KANIA, J. - This is a reference made under Section 66(1) by the Income-tax Appellate Tribunal. The applicants are a limited company and the question in respect of the assessment of the company arises for the accounting Samvat year 1995 (ending with 11th November, 1939). The income is from immovable properties owned by the company. Under Section 6 of the Income-tax Act the income of an assesseee is directed to be assessed under five heads, the third of which is 'Income from Property.' Section 9 deals with how that income is to be computed. It starts by stating that the tax shal be payable by the assessee under the head 'Income from Property' in respect of the bona fide annual value of the property consisting of any lands, buildings etc., of which he is the owner, subject to the allowances therein mentioned. Then there are sevenn paragraphs under which the different heads of allowances are grouped. Sub-section (2) states that for the purposes of that section the expression 'annual value' shall be deemed to mean a sum for which the property might be reasonably expected to let from year to year. The scheme of the section thereofre is that for the purpose of taxation of income from property, the first step is to determine the bona fide annual value of the property, ascertained according to Section 9 (2). That step having been reached, the assessee can claim allowance, if he can bring his case under any of the seven heads mentioned in the first sub-section. In the present case the assessee claim to deduct the general municipal tax and the urban immovable property tax before the income is assessed. That contention was rejected by the Income-tax Officer and the Assistant Commissioner. The assessee appealed to the Appellate Tribunal. One of the grounds, as put in the judgment of the Tribunal, was 'that on a proper construction of Section 9 the amount paid for municipal taxes and urban immovable property tax should be allowed as a deduction in computing the income from property.' This contention can cover two grounds : (1) that this tax should be deducted in the first instance before arriving at the bona fide annual value within the meaning of Section 9, and (2) that the annual value of the property being ascertained these are permissible deductions under head (iv) or (v) of sub-section (1). After noticing the contention as raised by the assessees the Tribunal has dealtonly with the second aspect of the matter. It felt itself bound by the decision of this Court in Commissioner of Income-tax v. Mahomedbhai I. M. Rowji. A perusal of that case shows clearly that the first aspect of the case not suggested to arise and has not been dealt with.
In the presnt case it was argued on behalf of the Commissioner that the first aspect was never contemplated by the ground urged by the assessee and has not therefore been dealt with. There appears force in that contention. The point still remains that the assessee was in a position to raise that contention by the grounds of appeal formulated by him and before us he has sought to argue that point.
Having regard to the general words used in raising the contention we are unable to hold that it is not open to him to contend that in arriving at his true income from property these taxes should be deducted. The contention does not in terms refer to the permissible deductions under Section 9 (1) (iv) or (v). The contention is that on a true construction of Section 9 in computing income from immovable property these taxes should be allowed as a deduction. It cannot therefore be stated with conviction that the point is not included in the contention urged.
We are thus faced with a situation that a contention was put forward as a ground of appeal before the Income-tax Tribunal and it has not been dealt with by the Tribunal. The only course left open to the Court under the circumstances is to send it back to the Tribunal and invite it to express its opinion on this aspect of the contention and raise a proper queation of law on that point also.
On behalf of the Commissioner it was pointed out that the Courts powers under Section 66 are limited to the questions raised by the Tribunal. It was also pointed out that the Privy Council had deprecated the practice of the High Court raising new questions of law. In this connection our attention was drawn to Commissioner of Income-tax v. Kameshwar Singh. In that case the Commissioner submitted certain questions but omitted to state one particular question. The High Court raised that question and answered it. In delivering judgment Lord Macmillan observed that practice was not proper. The observation only show that when such a case is noticed the proper procedure for the Court to follow is to refer it back to the referring body and ask it to state the proper questions of law. That decision does not in any way go against the course which we propose to adopt in the present case.
