1. The assessee-individual is an employee of the Madras Refineries Ltd. He constructed a residential house at plot No. 12, New Colony, Tiruvengadam Street, Madras-28, for self-occupation and occupied the same on 1-1-1977. For the assessment year 1977-78, his previous year ended on 31-3-1977. The assessee had taken a loan for the construction of the building and for the year, he paid interest of Rs. 4,169. The assessee had returned his income from the property as under claiming a loss of Rs. 3,864 to be set off against his other income:Annual value: 3,943Less: Municipal tax 1,016 2,927Pro rata for occupation from 1-1-1977 732Less: Half for self-occupation 366 366Less: One-sixth for repairs 61Interest payable 4,149 4,230 Loss: 3,864"Annual value: 3,943Less: Municipal tax 1,016 2,927Less: Deduction for self-occupation 1,463 1,463Less: One-sixth for repairs 246 1,220Less: Interest paid 4,169 Loss: 2,949Proportionate loss for 3 months 737 On appeal, the AAC confirmed the ITO's order. It is, thus, that the matter is in appeal before the Tribunal.
2. In confirming the ITO's order the AAC relied on a decision of the Tribunal in IT Appeal No. 1529 (Bom.) of 1979-80 decided in September 1979, where it was held that where a property was completed during the course of a year, interest relatable to the period from the date of completion of the property to the last day of the previous year alone can be allowed under Section 24 of the Income-tax Act, 1961 ('the Act'). Since there were other decisions of the Tribunal such as in IT Appeal No. 2381 of 1977-78, dated 20-3-1978, where the full interest for the year was allowed, the matter was referred to a Special Bench.
3. The learned Counsel for the assessee has pointed out that the provisions of Sections 23 and 24 of the Act clearly entitled him to the figure of loss worked out by him being set off against his other income. There is no dispute about the annual value of the property concerned. It is only in the manner of working out the income, that there is a difference between the ITO and the assessee. The assessee is entitled to take into account the actual income for the period that the asset belonged to him. He is also entitled to the relief for self-occupation on the basis of this income. As regards the expenditure, the clear words of Section 24 entitled the assessee to deduct interest payable by him during the year. While there are references to proportionate calculation in other sections, there is no such reference in Section 24. The deductions under this section, therefore, are to be given fully irrespective of the period for which they relate. At any rate, having worked out the loss at Rs. 2,949, there was absolutely no justification for reducing the loss proportionately to Rs. 737. Reliance is placed on the decision of the Tribunal in IT Appeal No. 2381 of 1977-78. The decision in the case of Challapalli Sugars Ltd. v. CIT  98 ITR 167 (SC) is given in a different context. The provisions of the Act dealing with the computation of property should be followed strictly in working out the income. The computation of property income is done primarily under Section 23. The proviso to Section 23(1) and the provisions of Section 23(2) are relevant. Section 24 comes in only at a later stage in the computation. The Explanation inserted, with effect from 1-4-1984, also indirectly supports the assessee's case. The proviso to Section 23(1) speaks of 'completed' period. All these, according to the learned Counsel, clearly point out to the allowability of the full interest.
Reference is also made to a circular issued by the Board--Circular No.363 [F. No. 168/4/82-IT(A-I)] dated 24-6-1983--which analogically supports the assessee's case.
4. For the department, stress is laid on the orders of the authorities below. Section 23(1) clearly refers to the computation of proportionate income. Income, according to the learned counsel for the department, must have reference to a particular period. Automatically, the expenses relative to that period only can be allowed. The asset in question having come into existence on 1-1-1977, the income for the period subsequent to this date has to be worked out, the expenditure also for the corresponding period only can be deducted. Since in the present case, income for three months only is computed as a natural corollary, the interest relevant to the three months' period only can be allowed.
The learned Counsel for the department also has relied on this Board's Circular, dated 24-6-1983, which clarifies that interest accrues from day to day and the relevant interest occurring for the period only can be taken into account. Reference is also made to the decision of the Orissa High Court in the case of CWT v. K.B. Pradhan  130 ITR 5. The issue involved is simple. The income from property is included only for a part of the year. The question is whether some of the expenses referred to in Section 24 should be allowed as claimed in full or on some proportionate basis. According to the assessee, interest, which is the subject-matter of dispute in the present case, should be allowed in its entirety since Section 24 does not speak of any proportion in this regard. The main argument of the department is that since the credit side of the account is considered only for a part of the year, it would not be proper to consider the expenses side for the full year. The issue can be resolved by a reading of the relevant provisions.
