The New Piecegoods Bazar Co., Ltd., Bombay vs The Commissioner of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. LXVI of 1949

Decision Date: 26 May 1950

Coram: Mehr Chand Mahajan, Saiyid Fazal Ali, B.K. Mukherjea

In this appeal, the Supreme Court of India considered a petition filed by The New Piecegoods Bazar Co., Ltd., Bombay, against the Commissioner of Income-Tax, Bombay. The judgment was rendered on 26 May 1950. The bench hearing the matter was composed of Justice Mehr Chand Mahajan, Justice Saiyid Fazal Ali, and Justice B. K. Mukherjea. The case is reported in the 1950 volume of the All India Reporter at page 165 and also in the 1950 South-Asian Cases at page 553. The statutory provision under consideration was section 9(1)(iv) of the Indian Income-Tax Act (XI of 1922), which deals with the computation of income from property and the deduction of “annual charge, not being capital charge.” The judgment examined the meanings of the expressions “annual charge” and “capital charge,” as well as the applicability of municipal property tax and urban immoveable property tax deductions under the relevant Bombay statutes, namely the City of Bombay Municipal Act, 1888 (section 212) and the Bombay Finance Act, 1932 (section 22).

The headnote of the judgment explained that the charge created by section 212 of the City of Bombay Municipal Act, 1888, in respect of municipal property tax, constituted an “annual charge not being a capital charge” within the meaning of section 9(1)(iv) of the Income-Tax Act. Consequently, the amount of that charge was to be allowed as a deduction while computing income from the property for the purposes of section 9. Similarly, the charge created by the Bombay Finance Act, 1939, in respect of urban immoveable property tax, was deemed to be of the same character and therefore also deductible. The Court clarified that a “capital charge” refers to a charge created for a capital sum, that is, a charge intended to secure the discharge of a liability of a capital nature, whereas an “annual charge” is a charge designed to secure an annual liability.

The appellate jurisdiction for the matter was identified as Civil Appeal No. LXVI of 1949, an appeal from the High Court of Judicature at Bombay arising out of a reference made under section 66 of the Indian Income-Tax Act, 1922. Counsel for the appellant was Mr. K. M. Munshi, assisted by Mr. N. P. Nathvani, while the respondent was represented by Mr. M. C. Setalvad, Attorney-General for India, assisted by Mr. H. J. Umrigar. The Court’s opinion was delivered by Justice Mehr Chand Mahajan.

The substantive issue before the Court was whether municipal property tax and urban immoveable property tax payable under the applicable Bombay enactments could be deducted under section 9(1)(iv) of the Income-Tax Act. The appellant company was an investment enterprise that derived its income from properties situated in the city of Bombay. For the assessment year 1940-41, the Income-Tax Officer had computed the net income of the appellant under the head “property” at Rs 6,21,764 after making certain deductions from the gross rents. During that assessment year, the company had paid Rs 1,22,675 as municipal property tax and Rs 32,760 as urban property tax. The company claimed deduction of both amounts under the provisions of section 9 of the Act. Out of the

In the first instance, the assessing authority allowed a deduction of Rs 48,572 on the basis that this amount represented expenses incurred by the assessee in the capacity of a tenant; any claim for deduction beyond this figure was rejected. The assessee then appealed the decision to the Appellate Assistant Commissioner and subsequently to the Income-Tax Appellate Tribunal, but both appeals were dismissed. Nevertheless, the Tribunal decided to refer two specific questions of law to the High Court of Judicature at Bombay for clarification. The first question asked whether the municipal taxes that the applicant-company had paid could be deducted under the provisions of section 9(1)(iv) of the Indian Income-Tax Act. The second question inquired whether the urban immovable property taxes paid by the applicant-company were allowable deductions either under section 9(1)(iv) or under section 9(1)(v) of the same Act. In addition to these two questions, a supplementary reference was made concerning a third issue that had not been raised before this Court; consequently, that third question was not required to be addressed in the present judgment. The High Court examined all three questions and answered each of them in the negative, which gave rise to the present appeal. The matter before this Court therefore centered on determining whether the municipal property tax and the urban immovable property tax could be claimed as deductions pursuant to clause (iv) of sub-section (1) of section 9 of the Income-Tax Act. The resolution of the issue required, first, an interpretation of the wording used in sub-clause (iv) of sub-section (1) of section 9, and second, a factual finding regarding the true nature and character of the liability imposed on the owner by the relevant Bombay statutes for the payment of those taxes. Section 9, together with the relevant clause, provides that the tax payable by an assessee under the head “income from property” shall be computed on the basis of the bona-fide annual value of any buildings or lands appurtenant thereto that the assessee owns, subject to certain allowances. Clause (iv) specifies that where a property is subject to a mortgage or other capital charge, the interest on such mortgage or charge is deductible; where the property is subject to an annual charge that is not a capital charge, the amount of that charge is deductible; where the property is subject to a ground rent, the ground rent is deductible; and where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the interest payable on that borrowed capital is deductible. It is evident that clause (iv) contains four distinct sub-clauses, each corresponding to one of the four types of deductions expressly enumerated. Prior to the amendment enacted in 1939, clause (iv) comprised only the first, third and fourth sub-clauses. Under the first sub-clause, interest is allowable as a deduction irrespective of whether the borrowed sum secured by the property was actually expended on the property itself; there is no requirement that the expenditure be capital in nature. Moreover, the term “capital charge” within that sub-clause cannot be interpreted as a charge imposed upon the capital asset itself, that is, the property being assessed, because such an interpretation would render the phrase redundant.