In National Mutual Life Association v. Commissioner of Income-tax an assessee was taxed in respect of his income and the question was brought to Court. The Court upheld the contention of the assessee, but in the course of discussion it was argued on behalf of the Commissioner that Section 42 of the Act was applicable and the assessment should be upheld on the ground that the assessee was a non resident company but was liable to be taxed in British India on account of the income arising out of business connection in British India or out of the assets in British India. The case was not sent back for ascertaining facts and getting the opinion of the Commissioner, who was the referring body in that matter. The Court on the argument of counsel alone, itself considered the question and decided it against the assessee. On looking at Section 42 it is obvious that it is necessary for the Court to obtain the necessary facts before Section 42 is applied. It is not a pure question of law. It arises on the finding of facts which it was the duty of the Commissioner in that case to find. Under the amended law it is now the duty of the Tribunal. The Privy Council did not state that it was not open to the Court to send the reference back to the Commissioner and ask him to submit the proper questios for the opinion of the Court. The Privy Council deprecated the practice of framing a question in the course of argument, when its decision clearly depended on a question of fact, and on which the Commissioner (the referring authority) had no opportunity to apply its mind. In Sir Rajendra Narain v. Commissioner of Income-tax the Court was invited to give its opinion on hypothetical question and the Privy Council held that was not permitted to be done. If necessary the assessee or the taxing authority can raise it on the happening of the events.
On the other hand, we find that in Commissioner of Income-tax v. The National Mutual Life Association of Australasia, the Commissioner made a reference to the Court and Marten, C.J., and Blackwell, J., acting under Section 66 (4) referred the case back to the Commissioner to record his finding on the questions which the Court itself suggested. They invited the Commissioner to state three questions of law, which they formulated and sent the matter back to the Commissioner. The Commissioner returned the papers and declined to state the questions raised by the Court. When the matter was thus brought back the Court itself raised the real question which it considered to have arisen and which was the third question suggested by the former Bench. The Court answered that question and disposed of the reference. The facts there were thus much stronger.
In this state of authorities we do not find any objection to refer this matter back and invite the Tribunal to deal with the first aspect covered by the contention urged by the assessee in one of their grounds of appeal to the Tribunal, and which is quoted by the Tribunal in its judgment. The Tribunal will record its findings and rise the proper questions of law also on that aspect.
Having regard to the importance of the questions covered by the contention urged by the assessee, and in view of the fact that the Court will have to consider the effect of a decision of a Bench of this Court in Commissioner if Income-tax v. Mahomedbhai I.M. Rowji, we considere it desirable that this matter should be dealt with by a Full Bench of the Court, which the learned Cheif Justice will direct to be formed on the papers being returned by the Tribunal in due course. The costs will be costs in the reference.
In accordance with the above direction the Tribunal submitted the following supplementary statement of case.
SUPPLEMENTARY STATEMENT OF CASE.
This case has been referred back to the Appellate Tribunal by the High Court of Judicature at Bombay under Section 66 (4) of the Indian Income-tax Act with the following direction :-
'In this state of authorities we do not find any objection to refer this matter back and invite the Tribunal to deal with the first aspect covered by the contention urged by the asessees in one of their grounds of appeal to the Tribunalwill record its findings and raise the proper questions of law also on that aspect.'
The aspect referred to is whether in arriving at the bona fide annual value of the property the amounts of the municipal taxes and the urban immovable property tax paid by the assessee company should be deducted.
2. The assessee companys income from property during the account year Samvat 1995 (24th October, 1938, to 11th November, 1939) was computed at Rs. 6,21,764 as follows :-
Gross rents realisable as per acounts in respect of the property wholly let.
Less : Tenants burdens borne by the company included in gross rents charged to tenants :
(1) Water tax
(3) Electric light charge
Net annual letting value of the property
Interest paid to Gorakshna Fund (Charitable fund)
Bad debts in respect of irreco-verable rent written off
Collection charges as per acco-unts
Fire insurance premia paid in respect of policies against risk of damage or destruction to the property allowed Rs. 10,940 as against Rs. 17,094 claimed including in respect of policies for loss of rent
Less: vacancy allowance claimed as per acounts Rs. 23,225 allowed net (Rs. 23,225 x 6,38,832)
Net property income
3. The assessee company paid Rs. 79,569-3-0 as municipal property tax and Rs. 32,760 as urban immovable property tax. The parties refer to the first trax as municipal property tax but it appears that it is the tax known as 'general tax' under section 140 (c) of the City of Bombay Municipal Act, 1888. A sum of Rs. 48,572 was paid by the assessee company in respect of taxes which are 'burden' on the tenants. This sum has been allowed by the Income-tax authorities. The figure of Rs. 1,22,675 mentioned in the statement of the case is a mistake for Rs. 79,569-3-0. It appears that the figure of Rs. 1,22,675 included a portion of municipal taxes already allowed by the Income-tax authorities.