6. Section 22 of the Act deals with the computation of income from house property. Section 23 deals with how the annual value is to be determined. Under the Act, Sections 4 and 5 of the Act, which are the charging sections and the section defining the scope of the total income, spread out the tax net. Section 14 of the Act deals with the heads of income. Even though the total income is a single concept, income from different heads and sources are to be computed under Section 14 in accordance with various sections following thereon and relating to each category of income. A reading of these sections, however, shows that while heads like salaries, interest on securities, business, etc., deal with a rational physical computation of income, item (C) under Chapter IV dealing with property income deals with, in the first place, a notional charge of income. More than that all other sections under Chapter IV dealing with all heads of income deal with 'income' obviously for a specific period relevant to its earning. There is a restriction with regard to the period in Section 22, which runs as under: The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'.
A basic concept in which Section 22 differs from all other sections is in bringing in a taxable period by reference to 'annual value'. In other words, what is taxed under the Act is only the annual value of the property. The expression 'annual' is the adjective of the word 'year'. What is taxed under Section 22 is, therefore, only the yearly income of the person derived from property. In other words, Section 22 and the sections following, viz. Sections 23, 24, 25, 26 and 27 of the Act, all are based on the concept of taxation of property income through 'the annual value of property'. Legally and etymologically, annual value cannot mean monthly value, weekly value, daily or momentary value. Where property income is brought to tax, therefore, if there is no 'annual value', there is no authority for taxing the property income in the Act at all. If the Legislature wanted a taxing of property income for a shorter period, there was no purpose in utilising the expression 'annual value of property'. As pointed out earlier the concept of 'annual' period for computation of income is completely absent with reference to all other sources and heads of income.
7. The learned Counsel for the department strongly stressed the point that all incomes under all heads should be taxed in the same manner.
There is no justification for adopting any special method for property income. The very same argument of the learned Counsel supports us in our above decision. It is noteworthy that the computation of property income under the Act is not only fictional but also contradicts the very normal conceptional idea of income. It would perhaps be absurd to say that a person who does not receive any rent or so from a property, by the mere holding of it, earns an income. To a rational mind, it would be still more ridiculous to hold that when he stays in a property, he receives income therefrom taxable in his hands. In fact, in some of the advanced countries like United States, property income is never assessed to tax especially when the owner stays therein. We are, therefore, not surprised that having resorted to taxation of property income on a notional basis, the Legislature chose a special method of taxation. It may be that this special method involved consideration of the property income as an 'annual income', that is, only when the property income enured to the benefit of the owner for the full year.
8. The learned counsel for the department also pointed out that right from the inception of the Act, property income was being assessed even for part of the year. Be this as it may, a mistake continuously perpetrated over the years does not cease to be a mistake. Merely because in the past sufficient note was not taken of the clear expression 'annual value' utilised in Section 22, it cannot be assumed that the monthly, weekly or daily value of the property should also be brought to tax. The necessary inference is that where property income cannot be computed so as to give an annual value for the holding up of property income, no property income can be included in the hands of the owner of the property. That property income has been dealt with in a manner different from other heads of income is also clear from the fact that only in the case of property income, the liability to tax is based on the ownership of the property. In the case of business or other sources of income, it is not necessary that the source should be owned by the assessee; mere accrual of income or receipt of income to him would make it taxable. We have, therefore, no hesitation in holding that where a property does not give a rise to an annual income or gives income for a lesser period, notional or otherwise, the income from that property cannot be included in the total income.
9. The above becomes of relevance firstly, where, as in the present case, the property is in the possession of the assessee only for a part of the year having been built during the course of the previous year.
