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Commissioner of Income-tax, Bombay City-iii Vs. S.B. Bakshi Dalip Singh - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 60 of 1969
Judge
Reported in(1979)12CTR(Bom)10; [1980]122ITR96(Bom); [1979]1TAXMAN416(Bom)
ActsIncome Tax Act, 1961 - Sections 22, 23, 24, 24(1), 25, 26 and 27; Indian Income Tax Act, 1922 - Sections 9(1), 16 and 16(3)
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentS.B. Bakshi Dalip Singh
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.J. Mehta, Adv.
Excerpt:
.....22, 23, 24, 24 (1), 25, 26 and 27 of income tax act, 1961 and sections 9 (1), 16 and 16 (3) of indian income tax act, 1922 - where payment is recurring over long period of years it can be called annually recurring payment - it is immaterial whether mode of payment is monthly or intervening period between two payments is less than year - if any amount is payable monthly and such payment is to recur year after year liability must be treated as one for making annual payment and property charged with such payment to be treated as charged with annual payment. - - cit [1948]16itr294(bom) ,where it was held that a legally enforceable charge created by the owner on his property for the payment of an annual sum to his mother would be an admissible deduction even if the charge was created..........tribunal was justified in holding that the provisions of sections 16(1)(c) and 16(3)(iii) of the indian income-tax act, 1922, had no application to the facts of the assessee's case ?' 2. the above two questions arose out of the assessment proceedings of the assessee relating to the assessment years 1960-61, 1961-62, 1962-63 and 1963-64. the assessee, who had been assessed in the status of an individual, had income from salary, interest on securities and house property. he had executed a mortgage deed on february 11, 1959, in favour of his wife whereby he had agreed to pay her an allowance and the payment was to take effect from march 1, 1959. the terms of the mortgage deed provided that in the event of the death of the assessee, his heirs and legal representatives were to pay the said.....
Judgment:

Chandurkar J.

1. The two questions which have been referred to this court at the instance of the revenue are :

'(1) Whether, on the facts and in the circumstances of the case, the income from Worli property was assessable to tax in the hands of the assessee for the assessment year 1960-61 to 1963-64 in view of the fact that it was mortgaged in favour of the assessee's wife to secure the amount of monthly maintenance payable to her

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of sections 16(1)(c) and 16(3)(iii) of the Indian Income-tax Act, 1922, had no application to the facts of the assessee's case ?'

2. The above two questions arose out of the assessment proceedings of the assessee relating to the assessment years 1960-61, 1961-62, 1962-63 and 1963-64. The assessee, who had been assessed in the status of an individual, had income from salary, interest on securities and house property. He had executed a mortgage deed on February 11, 1959, in favour of his wife whereby he had agreed to pay her an allowance and the payment was to take effect from March 1, 1959. The terms of the mortgage deed provided that in the event of the death of the assessee, his heirs and legal representatives were to pay the said amount from his estate. There is a clear recital in the mortgage deed that the property which was the subject of the mortgage was to be the security for the due payment of the said sum of Rs. 500 and that the right to receive Rs. 500 per month was secured by the mortgage of the property. The net income of the house property was computed by the ITO at Rs. 2,073 for the assessment year 1960- 61, Rs. 2,212 for 1961-62, Rs. 2,212 for 1962-63 and Rs. 3,000 for 1963-64. In the assessment proceedings, the assessee claimed exemption from payment of tax in respect of the house property income from Worli property because the net income which had accrued to him in respect of that property was less than Rs. 6,000, which was the amount payable under the mortgage to the wife of the assessee. Before the ITO, it was the case of the assessee that the payment of maintenance to the wife amounted to a diversion at the source before the income reached the hands of the assessee. This contention was rejected by the ITO, who took the view that the payment by way of maintenance was merely an application of income after the income had reached the hands of the assessee. The ITO also alternatively took the view that the provisions of s. 16(1)(c) or 16(3)(iii) of the Indian I.T. Act, 1922, would be attracted and the income from the Worli property was liable to be taxed thereunder.

3. The assessee took the matter in appeal to the AAC. The AAC confirmed the order of the ITO and the assessee then filed an appeal before the Appellate Tribunal. The Tribunal rejected the contention of the assessee that the payment of maintenance was in the nature of a diversion at the source by an overriding charge relying on the decision of the Supreme Court in CIT v. Sitaldas Tirathdas : [1961]41ITR367(SC) . The Tribunal, however, upheld the assessee's contention based on s. 9(1)(iv) of the Indian I.T. Act, 1922. The Tribunal took the view that the mortgage deed created a charge to secure an annual liability and that under s. 9(1)(iv) the assessee was entitled to an allowance from the income of the property in question to the extent of Rs. 6,000 per year. The Tribunal relied on the decision in Prince Khanderao Gaekwar of Baroda v. CIT : [1948]16ITR294(Bom) , where it was held that a legally enforceable charge created by the owner on his property for the payment of an annual sum to his mother would be an admissible deduction even if the charge was created voluntarily our of natural love and affection. The Tribunal further took the view that s. 16(1)(c) or s. 16(3)(iii) had no application to the facts of the case because the property was neither settled nor disposed of by the assessee in favour of his wife. The revenue being aggrieved by this decision of the Tribunal had asked for the two questions earlier mentioned to be referred to this court.