4. The municipal property tax and the urban immovable property tax are payable by the landlord.
5. The question that falls to be determined is whether in arriving at the bona fide annual value of the property the amountsd of Rs. 79,569-3-0 and Rs. 32,760 should be deducted from the income of the assessee company from property as determined by the Income-tax authorities. Section 9(1) of the Indian Income-tax Act provides that the tax shall be payable by an assessee under the head 'Income from property' in respect of the bona fide annual value of property consisting of any building or lands appurtenant thereto of which he is the owner, etc., subject to certain allowances. What is meant by annual value of property has been defined in Section 9(2). It provides that the expression 'annual value' shall be deemed to mean the sum for which the property might reasonably be expected to let from year to year. There is a proviso to Section 9(2) with which we are, however, not concerned. The first point that is to be determined under Section 9(1) therefore is the sum for which the property might reasonably be expected to let from year to year. The assessee company and the Income-tax department are agreed as to the amount of Rs. 8,69,253 specified in the computation in paragraph (2) above. In fact this computation was included in paragraph 8 of the statement of the assessee company. This statement is admitted to be correct by the respondent. This being so, swe hold that the assessee companys property might reasonably be expected to let from year to year for a sum of Rs. 8,69,253.
6. Had it not been for the direction of the High Court our further statement of the case would have stopped here, because we are of opinion that the question as to for what sum a property may be reasonably expected to let from year to year is a question of fact. We have, however, been asked to raise proper question of law on the 'first aspect' of the contention raised by the assessee company. We therefore raise the following question of law : -
Whether in arriving at the sum for which property might reasonably be expected to let from year to year the amounts of Rs. 79,569-3-0 and Rs. 32,760 paid by the assessee company respectively for municipal property tax and urban immovable property tax should be deducted ?
7. We are of opinion that the amounts paid by the assessee company referred to above cannot be deducted. Section 9(2) of the Indian Income-tax Act require the Income-tax authorities to ascertain the sum for which the property might reasonably be expected to let from year to year. If the property is let out on rent or if rent thereon is fixed, the rent for which it is let out or the rent which is fixed is the annual value if the property. The tax which the landlord has to pay with reference to that property does not enter into the picture at all. If the landlord wants to pass on the tax to the tenants, he must necessarily raise the rent. If the rent is raised that become the annual value of the property. We are therefore of opinion that for the purposes of Section 9(2), it is the rent which is paid or payable by a tenant which is the annual value of the property.
F. J. Coltman, for the Commissioner.
M. V. Desai, for the assessee.
STONE, C.J. - This is a reference under Section 66(1) of the Income-tax Act and raises a short though important point which regard to the computation of the figure to be included in respect of 'income from property' under Section 9 of the taxation statute.
The matter originally came before my learned brother Kania and myself on the 22nd September, 1944, and having regard to the general importance of the point raised, we sent the matter back to the Tribunal and asked them to frame a further question, in order to cover all the arguments which the assessee desired to raise.
The facts of this particular case can be briefly stated. The assessee companys income from property during the relevant year, which is account year Samvat 1955, that is to say the 24th October, 1938, till the 11th November, 1939, was computed by the Income-tax Officer in the sum of Rs. 6,21,764. That sum was made up from the figure of Rs. 9,17,825, which was the gross rents realised as shown in the accounts, in respect of the assessee companys properties. From that were deducted certain payments which ought to have been made and are normally made by tenants, but which by agreement were made by the company, and certain further permissible deductions which reduced the gross rents to the figure I have first mentioned.
The questions originally formulated by the Tribunal were :-
'(1) Whether the municipal taxes amounting to Rs. 79,569-3-0 paid by the applicant-company are an allowable deduction under the provisions of Section 9(1) (iv) of the Indian Income-tax Act ?
(2) Whether the urban immovable property taxes amounting to Rs. 32,760 paid by the applicant-company are an allowable deduction
(a) under Section 9(1) (iv) of the said Act, (b) under Section 9(1) (v) of the said Act ?'
The further question which has now been submitted, and which can be conveniently called question No. (3) is :-
'Whether in arriving at the sum for which property might reasonably be expected to let from year to year the amounts of Rs. 79,569-3-0 and Rs. 32,760 paid by the assessee company respectively for municipal property tax and urban immovable property tax should be deducted ?'
