1. This is a reference under s. 256(1) of the I.T. Act at the instance of the Commissioner of Income-tax, and the Tribunal has referred the following question :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the property tax referable to earlier years enhanced and levied by the Corporation should be allowed as a deduction in computing the annual letting value of the property for the assessment year 1971-72 ?'
2. The assessee derives a large income from 'property'. During the year under consideration he derived an income of Rs. 36,896. This amount was arrived at without taking into account a sum of Rs. 2,490 demanded from his as property tax which related to the earlier years but demanded during the relevant accounting year. The said amount related to the earlier accounting years 1966-67 to 1968-69. The enhanced demand came to be made by the city municipal authorities consequent on the revision of the annual value of the several properties on various dates, viz., June, July September and November, 1970. The disallowance made by the ITO was on the ground that the property tax payable in respect of the earlier years could not be allowed as deduction in the year of actual payment, having regard to the provision of s. 23(1) of the Act.
3. The assessee succeeded in the appeal before AAC and the department took the matter on appeal to the Tribunal.
4. The Tribunal came to the conclusion that the property tax as claimed and paid during the relevant year, though for some of the earlier years, was liable to be allowed as deduction.
5. The department has brought the matter on reference to this court on the question already extracted.
6. Section 23(4) of the I.T. Act provides for the determination of the annual value for the purpose of levying tax on the income from the house property. The annual value of any property is to be deemed to be the sum for which the property might reasonably be expected to be let from year to year; or where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of what might be reasonably expected from it, the actual rent is to be taken as the basis for taxation. There is a proviso, which states that where the property is in the occupation of a tenant, the taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by the owner, be deduct in determining the annual value of the property. Under the proviso, there is a straight deduction from the annual value or the letting value of the property of the taxes levied by any local authority. The contention of the revenue in the present case, is that this provision would justify allowance only of the amount relating to the relevant year even though the amounts for the earlier years. The language of the provision shows that there must have been a levy by a local authority in respect of the property, which is in the occupation of a tenant and to the extent to which such a levy is borne by the owner, he would be eligible for the deduction envisaged by the provisos. The word 'levied' is a significant one in the construction of this provision. Its import cannot be ignored. Section 24 deals with certain other deductions which has to be effected from the gross income from the house property. Section 24, wherever it contemplates the actual amount paid as deduction, uses the appropriate expression therefore, and wherever it restricts the allowance to the amount relating to the particular year, uses language appropriate for that purpose. For instance where the property is subject to an annual charge, the amount of such charge is liable to be allowed as deduction under cl.(iv)(i)(b) of sub-s. (1) of s. 24. The annual charge, irrespective of its discharge or payment, would represent the deduction. The amount of annual charge in such a case could only be that among t relatable to the particular year. There is no question of levy or deemed levy in such a case. Similarly, the deduction of ground rent levy or deemed levy in such a case. Similarly, the deduction of ground rent is provided under clause (v) and it provides that the amount of such ground rent is to be allowed as deduction. The actual payment of such ground rent to its levy is not the criterion. Whether the assessee pays the amount or not, he would be eligible for allowance of the amount of ground rent Consequently, the implication in clause (v) is that the amount relating to the particular year would alone be allowable as deduction. Clause (vi) provides for the deduction o interest payable on capital borrowed for acquisition, construction, repair, renewal or reconstruction of the building. The word 'Payable' used in the provision shows that it need not have been paid and it could only relate to that particular year. Clause (vii) however, contemplates the actual payment of land revenue to the State Govt. before it could be allowed as deduction and the same clause envisages the detection being granted in respect of other taken levied by the State Govt. in respect of the property. Thus, the several classes in s. 24 use appropriate expressions to demonstrate the basis of deduction.
7. In the proviso to s. 23, with which we are now concerned, the expression 'levied' has been used. We has occasion to examine the claim for deduction of the urban land tax paid by an assessee and claimed as deduction with reference not only to the relevant year but also other years, in CIT v. M. CT. Muthiah : 118ITR104(Mad) . In the relevant assessment year, the assessee paid Rs. 8,564 being the urban land tax relating to earlier years. He claimed the amount as deduction in computing the property income. This claim has been negatived by the I.T. authorities but upheld by the Tribunal and the correctness of the allowance was challenged by the department in the reference before us. It was held that urbanland, the levy having been made during the relevant year the assessee was entitled to the deduction. This decisions, in our opinion, completely covered the point now before use. The language of s. 24(1)(vii) with reference to taxes other than the land revenue is that it must believed by the State Govt. in respect of the property. The same expression occurring in the proviso to s. 23 would require to be construed in the same manner as justifying a deduction only in the year in which the levy is made.