4. In order to appreciate the contention which is raised by Mr. Joshi appearing on behalf of the revenue, it is necessary to refer to the relevant part of s. 9 of the Indian I.T. Act, 1922, which reads as follows

'9. Property. -(1) 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 for the purposes of any business profession or vocation carried on by him the profits of which are assessable to tax, subject to the following allowances, namely :-......

(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;.....

Explanation. -For the purposes of clause (iv) of this sub-section, the expression 'annual charge' does not include any tax in respect of property or income from property levied by a local authority or a State Government or the Central Government.......'

5. It may be stated that the Explanation was inserted by the Indian I.T. (Amend.) Act, 1960, and it is not in dispute that the Explanation came to be inserted because of the decision of the Supreme Court in New Piece Goods Bazar Co. Ltd. v. CIT : [1950]18ITR516(SC) . The relevant provision in the I.T. Act, 1961, is in s. 24, the material part of which reads as follows

'24. Deductions from income from house property -(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 :-.....

(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.'

The bracketed portion was introduced with effect from April 1, 1969, for the words 'not being a capital charge'.

6. The other relevant provision is the definition of 'annual charge' which is given in s. 27 which provides that 'For the purposes of sections 22 to 26. .... (iv) 'annual charge' means a charge to secure an annual liability, but does not include any tax in respect of property or income from property imposed by a local authority, or the Central or a State Government'.

7. Mr. Joshi appearing on behalf of the revenue has relied on certain observations made in the judgment of this court in CIT v. Mahomedbhoy whether municipal tax levied on property under the City of Bombay Municipal Act and which, when in arrears, became a charge on the property under s. 212 of that Act came within the expression 'in annual charge not being a capital charge' in s. 9(1)(iv) of the Indian I.T. Act, 1922, and this court held that an assessee is not entitled to deduct from his income from property under s. 9(1)(iv) of the Indian I.T. Act, 1922, the amount paid by him as municipal general tax in respect of his immovable property under the City of Bombay Municipal Act. While dealing with this question the court tried to ascertain the meaning of the words 'an annual charge'. Beaumont C.J., in his judgment, while referring to the meaning of the words 'an annual charge' observed as follows (p. 325) :

'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 arise 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.'

8. Kania J. as he taken was, in his separate judgment, referred to the provisions of s. 9(1)(iv) and observed as follows (p. 327)

'I do not propose to accept the burden of defining what would fall within the amending words in clause (iv) of section 9. To say the least it is drafted very inartistically. The expressions 'annual charge' and 'not being of a capital nature' are not defined anywhere. One can understand annual payment or annual receipt. I do not see how a charge can be annual unless it means a charge in respect of a payment to be made annually.'

9. Relying on these observations, it is contended by Mr. Joshi that the definition of annual charge in s, 27(iv) is in terms of the decision of this court in Mahomedbai I. M. Rowji's case : [1943]11ITR320(Bom) and, therefore, unless it is possible for the assessee to show on the basis of the mortgage deed that the payment had to be made annually, the assessee would not be entitled to the allowance either under s. 9 of the Indian I.T. Act, 1922, or under s. 24 of the I.T. Act, 1961. It is contended on the recitals of the mortgage deed that the payment was to be made monthly and it could not, therefore, be said to be a payment made annually and, consequently, notwithstanding the fact that the effect of the mortgaged property was charged with the liability for the amount of maintenance, the charge could not be described as an annual charge. On the other hand, Mr. Mehta appearing on behalf of the assessee has places heavy reliance on a decision of the Calcutta High Court in CIT v. State Bank of India : [1957]31ITR545(Cal) , where though the payment by way of maintenance had to be made on a monthly basis, such payment was held to be covered by the words 'annual charge' as contemplated by s. 9(1)(iv) of the Indian I. T. Act, 1922.

10. The question which we have, therefore, to decide is whether the words 'annual charge' for the purposes of s. 9(1)(iv) or s. 24 should be so strictly construed that any payment which is not to be made annually, that is to say, once in every year, would have to be excluded for the purposes of the allowances contemplated by s. 9(1)(iv) of the 1922 Act or s. 24 of the I.T. Act, 1961.

11. There is no dispute in this case that the mortgage deed created a charge in respect of the amount maintenance. The only question is whether the charge can be said to be annual. The word 'annual' has several meanings depending upon the context in which that word is used. The meaning of that word was considered by the House of Lords in Moss Empires Ltd. v. IRC [1937] AC 785; 21 TC 264, while construing the words 'annual payments' occurring in R. 21 of the General Rules under the English I.T. Act. 1918. The question was whether certain payments made by the appellants in fulfilment of an obligation undertaken by them in an agreement were 'annual payment charged with tax under Schedule 'D' within the meaning of para. (1) of R. 21 of the General Rules applicable to all Schedules of the I.T. Act, 1918'. The relevant part of R. 21 which provided for the liability of the payer to deduct the amount of income-tax on behalf of the receiver read as follows 'Upon payment of any interest of money, annuity, or other annual payment, etc.' Lord Maugham observed thus (p. 299) :

'In rule 21 'annual' must be taken to have, like interest on money or an annnity, the quality of being recurrent or being capable of recurrence.' In that case it was found that the payments were continue for five years and, therefore, they had the necessary quality of recurrence and, therefore, were within the terms of r. 21. This was also the meaning given in some earlier decision to the word 'annual' and we need refer only to two decisions, the first one being In re Janes' Settlement Wasmuth v. Janes [1918] 2 Ch 54 . It was held in that case that a fixed weekly payment made payable on a fixed day every week for a period possibly exceeding a year is an 'annual sum' within the English I.T. Act, 1942, s. 102, and the English I.T. Act, 1853, s. 40, so that the person liable to make the payment is entitled to deduct income tax. It was observed by Astbury J., in that case, that the real question was whether the weekly payment of 9 every Wednesday was an annuity or other annual referred to an earlier decision in In re Cooper [1917] WN 385 and observed as follows (p. 58) :

'In In re Cooper Sargant J. had a similar point before him. A testator gave his residuary realty and personality to his trustees upon trust for sale and conversion and directed them to pay thereout to his wife the sum of 50 in every calendar month, during her life. Sargant J., after saying that he had not to decide whether the wife was ultimately bound to pay the tax after going to the proper authorities, and after referring to the three authorities I have cited, said 'Here the testator had contemplated payments extending over a year, and had adopted as the unit of payments the one-twelfth of a year into which the calendar year was divided. Looking at the substance of the matter, his Lordship was clearly of opinion that the money payment was an annuity, and, if not an annuity, that it was an annual payment in respect of which income tax ought to have been deducted.''

12. Astbury J. then proceeded to observe :

'It seems extraordinary that a sum payable every calendar month should be within the sections, because the testator or covenantor has adopted an aliquot part of the calendar year as his unit of payment, but that a weekly payment, though contemplated to extend over a year, should be in a different category. It is, however, pointed out that a sum payable every calendar month must be a definite sum per annum, whereas a sum payable weekly is variable, owing to there being fifty-two weeks and one day in an ordinary year and fifty-two weeks and two days in a leap year, the odd days making up an extra week in every five or six years. It is therefore contended that a weekly sum is not an annuity or annual payment within the sections.

The prospect is somewhat alarming, as, if the contention is sound, the Income Tax Acts can be evaded in a manner that one does not care to contemplate. But the contention is really unsound. The covenant is in substance a covenant to pay so much a year by weekly payments of 9 every Wednesday. No doubt in some years there will be fifty-two and in others fifty-three payments. But the covenant is really a covenant to pay an annual sum determined by the number of Wednesdays in each successive year. The principle of In re Cooper [1917] WN 385 applies, and the income-tax is deductible.'

13. This decision is, therefore, a clear authority for the proposition that though a payment is made more than once in a year, it can qualify for being called an annual payment or an annuity if in substance the nature of the payment is such that the payment is contemplated every year or has an element of recurrence in it.

14. In Ryall v. Honey will [1923] 2 KB 447 , the meaning of the word 'annual' was again considered by Rowlatt J. as follows

'The word 'annual' may mean 'annually recurring', as applied to the seasons of the year, of 'recurring over a long period of years, or it may mean 'lasting only for one year', as we speak of certain flowers as annuals which must be sown afresh every year or, as in the case of interest on a sum of money, it may mean 'calculated with reference to a year'.'

15. It thus appears to us that if a payment recurs over a long period of years, it can be called an annually recurring payment and notwithstanding the fact that the mode of payment is monthly or the intervening period between two payments is less than a year. Thus, if any amount is payable monthly and such payment is to recur year after year the liability must be treated as one for making an annual payment and the property which is charged with such payment must be said to be charged with an annual charge.

16. We may point out that the decision in Moss' Empires Ltd. v. IRC [1937] AC 785; 21 TC 264 has been quoted with approval by the Supreme Court in New Piece Goods Bazar Co. Ltd. v. CIT : [1950]18ITR516(SC) . The question in appeal before the Supreme Court was whether, in computing the income from property under s. 9 of the Indian I.T. Act, 1922, an assessee is entitled to deduct under s. 9(1)(iv) the municipal property tax paid under the City of Bombay Municipal Act, 1988, and the urban immovable property tax paid under the Bombay Finance Act, 1932, and whether these taxes came within the expression 'an annual charge not being a capital charge' and the Supreme Court held that the annual charge meant a charge to secure an annual liability. One of the arguments, in that case, on behalf of the revenue, was that although the taxes were assessed for the year, the liability to pay them arose at the beginning of each half year and unless a notice of demand was issued and a bill was presented, there was no liability to pay them and, therefore, till then no charge under s. 212 of the Bombay Municipal Act could arise, and the liability to pay being half-yearly in advance, the charge was not an annual charge. The Supreme Court took the view that the whole tenor of the Bombay Acts showed that the taxes were in the nature of annual levy on the property and were assessed on the annual value of the property each year, but the annual liability could be discharged by half-yearly instalments. In that context, the Supreme Court observed as follows (p. 523) :

'In Moss' Empires Ltd. v. Inland Revenue Commissioners [1937] AC 785; 21 TC 264 it was held by the House of Lords that the fact that certain payments were contingent and variable in amount did not affect their character of being annual payments and that the word 'annual' must be taken to have the quality of being recurrent or being capable of recurrence.

In Cunard's Trustees v. Inland Revenue Commissioners [1946] 1 All ER 159; 27 TC 122 it was held that the payments were capable of being recurrent and were, therefore, annual payments within the meaning of Schedule D, Case III, rule 1(1), even though they were not necessarily recurrent year by year and the fact that they varied in amount was immaterial.'

17. Thus, it is clear that in the context of the words 'annual charge' even the Supreme Court has approved of the meaning given to the word 'annual' in Moss 'Empires Ltd.'s case [1937] 21 264 (HL) and the meaning given therein that, for a payment to be annual, there must be a quality of being recurrent was accepted for the purposes of s. 9(1)(iv) of the Indian I.T. Act, 1922.

18. We may also refer to the decision of the Calcutta High Court in CIT v. State Bank of India : [1957]31ITR545(Cal) , on which reliance was placed on behalf of the assessee, where a more or less similar question arose, namely, whether an alimony made payable by a consent decree at the rate Rs. 800 per month and not at the rate of Rs. 9,600 per year could be considered as an annual charge as contemplated by s. 9(1)(iv) of the Indian I.T. Act, 1922. The Calcutta High Court, after considering a series of English decisions including the Moss' Empires Ltd.'s case [1937] AC 785; 21 TC 264 and Janes' Settlement's case [1918] 2 Ch 54 , has taken the view that the expression 'annual payments' as used in taxing statutes must be taken to mean payments, in whatever kind of instalments paid, made every year in discharge of a liability incident to that year, if it has to be made during more than one year, whether consecutively or otherwise, and the payment is annual if it has the quality of recurrence in different years, although it might not be in every one of a succession of years. The Calcutta High Court also held that it was also not necessary that its quantum should be fixed by reference to a whole year. This view has our respectful concurrence. We may, however, point out that we were not inclined to agree with the further view taken by the Calcutta High Court in this case that the word 'charge' in s. 9(1)(iv) of the Indian I.T. Act, 1922, meant merely payment and not security. The Calcutta High Court had taken the view that an annual charge would also include a mere liability to pay. We are, however, not required to go into that question for the purpose of the present case because, admittedly, under the deed of mortgage, the mortgaged property is made a security for the amount of maintenance payable under that mortgage deed. It is not the case of the revenue that the charge was created voluntarily. We are, therefore, inclined to take the view that the Tribunal was right when it held that the amount of maintenance payable under the deed of mortgage, though it was payable monthly, the liability being a recurring liability, had qualified for being treated as an allowance as an annual charge as contemplated by s. 9(1)(iv) of the Indian I.T. Act, 1922, and s. 24(1)(iv) of the I.T. Act, 1961. The first question referred to us is answered in the negative and against the revenue.

19. So far as the second question is concerned, it was not possible for Mr. Joshi to urge that there was any settlement as contemplated by the provisions of s. 16(1) or s. 16(3) of the Indian I.T. Act, 1922. In that view of the matter, the second question is answered in the affirmative and against the revenue.

20. The revenue shall pay the costs of this reference.


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