LIQUIDATOR OF MAHAMUDABAD PROPERTIES (P) LTD. versus COMMISSIONER OF INCOME TAX, WEST BENGAL II, CALCUTTA

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• LIQUIDATOR OF MAHAMUDABAD PROPERTIES (P) LTD. v. COMMISSIONER OF INCOME TAX, WEST BENGAL II, CALCUTTA April 9, 1980 [N. L. UNTWALIA AND R. S. PATHAK, JJ.] Income Tax Act, 1961, Sections 22 and 23-Computation of Income frotn house property-Building not in a habita/Jle condition after it was released by Gol·crnment consequent to derequisitioning-Assessee claiming remission in· the computation of income of the entire annual value and also deductions on account of insurance premium and municipal taxes relating to the property- Permissibility of re1nission and deductions claimed-Competency of the High Court to give a direction to tile Appellate Tribunal, enabling the Revenue to tax income from the property, when the Revenue jailed to ask for a refertnce· against Appellate Tribunal's decision-Nature of High Court's polver in a reference case.

The appellant-assessee, in his income tax return for the assesssment year 1962-63 (for which the previous year was the calendar year 1961) r'cited that the annual value of the building derequisitioned by the Govt. on 26-12-1960· was Rs. 1,23,672/-. However on the ground that the building had remained: vacant throughout the previous year, the assessee claimed a remission in the computation of the income of the entire annual value. The assessee als0t cJairned a deduction on account of insurance premium and municipal taxes relating to the property.

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The lncame Tax Officer took the view that ~e property was not in a habitable condition and did not admit of letting and therefore no question e.rose of applying the provisions of the Income Tax Act relating to the com putation of income from property. Accordingly, be held that the annual value as well as the vacancy claim had to be ignored. The assessee appealed to the Appellate Assistant Commissioner who held that although the property ha<L remained vacant, it possessed an aunue.l value and should be considered for assessment. On that view, he a1lo\.ved the deductions claimed by the assessee. In second appeal, the Incon1e Tax Appellate Tribunal favoured the view taken by the Income Tax Officer and e.ccordingly held that the claim to deduc tions made by the assessee must fail. The Tribunal, in other words, affirmed that the property fell outside the scope of s. 22 of the Act and, consequently, satisfied with the order Of denied the deductions. The Revenue appeared reference was. Appellate Tribunal. But, at the instance of the assessee a made to the High Court. The High Court was of the opinion that the Appellate Tribunal had misconceived the la\v in holding that because the property was in a state of disrepair it did not possess an annual value. As regards the assessee's claim to the specified deduction, it held that while the insurance premium paid by it could be allowed, there was no merit in the claim on account of vacancy remission and payments of municipal taxes, Hence the appeal by special leave to this Court.

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Dismissing the appeal, the Court,

HELD : I. Whether the High Court was right in including a direction to the Appellate Tribunal to take into account the annual value of the property

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LIQUIDATOR MAHAMUDABAO PROPERTIES V. C.I.T.

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will depend on the appreciation of the true scope of the reference taken to A the High Court. The question referred to the High Court was rooted In the fundamental submission of the assessee that the property possessed an annual value for the purpose of Section 22 and it was, therefore, entitled to the vacancy remission end other deductions claimed by it. The frame of the question indicates that it has two parts, whether the Appellate Tribunal was right in holding that in computing the income from property the premises

3, Gun Foundry, possessed an annual value and whether the Appellate Tri- a

bunal '\\'as right in disallowing the vacancy remission and other deductions in resoect of that property.

[434C-E]

Unless the property fall within the scope of Section 22 there was no occa- sion for considering the assessec's claim to the deductions. The. High Court also, when considering the reference, examined the question in its bifurcated character. But although bifurcated. the thrust of the question was directed C to the consideration of the deductions claimed by the e.ssessee. Whether the property possessed an annual value was necessary to determine solely for the purpose of considering the claim to deductions. Unless the assessee was in •terested in those deductions it. would not have asked for a finding that the property possessed an annual value. The High Court. wes, therefore, right in examining both parts of the question and in determining whether the pro- perty had an annual value and the deductions claimed were permissible.

