RAJAGOPALAN, J. - Six questions were referred for the determination of this court under section 66 (1) of the Income-tax Act. It may not be necessary to set out over again the relevant facts to answer some at least of the questions.
The fifth of the questions ran :
'Whether the dividend of Rs. 7,500 received in the previous year for 1945-46 assessment from the Beverley Estates Ltd., Madras, is exempt under section 4 (3) (viii) of the Income-tax Act.'
The answer to this question is concluded by the authority of the decision of the Supreme Court in Bacha F. Guzdar v. Commissioner of Income-tax. The question is answered in the negative and against the assessee.
The sixth question ran :
'Whether the assessment in the assessment year 1947-48 of the gross income from the investment of shares in Avra Ltd., before deduction of the Ceylon income-tax thereon, is valid and proper.'
A similar question with reference to the provisions of the Ceylon Income-tax Ordinance was considered by us in Ramaswami Naidu v. Commissioner of Income-tax. The principles we laid down in that case apply. The question is therefore answered in the negative and in favour of the assessee. The sum of Rs. 9,562 which was deducted by the company before the dividends were paid to the assessee was never the income of the assessee.
The first question ran :
'Whether there was material for the Tribunal to hold that the business of stores and/or mills were separate and independent from the main shop, so as not to be entitled to any relief under section 25 (4) of the Act in respect thereof.'
This question arises only in relation to the proceedings in the assessment year 1945-46. There was ample material on which the Tribunal could rest its conclusion that what were referred to as stores, mills and the main shop, each constituted a distinct line to business. The Tribunal was therefore justified in coming to the conclusion that the relief under section 25 (4) of the Act had to be restricted only to the profits from the business designated the 'main shop.' The question is answered in the affirmative and against the assessee.
Questions (ii) and (iii) arise out of proceedings of the assessment year 1947-48. Here again it may not be necessary to set out at any length the relevant facts which have already been set out in the statement of the case.
Question (ii) ran :
'Whether the assessee is entitled to an order under section 25A (1) of the Act.'
Question (iii) ran :
'If the answer to question (ii) is in the negative whether the Ceylon immovable properties and/or the shares in Avra Ltd. belonging to the family ceased to be the assets of the joint family after 10th February, 1947, and the income therefore accruing thereafter required to be excluded from the assessments of the year 1947-48.'
The genuineness of the partition arrangements made with effect from February 10, 1947, was never in issue. In the course of his arguments the learned counsel for the assessee could not really assail the correctness of the finding of the Tribunal, that though the shares of the three members of the quondam Hindu undivided family were defined, there was no allocation of the individual items of the immovable properties in Ceylon to each of the shares. All that the learned counsel for the assessee could point out was that the income from this immovable property was divided in equal shares as shown in the accounts, and that each sharer enjoyed his share of income separately. That may not be sufficient to satisfy the requirements of section 25A. The immovable property was certainly capable of division by metes and bounds and there was no such division. The income from the immovable properties in Ceylon even after February 10, 1947, was therefore liable to be assessed as the income accruing to a Hindu undivided family. Question (ii) is therefore answered in the negative and against the assessee.
In view of what we have recorded in considering the second question, there should be no further need to refer again to the income from the immovable properties in Ceylon in considering question (iii). We shall, therefore, confine ourselves to the dividend income from the shares held by the three members of the quondam joint family in Avra Ltd. Even there our answer to question (ii) may have no real bearing on the assessment proceedings for 1947-48, because it was not shown to us that any dividend income accrued in the relevant year of account subsequent to February 10, 1947. But this is a point that will have to be verified by the Tribunal in giving effect to our answer to the third question.
