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PETITIONER: LIQUIDATOR OF MAHAMUDABAD PROPERTIES (P) LTD

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, WEST BENGAL II, CALCUTTA

DATE OF JUDGMENT09/04/1980

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L.

CITATION:  1980 AIR  758            1980 SCR  (3) 428  1980 SCC  (3) 482

ACT:      Income Tax Act, 1961, Sections 22 and 23-Computation of Income from  house  property-Building  not  in  a  habitable condition after  it was released by Government consequent to derequisitioning-Assesee   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 remission and deductions  claimed-Competency of the High Court to give a direction  to the Appellate Tribunal, enabling the Revenue to tax  income from  the property when the Revenue failed to ask for  a reference  against Appellate Tribunal’s decision- Nature of High Court’s power in a reference case.

HEADNOTE:      The appellant-assessee,  in his  income tax  return for the assessment year 1962-63 (for which the previous year was the calendar year 1961) recited 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 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 no  question arose  of  applying  the provisions of the Income Tax Act relating to the computation of income  from property.  Accordingly,  he  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  had remained vacant,  it possessed an annual value and should be 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 Income 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

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Appellate Tribunal.  But, at  the instance of the assessee a reference was  made to the High Court. The High Court was of the 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  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.      Dismissing the appeal, the Court, ^      HELD : 1. Whether the High Court was right in including a direction  to the  Appellate Tribunal to take into account the annual value of the property 429 will depend  on the  appreciation of  the true  scope of the reference taken  to    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  and  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 Tribunal was right in disallowing the vacancy remission  and other  deductions in  respect of that property. [434C-E]      Unless the property fall within the scope of Section 22 there was  no occasion  for considering 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 assessee.  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  interested in  those deductions  it would  not have asked  for a  finding that  the property  possessed  an annual value.  The High  Court,  was,  therefore,  right  in examining both  parts of  the question  and  in  determining whether the  property had an annual value and the deductions claimed were permissible. [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 terms of the statute  the  assessee  is  otherwise  entitled  to  the deductions claimed  by him.  If  those  deductions  are  not permissible under  the relevant  section, no question arises of examining  whether the  property  has  an  annual  value. Viewed in  that light,  the determination  of  the  question whether the  property has  an annual  value falls  into  its proper place. [434G-H, 435A]      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.  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  Tribunal  for  a  reference  to  the  High  Court accordingly. It  did not  ask for a reference and, therefore

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it is not entitled to raise that contention now. [435A-C]      However, the  only way  of  looking  at  the  case,  is whether on  the assumption  that the  property has an annual value and falls within the scope of Section 22, the assessee is entitled  to the  deductions under Sections 23 and 24. If 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  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 accordingly. It  may be  that the  deduction  to  which  the assessee is found entitled runs to a far smaller figure than the annual  value property  attributable to the property. In that event  the consequence  will be  a net  annual value of some  significance.   And  this   will  be  the  consequence notwithstanding that 430 the reference is at the assessee’s instance and no reference at all  has been  brought by the Revenue. The result appears anomalous, but  after 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 deductions 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]      3. 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 Appellate Tribunal then takes up the appeal and  disposes  it  of  conformably  with  the  answer returned  by   the  High  Court.  It  is  not  part  of  the jurisdiction of  the High  Court to  interfere 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  is  in  the occupation of  a tenant. It would seem so on the language of the proviso.  The assessee  does not  rest his  claim on any other provision of law. In the circumstances, the High Court is right in denying the claim in respect of municipal taxes. [436G-H]      5. The provisions of the Income-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 year needs  to the  computed, and  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 reading  s.24(2) (ix)  of  the Income Tax  Act, 1961  which speaks of property which is let and which  was vacant  during a  part of the year, the Court must read  it to  mean property  which was  let  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  assessee is not entitled to the deductions claimed by it in respect of municipal taxes and a vacancy remission. [437F]

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    Maharajadhiraja of  Darbhanga v. Commissioner of Income Tax, Bihar and Orissa, A.I.R. 1931 Patna 223; distinguished.

JUDGMENT:      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.      S. T.  Desai, K.  C. Dua,  Miss A.  Subhashini for  the Respondent. 431      S. Chaudhary.  D. N.  Gupta and  T. A. Ramachandran for the Respondent Intervener.      The Judgment of the Court 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 Income-tax  Act, 1961.      The assessee,  a private  limited company, is the owner of the property described as 3, Gun Foundry Road. Originally it  housed   a  jute   baling  press.   The   property   was requisitioned by  the West Bengal Government in 1951. It was released to  the assessee  on 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.      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 annual 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 income  of the  entire annual value. The assessee 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 no  question arose  of  applying  the provisions of the Income Tax Act relating to the computation of income  from property.  Accordingly,  he  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  had remained vacant,  it possessed an annual value and should be 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 Income 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 instance 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 432      Income-tax Act,  1961 the Tribunal was right in holding

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    that in computing the income from property the bonafide      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 it  could be allowed, there was no merit in the claim  on account  of vacancy  remission and  payment of municipal taxes. Accordingly, the High Court recorded:-           "On the  first part  of the  question we hold that      the Tribunal  was wrong  in holding  that there  was no      annual value  of this property No. 3, Gun Foundary Road      and that  it was outside the scope of section 22 of the      Income-tax Act, 1961. We hold and we are of the opinion      that this property has an annual value in the facts and      circumstances 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  Tribunal  and  answer  the  question      accordingly. The  answer to  this  first  part  of  the      question is  in the  negative. The answer to the second      part of  the question  follows 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  the assessee  is not entitled to claim      them in  the present  reference. We  answer the  second      part of the question accordingly.           The Tribunal,  therefore, will dispose of the case      conformably to  this judgment and the interpretation of      the principles  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 judgment that the Appellate Tribunal should take into account its finding 433 that the  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  to charge the assessee on income from  this property,  to apply for a reference to the High Court.  It is  urged that the Revenue having omitted 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 possessed an 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  property",  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  buildings  or

