessee, the municipal corporation collected tax from the assessee for the year under consideration at the rate in force prior to the first quarter of 1969-70, it did not follow that there was no fresh levy of tax at an enhanced rate for the year under consideration.

On a consideration of the provisions of Part IV of Chapter XI of the Calcutta Municipal Act, 1951, the Tribunal held that the notice dt. May 28, 1969, given to the assessee by the municipal corporation was the notice by which the revision of annual value was effected and it amounted to a fresh levy, though “subject to objections”. But the Tribunal did not accept the assessee’s contention that whatever is the tax payable as per the enhanced annual value specified in the municipal corporation’s notice dt. May 28, 1969, must be taken as the tax levied in respect of the property for the purpose of determining the deduction under the proviso to s. 23(1). According to the Tribunal, although the assessee claimed deduction in full as per the notice dt. May 28, 1969, the authorities under the IT Act have to allow deduction under the proviso to s. 23(1) only with reference to the municipal tax levied. The Tribunal held as follows: “The tax due as per the revised annual value shown in the notice dt. May 28, 1969, cannot be considered as the tax levied. Under that notice, the tax was levied provisionally “subject to objections”. When the appeal was finally disposed of by the Special Officer-1, Corporation of Calcutta, the levy under the notice dt. May 28, 1969, merged in the appellate order of the Special Officer-1, Corporation of Calcutta, and the tax payable for the year under consideration as per that appellate order must be taken as the tax levied for that year. Even at the risk of repetition, we want to make it clear that the pendency of the appeal would not have the effect of postponing the liability which had already been incurred in the year under appeal, but the decision in the appeal is determinative of the quantum of tax liability.

As per the decision of the appellate authority, the Special Officer-1, Corporation of Calcutta, the tax levied in respect of the property for the year under consideration was Rs. 1,93,643. The assessee bore the liability to pay the tax levied to the extent of half, i.e., to the extent of Rs. 96,824. We, therefore, hold that under the proviso to s. 23(1), the deduction allowable was Rs. 96,824 but not Rs. 1,20,909 as claimed by the assessee or Rs. 77,696 as allowed by the authorities below. We, accordingly, direct the ITO to modify the assessment by allowing deduction of Rs. 96,824 in the computation of the assessee’s income from house property”.

11. At the hearing, Dr. Pal, appearing for the assessee, contended that the point in issue is now concluded by the decision of the Supreme Court in the case of CIT vs. Dalhousie Properties Ltd. (1984) 42 CTR (SC) 142 : (1984) 149 ITR 708 (SC). There, the respondent-assessee, Dalhousie Properties Limited, owned extensive properties and its income from rents realised was substantial. In the assessment year in question, the assessee claimed deduction of Rs. 1,78,784 which represented the tax levied by the Corporation of Calcutta as a deductible item while computing its income from house property. It appears that the assessee had questioned before the Corporation the extent of liability which had just then been enhanced and on that account had not actually paid the whole of it. This led to a difference of opinion between the Department and the assessee. In course of time, the dispute regarding the assessment of the liability of the assessee under the Act reached the Tribunal. The Tribunal held that the total liability for municipal taxes which the assessee could claim by way of deduction under the proviso to s. 23(1) of the Act in respect of the buildings during the accounting year was Rs. 1,78,784 and that the said amount was to be allowed as a deduction irrespective of the fact that the assessee had raised a dispute about the extent of the liability before the Corporation and that the assessee had not paid the whole of it to the Corporation of Calcutta. Aggrieved by the above decision of the Tribunal, the Department got the following question referred to the High Court under s. 256(1) of the Act : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the full taxes levied by the Corporation of Rs. 1,78,784 should be deducted under s. 23(1) of the IT Act, 1961 ?”

