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Case Number
Attorney(S)
  • Mr. S. Ranganathan for Appt.
  • Mr. K. Srinivasan and Messrs. D.S Meenakshisundaram and A. Devanathan for Respt.
Judges
  • Ramachandra Iyer, C.J
  • Srinivasan, J.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. S. Ranganathan for Appt.
  • Mr. K. Srinivasan and Messrs. D.S Meenakshisundaram and A. Devanathan for Respt.
Judges
  • Ramachandra Iyer, C.J
  • Srinivasan, J.
See more information ...
Smart Summary

Summary of Opinion delivered by Srinivasan, J.

Factual and Procedural Background

The assessee owned property known as the Maharani Talkies and leased that property together with cinema equipment, machinery and furniture under a single lease. For the assessment year 1955–1956 the lease produced receipts of Rs. 26,295. The assessee claimed a deduction of Rs. 2,870 representing municipal tax paid in respect of the property.

The department declined to treat the income as business income and assessed it under section 12 of the Income-tax Act as income from other sources. Certain allowances (insurance and depreciation) were allowed, but the municipal tax deduction was disallowed by the Income-tax Officer and that order was confirmed by the Appellate Assistant Commissioner.

On further appeal the Appellate Tribunal held that the income had been properly assessed under section 12 and that deductions envisaged by subsections (2) and (4) of section 12 were not mutually exclusive; the Tribunal allowed the municipal tax deduction. The department, dissatisfied with the Tribunal's finding, moved under section 66(1) and the following question was referred to the court:

“Whether on the facts and in the circumstances of the case, the claim for municipal tax paid was allowable expenditure under S. 12(2) of the Income Tax Act?”

Legal Issues Presented

  1. Whether, assuming the assessment of the receipts under section 12 of the Income-tax Act is proper, the municipal tax paid by the assessee is an expenditure "incurred solely for the purpose of making or earning" the income in question and therefore deductible under section 12(2) of the Act?

Arguments of the Parties

Department's Arguments (Revenue)

  • The department contended that subsections (3) and (4) of section 12 specifically deal with hire of machinery, plant and furniture (sub-clause (3)) and hire of such machinery, plant and furniture together with buildings (sub-clause (4)), and that those clauses prescribe certain specified allowances only.
  • On that basis the department argued that allowances in respect of buildings which are not covered by the specific clauses cannot be brought within the scope of subsection (2) of section 12; i.e., subsection (2) cannot be used to claim allowances excluded by clauses (3) or (4).
  • The department pointed out that clause (4) refers to allowances in respect of buildings that correspond to clauses (iv), (v), (vi) and (vii) of sub-section (2) of section 10 (insurance, current repairs and depreciation).
  • Implicitly, the department relied on an interpretation that the structure of section 12 restricts what is allowable when the facts fall within clauses (3) or (4).

Assessee's Position

  • The assessee claimed the municipal tax paid as an allowable deduction under section 12(2) in assessing the income (as income from other sources) derived from the lease.
  • The Tribunal accepted that the expense was a necessary expenditure incurred for the purpose of earning the income and allowed the claim; the opinion under review considers whether that view was legally correct.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
C.I.T. v. Maharani Janki Kuar Sahiba (Patna High Court) Held that a cess levied on annual net produce (i.e., a tax assessed on net profits from forest produce) could not be regarded as an expenditure incurred for the purpose of earning that income and therefore was not deductible under section 12(2). The court noted this authority but distinguished it because the cess in that case was levied on net income; by contrast municipal taxes (in the present case) are levied on a percentage of the capital value of the property and not on the income derived. Thus the Patna decision did not compel the same result here.
In re Jyoti Prasad Singh Deo (Patna High Court) Earlier Patna decision followed in Maharani Janki Kuar Sahiba on a similar point (relating to cess on forest produce). Referenced as precedent relied on in Maharani Janki Kuar Sahiba; the court observed the Patna line of decisions but differentiated the present municipal tax on its basis (capital value rather than net income).
Isabella Coal Company v. The Commissioner of Income-Tax, Bengal (Calcutta High Court) The Calcutta decision took a contrary view to the Patna cases and treated payment of cess (in that context) as admissible deduction; it noted that the fact that cess is determined on annual value does not, for purposes of admissibility under the relevant provision, preclude deduction and observed that section 12 lacks a provision corresponding to section 10(4). The court considered this decision "more to the point" and relied upon its reasoning to support the view that municipal tax (levied on capital value) could be regarded as expenditure incurred for the purpose of earning the income and therefore deductible under section 12(2) in the present circumstances.

