Commissioner of Income Tax vs P.J. Irani

G. Ramanujam, J.—At the instance of the revenue the following question of law has been referred to this Court by the Tribunal, Madras,

under the provisions of section 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of urban land tax for the

period 1-7-1963 to 1-7-1970 was an admissible deduction in arriving at the income under the head ''Other sources'' for the assessment year

1971-72?

The dispute in this case relates to the computation of income from property jointly held by the assessee and certain others for the assessment year

1971-72, corresponding to the accounting year ended on 31-3-1971. The assessee has 24 per cent interest in the joint property which has been

let on rent to others. The assessee computed the income to be assessed from house property in the assessment year 1971-72 by deducting two

amounts : Rs. 16,130.52 being the urban land tax paid for the period 1-7-1963 to 1-7-1970 and Rs. 1,728.27 being the urban land tax paid for

the period 1-7-1970 to 31-3-1971. The ITO, however, felt that in computation of the income from house property for the year 1971-72, only the

urban land tax paid in relation to that assessment year could be deducted. In this view the recomputed the assessee''s income and arrived at the

share of the assessee''s income from house property at Rs. 3,973.

Aggrieved by the order of the ITO, the assessee filed an appeal before the AAC who, however, concurred with the ITO and held that for the

computation of income from house property that (sic) for deduction u/s 24 of the Act, can be only the tax relatable to the assessment year and that

any extra amount paid in respect of such taxes for the previous years is not allowable even though such arrears were paid during the previous year.

The assessee took the matter in appeal to the Tribunal. The Tribunal has held that the amount of Rs. 16,130.52 paid during the assessment year

1971-72, for the period from 1-7-1963 to 1-7-1970, was an admissible deduction and on this basis the Tribunal set aside the computation of

income made by the ITO and remitted the matter to him with a direction to recompute afresh the total income of the assessee from house property

and other sources. Aggrieved by the order of the Tribunal, the revenue has come up before us.

The facts of the case can briefly be referred to for the purpose of appreciating the contentions advanced by the parties before us. In 1943, the

assessee along with others had jointly taken on lease certain extent of land together with a building. One of the clauses in the lease deed provided

that the lessee shall bear and discharge all existing and future rates, taxes, assessments, duties, imposition and outgoings, whatsoever imposed or

charged upon, save the property tax and quit rent now being paid by the lessors and that all property tax attributable to the erection of any building

by the lessee on the plot of land shall be born and payable by the lessee himself. After taking the site on lease, the assessee jointly with others

constructed a cinema house and let it out. The original building of the lessor which was there, was given on lease by the assessee to Andhra

Scientific Co. on a rent of Rs. 250 per month. The rent received from the cinema house and the rent received from Andhra Scientific Co.

constituted the two items of income returned from house property. The ITO and the AAC thought that both items of income fall under the single

head ''Income from house property''. But the Tribunal had made a distinction between the income from the house property owned by the assessee

and from the property taken on lease for rent, for the reason that the difference will have material impact in the classification of income. According

to the Tribunal if the income is to be classified as income from house property, the assessee must be the owner of the house property and that the

income from buildings taken from another and then sublet will have to be taken only as income from other sources. It is on the basis of the said

classification, the Tribunal proceeded to consider the allowability of the urban land tax paid from the income of the assessee either from the house

properties or from other sources. The classification of the rental income made by the Tribunal has not been disputed before us. Therefore, we have

to proceed on the basis of the orders of the Tribunal that the rent from the cinema house constructed by the assessee jointly with others should be

taken to be income from house property and the rents received from the Andhra Scientific Co. in respect of the building that was taken on lease by

the assessee along with the land will have to be taken as income from other sources. According to the Tribunal, since urban land tax is payable in

respect of the land and not in respect of the property which is the theatre building, in computing the rental income from the theatre building the

urban land tax is not deductible and only a deduction relatable to the theatre building alone can be allowed, therefore, the income from the property

will have to be computed as income from the house property without giving any allowance for the urban land tax. However, the rental income from

Andhra Scientific Co. buildings let on rent of which the assessee is not the owner but only a lessee, has to be classified as income from other

sources and is to be computed in accordance with section 57 of the Act. In the computation of such an income, the sum of Rs. 16,130.52, being

the urban land tax paid, will be an appropriate admissible deduction as it is an amount of expenditure not being in the nature of capital expenditure

laid out or expended wholly and exclusively for the purpose of making or earning income from other sources which is the rental income from

Andhra Scientific Co. The question is whether the decision of the Tribunal classifying the rental income into two categories (1) income from house

properties, (2) income from other sources and allowing the deduction of urban land tax paid for the period prior to the assessment year from the

income from other sources is correct?

It is not in dispute that under the lease arrangement as between the assessee and the lessor the assessee has to bear the burden relating to urban

land tax. For the period from 1-7-1963 to 1-7-1970, the demand for urban land tax was made on the lessee on 30-7-1970 and it was paid during

the assessment year 1971-72. Though the ITO and the AAC took the view that the deduction can be claimed only in relation to the urban land tax

relatable to the assessment year and that deduction cannot be claimed in respect of the payment of urban land tax relatable to the earlier previous

years, the Tribunal has taken the view that so far as the urban land tax is concerned, the liability to pay the same arises only on a demand being

made for payment of Rs. 16,130.52 on 30-7-1970, i.e., within the year of assessment, and, accordingly, the said amount can be claimed as

deduction during the accounting year in question. On this aspect of the case, we are inclined to agree with the view of the Tribunal that the dates of

demand and payment of the urban land tax alone are material for the purpose of claiming deduction and not the period for which the urban land tax

has been paid. This is clear from a reading of the provisions of the Urban Land Tax Act, 1966, apart from the decision of this Court in