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[434E-G]

The High Court had to consider the first part of the question because that was the very case of the assessee throughout from the earliest stage of the proceeding. The need for the determination whether the property has an annual value arises only if it is found that on the tern1s of the statute the assessee is otherwise entitled to the deductions clairned by him. If those deductions are not permissible under the relevant section, no question arises of examin- ing whether the property has 0n annual value. Viewed in that light, the determination of the question whether the property has an annual value faJLq_ into its proper place. [434G-H, 435A]

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2. It is not open to the Revenue to contend that even though the claim to deduction must otherwise fail, the question whether the property has an annual value must still be considered. Court should determine whether Qli property had an annual value as a ques~ tion iOOependent of its admissibility of the deductions, the Revenue should have applied to the Appellate Tribunal for a reference to the It did not ask for a reference and, therefore it is High Court accordingly. not entitled to raise that contention now.

finding on the

If the Revenue intended that the High F

[435A-C]

falls within

However, the only way of looking o.t the case, is whether on the assump- the scope ot . tion that the property has an annual value >1nd Section 22, the assessee is entitled to the deductions under Sections 23 and If he is entitled to any of those deductions, then in order to establish 24. the foundation in which the deductions can be rooted it will be necessary to determine whether the property possesses an annual value. That is what the High Court did, and the observations made by it must be construed accor dingly. runs to a far smaller figure than the annual value property attributable to In that event the consequence will be a net annual value of the property. the consequence notwithstanding that some significance.

It may be that the deduction to which the assessee is found entitled H

~-\nd this will be

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[1980] 3 s.c.11..

the reference is at the assessee.'s instance and no reference at all has been brought by the Revenue. The result appears anomalous, but aft.er all it is for the assessee to choose whether or not he wishes to take a reference to the High Court, and if he is found entitled to even one of the 4eductions claimed by him and effect cannot be given to that claim without the annual value of the property being computed he has only to thank himself.

[435C,F]

jurisdiction

is advisory and no more. The High Court

3. The High Court, on a reference before it, does not act as a court of is appeal. The empowered to decide the question of law referred to it, and to return its answer to the Appellate Tribunal. .The Appellate Tribunal then takes up the appeal and disposes it of conform.ably with the answer returned by the High Court. It is not part of the jurisdiction of the High Court to interlere and modify or set aside the appellate order of the Tribunal.

[435F-H]

4. The proviso to Section 23(1) of the Income Tax Act, 1961 can be availed of only if the property It would seem so on the language of the proviso. The assessee does not rest his claim Jn the circumstances, the High Court is on any other provision of law. right in denying the claim in respect of municipal taxes.

is in the occupation of a tenant.

[436G-H]

5. The provisions of the Income-Tax Act relating to the charge on income apply in relation to a specific assessment year end the provisions of the Act providing for the computation of the chargeable income (which includes taking into account permissible deductions in the computation of the income charge able under different heads) apply, in the absence of anything to the contrary, in relation to the relevant previous year. The tolal incon1e of the previous year needs to the con1puted, and the different provisions relating to the com· putation o.f income must be read and applied in the context of the facts and circumstances obtaining· during that year, unless the context suggests the con trary. Consequently, \Vhen reading s.24(2)(ix) of the Income Tax Act, 1961 which speaks of property which is let and which \\'as vac;:ant during a part of the year, the Court must read it to mean property which was Jet during the previous year and was vacant during a part of the year. It cannot refer to property which was not let at all during the previous year.

[437D"E]

In the present case, there is no evidence to show that it was ever given out by the assessee that the property was available for letting. The e.ssessee is not entitled to the deductions claimed by it in respect of municipal taxes and a vacancy remission.

