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income-tax Officer Vs. Industry House Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)11ITD502(Mum.)
Appellantincome-tax Officer
Respondentindustry House Ltd.
Excerpt:
.....commissioner (appeals) had erred in holding that the state education cess is allowable against the annual value under section 24(1)(vii) of the income-tax act, 1961 ('the act'), and not against the gross income.2. the assessee is a company. the assessee owned certain immovable properties, which were in occupation of tenants. the state government levied state education cess under the provisions of the maharashtra education and employment guarantee (cess) act, 1962 (' the cess act').section 3 of the cess act provided for levy and collection in the manner indicated in the act, education cess for the purpose of providing for the cost of promoting education in the state of maharashtra. section 4 of the cess act laid down the rates at which the cess was to be collected. section 8 of the cess.....
Judgment:
1. The common ground that has been raised in these three appeals by the department for the assessment years 1977-78, 1978-79 and 1979-80 is that the learned Commissioner (Appeals) had erred in holding that the State education cess is allowable against the annual value under Section 24(1)(vii) of the Income-tax Act, 1961 ('the Act'), and not against the gross income.

2. The assessee is a company. The assessee owned certain immovable properties, which were in occupation of tenants. The State Government levied State education cess under the provisions of the Maharashtra Education and Employment Guarantee (Cess) Act, 1962 (' the Cess Act').

Section 3 of the Cess Act provided for levy and collection in the manner indicated in the Act, education cess for the purpose of providing for the cost of promoting education in the State of Maharashtra. Section 4 of the Cess Act laid down the rates at which the cess was to be collected. Section 8 of the Cess Act laid down that if the actual occupier of the building was the owner, the said cess would be leviable primarily on him. If the building had been let out, the cess would be leviable upon the lessor. Section 12 of the Cess Act provided that if there was failure to recover the amount from the lessor, the same could be recovered from the occupier of the building.

Section 13(1) of the Cess Act empowered the landlord to receive the amount of cess from the tenant, if the landlord had already paid the same in the discharge of his liability under Section 8. Section 13(3) laid down that recovery of any amount of cess from the occupier would not be deemed to be an increase for the purpose of Section 7 of the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947.

3. The assessee had paid Rs. 33,906 in each of the above mentioned three assessment years towards State education cess under Section 8 and had recovered the same from the tenants as permitted by Section 13(1).

The contention of the assessee was that the sum for which the property might reasonably be expected to let from year to year, should be the gross amount inclusive of education cess recovered from the tenants and that on the basis of that amount, the annual value of the property should be determined under Section 23(1) of the Act, and from the annual value so determined, deduction in respect of State education cess should be given under Section 24(1)(vii). This contention was not accepted by the ITO. His reasons are contained in the following passage in the assessment order: The assessee has claimed Rs. 33,906 as deductible from the net property income. The State education cess is charged under Section 195E of the Bombay Municipal Corporation Act. This cess is recovered by the Bombay municipal corporation on behalf of the State Government. This is imposed on the tenants who are actually in the occupation of the property. However, it is made recoverable from the owners of the property.

In fact, the assesses pays State education cess on behalf of its tenants and recovers from its tenants. The payment of education cess does not affect the annual letting value of the property and, as such, it should be deducted from the gross annual letting value of the property. If that is not done, the result would be that this amount would go to the annual letting value of the property, and the assessee's deductions under Section 24 would also increase, accordingly. In fact, in the case of Laxmi Properties Ltd. v. ITO for the assessment year 1966-67, the Income-tax Appellate Tribunal, Bombay, Bench 'A', in IT Appeal No. 6040 of 1967-68, dated 13-3-1970, has observed that the State education cess does not affect the annual letting value of the property. Accordingly, the State education cess paid by the assessee will be allowed as a deduction from the gross annual letting value of the property.

4. The Commissioner (Appeals) agreed with the contention of the assessee, although no reasons are given in his order. What all he observed is as follows: The cess is allowable against the annual rateable value under Section 24(1)(vii) and not against the gross income. In the recomputation, the Income-tax Officer is directed to make the allowance, accordingly.

5- The department has come in appeals before us. The dispute between the parties lies in a narrow compass. The question is at what stage the amount of education cess should be deducted in determining the income from the property. The contention on behalf of the department is that the amount of education cess should be deducted from the gross amount representing the rent as such, and the amount of education cess at the initial stage of determining the annual value under Section 23(1). In other words, the contention is that the annual value under Section 23(1) should be determined on the basis of rent paid by the tenants exclusive of the amount of education cess. If this is done, there would be no question of deduction of education cess under Section 24(1)(vii).

The contention on behalf of the assessee, on the other hand, is that for determination of the annual value, the amount of education cess paid by the tenants should be treated as part of the rent paid by them and that the annual value should be determined on the basis of gross rent inclusive of education cess and, thereafter, deduction in respect of education cess should be made under Section 24(1)(vii).

6. We have considered the rival submissions. As already stated, the ITO has observed in the assessment order that the education cess had been imposed under the provisions of the Bombay Municipal Corporation Act, 1888. This observation is not correct. In fact, the education cess has been imposed under the provisions of the Cess Act. The ITO has further observed that the assessee had paid the education cess to the Government on behalf of the tenants and had recovered the same from the tenants, and, as such, the education cess does not affect the annual letting value of the property, with the result, that it should be deducted from the gross annual letting value of the property.