The relevant facts were as follows : The Hindu undivided family carried on three lines of business, referred to in the statement of the case as the main shop, the stores and the mills. With effect from June 1, 1944, these three businesses were transferred to the limited company called Avra Ltd., Colombo, with 6,425 fully paid up shares of Rs. 100 each. Out of this each of the three members of the family, Veerappa Chettiar, Ramanathan and Adaikappan was allotted 2,125 shares, and this holding continued to be shown in the books of the company right through. It should be remembered that in June, 1944, all the three constituted an undivided family. The partition was with effect from February 10, 1947. The Tribunal recorded in paragraph 8 of the statement of the case :
'...... nor were the 6,375 shares held by the family in Avra Ltd., albeit standing in the names of three members separately, re-transferred to them in their individual status on partition.'
The further statement in paragraph 9 was :
'..... nor the shares in Avra Ltd., which only stood in the names of the three members, as the nominees of the family and not in their own right, at any time, and continued to stand undisturbed as shown by annexure E aforesaid, could be said to have been divided in definite portions within the meaning of section 25A (1) of the Act, though their shares could be said to have been defined by virtue of the annexures C and D aforesaid.....'
We are really unable to follow the reasoning of the Tribunal. No doubt in 1944, when the shares were allotted to three individual members, they constituted a Hindu undivided family. Each of them vis-a-vis the company was the shareholder. Inter se the members, their rights and liabilities were governed by their status as undivided members of a Hindu family. We really fail to see what more they need have done themselves to continue the registry as separate shareholders in the books of the company after the partition on February 10, 1947. Their rights and obligations inter se as members of an undivided family ceased on February 10, 1947. Their rights vis-a-vis the company continued undisturbed as individual sharers. There can be no question for example of transferring 2,155 shares held by Veerappa to Veerappa himself on February 10, 1947. The books of the assessee showed that the dividend income in the subsequent years was credited to each of the three members of the family. On the material on record the only conclusion that was possible was that the partition of the shares, which we would again stress governed the rights inter se of the three members of the family, was completed even on February 10, 1947, itself, and that there was nothing further to be done to give effect to the allocation of the shares in the books of the company. Even if a formal declaration by the members of the family were required, that was forthcoming. The Assistant Commissioner referred to the statement on oath made by the members that there were no assets left in common. That will certainly apply to the shares, though it may not help to satisfy the requirements of section 25A (1) in relation to the immovable properties held in Ceylon.
Our answer to question (iii) is that the immovable properties in Ceylon did not cease to be the assets of the joint family after February 10, 1947, but that the shares in Avra Ltd., ceased to be the assets of the joint family after February 10, 1947. The income accruing from the shares to each of the three members after February 10, 1947, had to be excluded from the assessment of the Hindu undivided family.
The last of the questions were have to answer is question (iv) which ran :
'Whether the rates paid to the Colombo Municipality on the Ceylon house properties are deductible in computing the rental income therefrom in the four assessment years 1944-45 to 1947-48 ?'
We have to answer this question with reference to the relevant provisions of section 9 (1) of the Income-tax Act, and the provisions of the Ceylon Municipal Councils Ordinance regulating the assessment, levy and collection of rates on houses in Ceylon.
The relevant provisions of section 9 (1) of the Income-tax Act ran :
The tax shall be payable by an assessee under the head Income from Property in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner..... subject to the following allowances, namely .....
(iv) where the property is subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge; where the property is subject to an annual charge not being a capital charge, the amount of such charge; where the property is subject to a ground rent, the amount of such ground rent; and, where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital......
Explanation. - For the purposes of clause (iv) of this sub-section the expression annual charge does not include any tax in respect of property or income from property levied by a local authority or a State Government or the Central Government.'
The relevant portion of section 115 (1) of the Municipal Councils Ordinance, Ceylon, ran :
'.... the Council shall from time to time, so often as they think necessary, make and assess, with the sanction of the Governor any rate of rates on the annual value of all houses and buildings of every description, and all lands and tenements whatsoever within the town. Such rate or rates -
(a) shall endure for any period not exceeding twelve months,....
