Skip to content


Gujarat Ginning and Mfg. Co. Ltd. Vs. Commissioner of Income-tax, Gujarat I. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-Tax Reference No. 210 of 1974
Judge
Reported in[1977]107ITR590(Guj)
ActsIncome Tax Act, 1961 - Sections 14, 22, 23, 24, 24(1), 25, 26, 27, 28, 66, 81(1) and 110
AppellantGujarat Ginning and Mfg. Co. Ltd.
RespondentCommissioner of Income-tax, Gujarat I.
Cases ReferredHughes v. Bank of New Zealand
Excerpt:
.....act, 1961 - whether assessee-company entitled to deduction of entire amount of interest paid on mortgage of buildings and machineries under section 24 (1) (iii) - apportionment of interest between machineries and rest of properties - prior to repeal from 01.04.1969 under section 24 (1) (iii) bifurcation and apportionment of interest was required to be done and after apportionment deduction be granted only in respect of interest paid on buildings and lands appurtenant thereto - company not entitled to deduction of entire amount of interest paid on mortgage of buildings and machineries under section 24 (1) (iii). - - 24 of 1974, which was decided along with two other references by a common judgment on september 3, 1975. there the question before us was whether receipts from..........27, both inclusive, of the income-tax act, 1961, provision is made for computation of income from house property. section 14 of the income-tax act, 1961, provides for classification of income for the purpose of charge of income and computation of total income and head 'c' is 'income from house property'. section 22 provides that 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 purpose of any business of 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'. section 23 provides for determination of annual value and says that for the purposes of.....
Judgment:

B.J. Divan, C.J.

1. In this case, at the instance of the assessee, the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to deduction of the entire amount of interest paid on the mortgage of the buildings and machineries under section 24(1)(iii) of the Income-tax Act, 1961 ?'

2. We are concerned in this case with assessment years 1962-63 to 1967-68, the relevant previous years being calendar years 1961 to 1966. During the accounting years relevant to the assessment years under reference, the assessee-company paid interest on the amount of loan secured by the mortgage of properties, the annual value of which was included in its total income and the mortgage was on the properties together with the machineries kept in those properties. The assessee-company claimed deduction of the entire amount of interest for the mortgage and in this connection he wanted relief under section 24(1)(iii) of the Income-tax Act, 1961. It may be mentioned at this stage that with effect from April 1, 1969, by virtue of the provisions of the Finance Act, 1968, section 24(1)(iii) has been deleted. The Income-tax Officer apportioned the amount of interest between the properties on the one had and the machineries on the other and allowed deduction of only interest attributable to the mortgage of the properties, the annual value of which was included in the company's total income. The following table shows the total claim of interest paid by the assessee, claim of interest on joint mortgage of buildings and machineries and the claim allowed by the Income-tax Officer.

____________________________________________________________________Asstt. Amount of Claim of interest of joint ClaimYear interest paid mortgage of buildings and allowedmachineries_____________________________________________________________________Rs. Rs. Rs.1962-63 43,658 27,193 18,1291963-64 35,654 18,860 13,3801964-65 29,403 11,667 8,2001965-66 25,723 7,504 5,3471966-67 22,077 3,440 2,3411967-68 31,007 35 Disallowed in full________________________________________________________________________

3. Against the decision of the Income-tax Officer the assessee took the matter in appeal and the Appellate Assistant Commissioner dismissed the appeals and confirmed the order of the Income-tax Officer. Against the decision of the Appellate Assistant Commissioner, the assessee preferred appeals to the Appellate Tribunal. The Tribunal held that having regard to the language of section 24(1)(iii) read with sections 22 and 23, it was obvious that only interest attributable to mortgage of the properties, the annual value of which was included in the assessee-company's total income, was to be deducted. Thereafter, at the instance of the assessee the question set out hereinabove has been referred to us for our opinion.

4. Under Sections 22 to 27, both inclusive, of the Income-tax Act, 1961, provision is made for computation of income from house property. section 14 of the Income-tax Act, 1961, provides for classification of income for the purpose of charge of income and computation of total income and head 'C' is 'Income from house property'. section 22 provides that 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 purpose of any business of 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'. section 23 provides for determination of annual value and says that for the purposes of section 22, 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. It is thus clear, reading sections 22 and 23 together, that only the annual letting value, that is, the sum for which the property might reasonably be expected to let from year to year, has to be considered only in respect of property other than such portions of the property as the assessee may occupy for the purpose of business or profession carried on by him, the profits of which are chargeable to income-tax, and hence the portions occupied by the assessee for the purposes of his business or profession are not to be considered for arriving at the sum for which the property might reasonably be expected to let from year to year. Thus, this scheme of sections 22 and 23 requires the apportionment of income between the portions occupied by the assessee for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, and the rest of the property. Section 24 provides for deductions from income from house property and lays down that 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. Clause (iii) of section 24(1) as it stood prior to April 1, 1969, was in the following terms :

'(iii) where the property is subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge.'