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lands appurtenant  thereto in the ownership of the 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 be chargeable to income tax as "income 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  the purpose  of computing  the net figure of the income from property.      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 appreciate the true scope of the reference taken to the High Court. The  Income Tax  Officer had found that the property, having regard to its condition, was not capable of being let to tenants  and therefore the gross value and the deductions claimed had  to be  ignored. The  assessee was  aggrieved by that finding.  It must  be remembered that in its return the assessee had indicated that the property possessed an annual value of  Rs. 1,23,672  unless the  property had  an  annual value,  it  believed,  it  could  not  be  entitled  to  the deductions claimed  by it.  In appeal  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 Commissioner, who held that the annual value of the property could not be 434 ignored and  further that  the vacancy  remission and  other deductions claimed by the assessee were admissible. When the Revenue proceeded  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  condition of  the building, and  was of opinion that the building was not in a habitable condition  and it  could  not  be  said  that  the property could  be reasonably  let  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  altogether 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 Officer. It  was in the context of this train of proceedings that the assessee 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 assessee that the property possessed an  annual value for the purpose of Section 22 and it was,  therefore, entitled  to the  vacancy remission  and 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 Tribunal was right in disallowing the  vacancy remission  and other  deductions in respect of  that property. Plainly, unless the property fell within the  scope of  Section 22  there was  no occasion for considering 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  assessee. 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 interested in those

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deductions it  would not  have asked for a finding, that the property possessed  an annual  value. The  High  Court  was, therefore, right in examining both parts of the question and in determining  whether the property had an 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, because 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 deductions claimed by him. If those deductions are not permissible under 435 the  relevant  section,  no  question  arises  of  examining whether the  property has  an annual  value. Viewed  in that light,  the   determination  of  the  question  whether  the property has an annual value falls into its proper place. It cannot be contended that even though the claim to deductions must otherwise  fail, the  question whether the property has an annual  value must still be considered. Such a contention is not open to the Revenue. 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  Tribunal for  a reference  to the High Court  accordingly. It did not ask for a reference and, therefore it  is not  entitled to raise that contention now. It seems  to us that there is only 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 assessee is entitled to the deductions under Sections 23  and 24.  If 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 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 accordingly.  It may  be that  the deduction to  which the assessee is found entitled runs to a far  smaller   figure  than   the  annual   value   property attributable to  the property. In that event the consequence will be  a net  annual value  of some significance. And this will be  the consequence  notwithstanding that the reference is at  the assessee’s  instance and  no reference at all has been brought  by the  Revenue. The result appears anomalous, but after  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 deductions 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.      At the  same time,  we must  point out  that  the  High Court, after  holding that the property has an annual value, has 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 Appellate Tribunal  then takes up the appeal and disposes it of conformably  with the  answer returned by the High Court. It is  not part  of the  jurisdiction of  the High  Court to interfere and modify or set aside the appellate order of the Tribunal. 436

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    As has  been said  earlier, the  High Court  considered both parts  of the  question referred  to  it,  whether  the property  possessed   an  annual   value  and   whether  the deductions claimed  by  the  assessee  were  admissible.  It examined first  whether the  deductions were  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 deduction 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 municipal taxes could  be deducted  only if  the property  was in  the occupation of  a tenant.  The High  Court then turned to the fundamental  question  whether  the  property  possessed  an annual value  for the purpose of s. 22, and held that merely because the  building was  in a  state of disrepair it could not be  predicated that  it had  no  annual  value.  In  the result, on  the question  referred by the Appellate Tribunal 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.      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  respect of the property are under the law      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 the part, if any, of      the tenant’s liability borne by the 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  not rest his claim on any other provision of  law. In  the circumstances,  the High Court is right in denying the claim in respect of municipal taxes.      The next  deduction claimed  requires the consideration of s. 24(1) (ix) of the Act. 437 S. 24(1)(ix) reads :           "24 (1)  Income chargeable  under the head ’Income      from house  property’ shall,  subject to the provisions      of  subsection   (2),  be  computed  after  making  the      following deductions, namely:-      xx        xx        xx       xx        xx           (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  in parts,  that  portion  of  the      annual value  appropriate to  any vacant part, which is      proportionate to  the period  during which such part is      wholly unoccupied..... "      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 the Income-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

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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 year needs  to be  computed, and  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 reading  s. 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  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. In the present case, there is no evidence to show that it was ever even given out by the assessee that the property was available for letting. We  were   referred  to   Maharajadhiraja  of  Darbhanga  v. Commissioner of  Income-tax, Bihar  and Orissa,(1)  where it was observed by the Patna High Court that s. 9 (1) paragraph 7 of  the Income  Tax Act,  1922 could  be invoked in a case where a  house not  in  the  occupation  of  the  owner  was habitually let  to tenants and the vacancies referred to are vacancies between the different tenancies, or a house though not let  is dismantled  and shut  up by  the owner.  We have carefully read the judgment 438 delivered by  that High  Court,  and  it  appears  that  the observation is  a mere obiter. The actual point for decision was in  fact quite  different.  It  was  a  case  where  the assessee, who  owned several  houses 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 considered 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 High  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. S.R.                                       Appeal dismissed. 439