That latter question, which it will be convenient to deal with first means, should the municipal taxes be deducted in computing the annual value, before any of the permissible allowances mentioned in Section 9 are considered. Section 9 is in these terms :-
'The tax shall be payable by an assessee under the head Income from Property in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy' in the manner therein set out.
By sub-section (2) 'annual value' is defined as being deemed to mean the sum for which the property might reasonably be expected to let from year to year. The two clauses which deal with allowances material to this reference are clauses (iv) and (v) of sub-section (1) :-
'(iv) Where the property is subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge; where the property is subject to an annual charge not being a capital charge, the amount of such charge; where the property is subject to a ground rent, the amount of such ground rent; and, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.
(v) any sums paid on account of land revenue in respect of the property.'
The third question submitted to us, therefore, lies within an extremely narrow compass, and is whether these municipal taxes must be taken into account in finding what is the sum, within the definition of 'annual value', for which the premises might reasonably be expected to let. In my opinion this does not mean any hypothetical letting, but must mean any letting, having regard to all the prevailing circumstances, such as the state of the property market, the supply and demand, and the cost of repairs which the landlord has to do, and also any other liabilities which the landlord must discharge in order to give quiet enjoyment of the premises to the tenant who is to pay a rent therefor, and amongst those liabilities are these two municipal taxes. Accordingly on this question, in my opinion, the assessee must fail because the fact that the landlord will have to pay these taxes is undoubtedly a matter which he must take into account when fixing the amount for which the premises may be reasonably expected to let.
The next question is whether these municipal taxes fall to be deducted as an allowance under clause (iv) of sub-section (1), and the argument submitted by Mr. M. V. Desai in favour of such a deduction, turns exclusively on the words 'where the property is subject to an annual charge not being a capital charge,' and it is submitted that these municipal taxes by virtue of their character are annual charges not being capital charges. For that proposition Section 212 of the Municipal Act is relied upon, by which property taxes due under the Municipal Act in respect of any building or land shall, subject to the prior payment of land revenue, if any, due to the Provincial Government thereupon, be a first charge upon the said building or land and upon the goods and chattels, if any, found thereon. It is suggested by Mr. Desai, with considerable ingenuity, that, whether or not this is a charge, must be looked at from the creditors ?) point of view; that is to say, from the point of view of the assessee company, who has to pay these taxes, and it is said, that from this point of view, this is a charge in the nature of an income payment and therefore not excluded as being a capital charge.
Had this matter been free from authority I should have been of the opinion that that was clearly not so, because Section 212 of the Municipal Act unmistakably charges this taxes on the land and buildings themselves. That view is entirely consistent with a decision of a Bench of this High Court in the case of Commissioner of Income-tax, Bombay v. Mahomedbhoy I. M. Rowji. In that case this very point was raised and the learned Chief Justice Sir John Beaumont said at page 325 :-
'The question is whether that tax can be said to be an annual charge not being a capital charge.
'I do not find it very easy to say what is the meaning of an annual charge. The words in their most natural significance would mean a charge arising annually. But charges as a rule do not arises annually. The words, I think, would cover a charge to secure an annual liability, and in that sense it is argued that this tax is an annual charge. It is to be noticed that the charge only come into existence when default is made in payment of tax, and naturally ceases as soon as the payment is made. So that the charge is unlikely to enure for a year, since the liability is unlikely to exist for a year. Whether it can be said that this is annual charge may be doubtful, but it seems to me plain that it cannot be described as annual charge not being a capital charge. I do not know what meaning can be assigned to the expression in the sub-section a capital charge, except a charge on capital, though it is not necessary to consider the meaning of expression except in relation to the charge arising under Section 212 of the Municipal Act. To my mind, such a charge is unquestionably a charge on capital, and, in my view, therefore, one cannot say that the general tax falls within the expression an annual charge not being a capital charge, which has been added to Section 9(1) (iv).'
And with that judgment Mr. Justice Kania concurred.