5. Mr. Shah contends that the words 'interest on such mortgage or charge' means the entire amount of interest which is required to be paid by the assessee in respect of any mortgage on the property and, hence, according to him, there is no scope for apportionment of the interest between machineries on the one hand and the rest of the house property on the other. In this connection Mr. Shah contended that under the Transfer of Property Act, whenever there is a mortgage of a building together with the machineries embedded in the building or kept in the building, the mortgage is one and indivisible and, hence even under the income-tax law, the same principle of the mortgage being one and indivisible must apply. Mr. Shah has relied upon several decisions of the Supreme Court and other High Courts of the proposition that there cannot be apportionment of interest. He also contended that wherever the legislature wants to make provision for apportionment, it does so expressly and in this connection be referred to section 44F of the Indian Income-tax Act, 1922, and to sections 11(1)(b), 159(4), section 159(6) and Explanation (a) to section 9(1)(i), rules 7 and 8 of the Income-tax Rules and section 24(1)(ix) and 27(1)(iii) of the Act. of 1961. He contended that the wording of section 24(1)(iii) as it stood at the relevant time was intentionally so kept by the legislature as to indicate that it did not want any any apportionment of interest payable in respect of mortgage on the property where there was a composite mortgage of house property together with machineries.

6. Mr. Shah's attention was drawn to sub-clauses (ii) and (iv) of sub-section (1) of section 24 where obviously apportionment of the relevant amount has to be made. Section 24(1)(ii) provides for the deduction of amount of any premium paid to insure the property against risk of damage or destruction and under clause (iv) where the property is subject to an annual charge, the amount of such charge. Mr. Shah contended that unlike clause (iii) of section 24(1), clauses (ii) and (iv) on the other, apportionment which may be permissible under clause (ii) or under clause (iv) is not permissible under clause (iii). In our opinion, the solution to the problem lies in the very language of section 24(1)(iii) which refers to 'the property' being subject to a mortgage or capital charge meaning thereby the house property, the income of which is under consideration. That house property, by the very scheme of section 22, means the portions of the house property other than the portions occupied by the assessee for the purpose of any business or profession carried on by by him, the profits of which were chargeable to income-tax. Thus, so far as section 24(1)(iii) is concerned, when it uses the words 'the property' it contemplates only the house property, that is, buildings or lands appurtenant thereto and nothing else, and it is only interest payable in respect of mortgage or capital charges on buildings or lands appurtenant thereto other than such portions of the house property as the assessee may occupy for the purposes of any business or profession carried on by him, that can be deducted under section 24(1)(iii). No other meaning appears to us to be possible on the language of these sections.

7. Mr. Shah has relied on the following decisions in support of his contention : Commissioner of Income-tax v. Indian Bank Ltd. : [1965]56ITR77(SC) , Commissioner of Income-tax v. South Indian Bank Ltd. : [1966]59ITR763(SC) , Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. : [1968]68ITR512(Bom) , this being a Bombay decision, and the decision of the Supreme Court in the same case on appeal against the decision of the Bombay High Court being the decision in Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) . He has also relied upon the decision of the Calcutta High Court in Hanuman Sugar & Industries Ltd., v. Commissioner of Income-tax : [1970]76ITR603(Cal) , the decision of the Allahabad High Court in Commissioner of Income-tax v. Radha Swami Bank : [1972]85ITR136(All) , the decision of the Bombay High Court in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. : [1968]67ITR436(Bom) and the decision of the Madhy Pradesh High Court in Commissioner of Income-tax v. Bhopal Sugar Industries Ltd. : [1970]78ITR209(MP) . He relied upon these decisions in support of the proposition that the apportionment of income between different items, as for example in the instant case, apportionment of interest between machineries on the one hand and rest of the house property on the other could not be made and he contended that there could not be any bifurcation of interest in the manner in which the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have done in the instant case. All these decisions which he has relied upon and several others were considered by us in Commissioner of Income-tax v. Sabarkantha Zilla Kharid Vechan Sangh Ltd. : [1977]107ITR447(Guj) , Income-tax Reference No. 24 of 1974, which was decided along with two other references by a common judgment on September 3, 1975. There the question before us was whether receipts from exempted activity carried on by a co-operative society engaged in exempted business activities as well as taxable business activities could be bifurcated and separated as between the exempted income and the taxable income, we held, after considering all those authorities that composite overhead expenses have to be bifurcated [proportionately between exempted receipts and taxable receipts. Such bifurcation can be on the basis of the rule of three in the absence of any material to indicate whether any expense related specifically to taxable or exempted activity. We relied in that case on the observations of Lord Wright M. R. In the case decided by the court of Appeal in England and the decision of the Court of Appeal being ultimately approved by the House of Lords and we also relied upon the observations of Greene L. J. in Hughes v. Bank of New Zealand : [1938]6ITR541(Cal) that, in order to give effect to the Income-tax Act, bifurcation and apportionment of expenditure had got to be resorted to. We held that the scheme of the Income-tax Act required that profits and gains from non-taxable activities and taxable activities, both of which were components which had entered into the total income as known to income-tax law should be separated and that separation of these two components which had entered into the total income could only be done by finding out the proportionate net income, that is, after deducting from the amount of gross profits both for taxable activities as well as for non-taxable activities all expenditure attributable to these two different categories of cases. We said that it would be advisable to resort to the rule of three in finding out the proportionate net income out of the total income of the assessee. Thus, it has been held in Sabarkantha Zilla Kharid Vechan Sangh Ltd.,'s case : [1977]107ITR447(Guj) , that apportionment of expenditure between taxable activities and non-taxable activities must be made in view of the specific language of the relevant sections, namely, sections 28, 66, 81(1)(d) and 110. In the instant case we are concerned with apportionment of interest which the income-tax authorities want to carry out between interest payable in respect of house property and interest payable in respect of machineries though the total amount of interest is paid on a mortgage which is a composite mortgage over both properties and machineries. The principle which has been culled out from the authorities is that, if the language of the particular enactment gives a clear indication apportionment will be permissible and not only will it be permissible but in order to give effect to the Income-tax Act, it would be necessary to carry out such apportionment of income.