This also is of importance where the assessee has disposed of the property during the course of the year. Maybe, therefore, if for one reason or the other the assessee is not the 'owner' of the property for the full year, income from property cannot be included while working out his total income. The learned Counsel for the department urged that it would be shocking to note that an assessee received a substantial income from property for a good part of the year but merely because he does not own the property for the whole of the year, that income should escape. Perhaps this is a natural result of the above interpretation forced on us by the clear words of the Act. But there is no inequity in this, since, as we pointed out above, the very manner of taxing of property income is notional, full of controversy and a little artificial. This view is further strengthened by the fact that in Section 23, which deals with the determination of the annual value; "the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year". When normally a property can be let out from month to month and in. all tenancy legislation the proper concept is the monthly rent, it is certainly an intentional deviation to refer to the letting from year to year. What the Income-tax Act, unlike the tenancy Acts, clearly wants is that there should be an 'annual' rent in order to bring the property income within the tax net. If, therefore, out of 365 days of the year, the assessee is the owner of the property for 364 days, no property income can be included in his total income because no annual value can be computed for that previous year.
10. The learned Counsel for the department pointed out that annual value can always be computed on the basis of the letting out figures or the bona fide annual value figures relevant to a shorter period. In this connection, reference is also made to the newly introduced Explanation to Section 23(1), inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976. We have seen this section. It is of limited application in the scheme of computation of property income.
The actual mode of computing property income obtains in Section 23, which states that the annual value of any property shall be deemed to be (1) the sum for which the property might reasonably be expected to let from year to year; or (2) where a property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred in (1) above, the amount so received or receivable. It is in the context of the expression 'annual rent', referred to in Section 23(1)(b), that the Explanation is inserted with effect from 1-4-1976. The Explanation provides that where rent is received by the owner of property and the rent for a particular period is known, 'annual rent' is to be computed on the basis of the actual rent for the shorter period. Addressing us and explaining the provisions of the Explanation, the learned Counsel for the department referred to the proportion in a way to support his claim.
Unfortunately, the proportion given in the Explanation is not the usual fraction with a denominator larger than the numerator but the reverse with the numerator larger than the denominator. In other words, what the Explanation wants is that if the property is let out for a period of two months, the proportion would be 12/2 for the computation of annual rent and not the usual fraction 2/12 which is usually thought of in the context of proportions. The Explanation, therefore, further confirms our view that what is intended is, therefore, annual rental for consideration. It may be mentioned that the Explanation would fit in a case where the property is in the ownership of the assessee throughout the year but is let out only for a part of the year. For instance, the municipal, etc., valuation which would come up for consideration under Section 23(1)(a), say, may be Rs. 500 per month, but for the last two months of the year, the assessee could let out the property at Rs. 5,000 per month. In such a case, under the Explanation the annual value for the whole year should be taken at Rs. 60,000 (Rs. 5,000 x 12) and not at Rs. 6,000 (Rs. 500 X 12). Except for this limited modification of the computation, the Explanation does not serve any purpose.
11. On the facts of the case, though the assessee's previous year ended on 31-3-1977, he became the owner of the property and was in a position to occupy it on 1-1-1977, on which date the construction was completed.
For the assessment year 1977-78, therefore, the assessee was not the owner of the property for a year so as to give 'annual value' for the property. In our view, therefore, there is no justification at all for including any property income from this property for this year.
12. The ITO, however, has worked out property income and also given benefit of adjustment of some amount of interest, though lesser than the claim made by the assessee. The learned Counsel for the assessee has pointed out that if no property income is computed for the year under appeal, the assessee would virtually lose the interest paid or payable during the year. In this connection, reference is made to the Explanation to Section 24 inserted by the Finance Act, 1983, with effect from 1-4-1984. The Explanation runs as under: Explanation: Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as a deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years.
The learned Counsel has pointed out that the anomaly would be that for all years prior to the previous year, the interest would be allowable under the Explanation. For all years after the previous year, the interest would be allowable on the basis of the computation of income for the previous year itself, but for only one year, the year of purchase or occupation where the assessee is not the owner of the property for the full year, the interest would not be allowable. This creates a strange anomaly.
13. We have considered this case. We find that this does require a reconciliation of the provisions of the Act so as to make them meaningful. The Explanation was introduced with effect from 1-4-1984.