Commissioner of Income Tax Vs. M. Ct. Muthiah, . In that case the assessee paid for the assessment year 1971-72, a sum of Rs. 8,564

representing the urban land tax relating to earlier years claimed from him during that year. He claimed deduction of the amount u/s 24(1)(vii) in

computing his income from property. This was negatived by the ITO as well as by the AAC but upheld by the Tribunal. When the matter was

taken to this Court, this Court took the view that having regard to the scheme of the Tamil Nadu Urban Land Tax Act, which levies urban land tax,

it is clear that there is no question of accrual of the liability of every year, that the amount became payable only as and when it is demanded, that

insofar as section 24(1)(vii) used the word ''paid'' and not ''payable'' or ''chargeable'', the emphasis should be placed on the actual payment and

not payability and that, therefore, the assessee was eligible for deduction of the urban land tax paid during the year though the amount related to

some earlier years. The same view has also been taken by this Court in Commissioner of Income Tax Vs. Woodlands Hotel,

The only question then remains to be considered is whether the payment of Rs. 16,130.52 can be claimed as an admissible deduction for

arriving at the income under the head ''Other sources'' for the year 1971-72 as has been held by the Tribunal.

The contention of the revenue on this aspect of the case is that the assessee has got two capacities, one as a lessee and the other as a landlord

and that the amounts should be taken to have been paid only in his capacity as landlord and not in his capacity as a lessee in which case he is not

entitled to claim deduction. It is also pointed out by the revenue that in any event the deduction can be claimed only from the income from house

properties and not from the income from other sources. Reference has been made to the decision of the Supreme Court in The Indian Aluminium

Co. Ltd. Vs. The Commissioner of Income Tax , West Bengal, Calcutta, wherein the Supreme Court expressed the view that when a person has a

dual capacity of a trader- cum- owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken

to be in the capacity of a trader according to ordinary commercial principles and that to be a permissible deduction, there must be a direct and

intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not

as owner of assets, even if they are assets of the business. In that case the Court pointed out the distinction between sections 37 and 57 and stated

that while section 37 deals with the allowability of an expenditure wholly or exclusively made for the purpose of the business profession, section 57

deals with the allowability of deductions of any expenditure from the income chargeable under the head ''Income from other sources'' and held that

the deduction for payment of tax cannot be claimed u/s 57(iii) as an expenditure laid out or expended wholly or exclusively for the purpose of

making or earning such income. Reference is also made to the decision of the Supreme Court in T.S. Krishna Vs. Commissioner of Income Tax ,

Madras, where the wealth-tax paid by the assessee in respect of the shares held by him was held as not a deductible expenditure as it did not bear

any relationship direct or incidental to the earning of the income from dividends and could not also be said to be laid out or expended exclusively

for the purpose of making or earning such income within the meaning of section 57(iii).

It is not possible for us to agree with the revenue that the assessee is not entitled to deduction u/s 57(iii). As already stated, deduction has been

allowed from the rental receipts from Andhra Scientific Co. The assessee has taken a building on lease and is earning an income by subleasing it. It

is only by taking a lease of the property and subleasing it he earns income. As a lessee he has undertaken to pay the urban land tax payable on the

land in respect of which the lessor is principally liable. Therefore, the amount of urban land tax actually paid should be taken to be an amount paid

in addition to the lease amount by the lessee to the landlord. Though the amount is paid by the assessee as a lessee to the Government, he is

discharging the liability of the owner of the land in pursuance of a lease agreement and not as a owner of the land. The liability to pay urban land tax

on behalf of the lessor, undertaken by the lessee, is a contractual liability entered into as part of the lease arrangement which has been entered into

between the lessor and the lessee for the purpose of making or earning income. Therefore, the urban land tax which the assessee has undertaken to

pay to the Government on behalf of the lessor should be taken to be a payment in addition to the lease amount. It cannot be disputed that the lease

amount paid by the lessee to the lessor will be deductible expenditure in the computation of income from other sources. If the lease amount could

be deducted u/s 57(iii), we do not see why the urban land tax paid by the lessee to discharge the liability of the lessor cannot be taken as a

deduction made for the purpose of earning income. In this view of the matter, we have to hold that the urban land tax paid is a deductible

expenditure u/s 57(iii) from the rental income received from Andhra Scientific Co. The learned counsel for the revenue would then contend that the

giving of such a deduction from the income from other sources goes to the benefit of a third party like the lessee of the cinema theatres. The urban

land tax liability which is in respect of the entire land is sought to be deducted only from the income from one building. It is no doubt true that the

benefit of deduction goes to a third party. But that is not a ground for denying the asses-see the benefit of section 57(iii). Lord Sumner in Usher''s

Wiltshire Brewery Ltd. v. Bruce [1915] 6 TC 399 (HL) had expressed the view thus:

Where the whole and exclusive purpose of the expenditure is the purpose of the expender''s trade and the object which the expenditure serves is

the same, the mere fact that to some extent the expenditure enures to a third party''s benefit or that the expender incidentally obtains some

advantage in some character other than that of a trader, cannot in law defeat the effect of the findings as to the whole and exclusive purpose.

The same principle was laid down by the Supreme Court in The Commissioner of Income Tax, Bombay Vs. Chandulal Keshavlal and Co., Petlad,

Commissioner of Income Tax, West Bengal Vs. Royal Calcutta Turf Club, and Eastern Investments Ltd. Vs. Commissioner of Income Tax, West

Bengal, .

Thus, on a due consideration of the matter, we have to agree with the ultimate conclusion arrived at by the Tribunal. The reference is, therefore,

answered in the affirmative and against the revenue. The assessee will have his costs from the revenue. Counsel''s fee Rs. 500.