In this case the Court observed that the opening words of the provision clearly indicate that the charge is imposed upon the property. The Court therefore held that the term “capital charge” could only refer to a charge created for a capital sum, that is, a charge intended to secure the discharge of a liability of a capital nature. The Court then referred to the 1933 Privy Council decision in Bijoy Singh Dudhuria v. Commissioner of Income-tax, Calcutta (1). That decision was not an assessment under section 9; it concerned an assessment of the general income of a taxpayer who was required to pay maintenance to his step-mother, a liability that had been charged on all his assets by a court decree. The liability was not voluntarily incurred by the taxpayer but was imposed by law. The Privy Council held that the amount paid by the taxpayer in discharge of that liability formed no part of his real income and therefore should not be included in his assessment. Although that decision rested on the principle that such outgoings are not part of the assessee’s income, the Court noted that the framers of the amending Act of 1939 apparently sought to extend the principle, for the purpose of property assessment, to cases where obligatory payments must be made out of the income derived from the property that is charged with such payments. Consequently, the second sub-clause was added, reading: “where the property is subject to an annual charge not being a capital charge, the amount of such charge.” The appellant relied on this newly added sub-clause to claim a deduction for municipal and urban property taxes in the present case. In view of the opening words of the newly added sub-clause, the Court concluded that the expression “capital charge” used therein cannot refer to a charge on the property, and it thought it must (1) I.L.R. 60 cal. 1029. be understood in the same sense as in sub-clause (1); that is, while the first sub-clause provides for deduction of interest where a capital sum is charged on the property, this sub-clause provides for deduction of annual sums so charged, such sums not being capital sums, the limiting words being intended to exclude cases where capital raised on the security of the property is made repayable in instalments. The Court then referred to the Bombay High Court decision in Commissioner of Income-tax, Bombay v. Mahomedbhoy Rowji (1), where the meaning of “annual charge” was examined. Chief Justice Beaumont observed that the words would cover a charge to secure an annual liability. Justice Kania, then a puisne judge, added that a charge could be described as annual only if it relates to a payment to be made annually. This construction of the words was followed in the judgment under appeal. Finally, the Court mentioned the Allahabad High Court decision in Gappumal Kanhaiya Lal v. Commissioner of Income-tax (2), the connected appeal before it, where the bench agreed with the construction placed on