Our attention has been drawn by Mr. Desai to a later case in the Allahabad High Court, Gappumal Kanhaiyalal v. Commissioner of Income-tax, C. P. and U. P. That case raises this same point an Mr. Justice Allsop who delivered the judgment of the Bench after referring to the decision of this High Court in Commissioner of Income-tax v. Mahomedbhoy I. M. Rowji, dissented from it for this reason :-
'If an annual charge means a large to secure the discharge of an annual liability, I have no doubt that a capital charge means a charge to secure the discharge of liability of a capital nature, and as I consider that a payment of house tax or water tax would not appear in a capital account, I have no hesitation in holding that a charge to secure such payment would not be a capital charge.'
And accordingly the learned Judges of that High Court dissented from the earlier decision of this High Court and held that these municipal taxes were a permissible deduction under clause (iv).
With the greatest respect to the Allahabad High Court, it is my opinion that that decision is not good law, and that we must not only follow, but express entire approval with the previous decision of this High Court.
The remaining question is, whether this a permissible deduction under clause (v), and whilst not abandoning that point Mr. Desai has not pressed it and has addressed no argument upon it.
In the result, in my opinion, all the questions must be answered in the negative. The assessee must pay the costs of the Commissioner.
CHAGLA, J. - I agree.
One of the heads of the income which is chargeable to income-tax is 'Income from property', and that head is dealt with under Section 9 of the Income-tax Act. The scheme of Section 9 is this : that income from property is charged in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto subject to the allowances mentioned in the following seven sub-clauses; and 'annual value' is defined and explained in Section 9, sub-section (2), to mean the sum for which property might reasonably be expected to let from year to year. Now in my opinion no better method of finding out what the property might reasonably be expected to let from year to year can be devised than the actual rent which is received for that property, and that is the test which the Tribunal applied in this case in order to find out what the annual value of the property in this case was. The Tribunal accepted the very figures given by the assessee of the rents received by them and came to the conclusion that that was the bona fide annual value of the property.
Now Mr. M. V. Desais grievance is this : he says that he has in fact not received all the income which has shown under that head on income from property. He says that he has paid the municipal property tax and the urban immovable property tax and, therefore, he should be permitted to deduct the amount paid for the municipal property tax and the amount paid for the urban immovable property tax before arriving at the figure of the bona fide annual value of the property. Now that contention is clearly based on a fallacy because income on property is not based on what the landlord actually receives. It is based on the bona fide annual value of the property. If a landlord claims any deductions, he must come under one or other of the heads which are contained in the sub-sections to Section 9 of the Income-tax Act and which are considered to be allowances which can be made to a landlord in taxing his income to income-tax. In fixing a rent a landlord takes into consideration all his outgoings and fixes a reasonable rent, and one of the outgoings in this case happens to be the municipal property tax and the urban immovable property tax. It would be entirely erroneous to suggest that a landlord is allowed to deduct from the rent which he receives all the outgoings before the bona fide annual value of the property is arrived at. The bona fide annual value of the property is the rent which the landlord receives. The outgoings are matters for allowances, and if a particular outgoings is a permissible allowance under Section 9, then the Income-tax authorities could grant that allowance to the landlord.
With regard to the second point, whether this particular payment falls under Section 9(1) (iv) of the Income-tax Act, I find it very difficult to under stand how the payment of municipal property tax and the urban immovable property tax is in respect of an annual charge when Section 212 of the City of Bombay Municipal Act makes it clear that the charge only arises when the property taxes become due nor than I understand how this is not a capital charge when again Section 212 in express terms provides that the charge is on the property, not on the income of the property but on the property itself. Mr. Desai has very strenuously urged that we should overrule the decision of a Divisional Bench of this Court. I have carefully considered his arguments and I have also given the careful attention which a decision of a sister High Court deserves, namely, the decision of the Allahabad High Court to which the learned Chief Justice has referred, and even at the risk of being accused of partiality for a decision of this Court, I remain entirely unconvinced that the decision given by Sir John Beaumont, Chief Justice, and Mr. Justice Kania in Commissioner of Income-tax, Bombay v. Mahomedbhoy I. M. Rowji, was not a correct decision.
As regards the question whether this is land revenue and, therefore, entitled to an allowance under Section 9(1) (v), as the learned Chief Justice has pointed out, Mr. Desai has not seriously pressed that point.
I, therefore, agree that the questions should be answered in the manner suggested by the learned Chief Justice.
COYAJEE, J. - I agree with the reasons and conclusions arrived at by my Lord the Chief Justice and by learned brother Mr. Justice Chagla and I have nothing further to add.
Reference answered in the negative.