Commissioner of Income Tax vs Parachuri Siva Lakshmi

Syed Shah Mohammed Quadri, J.—This is a reference at the instance of the Revenue. It relates to the assessment year 1980-81. The question referred to us for our opinion by the Income Tax Appellate Tribunal is as follows :

"Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount of Rs. 28,555 being municipal tax relating to earlier years was allowable as a deduction in computing the assessee''s income from house property ?"

The assessee is an individual. He has income from various sources including from house property. Out of the total income for the said assessment year he claimed deduction of Rs. 48,834 being the amount of municipal tax paid by him for the accounting year as well as for earlier three years. His claim for deduction of tax for the earlier years corresponding to the respective assessment years was negatived by the assessing authority on the ground that the deduction could be allowed only in the year in which tax would be paid, and the Income Tax Officer disallowed the deduction of Rs. 28,555 which relates to the period 1977-78 and 1978-79. The assessee preferred an appeal against the order of assessment before the Appellate Assistant Commissioner who upheld the order of the Income Tax Officer. On further appeal to the Income Tax Appellate Tribunal, it was held that the amount in question was a permissible deduction in computing the income from the house property in the assessment year in question and thus allowed the appeal on October 22, 1985. It is from that order that the abovesaid question has arisen.

Mr. J. V. Prasad, learned standing counsel for the Income Tax Department, contends that the proviso to section 23(1) of the Income Tax Act, 1961 (for short "the Act"), as it stood in the relevant assessment year, did not permit deduction of the municipal tax in a year other than the year in which the liability has arisen, so the Income Tax Appellate Tribunal has erred in allowing the appeal of the assessee.

None appeared for the assessee.

To appreciate the contention of learned standing counsel it would be necessary to read the proviso to section 23(1) as it stood in the relevant assessment year and as it stands after the amendment which are as follows :

The proviso to section 23(1), as it stood in the relevant year, i.e., 1980-81 :

"Provided that where the property is in the occupation of a tenant, the taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by the owner, be deducted in determining the annual value of the property."

The proviso to section 23(1) as it stands after the amendment, i.e., w.e.f. 1-4-1985.

"Provided that where the property is in the occupation of a tenant, the taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by the owner, be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him."

From a perusal of the proviso, extracted above, it is evident that the taxes levied by any local authority in respect of the property to the extent such taxes are borne by the owner, have to be deducted in determining the annual value of the property. That proviso was substituted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985. The proviso as it stands makes deductibility of the local taxes in determining the annual value of the property of that previous year in which such taxes are actually paid by him. It may be noted here that a Division Bench of this court in Hyderabad Co-operative Central Trading Society Ltd. Vs. Commissioner of Income Tax, held that the amendment is declaratory of the law as existing up to and including 1984-85. Therefore, what follows is that the local tax that has been paid has to be deducted in computing the annual rental value of the year in which payment has actually been made. Inasmuch as in the assessment year in question municipal tax for the earlier years has been paid the deduction of the tax has to be allowed in computing the annual rental value.

Here we may refer to the judgment of the Division Bench of the Karnataka High Court in Commissioner of Income Tax Vs. Shankaranarayana Hotels Pvt. Ltd., . There, the assessee claimed deduction of municipal taxes aggregating to Rs. 5,00,000 out of which Rs. 93,266 related to earlier years. The assessee claimed the deduction on the ground that it was only in that relevant accounting year that the levy and payment was made. The Income Tax Officer did not accept that plea. However, the Commissioner of Income Tax (Appeals) accepted the contention of the assessee and held that under the proviso to section 23(1), the assessee was entitled to the deduction during the year in which the property tax was demanded. That view of the Commissioner of Income Tax (Appeals) was confirmed by the Income Tax Appellate Tribunal. On a reference to the High Court the view of the Tribunal was upheld.

From the above it follows that the view taken by the Tribunal in the instant case, is the correct view. We, therefore, answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.

The reference in accordingly answered. No costs.