(b) shall be payable by such instalments and at such times as the Chairman, with the sanction of the Council, shall direct....'
As the learned counsel for the assessee pointed out, that made it clear that the rates were annual; it was the annual rental value that furnished the basis. That conclusion is reinforced by section 117 (8) which runs :
'Every assessment against which no objection is made shall be final for the year.'
Section 135 of the Ordinance provided for the recovery of unpaid rates assessed on house property. It authorised recovery by 'seizure and sale of all and singular the moveable and immoveable property of the proprietor, or of any joint proprietor, of the premises on account of which such rate or rates may be due, and of all moveable property, to whomsoever the same may belong, which be found in or upon any such premises...' Under section 138 of the Ordinance the property seized under the provisions of section 135 could be sold. Section 142 directed that, if land, or other immoveable property was thus sold, it was to vest in the purchaser free from all encumbrances.
There was nothing in the Ceylon Municipal Councils Ordinance to correspond for instance to section 103 of the Madras City Municipal Act which runs :
'The property tax on buildings and lands shall, subject to the prior payment of the land revenue, if any, due to the Government thereon, be a first charge upon the said buildings or lands and upon the moveable property, if any, found within or upon such building or lands and belonging to the person liable to such tax.'
Section 85 is an analogous provision in the Madras District Municipalities Act (V of 1920).
Thus the position in Ceylon is that the owner of the house assessed to municipal rates is under a legal liability to pay those rates. Those rates are annual, but provision is made under the statute for payment of these rates in instalments. Whether factually any instalments were fixed is not clear from the material made available to us. For non-payment of the rates any property of the defaulting owners is liable to seizure and sale. We can leave out of account the liability of properties belonging to others but found on the premises assessed to municipal rates, to seizure and sale for non-payment of these rates. No provision is made by the laws in Ceylon for making the house property on which the rates are assessed security for the payment of those rates. As we pointed out, there is nothing analogous to section 103 of the Madras City Municipal Act, which makes the tax a first charge on the house property, and makes the house security for the payment of the house tax. There is nothing in the Ceylon law even to indicate that the income from the house property is a source from which the assessed rates have to be paid. That, of course, leaves intact the statutory liability imposed on the owner of the house property to pay the annual rate assessed on that property by the municipal authorities.
Is the liability of the assessee to pay these municipal rates in Ceylon an 'annual charge' within the meaning of section 9 (1) (iv) of the Income-tax Act is the question.
We have already pointed out that the liability to pay the rates was annual, though the Ceylon Ordinance permitted the payment in instalments. If such a liability otherwise constitutes an annual charge, the statutory provision to discharge the liability in instalments does not make it any the less an annual charge. That is concluded by the decision of the Supreme Court in New Piece Goods Bazar Co. Ltd. v. Commissioner of Income-tax.
The next question is does the word 'charge' in section 9 (1) (iv) import anything more than a liability to pay an ascertained or ascertainable amount. We have pointed out that under the laws in Ceylon the house property itself was not constituted security for the discharge of the liability to pay the assessed municipal rates. Nor was the income from that house property indicated as the source from which the rates had to be paid. The learned counsel for the assessee contended that all that the expression 'annual charge' in its context in section 9 (1) (vi) of the Act meant was that it should be a payment to discharge an annually recurring liability, that 'annual charge' meant nothing more than any annual payment, and that them was no scope to restrict it further by requiring that the house property in question should be security for that payment. He relied on the observations of Chakravartti, C.J., in Commissioner of Income-tax v. State Bank of India.
'I would only add here that the word charge as used in section 9 (1) (iv) must mean payment and not security. The relevant words of the section are : where the property is subject to an annual charge...... the amount of such charge. Clearly, the phrase the amount of such charge indicates that the word charge used in the earlier phrase also means payment. It would be singularly inappropriate to use to the word charge if security was intended, for annual security would be wholly meaningless. That the meaning is payment would also seem to be clear from the explanation appearing after clause (vii) of the sub-section where it is said that the expression annual charge in clause (iv) does not include any tax in respect of property or income from property, if such tax is of a certain kind.'