12. The High Court answered the above question in the affirmative and in favour of the assessee. The matter was then taken before the Supreme Court. The Supreme Court held as follows : “The only point canvassed before the High Court and before us is whether the expression borne by the owner would refer to the amount of tax which the owner was liable to pay or the amount of tax which he had actually paid in discharge of the said liability. It is true that the expression ‘borne’ may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability. But we agree with the High Court that in the present context it should be construed as referring to the former, namely, the amount of tax which the owner is liable to discharge as stated in the proviso to s. 23(1) of the Act and not the latter one …. As mentioned earlier, the expression ‘annual value’ is a notional figure and it does not refer to any actual receipt. It is arrived at by deducting the taxes levied by a local authority, for paying which the owner has assumed the responsibility, from the sum for which the property might reasonably be expected to let from year to year. It is reasonable to treat the annual value of a house property as remaining more or less constant during the entire period covered by any given previous year except perhaps where the tax liability itself is modified by the local authority concerned. It cannot keep on changing as and when some payment towards the tax liability imposed by the local authority is made by the assessee during the year. In order to ensure that there is no unwarranted fluctuation in the annual value during the year in question, such actual payment should be eliminated from consideration but only the tax liability imposed by the local authority which the assessee is liable to pay as contemplated by the proviso to s. 23(1) of the Act should be allowed to be deducted under the said proviso. It is not, therefore, necessary that the assessee should have actually paid the amount of tax in question before such deduction is claimed. The position is not also different even where the assessee has disputed the correctness of the levy before the local authorities concerned. A mere expectation of success in the proceedings in which the assessee has disputed such levy does not disentitle him to the statutory deduction on the basis of the levy which is in force.”

13. It, therefore, appears to us that the tax liability borne by the assessee, the owner of the house property, shall be deducted under the proviso to s. 23(1) of the Act. It is not necessary that the assessee should pay the amount in question before such deduction is claimed. The Supreme Court made it clear that even where the assessee has disputed the correctness of the levy before the municipal or local authority, the assessee is entitled to deduction of the amount enhanced.

14. In our view, the Tribunal fell in error in holding that the tax due as per the revised annual value shown in the notice dt. May 28, 1969, cannot be considered as tax levied. As indicated earlier, the tax levied by the Calcutta Municipal Corporation in respect of the property was Rs. 1,55,938 up to the first quarter of 1969-70. The assessee was to bear 50per cent of the said tax. By notice dt. May 28, 1969, the Calcutta Municipal Corporation enhanced the valuation w.e.f. the first quarter of 1969-70 and as a result, the tax payable in respect of the house property was enhanced to Rs. 2,41,818. As the assessee agreed to bear half of whatever tax was levied, it claimed deduction of Rs. 1,20,909 being half of the enhanced tax of Rs. 2,41,818 in the computation of its income from house property. The ITO allowed deduction of Rs. 77,969, being half of Rs. 1,55,938, which was the amount of tax payable prior to the enhancement. The liability, as finally determined by the Special Officer after hearing the objections of the assessee, was Rs. 1,93,643 and, accordingly, the Tribunal allowed deduction of Rs. 96,824, being half of the said liability. The Tribunal did not, however, allow the entire sum of Rs. 1,20,909 as, according to the Tribunal, the appeal was finally disposed of by the Special Officer-I, Corporation of Calcutta. It is, no doubt, true that in view of the judgment of the Supreme Court in Dalhousie Properties Ltd. (supra), the assessee would have been entitled to claim deduction of Rs. 1,20,909 had the appeal still remained undisposed of. It is nobody’s case that the assessee preferred a further appeal against the determination made by the Special Officer-I. Even if the assessee had preferred a further appeal, his liability might have been reduced. It could not be enhanced any further. When the final determination has been made on appeal, the question of allowing the amount shown in the notice of enhancement does not arise.

15. Having regard to the facts and circumstances of the case, we are of the view that the Tribunal was right in allowing deduction to the extent of Rs. 96,824. We, therefore, answer the second question by saying that the Tribunal was right in holding that the deduction on account of municipal tax was allowable to the extent of Rs. 96,824, in the computation of the assessee’s income from house property under s. 23(1) of the IT Act, 1961. There will be no order as to costs.

K. M. YUSUF J.

I agree.

[Citation : 175 ITR 515]

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