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1933 Supreme(SC) 34
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD TOMLIN, LORD RUSSELL OF KILLOWEN, AND SIR GEORGE LOWNDES.
COMMISSIONER OF INCOME-TAX, UNITED PROVINCES OF AGRA AND OUDH - Appellant
Versus
BASANT RAI TAKHAT SINGH - Respondents
On Appeal from the High Court at Allahabad.
Decided On : April 28, 1933.
Solicitor for appellant: Solicitor, India Office.
Under Section 12(2) of the Indian Income-tax Act, 1922, deductions for expenditure are only permissible if the expenditure was incurred in the same year as the income being assessed; expenditure from previous years cannot be deducted from current profits.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 3, 4, 6, 9, 10 and 12 - Income from "Other sources" - Section 12(2) - Deduction for expenditure - Expenditure incurred in previous years - Whether deductible in the current year of assessment - Allowance for expenditure under Section 12(2) must be for expenditure incurred in the year in respect of which the income, profits and gains forming the basis of the assessment arise - No justification for deducting expenditure occurred many years before, regardless of whether it is regarded as capital expenditure or not.
(B) Nature of Expenditure - Expenditure on buildings reverting to lessor at the end of a lease - Whether such expenditure is of a capital nature - Lower court held it was not capital as the advantage is lost at the end of the lease - Appellate court reversed this on the basis of the timing of the expenditure under Section 12(2).
Facts of the case:
A joint Hindu family was assessed on income derived from rents of buildings erected on land held under a long-term lease. The lease provided that the buildings would revert to the lessor upon expiration. The assessee claimed a deduction for the cost of erecting the buildings, proposing an annual deduction based on the lease term. The lower court allowed this deduction, treating the expenditure as non-capital because the assessee would lose the asset at the end of the lease.
Findings of Court:
The court found that under the construction of Section 12(2), any allowance for expenditure must relate to expenditure incurred during the specific year of assessment. Expenditure incurred several years prior to the assessment year cannot be deducted from the current profits and gains.
Issues: Whether an assessee is entitled under Section 12(2) of the Act to an allowance for expenditure incurred in erecting buildings prior to the year of assessment, and whether such allowance can be claimed as an annual deduction over the term of the lease.
Ratio Decidendi: The court reasoned that each year is a self-contained period for assessment. Therefore, Section 12(2) only permits deductions for expenditure incurred in the same year as the income being taxed. Expenditure incurred in previous years is not deductible in the current year, irrespective of its classification as capital or revenue expenditure.
Result: Appeal allowed.
Legal Category Hierarchy
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taxation
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income tax
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heads of income
- other sources
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deductions
- capital expenditure
- revenue expenditure
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heads of income
-
income tax
Judgement
Appeal (No. 68 of 1932) from a judgment of the High Court (July 10, 1931) upon a reference to that Court under s. 66 of the Indian Income-tax Act, 1922.
The respondents, a joint Hindu family, had been assessed to tax for the year 1928- 1930 under the Indian Income-tax Act, 1922, in respect of the income, profits and gains derived by them from (inter alia) buildings erected by them upon land leased to them. They had not appealed from the decision of the High Court that the assessment in question was properly made under s. 12 (" Other sources"), not
s. 9 ("Property"), nor s. 10 ("Business"). The only question arising upon the present appeal by the Commissioner was whether the respondents were entitled under s. 12, sub-s. 2, to an allowance in respect of expenditure incurred by them before April 1, 1928, in erecting the buildings.
The terms of the reference to the High Court, and the facts of the case, together with the terms of the material provisions of the Act, appear from the judgment of the Judicial Committee.
The learned judges of the High Court (Mukerji and Allen JJ.) were of opinion that as the assessee would lose the advantage of his expenditure upon erecting the buildings at the conclusion of the lease the expenditure was not of a capital nature and that he was entitled to an allowance in respect of it ; they held that the allowance should be in the form of an annual deduction
Law Rep. 60 Ind. App. 307 ( 1932- 1933) Commnr. of Income-Tax v. Basant Rai Takhat Singh
128
of a thirtieth part of the expenditure— the lease being for thirty years.
1933. April 27, 28. Dunne K.C. and R. P. Hills for the appellant. The only question upon this appeal is whether the allowance claimed is permissible under s. 12, sub-s. 2, of the Act.
[LORD TOMLIN. Should not the assessment have been under s. 9 ?]
That question does not arise, as the assessee has not appealed from the decision of the High Court that in respect of the income in question he was assessable under s. 12, not under s. 9 or s. 10 ; the assessee contended that either s. 9 or s. 10 applied.
By s. 4 "all income " under each of the heads mentioned in s. 6 is taxable subject to the deductions specifically allowed. Sect. 12 does not provide for an allowance for depreciation of capital value. It is a well established principle under the English income-tax Acts that even if sums are actually set aside for that purpose they still form part of the taxable income. In re Gooptu Estates , Ld. (( 1929) I. L. R. 57 C. 910, 917.), referred to by the High Court, appears to recognize that no allowance could be made under s. 12 for the wasting of an asset.
[LORD RUSSELL OF KILLOWEN. Must not the " expenditure " referred to in s. 12, sub-s. 2, be made in the year of assessment ?]
Yes, each year is a self-contained period for the purpose of assessment Income-tax Commissioner v. Chitnavis . (( 1932) L. R. 59 I. A. 290.) If the Board take that view it is not necessary now to discuss further the other question which, however, is of great importance.
The respondents did not appear.
April 28. The judgment of their Lordships was delivered by
LORD TOMLIN. This is an appeal by the Commissioner of Income-tax of the United Provinces of Agra and Oudh from a judgment of the High Court of Judicature at Allahabad, dated July 10, 1931, upon a reference of questions made to the High Court by the Commissioner of Income-tax under s. 66 of the Indian Income-tax Act, 1922.
The question arises in this way The assessee is a Hindu undivided family. The assessment in question was an assessment made for the year 1929-30. The assessee was assessed on an income of Rs. 57,979. Of this Rs. 14,425 were derived from property owned by the assessee and were assessed under s. 9 of the Income-tax Act. The remainder, Rs. 43,554, were assessed under s. 12 and were derived from the rents of buildings erected by the assessee upon land leased from the Agra Cantonment authority.
The assessee appealed and his appeal was rej
