Commissioner of Income Tax vs Goverdhan Dass and Sons

Jawahar Lal Gupta, J.—The Income Tax Appellate Tribunal, Chandigarh Bench, has referred the following question for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the decision of the Appellate Assistant Commissioner in allowing the set off of loss relating to house property against income under the other heads for the assessment years 1976-77, 1977-78 and 1978-79 ?"

The reference relates to three assessment years. The assessee claimed to have paid Rs. 13,211. Rs. 22,159 and Rs. 18,018 by way of interest. On this basis, it was claimed that there was loss in the income from house property. The assessee claimed that this loss had to be set off against the income derived from business in respect of the three assessment years. The claim was disallowed by the assessing authority. The appeal filed by the assessee was accepted by the Appellate Assistant Commissioner. However, the Tribunal having accepted the assessee''s claim, the Commissioner of Income Tax had filed three reference applications u/s 256(1) of the Income tax Act, 1961.

On consideration of the matter, the Tribunal found that an identical question had already been referred to the High Court in the case of Commissioner of Income Tax Vs. K.K. Dhanda (HUF), . Thus, the reference has been made in the present case also.

Mr, R. P. Sawhney, learned counsel for the Revenue, has contended that in view of the provision contained in Section 25, the assessee was not entitled to the claim as made by him. The claim made on behalf of the Revenue has been controverted by Mr. A. K. Mittal, learned counsel for the assessee.

The short question is--Was the assessee entitled to set off the loss relating to house property against the income under the other heads in respect of the three assessment years ?

It is apt to notice the relevant provisions. Chapter IV of the Income Tax Act as it existed at the relevant time provides for the computation of total income under different heads. Part C relates to income from house property. Section 22 provides as under :

"The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to Income Tax, shall be chargeable to Income Tax under the head, ''Income from house property''."

Section 23 lays down the method for the determination of annual value as contemplated u/s 22. Section 24 provides for the permissible deductions on account of repairs, payment of premium, ground rent, etc., etc! It has been specifically provided that "where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital" can also be deducted from the income. The provision for various other deductions has also been made. Section 71 permits the assessee to set off the loss "from one head against income from another".

On a harmonious reading" of the abovenoted provisions, we find that the view taken by the Appellate Assistant Commissioner which has been affirmed by the Tribunal, is correct.

Mr. Sawhney contends that u/s 23, it has been specifically provided that there shall be "in no case a loss". That being so, the assessee was not entitled to claim any set off.

We are unable to accept this contention. It is undoubtedly true that if we read Section 23 in isolation, it appears that Parliament had contemplated that while determining the annual value of the property, the question of loss would not arise. However, we cannot persuade ourselves to ignore the stipulation in Section 24 regarding deduction of interest paid on the capital for acquiring the house property. Still further, Section 71 clearly postulates the setting off of loss against income. If the loss can be set off against the income on account of capital gains as envisaged under the provision, there seems to be no rationale for denying a similar relief in respect of the income from other sources.

It can happen that an assessee who is running a business may take a loan for construction of property. Let us assume that an assessee takes a loan of Rs. 1 crore from a bank. He buys a piece of land and raises construction thereon. The interest would begin to accrue from the date of the taking of the loan. He may pay a substantial amount of say Rs. 10 lakhs in a particular year by way of interest. The building may not be complete. There may be no income therefrom. Yet, the assessee will have to pay an amount of Rs. 10 lakhs by way of interest on the amount of loan taken by him. Would the assessee not be entitled to claim this deduction from the income ? In our view, Section 24 clearly contemplates the deduction of interest from the income. Still further, Section 71 postulates the setting off of this amount from the other income.

The provisions of a statute have to be harmoniously construed. This rule is equally applicable to a taxing statute. In fact, a liability to pay can be foisted on the assessee only when it is clearly made out from the express provisions of the Act. Not otherwise. While making the reference, the Tribunal has referred to the case of K. K. Dhanda (HUF). Where a reference was made to this court. The matter was considered. The judgment is reported in Commissioner of Income Tax Vs. K.K. Dhanda (HUF), . The view taken by the Tribunal was affirmed and the reference was answered in favour of the assessee. Still further, a similar issue was also raised in the case of COMMISSIONER OF Income Tax Vs. JUSTICE P. C. JAIN., . The matter was considered at length. V. Ramaswami C. J. (as his Lordship then was) observed as follows (page 576):

"Thus, while Section 22 provided that the profits chargeable to Income Tax from house property is the annual value of such house property, Section 23 provided as to how the annual value has to be deter- mined and Section 24 for the deductions to be made in computing the income from house property. If the house property is not one which would come within clause (b) of the second proviso, then, under the main part, the annual value of the property shall be determined when it is let out on the amount of rent received or where the property is not let out, the sum for which the property might reasonably be expected to be let from year to year. The deductions provided u/s 24 shall also have to be made from such amount or sum as is referred to above. In our view. Parliament could not have intended that, while permitting the amount of interest payable on borrowed capital to be deducted u/s 24 in respect of such a building, it wanted to take away such a benefit in respect of a building which would fall within the second proviso to that section, obviously for the reason that both are borrowed capital and the interest is paid on such borrowed capital. Further, the provision of Section 23 itself is for the purpose of Section 22 as specialty stated therein and, therefore, it could not affect the deductions referred to in Section 24. Nor is there any reason to restrict the deduction only to the extent of the income from the property and not beyond that. In the light of this set up, the proviso to Sub-section (1) of Section 23 shall be read, interpreted and understood as relating to the determination of the annual value and, therefore, that portion which stated that the income in respect of any residential unit deferred to in clause (a) or clause (b) ''is in no case a loss'' shall be related only to the determination of the annual value with reference to the main part of Sub-section (1) of Section 23 and not for the purposes of admissibility of the total amount of deductions that could be made u/s 24. In fact, the second proviso specifically states that ''the annual value as determined under this sub-section shall'' be reduced by the amounts specified, in the clauses. It is true, as pointed out by learned counsel for the Revenue, that the words ''is in no case a loss'' will be meaningless if those will have to be restricted to the provisions of Section 23 alone. That may be so, but on that ground, we cannot enlarge the scope of Section 23 and restrict the applicability of the deductions u/s 24. It may be pointed out that Section 24 itself does not make any restrictions on the deductions referred to therein, nor had it subjected the provisions of that section to the provisions of Section 23. On the other hand, when any restriction of that category is to be made, the section has specifically referred to it as seen from Sub-section (2) of Section 24. If Parliament had any intention to restrict the deduction, that could have been made in Section 24 itself."

There is another fact which deserves notice. By the Taxation Laws (Amendment) Act, 1984, the last portion of the second proviso to sub-section (1) of Section 23 was omitted. In the explanatory note, it was stated as under (see [1984] 150 ITR 3) :

"9.2 Apprehensions had been expressed that the above quoted words may be construed to imply that no loss shall be allowed in respect of such new residential units even when the loss may arise as a result of other deductions claimed by the assessee. as for instance, interest paid on borrowed capital for purposes of constructing the residential building. With a view to removing any controversy or doubt in the matter the above-quoted words have been omitted from the aforesaid second proviso. This would secure that the deduction admissible to the assessee under the provisions of Section 24 of the Income Tax Act in computing the income from house property shall not be limited to the annual letting value of the house property as arrived at after providing for the deduction under the said second proviso."

This explanation clearly clarifies the legislative intent. What was latent has been made patent.

No other point has been raised.

In view of the above, the question as posed by the Tribunal is answered in the affirmative. We hold that the claim of the assessee was rightly upheld by the Tribunal. In the circumstances, there will be no order as to costs.