The question, whether the expression annual charge should be construed as meaning only an annual payment without any reference to security for that payment, did not really arise for determination in Commissioner of Income tax v. State Bank of India. The payments the learned Chief Justice had to consider in that case were specifically charged upon the house property in question there, in the sense that the house property was constituted security for those payments. Though the observations are obiter, when they come from so experienced and learned a Judge, they are certainly entitled to great respect. With all respect to the learned Chief Justice, we regret our inability to accept as correct the interpretation he placed upon the expression 'annual charge' in its context in section 9 (1) (iv) of the Act.
It is true that the question whether the expression 'annual charge' meant annual payment plus security for that payment did not directly arise in that form for consideration in the case decided by the Supreme Court in New Piece Goods Bazar Co. v. Commissioner of Income-tax. The enactments their Lordships had to consider in that case specifically imposed a statutory charge on the house properties for the unpaid arrears of house tax. Their Lordships, however, had to construe the scope of the expression 'capital charge' and 'annual charge' as they occur in section 9 (1) (iv). It may not therefore be strictly accurate to view these observations as obiter dicta; but even as obiter, the observations of their Lordships of the Supreme Court are entitled to the highest respect.
Section 9 (1) (iv) of the Act, it should be remembered, refers to an annual charge other than a capital charge. Earlier in section 9 (1) (iv) the distinction is between a mortgage and a capital charge. Obviously the same meaning should be given, if possible, to the expression 'capital charge' wherever it occurs in section 9 (1) (iv). In construing the scope of capital charge and in dealing with the expression 'annual charge other than a capital charge' Mahajan, J., said at page 519 in New Piece Goods Bazar Co. Ltd. v. Commissioner of Income-tax.
'We are therefore of opinion that capital share here could only mean a charge created for capital sum i.e., a charge to secure the discharge of a liability of a capital nature.'
After recording with approval the principle laid down by the Allahabad High Court in Gappumal Kanhaiyalal v. Commissioner of Income-tax, Mahajan, J., proceeded :
'It was said that if an annual charge means a charge to secure the discharge of an annual liability, then, capital charge means a charge to secure the discharge of a liability of a capital nature. We think this construction is a natural construction of the section and is right.'
His Lordship referred again to the need for the existence of a charge on the property for the discharge of the liability for the annual payment when he observed at page 523 :
'Municipal taxes, on the other hand, do not stand on the same footing as land revenue. The law as to them varies from province to province and there may not be necessarily a charge on property in all cases. The Legislature seems to have thought that so far as municipal taxes on property are concerned, if they fall within the ambit of clause (iv), deduction will be claimable in respect of them but not otherwise.'
In view of the principles laid down by the Supreme Court in New Piece Goods Bazar Co. Ltd. v. Commissioner of Income-tax, we think that the question at issue before us is not really res integra.
In Burrows on Words and Phrases Vol. 1, pages 411-12, the first passage under the heading 'charge' runs :
'A charge differs altogether from a mortgage. By a charge the title is not transferred, but the person creating the charge merely says that out of a particular fund he will discharge a particular debt.'
The next passage runs :
'The word charge may well be used to describe a burden imposed upon land and if a payment has to be made in respect of land, and it can only be enjoyed subject to the liability for that payment, I cannot think that there would be any great straining of language if it were spoken of as charged upon the land.'