8. The learned counsel for the Commissioner brought to our notice s. 104 of the Madras City Municipal Act, 1919. That provision stated that the property tax shall be levied every half and shall, save as otherwise expressly provided in Sch. IV, be paid by the owner of the assessed premises within fifteen days after the commencement of the half year. Schedule IV to the said Act contains what are called 'taxation rule' and clause I.A. deal with the assessment of the property tax. Broadly stated, the scheme is to continue the same take of property tax until it is altered as a result to a quniquennial revision for which purpose the relevant procedure prescribed by the rules have to be gone into. There are also provision for as assessee to contest the revision of the property tax is not an automatic levy so as to require the property owner to go and pay tax voluntarily and without any levy, followed by a notice of demand from the departmental authorities. Thus, the scheme of the City Municipal Act is in no way different from the Scheme of the property tax by way of appeal, etc. As s. 104 contemplates a levy, it is clear that the liability to tax arises at the time of the actual levy. The property tax is not an automatic levy so as to require the property owner to go and pay tax voluntarily and without any levy, followed by a notice of demand from the departmental authorities. Thus, the scheme of the City Municipal Act is in no way different from the scheme of the Tamil Nadu Urban Land Tax Act, 1966, which was the subject of consideration in the case already cited.
9. The learned counsel for the department however, brought to our notice two decisions. The first decision is of the Bombay High Court in CIT v. Abdul Hussein Essaji Arsiwalla (1968) 69 ITR 38. In that case, the assessee had constructed a building on the vacant land belonging to the Railways. The lease had expired on June 30, 1951. The ground rent payable under the expired lease was Rs. 254 per month. After the expiry of the lease, the assessee and the Railway authority carried on negotiations, which were finally concluded in the year 1957, when a fresh less agreement was entered into. The railway authorities then made a demand on the assesses requiring him to pay the arrears of ground rent calculated at the enhanced rate provided in the fresh agreement between the parties for the earlier years. the assessee paid the enhanced amount, which related to some of the past year and claimed it as deduction under s. 9(1)(iv) of the Indian I.T. Act, 1922. The Bombay High Court held that the amount allowable in respect of ground of the arrears of ground rent for prior years of the I.T. Act, 1961, corresponds to s. 9(1) of the Indian I.T. Act, 1922. In both the Acts, in relation to ground rent, what is stated is that the deduction is allowable with reference to the 'amount of such ground rent'. There is no expression similar to the one to be found in the provision so s. 23 or in the other provision of s. 24, where the deduction is allowable either on payment or on levy. In that particular case, the assessee could not have anticipated the enhanced ground rent demanded by the Railway authorities in pursuance of a fresh lease entered into between the parties in the year 1957, which covered the earlier years commencing from July 1, 1951. We do not consider that it is possible to be so axiomatic as was done by the Bombay High Court so that any enhanced of ground rent for earlier years retrospectively in the relevant previous year has to be ignored for deduction. The hardship to the assessee in such a case is quite apparent as t the instance of the assessee the assessment for the earlier years cannot be reopened while the department, it if has a chance, would always come with a notice for reassessment so as to levy tax on the assessee. The different expressions used in the provisions have not been adverted to.
10. It is this decision which has been followed by the Delhi High Court is Gulab Singh and Sons P. Ltd. v. CIT : 94ITR537(Delhi) . The Delhi High Court has actually pointed out at page 546 the different aspect in the matter of deduction envisaged by the statue. As pointed out by that High Count the repair allowance could be had by the assessee irrespective of his actually carrying out the repairs. The learned judges have also gone into the other parts is s. 9 which corresponds to s. 24 of the present Act and pointed out different condition soft allowance prescribed by the statute. It is perhaps because there was no condition requiring a levy or actual payment that the Delhi High Court following the deduction of the Bombay High Court held that the ground rent could only be related to the relevant previous years. As the language of the present provision is different we do not think it necessary to go more into the point considered by the said two courts. In our opinion having regard to the language of the proviso to s. 23(1) the assessee would new eligible for the allowance because there was a levy during the relevant year and the tax was also borne by the owner of the property in that year. The question is, accordingly, answered in the affirmative and in favour of the assessee. The assessee would be entitled to his costs. Counsel's fee Rs. 500.