7. His further observation is that if this is not done, the result would be that deductions under Section 24(1)(vii) would increase. The first part of this observation is not correct. The real character of the education cess was considered by the Bombay High Court in Smt.

Muktabai Gangadhar Kadam v. Smt. Muktabai Laxman Palwankar 71 BLR 752.

In that decision, the Bombay High Court considered the relevant provisions of the Cess Act and the Bombay Rents, Hotel and Lodging House Rates (Control) Act. After considering those provisions, the High Court came to the conclusion that education cess payable by an occupant by virtue of Section 13 of the Cess Act is part of the 'rent' within the meaning of that term as used in the Bombay Rents, Hotel and Lodging House Rates (Control) Act, and when claimed in addition to the contractual or standard rent constitutes a 'permitted increase' as defined in Section 5(7) of the latter Act. Thus, looking to this scheme of both the relevant Acts, we hold that the education cess should be treated as part of the rent payable by the tenant. Since the annual value of the property under Section 23(1) is required to be determined on the basis of the rent received by the owner, it follows from what has been stated above that the amount of education cess should be treated as part of the rent for determining the said annual value.

Under Section 24(1)(vii), deduction is to be made in respect of the property. The State education cess is the tax levied on the assessee by the State Government under the Cess Act. Consequently, the assessee would be entitled to deduction of that amount from the annual value determined under Section 23(1).

8. The ITO has also referred to a decision of the Tribunal for the assessment year 1967-68 in the case of another assessee in the case of Laxmi Property Ltd. [IT Appeal No. 6040 of 1967-68, decided on 13-3-1970], wherein it was observed that the State education cess did not affect the annual letting value of the property. A copy of the order of the Tribunal in that appeal is not before us. However, the relevant portion of the said decision of the Tribunal has been extracted in IT Appeal Nos. 3444 to 3446 (Bom.) of 1980, decided on 18-11-1981, and a copy of the latter decision of the Tribunal is before us. From that, we find that the Tribunal had in the former appeal based its decision on the decision of the Bombay High Court in LIC v. Bombay Municipal Corpn. 67 BLR 202. The Bombay High Court in that decision was concerned with education cess levied under the provisions of the Bombay Municipal Corporation Act, for the years 1957-58 and 1958-59. The Bombay High Court held that payment of education cess by the tenants to the landlord, in addition to the contractual or standard rent, did not amount to increase in rent, and as such, the education cess could not be taken into account in determining rateable value under the provisions of the Bombay Municipal Corporation Act. Relying on this decision of the Bombay High Court, the Tribunal had held that education cess had nothing to do with the rent payable by the tenant, and, as such, that cess should not be taken into account for determining the annual value under Section 23(1).

9. The above decision of the Bombay High Court, on which the Tribunal had relied has been overruled by the Supreme Court in the appeal filed by the Bombay Municipal Corporation against the said decision of the Bombay High Court, i.e., the decision of the Supreme Court in the case of Bombay Municipal Corpn. v. LIC of India AIR 1970 SC 1584. The Supreme Court has held that the education cess payable by the tenant under the provisions of the Bombay Municipal Corporation Act, should be added to the contractual or standard rent, in order to compute the rateable value of the building under the provisions of the Bombay Municipal Corporation Act. Thus, this decision of the Supreme Court is an authority of the proposition that the education cess paid by the tenant to the landlord partakes the characteristics of the rent and, as such, the same should be taken into account when any determination is to be made on the basis of the rent paid by the tenant. It follows that in determining the annual value under Section 23(1), the education cess should be treated as part of the rent.

10. In the subsequent decision of the Tribunal, viz., Laxmi Properties Lid. v. ITO [IT Appeal Nos. 3444 to 3446 (Bom.) of 1980, decided on 18-11-1981], the Tribunal has not given clear decision on the question whether the education cess should be taken into account as part of the rent while determining the annual value under Section 23(1). The Tribunal has restored the matter to the ITO to ascertain whether the education cess had been taken into account in determining the annual value and then a further direction has been given to the ITO to grant deduction under Section 24(1)(vii), if he found that the education cess had been taken into account in determining the annual value. The Tribunal has also given an alternate direction that if the ITO found that the education cess had not been taken into account in determining the annual value, no deduction under Section 24(1)(vii), should be given, because in that case it would amount to double deduction in respect of the same item. In the present case, we have considered the decision of the Bombay High Court in Smt. Muktabai Gangadhar Kadam's case (supra) and also the decision of the Supreme Court in Bombay Municipal Corpn.'s case (supra) and have come to the conclusion that the education cess should be treated as rent for determining the annual value under Section 23(1), and that deduction under Section 24(1)(vii) should be given in respect of the said cess. Thus, there is no conflict with the latter decision of the Tribunal. As far as the earlier decision of the Tribunal is concerned, we have already stated that it is based on the decision of the Bombay High Court, which has been reversed by the Supreme Court. For the reason s given above, we confirm the order of the Commissioner (Appeals).


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