Court's Reasoning and Analysis

The court proceeded in logically ordered steps:

  1. Preliminary observation on classification: The court expressed doubt whether the entire receipts should have been assessed under section 12 at all, noting that income from property owned by the assessee would ordinarily fall under section 9, while income from hire of machinery, plant or furniture falls under section 12; where both are involved in a composite lease the Act's heads suggest the two parts of income can be separated. However, the court stated it could not entertain that issue because the question of classification had not been referred to it.
  2. Assumption for present question: The court therefore assumed the assessment under section 12 was properly made and addressed whether the municipal tax payment fell within "expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning" the income as required by section 12(2).
  3. Response to the department's textual argument: The department argued that clauses (3) and (4) of section 12 limit the allowances available when the facts fall within those clauses. The court analyzed the language and structure of section 12 and concluded that the clauses are not framed as mutually exclusive alternatives; the Tribunal's view that subsections (2) and (4) are not mutually exclusive was supported by a plain reading of the provision.
  4. Applicability of subsections (3) and (4): The court also observed that the department had not established that the present lease was of the precise kinds contemplated by clauses (3) or (4). Even on the department's own stand those clauses would not apply to the present case.
  5. Nature of municipal tax and its relation to earning income: The court examined the nature of municipal tax (a statutory levy) and noted that municipal taxes are levied on a percentage of the capital value of property rather than on the income derived from the property. The court found it difficult to accept the department's contention that payment of such a statutory levy should be excluded from the expression "expenditure incurred for the purpose of earning the income" because it is an involuntary or statutory outlay.
  6. Distinguishing precedents: The court considered the Patna decisions (including Maharani Janki Kuar Sahiba and In re Jyoti Prasad Singh Deo) which declined deduction for a cess levied on net annual produce, and contrasted those facts with the present municipal tax (based on capital value). The court found the Calcutta decision in Isabella Coal Company more directly applicable and persuasive on the point that such levies can be deductible under the relevant provision.
  7. Conclusion of analysis: On the basis that (a) clauses (2) and (4) of section 12 are not mutually exclusive, (b) clauses (3) and (4) did not squarely apply on the department's own case, and (c) municipal tax is a statutory, capital-value-based levy which nonetheless is an expenditure incurred for the purpose of earning the income, the court concluded that the municipal tax paid was allowable under section 12(2).

Holding and Implications

Holding: The question is answered in favour of the assessee: the municipal tax paid is an allowable deduction under section 12(2) of the Income-tax Act on the facts and circumstances of this case.

Direct implications and orders:

  • The assessee is entitled to the deduction of the municipal tax claimed.
  • The assessee is entitled to costs; the court awarded counsel's fee of Rs. 250.

The opinion confined itself to the question referred (deductibility under section 12(2)) and expressly did not decide the separate issue whether the income should have been assessed under section 12 rather than section 9, because that question was not referred to the court.

Show full summary ...

    The Commissioner Of Incometax, Madras v. Jagannatha Govindas.

    (Delivered by Srinivasan, J.)

    The question referred to us is:

    “Whether on the facts and in the circumstances of the case, the claim for municipal tax paid was allowable expenditure under S. 12(2) of the Income Tax Act?”

    The assessee is the owner of the property known as the Maharani Talkies. He leased out this property together with the cinema equipment, machinery and furniture. During the assessment year 1955-1956, the sum realised by this lease was Rs. 26,295. The assessee claimed a deduction of Rs. 2870, being the municipal tax paid for this property. His request that the income should be assessed as income from business was rejected. The department proceeded to assess this income under S. 12 of the Act as income from other sources. Certain allowances such as for the insurance and depreciation were allowed. On the disallowance of this item of expenditure, the assessee appealed to the Appellate Assistant Commissioner, who confirmed the order of the Incometax Officer in this regard. On further appeal to the Appellate Tribunal, the Tribunal took the view that the income was rightly assessed under S. 12 of the Act and that further that the deductions contemplated under S. 12(2) and 12(4) of the Act are not mutually exclusive. It took the view that this expenditure was a necessary expenditure incurred for the purpose of earning the income in question and allowed the claim of the assessee. The department being dissatisfied with the finding of the Tribunal moved the Tribunal under S. 66(1) of the Act with the result that the question set out above stands referred to us.