In the Bombay case the Court had explained that the expression “annual charge” meant a charge that secured an annual liability. Accordingly the Court said that there was no conflict between judicial decisions on the meaning of the phrase “annual charge” occurring in section 3(1)(iv) and that the natural meaning of those words was the one already adopted. Regarding the expression “capital charge”, the Chief Justice in the earlier decision had taken the view that the words meant a charge on capital. By contrast another Judge expressed a different opinion and stated that he could not accept the suggestion that a document providing for a payment to be made monthly or annually and secured on immovable property or on the estate of an individual should be treated as a capital charge. In the Allahabad judgment that was under appeal the cited authorities (I L R 1943 Bom 628 and I L R 1944 All 780) were considered and it was held that those words did not denote a charge on capital. The judgment further observed that if an annual charge meant a charge to secure the discharge of an annual liability, then a capital charge ought to be understood as a charge to secure the discharge of a liability of a capital nature. The Court agreed that this was the natural construction of the statutory provision and found it correct. The Court then explained that deciding whether the taxes in dispute fell within the phrase “annual charge not being a capital charge” required reference to the statutes under which the taxes were imposed. Section 143 of the City of Bombay Municipal Act, 1888, authorised a general tax on all buildings and lands within the city. Section 146 placed the primary responsibility for payment of that property tax on the lessor. Section 154 provided for the determination of the annual rateable value of each building for the purpose of assessment. Section 156 required the maintenance of an assessment book in which, for each official year, entries were to be made of every building’s rateable value, the names of persons primarily liable for the tax on that building, and the amount for which each building was assessed. Section 167 specified that the assessment book need not be prepared every official year, but that public notices had to be issued each year in accordance with sections 160 to 162, and that the provisions of those sections together with sections 163 and 167 would apply annually. Those provisions also set out the procedure for hearing objections and complaints against entries in the assessment book. From these statutory provisions it was clear that the liability for the tax was fixed at the beginning of each official year and that the tax was an annual liability that recurred from year to year. Sections 143 through 168 dealt with the imposition, liability and assessment of the tax for each year, and they defined both the amount of tax for the year and the corresponding liability.

Section 197 of the Municipal Act provides that each property tax must be paid in advance in two equal instalments, one on the first day of April and the other on the first day of October. The requirement of half-yearly instalments necessarily implies an annual liability, meaning that the total yearly obligation can be satisfied by making two payments during the year. The Act also sets out the procedure for recovering any instalment that remains unpaid, which includes the presentation of a bill, issuance of a notice of demand, and, if necessary, the enforcement of distress and sale of the property.

Section 212 of the same Act creates a statutory charge on the property. The provision reads: “Property taxes due under this Act in respect of any building or land shall, subject to the prior payment of the land revenue, if any, due to the provincial Government thereupon, be a first charge........ upon the said building or land....” This clause makes the unpaid tax a first charge on the building or land. Urban immovable property tax is levied under section 22 of Part VI of the Bombay Finance Act, 1932, based on the annual letting value of the property. The duty of collection rests with the municipality, which collects it in the same manner as municipal property tax. Section 24(2)(b) is worded in a manner similar to section 212 of the Municipal Act, thereby making the land or building security for the payment of this tax as well. For the purposes of section 9 of the Indian Income-Tax Act, both the municipal property tax and the urban immovable property tax are treated as taxes of the same character and standing.

The counsel appearing for the appellant argued that both taxes are assessed on the annual value of the land or building and therefore constitute annual taxes, even though the actual collection may be made in six-month instalments for convenience. He further submitted that income-tax liability is assessed on an annual basis, and that deductions should be allowed for all payments made or liabilities incurred during the preceding year of assessment. Accordingly, he maintained that the taxes clearly fall within the language of section 9 (1) (iv). The Attorney-General, on the other hand, contended that although the taxes are assessed for the year, the liability to pay arises only at the beginning of each half-year. He argued that, without a notice of demand and a bill being presented, no liability exists and consequently no charge under section 212 can arise. He further suggested that because the liability to pay is half-yearly in advance, the charge cannot be described as an annual charge, and that the taxes represent a capital charge in the sense that the property itself serves as security for payment. The Court found that the contentions raised by the Attorney-General were not persuasive.

The Court held that the arguments presented by the Attorney-General were untenable. It observed that, when the two Bombay statutes were read as a whole, the taxes in question were clearly an annual levy imposed on the property and were assessed each year on the property’s annual value. Although the yearly liability could be satisfied by paying in half-yearly instalments, the liability remained an annual one, and because the property was subject to that liability, clause (iv) of subsection (1) of section 9 became applicable. The Court rejected the emphasis placed on the term “due” in section 212 of the Municipal Act, where it had been argued that a charge did not arise until the time for payment arrived and therefore the charge could not be an annual charge. The Court stated that this was a misinterpretation of section 212. It explained that the phrase “property taxes due under this Act” refers to property taxes for which a person is liable under the Act, and that taxes payable during the year are made a charge on the property. Consequently, the liability and the charge coexist and are co-extensive, and the provisions that allow for the discharge of the liability do not alter the true nature or character of the charge.

