Commissioner of Income Tax vs Rajah Dhanrajgiriji

Jeevan Reddy, J.—The following question is referred for our opinion u/s 256(1) of the income tax Act, 1961 (''the Act'') : "Whether, on the facts and in the circumstances of the case, the interest as claimed is deductible u/s 24(1)(iv) of the income tax Act ?"

The assessee was deriving income from different sources including house property. He owned two houses, viz., one at Bombay known as ''Dhanraj Mahal'' and another at Pune, known as ''Pudumjee Terrace''. The assessee had raised certain loans both for the purpose of constructing the said houses and also to meet his personal needs. While it is not necessary to set out the history of the dealings between the assessee and his creditors, it is sufficient to mention that, so far as the house ''Dhanraj Mahal'' at Bombay is concerned, a suit (O.S. No. 452 of 1954) was filed by the creditor, Secunderabad Trading Syndicate, represented by Shri M.M. Malani, against the assessee. The suit was decreed and the suit property was brought to sale in execution of the decree. The sale was notified to be held on 2-12-1959. But before the sale was held, a settlement was arrived at between the assessee and the creditor. The said building, ''Dhanraj Mahal'', was under requisition by the Government of India for accommodating the Government officers and for other public purposes. The Government of India lent a sum of Rs. 29,00,000 to the assessee by taking a mortgage of the entire house in its favour. The creditor was paid off from this amount. Under the mortgage executed by the assessee in favour of the Government of India, the assessee agreed to pay interest at a particular rate and also stipulated that, if the interest was not paid as agreed, it would be added to the principal and further interest would be calculated. A charge was created in respect of both principal and interest on the said property. Now coming to the Pune house, ''Pudumjee Terrace'', it was found on an account being taken that at the end of Diwali year 1963-64, the assessee was owing an amount of Rs. 3,33,753. The creditor insisted on some security being offered in addition to the promissory note executed by the assessee. Accordingly, the assessee created an equitable mortgage in respect of the said house by deposit of title deeds. Under this equitable mortgage he agreed to pay interest at the rate of 8 per cent per annum. 2. The assessee was paying interest in respect of both the mortgages, i.e., to the Government of India as well as to the other creditor in respect of the Pune house property. This was being allowed as deduction from out of the income arising from the house property till the assessment year 1968-69. But after the Finance Act, 1968, amended clause (iv) of sub-section (1) of section 24 of the Act, the ITO disallowed the said interest as a deduction. This was challenged by the assessee in appeal before the AAC. The matter ultimately went before the Tribunal. The Tribunal held that the deduction is allowable. It held that, on the facts and in the circumstances of the case, the deduction fell with in clause (iv) of sub-section (1) of section 24. Thereupon, the revenue asked for and obtained this reference.

Section 24(1) specifies several deductions which can be allowed out of the income from house property. Clause (zv), as amended by the Finance Act, 1968, reads as follows:

"24. (1) Income chargeable under the head ''Income from house property'' shall, subject to the provisions of sub-section (2), be computed after making the following deductions, namely :-

(i) to (iii) ** ** **

(iv) where the property is subject to an annual charge (not being a charge created by the assessee voluntarily or a capital charge), the amount of such charge;"

Before the amendment, the words ''a charge created by the assessee voluntarily or'' were not there. In this reference we are concerned with the assessment years 1970-71, 1971-72, 1972-73 and 1973-74 and, therefore, the matter is governed by the amended clause (iv). A reading of clause (iv) discloses that, for claiming the said deduction, three requirements must be satisfied, viz. :

(1) the sum claimed as a deduction must be an annual charge on the house property which is yielding income;

(2) the charge should not have been created by the assessee voluntarily; and

(3) it should not be a capital charge.

It is not necessary further that the annual charge should have been created for the purpose of acquiring or constructing house property which is yielding income.

While, in the case of all other deductions provided in section 24(1), there is a nexus between the deduction and the house property, such a nexus is not provided in clause (iv) of section 24(1). We can only presume that it must have been done by the Parliament knowingly. So long as the above three requirements are satisfied, the amount paid on account of the annual charge is deductible out of the house property income.

A good amount of controversy is raised be fore us as to the meaning of the word ''voluntarily'' occurring in the said clause. The said word cannot be understood as signifying a meaning opposite to the words ''by operation of law''. If that was the intention of the Parliament, it would have used the words ''by act of parties'', which is the expression generally understood as the opposite of the words ''by operation of law''. Here, the expression used is ''voluntarily'', which must be understood as distinct from, and as opposed to the expression ''involuntarily''. The word ''involuntarily'' means, without there being any option, i.e., under an enforceable obligation. On this reasoning, where a person creates an annual charge to meet an existing, genuine, legal or contractual obligation, it would not be a case of creating a charge voluntarily.

It is evident that the Finance Act, 1968, amended clause (iv) by introducing the word ''voluntarily'' to overcome certain decisions rendered by the Courts to the effect and that so long as there is annual charge, the amount payable on that account is deductible under clause (iv) as it stood prior to amendment, irrespective of the fact whether the charge is created voluntarily or involuntarily of the creditors and involuntarily. Another fact to be noticed is that, the amount that the assessee is claiming by way of deduction is only the amount paid towards interest and not the amount paid on account of the principal due under the mortgages; payment of any such amount would be a capital charge and not permissible under clause (iv).

We find that there are no decided cases throwing light on the meaning of the word ''voluntarily''. Two decisions, one of the Bombay High Court in Commissioner of Income Tax, Bombay City-III Vs. S.B. Bakshi Dalip Singh, and the other of the Delhi High Court in Commissioner of Income Tax Vs. Dr. Rameshwar Lal Pahwa, are brought to our notice but, both these cases arose and were decided with reference to the unamended clause (iv). Therefore, there was no occasion for them to discuss the meaning of the expression ''voluntarily'' which occurs only in the amended clause (iv). In S.B. Bakshi Dalip Singh''s case (supra), the Bombay High Court found, as a fact, that the charge was not created voluntarily and being an annual charge, qualified for deduction. So far as the decision in Dr. Rameshwar Lal Pahwa''s case (supra) is concerned, all that the Bench of the Delhi High Court held was that, according to the language of clause (iv), before its amendment, it is not necessary that the charge should have been created in voluntarily. It was further held that even a charge created voluntarily by the assessee qualifies for deduction. Be that as it may, on the language of clause (iv), we must hold that the Tribunal was right in holding that the amounts paid towards interest on the aforesaid mortgages qualify for deduction under clause (iv) of section 24(1). For the above reasons, we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. No. costs.