8. In view of what we have stated in the earlier judgment in Sabarkantha Zilla Kharid Vechan Sangh Ltd.,'s case : [1977]107ITR447(Guj) , it is not necessary for us to refer once again to all the authorities relied upon by Mr. Shah before us. The scheme of Sections 22 and 23 and 24(1)(iii) of the Act of 1961 has to be considered and the question that we have to ask ourselves is, whether under this scheme, apportionment of income of the kind which is asked for in the instant case is clearly indicated. It is only the buildings or lands appurtenant thereto which constitute the house property, the annual value of which is brought to tax under the head' Income from house property' and under section 24(1), it is only while computing the income from such house property that the question of any deduction respect of interest paid on a mortgage or other capital charge has to be deducted. The deduction is from the income of the property and 'the property' in the light of section 22 means the property consisting of buildings and lands appurtenant thereto. It is only that property consisting of buildings and such lands the income of which has to be ascertained in accordance with section 23, namely, the sum for which this property consisting of buildings and lands appurtenant thereto might reasonably be excepted to let from year to year. Therefore, it is only the income, namely the sum for which the property might reasonably be expected to let from year to year in respect of buildings and lands appurtenant thereto from which deduction of interest paid in respect of mortgage in respect of the property has to be made. Undoubtedly, under the Transfer of Property Act, as Mr. Shah has rightly contended, there is only one and indivisible mortgage when there is a composite mortgage burdening the building as well as the machineries kept in the building. It is possible, as Mr. Shah contends, that very often the machinery has to be embedded in the floor of the building but what is material is not the provisions of the Transfer of Property Act and the general law under the Transfer of Property Act by the specific provisions of the Income-tax Act, 1961. These provisions clearly indicate, according to the scheme of sections 22 and 23 and 24, that the deductions under section 24(1)(iii) are to be in respect of the amount of interest paid on the mortgage or capital charge on 'the property', that is, on the buildings and lands appurtenant thereto. Under these circumstances, even though under the general law relating to transfer of property, a composite mortgage of the kind before us covers both lands and the machineries, under the Income-tax Act, we are only concerned with the income from buildings and lands appurtenant thereto and not with any other Income. It is from the annual value thus arrived at that the deduction by way of interest has to be made from the income of the property. In view of what has been stated in Sabarkantha Zilla Kharid Vechan Sangh Ltd.,'s case : [1977]107ITR447(Guj) , the apportionment of income between machineries on the one hand, and the buildings and lands appurtenant thereto on the other, can be made by applying the rule of three if the language of the enactment clearly requires it to be done. In the instant case, we find that by the very scheme of sections 24(1)(iii), 22 and 23, this apportionment of income is clearly indicated. Under these circumstances, none of the authorities relied upon by Mr. Shah specifically applied to the case before us and we will follow the principles laid down in Sabarkantha Zilla Kharid Vechan Sangh Ltd.,'s case : [1977]107ITR447(Guj) .

9. It is therefore, obvious that, so far as the instant case is concerned, we must hold that apportionment of interest between machineries on the one hand and the rest of the properties on the other as has been done by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal was the correct conclusion. Under these circumstances we answer the question referred to us in the negative, that is, against the assessee and in favour of the revenue. The a-company is not entitled to deduction of the entire amount of interest paid on the mortgage of buildings and machineries. Under section 24(1)(iii) of the Act of 1961, as it stood prior to its repeal with effect from April 1, 1969, the bifurcation and apportionment of interest was required to be done and after apportionment deduction could be granted only in respect of interest paid on buildings and lands appurtenant thereto.

10. The assessee will pay the costs of this reference to the Commissioner.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //