1. This appeal is by the assessee, Paras Agarbathi Co., a partnership firm registered under the Income-tax Act, 1961. It relates to the income-tax assessment for the year 1978-79. The first ground of objection contained in ground Nos. 1 to 5 pertains to the computation of income from property under Section 22 of the Income-tax Act, 1961 ('the Act'). The assessee held a property at Ranjitram Road, Gopipuram, Vaharwad, Ward No. 8, Surat, which was partly used for assessee's business and partly let out to various tenants fetching an aggregate rent of Rs. 23,400. The assessee computed its income under the head 'Income from house property' at a loss of Rs. 6,957. This was arrived at by first deducting from the aggregate rental as stated above, the municipal taxes, light charges, etc., and a deduction or Rs. 8,400 in respect of new residential unit as contemplated under Section 23 of the Act. From the balance of Rs. 11,617, the assessee claimed deduction on account of interest, collection charges, one-sixth for repairs, etc., totalling Rs. 18,574. Thus, the assessee claimed a loss of Rs. 6,957.
The ITO in the assessment disallowed the loss and took the income from property at nil on the ground that according to the second proviso to Section 23(1), the income in respect of the property shall in no case be a loss. The AAC in the appeal preferred by the assessee on this point upheld the ITO's computation as correct.
2. In the appeal before us by the assessee on this point, it is contended that the departmental authorities are wrong in the computation of income adopted by them and holding that in no case there can be a loss under the head 'Income from house property' where any such property is entitled to deduction as new residential unit under Section 23. It is submitted that the deduction contemplated by Section 23 in respect of new residential unit is not a deduction for determining the net income from property, but is a deduction in determining the annual letting value of the property, from which further deductions as contemplated under Section 24 of the Act are to be allowed. In other words, the deduction under Section 24 are independent of the deduction contemplated under Section 23 and irrespective of the question as to whether there is a positive figure after making the deduction under Section 23 against the rental income or not such deductions have to be allowed even if it results in a loss.
It is further pointed out that the deduction contemplated under Section 23 is, as stated therein, for the purpose of determining the annual value of any property contemplated under Section 22, which is required to be charged under the head 'Income from house property' and such income from house property has to be computed by further deductions under Section 24. Another submission made in this connection is that the second proviso to Section 23(1) applies for determination of income in respect of any residential unit stated in Clauses (a) and (b) of Section 23(1) and not in respect of property as a whole, i.e., where the deduction under Section 23 will result in a loss, then such loss has to be ignored and the amount taken as nil, but it does not affect the deduction under Section 24. The learned departmental representative supported the order of the AAC and contended that according to the language used in the second proviso to Section 23, the income from house property cannot in any case arrive at a nil figure where it is also entitled to deduction under Section 23 as a new residential unit.
3. On a consideration of the facts and contentions of the parties we find considerable force in the assessee's contention. According to the order and sequence of the provisions of Sections 22 to 24, it is clear that the deduction contemplated under Section 23 in respect of any residential unit is only for the purpose of determining the annual value of the concerned property and in determining such annual value there cannot be a loss figure and at best it can be a nil figure only.
The deduction under Section 24, however, follow determination of the annual value of the property to be computed as per provisions under Sections 22 and 23 of the Act and there is no restriction placed with regard to these deductions under Section 24 to say that there cannot be a loss figure. This is further supported by the provisions of Section 24(2) which clearly indicate that the deductions under Section 23 are required to be made only in determining the annual letting value of the property and there is a limitation against deduction of expenses contemplated by Section 24 only in respect of property of the nature referred to in Sub-section (3) of Section 23 which speaks of only one residential house in the occupation of the owner, but which he cannot occupy on account of certain reasons stated therein. Thus, the provisions of Section 24 make it clear that there can be a deduction made under Section 24 in excess of the annual letting value as determined under Section 23 in respect of property other than the property meant for the owner's use and which cannot for reasons contemplated under Section 23(3) be occupied by him. We, therefore, uphold the assessee's contention and direct the departmental authorities to modify the assessment accordingly.
4. & 5. [These paras are not reproduced here as they involve minor issues].