This second passage is an extract from the speech of Lord Herschell in Payne v. Esdaile. This passage taken by itself out of its context might appear to support the contention of the learned counsel for the assessee, that the use of the expression 'charge' by itself could imply nothing more than a mere liability to pay. But to understand the scope of the observations of Lord Herschell we have to examine the context in which he made these observations. At page 622 of the report he prefaced a discussion of the meaning to be given to the expression 'charge' in the relevant statutes which their Lordships had to construe by saying :
'The Court of Appeal have held that the payment in question is not within this definition, because though an annuity or periodical payment it is not charged upon or payable out of land. I gather that they interpreted the words charged upon as applicable only to those cases in which there was some remedy against the land itself. It may be admitted that this is the most common signification of the words, and is meaning that would be attributed to them if there were nothing in the context to lead to a different conclusion.'
Lord Herschell then proceeded to examine the context, also in relation to the previous enactments on the same subject, and after pointing out at page 625 'the question is certainly not free from difficulty,' he summed up : '.... upon the whole I have come to the conclusion that the judgment of the court below on this point was erroneous.....'
If the test were, does the context of section 9 (1) (iv) require a meaning different from what the normally accepted signification in law of expression 'charge' justifies, our answer is in the negative. If we may say so with respect, Chakravartti, C.J., appears to have isolated the passage 'where the property is subject to an annual charge... the amount of such charge,' in his observations at page 559 of Commissioner of Income-tax v. State Bank of India. The expression 'charge' occurs more than once in section 9 (1) (iv), and there is also the explanation to consider. The familiar legislative pattern in India is to charge the house property with the liability for the house tax. Often it constitutes the first charge on the house property, subject to the claims of the Government for land revenue. These were in fact the charges excluded by the explanation. If the tax itself did not constitute an annual charge, obviously there would be no scope for recourse to the explanation to exclude it from the scope of section 9 (1) (iv). As pointed out by the Supreme Court in New Piece Goods Bazar Co. Ltd. v. Commissioner of Income-tax, if the expression capital charge has to be construed as a charge created for a capital sum, that is, to secure the discharge of a liability of a capital nature, the expression annual charge in that context should mean, again in the words of Mahajan, J., a charge to secure the discharge of an annual liability.
We are clearly of opinion that the word 'charge' in the statutory expression 'annual charge' in section 9 (1) (iv) connotes something more than a mere liability to pay, something more than the annual payment. Both the concepts are involved, liability to pay and a charge on the house property for the discharge of that liability. That charge can be contractual or statutory. It can be expressed or it can be implied. If, for instance, the income from the property is shown as the source from which the liability is to be discharged, law would imply a charge for that amount. In the present case there was no charge for the payment of the assessed municipal rates, express or implied. To sum up, the annual charge in the context of section 9 (1) (iv) means an annual payment charged upon the house property, just as capital charge means payment of a capital nature charged upon the house property.
In rejecting the assessees claim to deduct the municipal rates assessed on the assessees house property in Ceylon, the Tribunal recorded :
'It was argued that the explanation to section 9 (1) refers only to the levied by a local authority or a State Government or Central Government of the Republic of India and the rates paid to the Municipality of Colombo are not within the aforesaid prohibition, the deduction claimed is undoubtedly an annual charge, not of the nature of a capital charge and consequently permissible under section 9 (1) (iv). This argument, though attractive, is clearly untenable as assessment of even foreign properties require to be made under section 9 and the sub-section will consequently require to be read mutatis mutandis.'
It was on the application of the explanation that the Tribunal rejected the claim. We have already pointed out that the explanation would apply only if the municipal rates had constituted an annual charge within the meaning of section 9 (1) (iv). We have held that they did not constitute such annual charge. There is, therefore, no necessity for us to examine in these proceedings the scope of the explanation, to verify if it would refer to taxes or rates imposed by authorities outside India.
As the municipal rates payable by the assessee under the laws in Ceylon did not constitute an annual charge within the meaning of section 9 (1) (iv) of the Act, the assessee was not entitled to claim the payments towards those rates as lawful deductions permitted by section 9 (1) of the Act.
We answer the fourth question in the negative and against the assessee.
As neither side has wholly succeeded in this reference there will be no order as to costs.
Reference answered accordingly.