[437F]

_(

Maharajadhiraja of Darbhanga. v. Com1nissioner of Income Tax, Bihar and

Orissa, A.I.R. 1931 Patna 223; distinguished.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No._ 2183 of

1972.

Appeal by Special Leave from the Judgment and Order dated 28-7-1970 of the Calcutta High Court in Income Tax Reference No. 45 of 1969.

F. S. Nariman and M. M. Kshatriya for the Appellant.

aind S. T. Desai, K. C. Dua, Miss A. Subhashini for the Respondent

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LIQUIDATOR MAHAMUDABAD PROPERTIES v. c.I.T. (Pathak, J.) 431

S. Chaudhary. D. N." Gupta and T. A. Ramachandran

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Respo'ndent Intervener.

The Judgment of the Coun was delivered by

PATHAK, J.-This appeal by special leave is directed against the judgment of the Calcutta High Court on a question concerning the computation of income from house property under the Act, 1961.

Income-tax a !

The assessee, a private limited company, is !he owner of the property described as 3, Gun Foundry Road. Originally it housed a jute baling press. The property was requisitioned by the West to the asses see on Bengal Government in 19 51. December 26, 1960, after being used for housing refugees. Evidently, the building had not received the care it deserved, for when the assessee resumed possession he found it in a sorry state.

It was released

The assessee filed an income-tax return for the assessment year 1962-63 (for which the previous year was the calendar year 1961), and the return recited that the aunual value of the building was Rs. 1,23,672. However, on the ground that the building had remained vacant throughout the previous year, the assessee claimed a remission in the computation of the iilcome of the entire annual value. The assesisee also claimed a deduction on account of insurance premium and municipal taxes relating to the property.

The Income-tax Officer took the view that the property . was not in a habitable condition and did not admit of letting and therefore ilo question arose of applying the provisions of the Income Tax Act relating to the computation of income from property. Accordingly, he held that the aunual value as well as the vacancy claim had to be ignored. The assessee appealed to the Appellate Assistant Commis sioner, who held that although the property had remained vacant, it possessed an annual value and should h~ considered for assessment. On that view, he allowed the deductions claimed by the assessee. In second appeal, the Income Tax Appellate Tribunal favoured the view taken by the Inoome Tax Officer and accordingly held that the claim to deductions made by the assessee must fail. The Tribunal, in other words, affirmed that the property fell outside the scope of S. 22 of the Act and, consequently, denied the deductions.

The Revenue appeared satisfied with the order of the Appellate Tribunal. But, at the instailce of the assessee, a reference was made to the High Court at Calcutta on the following question :-

"Whether on the facts and in the circumstances of the . case and on the interpretation of sections 22 and 23 of the

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Income-tax Act, 1961 the Tribunal was right in holding that iu computing the income from property the l;lonafide annual value of the property at 3, Gun Foundry Road, Calcutta has not to be taken and in disallowing the vacancy remission and other deductions in respect of the aforesaid property ?"

The High Court was of opinion that

the Appellate Tribunal had misconceived the law in holding that because the property was in a state of disrepair it did not possess an annual value. As regards the assessee's claim to the specified deductions, it held that while the insurance premium paid by there was no merit in the claim on account of vacancy remission and payment of . municipal taxes. Accordingly, the High Court recorded :-

it could be allowed,

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"On the first part of the question we hold that the Tri bunal was wrong in holding that there was no annual value of this property No. 3, Gun Foundary Road and that it was o.utside the scope of section 22 of the Income-tax Act, 1961. We hold and we are of the opinion that this pro perty has an annual value in the facts and circumstan~ of the case and it should be taken into account in the light of the principles and observations we have made above. We therefore set aside that part of the order of the Tribu nal and answer the question accordin&Jy. The answer to this first part of the question is in the negative. The ans wer to the second part of the question folloWIS from the answer to the first part of the question and is that the only deduction in the facts and circumstances of the present reference which the assessee can get is the deduction for insurance premium paid. We hold further on this part of the question that the other deductions, namely, (a) vacancy remission and (b) municipal taxes are not permissible and in the present the assessee is not entitled to claim them reference. We answer the the question second part of accordingly.

The Tribunal, therefore, will dispose of the case confor mably to this judgment and the interpretation of the prin ciples enunciated herein under section 260 of the Income tax Act, 1961."

At the outset a serious controversy arose before us on the point whether the High Court was right in including a direction in its judg ment that the Appellate Tribunal should take into account its finding

LIQUIDATOR MAHAMUDABAD PROPERTIES V. C.I.T. (Pathak, ].) 433

that th" property possessed an annual value. The assessee says that when the Appellate Tribunal had held that the property did not fall within the scope of s. 22, it was for the Revenue, in case it desired tci charge the assessee on income from this property, to apply for a It is urged that the Revenne having ~"forence to the High Court. omi'ted to do so, it was not open to the High Court to make an order enabling the Revenue to tax any income from that property. On behalf of the Revenue, the submission is that inasmuch as the assessee had taken the case in reference to the High Court for an adjudication on the deductions claimed by it the point whether the property pos sessed a·n annual value and its income was chargeable was directly raised by the assessee itself, and therefore, the High Court was right in rendering a decision on this point.

"Income from house property" is one of the heads into which different categories of income included in the total income have been classified. For the purpose of computing "income from house pro perty", a code of provisions is incorporated in ss. 22 to 26 of the Act. S. 22 declares that the annual value of property consisting of the buildings or lands appurtenant thereto assessee, excepting such portions of the property occupied for any business or profession carried on by him of which the profits are chargeable to income tax, shall bo chargeable to income tax as "in come from house property". The annual value is determined after making a deduction on account of municipal taxes. The income from house property is then subject to the deductions set forth in Sec. 24. The deductions are made for th·~ purpose of computing the net figure of the income from property.

in the ownership of

In order to decide whether the High Court was right in including a direction to the Appellate Tribunal to take into account the annual value of the property, it is necessary to apprechtte the true scope of the reference taken to the High Court. The Income Tax Officer bad fo\Jnd that the property, having regard to its condition, was not cap able of being let to tenants and therefore the gross value and the deductions claimed had to b~ iguored. The assessee was aggrieved It must be rememb~red that in its return the assessee by that finding. had indicated that the property possessed an annual value of Rs. 1,23,672 unless the property had an annual value, it believed, it In appeal could not be entitled to the deductions claimed by it. before the Appellate Assistant Commissioner, its· case was that the property could not be ignored for the purposes of the Income-tax Act. The contention was accepted by Appellate Assistant Commis sioner, who held that the annual value of the property could not be

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ignored. and forther that the vacancy remission and other deductions claimed by the assessee were admissible. When the Revenue pro ceeded in appeal to the Appellate Tribunal it urged that the assessee was not entitled to the deduction claimed in respect of the property. The Appellate Tribunal considered the evidence relating to the condi tfon of the building, and was of opinion that the building was not i'n a habitable condition and it could not be said that the property could be reasonably Jet out at any particular annual value. In its opinion, the property fell outside the scope of Section 22 and, therefore, the Income Tax Officer was right in ignoring the property altqgether and in not computing any profit or loss in respect of it. The Appellate Tribunal set aside the order of the Appellate Assistant Commissioner and restored the order of the Income Tax iOlficer. the context of this train of proceedings that the assess·~e now took the case in reference to the High Court. The question referred to the High Court was rooted in the fundamental submission of the assessec that the property possessed an annual value for l!he purpose of Sec tion 22 and it was, t!rerefore, entitled to the vacancy remission and other deductions claiimd by it. The frame of the question indicates that it has two parts, whether the Appellate Tribunal was right in hold ing that in computing the income from property· the premises 3, Gun Foundry, posses9~d an annual value and whether the Appellate Tri bunal was right in disallowing the vacancy remission and other deduc tions in respect of that property. Plainly, unless the property fell within the scope of Section 22 there was no occasion for consideri'ng the assessee's claim to the deductions. The High Court also. when considering the reference, examined the question in its bifurcated character. But although, bifurcated, the thrust of the question was directed to the consideration of the deductions claimed by the assessre. Whether the property possessed an annual value was necessary to determine solely for the purpose of considering the claim to deduc tions. Unless the assessee was interested in those deductions it would not have asked for a finding that the property possessed an annual value. The High Court was, thev~fore, right in examining both parts the property had an of the question and in determining whether annual value and the deductions claimed were permissible. The assessee can have no quarrel with the High Court considering the first part of the question, becaure that was the very case of the assessee throughout from the earliest stage of the proceeding. From what has gone before it is apparent that the determination whether the property has an annual value arises only if it is found that on the terms of the statute the assessee is otherwise entitled to the deduc If those deductions are not permissible under tiom; claimed by him.

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LIQUIDATOR MAHAMUDABAD- PROPERTIES V. C.I.T. (Pathak, J.) 435

the relevant section, no question arises of examining whether the pro perty has an annual value. Viewed in that light, the determination of the question whether the property has an annual value falls into It cannot be contended that even though the claim its proper p\ace. to deductions must otherwise fail, the questiou whether the property has an annual value must still be considered. Such a contention is not ~pen to the Re\•~nue. If the Revenue intended that the High Court should determine whether the property had an annual value as a question independent of its finding on the admissibility of the deductions, the Revenue should have applied to the Appellate Tri bunal for a reference to the High Court accordingly. It did not ask for a reference and, therefore it is not entitled to raise that conten tion now. It seems to us that there is ol:ily one way of looking at the case, and that is Whether on the assumption that the property has an annual value and falls within the scope of Section 22, the If assessee is ~ntitled to the deductions under Sections 23 and 24. he is entitled to any- of those deductions, then in order to establish the foundation in which the deductions can be rooted it will be neces sary to determine whether the property possesses an annual value. That is what the High Court did, and the observations made by it must be construed accordingly. to which the assessee is found entitled runs to a far smaller figure than In that event the annual value property attributable to the p,roperty. the consequence will be a net annual value of some significance. And this will be the consequence notwithstanding that the reference is at the ass>;:s.see's instance and no reference at all has been brought it is by the Revenue. The- result appears a,nomalous, but after all for the assessee to choose whether or not he wishes to take a refer ence to the High Court, and if he is found entitled to even one of 1he deductions claimed by him and effect cannot be given to 1hat clainl without the annual value of the property being computed he ba8 only to thank himself.

It may' be that the deduction

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At the same time, we must point out that the High Court, after holding that the property has an annual value, bas erred in stating that it sets aside that part of the order of the Appellate Tribunal. The High Court, on a reference before it, does not act as a court of appeal. The jurisdiction is advisory and no more. The High .Court is empowered to decide the question of law referred to it, and to return its answer to the Appellate Tribunal. . The AppeHate Tri bunal then takes up the appeal and disposes it of confurmably with It is not part of the juris the answer returned by the High Court. diction of the High Court to interfere and modify or set aside the appellate order of the Tribunal. _ 8-289SCI/80

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It examined

first whether

A~ has been said earlier, the High Court considered both parts of the question referred to it, whether the property possessed an a'nnual value and whether the deductions claimed by the assessee the deductions were were admissible. admissible. It found that the amount of Rs. 689 paid on account of fire insurance premium in respect of the property was deductible from the annual value under s. 24(1)(ii). Regarding the claim under s. 24( 1 )(ix) on account of vacancy remission, it disallowed the deduc tion on the ground that the property was not let during the previous year. The claim to deduction under s. 23 of the municipal taxes paid in respect of the property was also rejected in the view that the muni· cipal taxes could be deducted only if the property was in the occu pation of a tenant. The High Court then turned to the fundam~ntal question whether the property possessed an annual value for the pur in a pose of s. 22, and held that merely because the building was state of disrepair it could not be predicated that it had no annual value. In the result, on the question referred by the Ap~llate Tri bunal it returned the opinion that the property possessed an annual value and that the assessee was entitled to a deduction in respect of insurance premium only.

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In this appeal, the only question is whether the High Court is right in holding that the assessee is not entitled to any deduction on account of municipal taxes and the vacancy remission claimed by it.

The claim to the deduction of municipal taxes is made under the

proviso to s. 23 (1). The proviso reads :

"Provided that where the property is in the occupation of a tenant, the taxes levied by any local authority in res pect of the property are under the Jaw authorising such levy, payable wholly by the owner, or partly by the owner and partly by the tenant, a deduction shall be made equal to liability borne by the

· the part, if any, of the tenant's

owner."

It is immediately apparent that the proviso to s. 23(1) can be availed of only if the property is in the occupation of a tenant. It would seem so on the language of the proviso. The assessee does In the circumstan 'not rest his claim on any other provision of law. ces, the High Court is right in denying the claim in respect of muni cipal taxes.

The next deduction claimed requires the consideration of s. 24( 1)

{ix) of the Act.

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LIQUIDATOR MAHAMUDABAD PROPERTIES V. C.I.T. {Pathak, /.) 437

S. 24(1) (ix) reads:

"24(1) Income chargeable under the head 'Income from house property' shall, subject to the provisions of sub section (2), be computed after making the following deduc- tions, namely

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(ix) Where the property is let and was vacant during a part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the property is let out i'n parts, that portion of the annual value appropriate to any vacant part, which is proportionate to the perlod during which such part is wholly unoccupied ...... "

the

The question is whether the property, 3 Gun Foundry Road, which admittedly has remained vacant since December 26, 1960 can attract s. 24(2) (ix). It is plain that it cannot. The provisions of In come-tax Act relating to the charge on income apply in relation to a specific assessment year and the provisions of the Act providing for the computation of the chargeable income (which includes taking into account permissible deductions in the computation. of the income chargeable under different heads) apply, in the absence of anything to the contrary in relation to the relevant previous year. The total income of the previous )'~ar needs to be computed, aod the different provisions relating to the computation of income must be read and applied in the context of the facts and circumstances obtaining during that year, unless the context suggests the contrary. Consequently, when readings. 24(2) (ix) which speaks of property which is let and which was vacant during a part of the year, we must read it to mean property which was let durin: the previous year and was vacant dur It cannot refer to property which was not ing a part of the year. In the presenti case, there is no let at all during the previous year. evidence to show that it was ever even given out by the assessee that the property was available for letting. We were referred to Maha rajadhiraja of Darbhanga v. Commissioner of Income-tax, Bihar und Orissa, (') where it was observed by the Patna Hi~ Court that s. 9 (1) .paragraph 7 of the Income Tax Act, 1922 could be invoked i'n a case where a house not in the occupation of the owner was habi tually let to tenants and the vacancies referred to are vacancies bet ween the different tenancies, or a house thou&Ji not let is dismantled and shut up by the owner. We have carefully read the judgmeht

(I) A.T. R. 1931 Patna 223.

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delivered by that High Court, and it appears that the observation is a mere obiter. The actual point for decision was in fact quite diffe It was a case where the assessee, who owned several houses rent. kept them furnished and open for his residence and never let them to any tenant, and he did not occupy some of them during the relevant previous year. He claimed a vacancy remission in respect of them. The High Court, in our opinion, rightly rejected the claim. It may also be pointed out that the statutory provision cousidered there was materially different from the one before us.

In our judgment, the assessee is not entitled to the deductions claimed by it in respect of municipal taxes and a vacancy remission. The ~gh Court is right in its view in respect of this part of the case.

The appeal is dismissed. There is no order as to costs.

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Appeal dismissed.