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1988 Supreme(Cal) 247
High Court Of Calcutta
Ajit K. Sengupta, K. M. Yusuf
CLIVE BUILDINGS (CALCUTTA) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 101 Of 1979
Decided On : 06/28/1988
H.M.Bhar, MANISHA SEAL, PAL
1. Interest on debentures does not qualify for deduction under Section 24(1)(iv) of the Act if the charge is created voluntarily by the assessee. 2. The deduction on account of municipal tax is allowable to the extent of the tax liability as finally determined by the appropriate authority, and not the amount shown in the notice of enhancement.
Headnote:
INCOME TAX - DEDUCTION - ANNUAL CHARGE - INTEREST ON DEBENTURES - MUNICIPAL TAX - ANNUAL VALUE - LEVY - LIABILITY - SECTION 24(1)(IV), 27(IV), 27(V), 23(1) - INCOME TAX ACT, 1961 - WHETHER INTEREST ON DEBENTURES FORMED PART OF SECURED LOAN AND SHOULD BE TREATED AS ANNUAL CHARGE - WHETHER ANNUAL VALUE OF PROPERTY SHOULD BE DETERMINED ON THE BASIS OF TAX LEVIED OR TAX LIABILITY.
Fact of the Case:
The assessee, a company owning a house property, claimed deduction of interest on debentures and municipal tax in the computation of its income from house property. The Income-tax Officer disallowed the deduction of interest on debentures on the ground that the charge was created voluntarily and was a capital charge. The Appellate Assistant Commissioner and the Tribunal confirmed the disallowance. The assessee also claimed deduction of municipal tax as per the enhanced levy, but the authorities allowed deduction only to the extent of the tax payable prior to the enhancement. The Tribunal, however, allowed deduction to the extent of half of the tax liability as finally determined by the Special Officer-I.
Finding of the Court:
The court held that the interest on debentures did not qualify for deduction under Section 24(1)(iv) of the Act as the charge was created voluntarily by the assessee. The court also held that the deduction on account of municipal tax was allowable to the extent of the tax liability as finally determined by the Special Officer-I, and not the amount shown in the notice of enhancement.
Issues: 1. Whether the assessee was entitled to the deduction of interest on debentures under Section 24(1)(iv) of the Act, in the computation of its income from house property? 2. Whether the deduction on account of municipal tax was allowable only to the extent of the tax payable prior to the enhancement?
Ratio Decidendi: 1. The court held that the assessee was not entitled to the deduction of interest on debentures under Section 24(1)(iv) of the Act, as the charge was created voluntarily by the assessee. The court observed that the assessee failed to discharge the onus of proving that the charge was created involuntarily. 2. The court held that the deduction on account of municipal tax was allowable to the extent of the tax liability as finally determined by the Special Officer-I, and not the amount shown in the notice of enhancement. The court relied on the judgment of the Supreme Court in CIT v. Dalhousie Properties Ltd. [1984] 149 ITR 708, which held that the tax liability borne by the assessee, the owner of the house property, shall be deducted under the proviso to Section 23(1) of the Act, and it is not necessary that the assessee should have actually paid the amount in question before such deduction is claimed.
Final Decision: The court answered the first question in the affirmative and in favor of the Revenue, and the second question in the affirmative and in favor of the assessee. The court allowed deduction of Rs. 96,824 on account of municipal tax, in the computation of the assessee's income from house property.
( 1 ) IN this reference under Section 256 (1) of the Income-tax 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 Section 24 (1) of the Income-tax Act, 1961, in the computation of the asses-see'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 Section 23 (1) of the Income-tax 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 ?"
( 2 ) 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 assessment year 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 Section 24 (l) (iv) of the Act. The Income-tax Officer disallowed the claim on the ground that the charge created under the trust deed dated June 24, 1936, was a capital charge and was created thereunder voluntarily.
( 3 ) IN the appeal before the Appellate Assistant Commissioner, the assessee challenged, among others, the aforesaid disallowance of deduction of Rs. 46,867 in the computation of the income from house property. The Appellate Assistant Commissioner held that the finding of the Income-tax Officer that the charge was created voluntarily and was a capita! 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.
( 4 ) 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 Section 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 dated 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 ) SECTION 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 Section 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 Section 27 (v), capital charge means a