Even so, it clearly provides that where the property is acquired, constructed, etc., with borrowed capital, the interest payable for a period prior to the previous year of acquisition, construction, etc., shall be deducted in equal instalments during the year of construction or acquisition and the subsequent four years. Where the property is constructed during the course of the year, this provision cannot be given effect to in view of our earlier clarification with regard to the annual income of the property. Before the introduction of this Explanation, the assessee could perhaps validly claim deduction of the interest payable right from the date of borrowing but paid during that previous year. This is because there is no provision for referring the interest to any particular year or a proportionate disallowance of the same in Section 24 which deals with deductions from house property income. After the introduction of this Explanation, this position has been modified. The interest payable for all previous years is allowed to be spread over five years. As pointed out by the learned Counsel for the assessee, the interest for the succeeding years would be allowable in the respective years. Certainly when the Legislature has taken care to allow even the interest paid prior to the previous year though on an instalment basis, there is no logic in not allowing the interest payable during the previous year when the property was constructed. The only way to reconcile this provision would be to allow the interest for the period of construction or acquisition in computing property income for the earliest assessment year subsequent to the acquisition, when the property income is brought to tax.
14. We have clarified above the general principles for computing the property income of an assessee for inclusion in his total income. These may be summarised as under: 1. Property income under the Act can be included in the total income of an assessee only if the assessee is the owner of the property or can be treated as such for a full year and not when it is for a period less than one full year.
2. The scheme of allowance of interest would be: the interest for all previous years included in the period prior to the previous year, in which the property was acquired or constructed, would be deducted in equal instalments in five years. One-fifth of this and the interest for the previous year of construction would be allowed in the first year when the property income is taxed. The interest for all the subsequent years would be allowed from year to year.
15. As far as the present appeal is concerned, the ITO has already worked out the loss allowable to the assessee at a figure of Rs. 2,949.
His calculation of a proportionate loss for three months is not correct or justified for the reasons abovementioned. The assessee has come to the Tribunal for a greater relief than what the ITO has granted. It would not be proper, therefore, to put the assessee, who has come up on appeal, in a position, worse than he is. While, therefore, the above would be the general principles for computation of property income, in the peculiar circumstances of the present case, the ITO not being on appeal before the Tribunal, the loss of Rs. 2,949 has to be allowed to the assessee during the year itself. We direct accordingly.
1. While generally agreeing with the order of my learned brother, the Vice-President, I desire to add the following to reinforce our conclusion.
2. Income-tax, under the scheme of our taxing statute, is an annual tax on, ordinarily, annual income from different sources, subject to certain exceptions. Definition of 'previous year' in Section 3 of the Act will show that normally the twelve months period included in the financial year or for which the accounts are made up is the period, the income of which is to be computed. Exceptions to the twelve months period are provided in Clauses (c) to (e) of that section. Property income not arising from business is covered by clause either (a) or (b). It follows, there is no scope for taxing the income from property for a period less than a full year. However, the income from this source, charge of which is attracted by the fact of mere ownership thereof, is computed on a notional basis--annual value--irrespective of whether it produces income or not, but where the basis of actual rent received for computing the income will yield a higher figure, it would be computed on such actual rent basis [section 23(1)(b) and Clauses (a) and (b) of the Explanation to the said sub-section], subject to certain reliefs provided on account of its lying vacant for any part of the year, vide Sections 23(3) and 24(1)(ix). It must follow as a corollary that there can be no charge in respect of income from property for a period less than a year. Computation of loss of either the assessee or the ITO, adopting a proportionate basis for a period of three months, has, according to me, therefore, no statutory sanction.
3. However, having regard to the scope of the appeal before us, where we cannot put the assessee in a worse position than he already is, and the fact that neither party disputed the charge for the year and both agree that computation may be made for the full year, the annual loss computed by the ITO has to be adopted and allowed to be set off against the other income. There is no warrant for restricting the allowance of interest as held to accrue only after construction of the property.
Indeed, the ITO himself in his computation of loss for the year has deducted the full interest, as claimed by the assessee. The assessee is accordingly entitled to the loss of Rs. 2,949 instead of either Rs. 3,864 as claimed by him or Rs. 737 as computed by the ITO.