The Court further considered whether failure to discharge the annual liability in the manner prescribed by section 197 would prevent the sale of the property for recovery of the whole amount due for the year. It answered affirmatively, holding that the property could be sold to recover the outstanding amount. The Court then referred to the earlier decision in Commissioner of Income-Tax, Bombay v. Mahomedbhoy Rowji, where Chief Justice Beaumont, while rejecting the claim for deduction of the taxes, relied on I.L.R. 1943 Bom. 628 and on section 9(1)(v), which permits deduction of sums paid on account of land revenue. The judgment observed that land revenue was placed on the same footing as municipal taxes, and that the legislature’s decision to provide a special deduction for land revenue but not for municipal taxes indicated that the latter were not deductible. The Court also cited section 10, which deals with business allowances and permits deduction of sums paid on account of land revenue, local rates, or municipal taxes. In the concluding part of that judgment, the Chief Justice had stated that it was unnecessary to determine the precise meaning of the statutory words, only that they did not encompass municipal taxes that were made a charge on the property under section 212 of the Bombay Municipal Act. The Court noted that without a definitive interpretation of the statutory language, it could not reach a conclusion that the taxes fell outside the scope of the clause.

The Court observed that it had reached the conclusion that the taxes in question did not fall within the scope of the clause under consideration. It emphasized that the fundamental duty of a Court is to give effect to the legislature’s intention as expressed in the statutory language, and that no extraneous considerations may be invoked in seeking to discern that intention. The Court noted that merely referring to clause (v) of the provision did not illuminate the issue, because land revenue constitutes a paramount charge imposed on all buildings and lands, and the statute expressly provided for a deduction of the amount of such land revenue. By contrast, municipal taxes do not occupy the same position as land revenue. The law governing municipal taxes varies from province to province, and such taxes are not necessarily a charge on property in every instance.

The Court inferred that the legislature appeared to contemplate that, where municipal taxes relate to property and fall within the ambit of clause (iv), a deduction would be permissible, but that no deduction would be allowed where the taxes fall outside that clause. It further explained that the deductions authorised in section 10, under the head “Income from business,” operate on a different basis, and that construing section 9 with the assistance of section 10 would be misleading. The Court recalled that Kania J., in the earlier case, had reached his conclusion on the basis that municipal taxes were of a variable character, meaning that they could be increased or reduced under various provisions of the Municipal Act and that the charge was contingent in nature.

With respect, the Court pointed out that all charges, to some degree, possess a variable and contingent character. If a default does not occur, a charge is never enforceable; and whenever a charge exists, it may be increased or decreased during the year either through payment or through additional borrowing. The Court then referred to the authority in Moss Empires Ltd. v. Inland Revenue Commissioners (1), wherein the House of Lords held that the contingency and variability of certain payments did not alter their character as annual payments, and that the term “annual” should be understood as possessing the quality of recurrence or the capacity for recurrence. Likewise, in Cunard’s Trustees v. Inland Revenue Commissioners (2), it was held that payments capable of recurrence qualified as annual payments within the meaning of Schedule D, Case III, Rule 1 (1), even though they were not necessarily recurring each year, and that the variation in amount was immaterial.

The learned Attorney-General, relying on these decisions, did not endorse the view expressed by Kania J. The Court noted that reliance had also been placed on a decision of the Madras High Court in Mamad Keyi v. Commissioner of Income-tax, Madras (3), where monies paid as urban immovable property tax under the Bombay Finance Act were held to be inadmissible under section 9(1)(iv) or 9(1)(v) of the Indian Income-tax Act.

The Court observed that the decision under review simply adhered to the view expressed in the earlier case of Commissioner of income-tax, Bombay v. Mahomedb- hoy Rowji (4) and that it was not based on any independent or fresh reasoning; consequently, the decision did not provide substantial assistance in resolving the matters before this Court. The Court then referred to the authorities of the Allahabad High Court, namely (1) [1937] A.C. 785, (2) [1948] 1 A.E.R. 150, (3) I.L.R. 1944 Mad. 399, and (4) I.L.R. 1943 Bom. 628, which were cited in the earlier proceedings. In the connected appeal of Gappumal Kanhaiya Lal v. Commissioner of Incometax (1), the Court noted that the High Court had taken a correct view of the issue and that the reasoning adopted in that decision was approved. Accordingly, the Court concluded that the present appeal should be allowed and that the two questions which had been referred by the Income-tax Tribunal to the High Court and mentioned earlier were answered in the affirmative. The Court further ordered that the appellants would be awarded their costs in the appeal. The final disposition was that the appeal was allowed. The agents appearing for the parties were recorded as M.S. Krishnamoorthi Sastri for the appellants and P.A. Mehta for the respondent.