    It would be clear from what we have stated above that the assessee leased out under a single lease a certain property of his own along with machinery, furniture etc. We have our own doubts as to whether in this particular case the assessment of the entirety of the income under S. 12 of the Act is justified. The income derived from property of which the assessee is the owner would properly come within the scope of S. 9 of the Act. Where income is derived by the hiring out of machinery, plant or furniture belonging to an assessee, the assessment would fall within the scope of S. 12 of the Act. In a case where such an income is derived by the hire of machinery, plant or furniture belonging to the assessee, but the hire is in association of the buildings let out, the buildings not belonging to the assessee and the letting of the buildings is inseparable with the letting of such machinery, etc., certain allowances are prescribed under S. 12(4) of the Act. The implication would appear to be that in case income is derived in cases such as the above, it should by regarded as income derived from other sources under S. 12 of the Act. We are not persuaded to believe that where an assessee lets out buildings of his own along with machinery, plant and furniture, also belonging to him, under a composite lease, the assessment would fall under S. 12. The various categories of such lettings dealt with under S. 12 would appear to suggest that the property income could and should be separated from the income from machinery, plant, furniture etc., and the two parts of the income dealt with under the separate heads of income provided by the Act. Though we are making these observations, it is not open to us to interfere with the assessment made under S. 12 of the Act, as that question has not been referred to us.

    Assuming that the assessment has been properly made under S. 12 of the Act, the question that we have to examine is whether the expenditure incurred by the assessee by the payment of the municipal tax is an expenditure incurred solely for the purpose of making or earning such income, profits or gains as laid down in S. 12(2) of the Act. What the department purports to contend for is that having regard to Cls. (3) and (4) of S. 12, which deal specifically with the hire of machinery, plant and furniture under Cl. 3, and with the hire of machinery, plant and furniture belonging to the assessee as well as the buildings under Cl. 4, certain specified allowances alone are contemplated and that in so far as the buildings are concerned, any allowance not covered by these clauses cannot be brought within the scope of Cl. 2. In Cl. 4 of S. 12, the allowances contemplated in respect of buildings are those set out in Cls. (iv), (v), (vi) and (vii) of Sub-S. 2 of S. 10. These clauses relate to insurance charges, current repairs and depreciation. In the case of property income, however, which would fall under S. 9, it is not denied by the department that certain other allowances are awardable. We are not however concerned with that aspect of the matter because the assessment has been made under S. 12. It seems to us that the Several clauses of S. 12 which provide for these allowances are not framed as in the alternative. The view that the Tribunal took that these clauses are cot mutually exclusive seems to be correct on a plain reading of the provision. Strictly speaking, it may also be pointed out that it is not the case of the department that the income now in question was derived by a lease of the kind that is comtemplated by Cl. 3 or Cl. 4 of S. 12. These clauses will not apply to the present case even on the stand taken by the department itself.

    The point we have to consider accordingly is whether the municipal taxes paid by the assesseee can come within the description of any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains. We are of the view that in a lease of this kind, the income from which the department seeks to tax as income from other sources, it is not the category of income labelled as municipal tax that is determinative of the question. If the assessment is under S. 12 and it does not fall within Cls. 3 and 4 of that section, the assessee should be entitled to an allowance of all those items of expenditure which have been incurred for the purpose of earning that income. We are unable to see how the payment of municipal tax which is a statutory levy and which the assessee is in law bound to pay can be taken out of the expression “expenditure incurred for the purpose of earning the income.” We are conscious that in a manner of speaking this expenditure is not an outlay which the assessee voluntarily makes in order to enable him to earn the income. But that it is an involuntary item of expenditure which the relevant statute enjoins upon him to pay does not to our minds render it any the less an allowable expenditure.

    Reliance has been placed upon C.I.T v. Maharani Janki Kuar Sahiba (1). This was a case of income derived from forest produce. Under the Bengal Cess Act, 1818, forest cess was levied on the annual net produce from immoveable property. In an assessment made under S. 12 of the Act, the assessee claimed to be entitled to deduct under S. 12(2) of the Incometax Act, the expenditure by way of cess. The Patna High Court took the view that as the cess was an imposition on the annual net profits from forest produce, it could not be said that the expenditure aided the assessee in earning the income or that it was incurred for the purpose of earning the income from forest produce. In coming to that conclusion, the learned Judges followed an earlier decision of that same High Court in In re Jyoti Prasad Singh Deo (2). They also referred to a Calcutta decision in Isabella Coal Company… v. The Commissioner Of Income-Tax, Bengal…., Bengal . In that case, an assessment under S. 10 was in question. The view expressed by the Calcutta High Court was contrary to the view expressed by the Patna High Court. In the Calcutta case, the payment of chess was claimed as an allowable deduction under S. 10(4) of the Act. The learned Judges in that case observed:

    “The authorised representative for the department contends that the cess on immoveable property is determined on the basis of the annual value, that is, on the basis of the profits earned by the assessee from the immoveable property. It appears to us that this circumstance is of no consequence for the purpose of determining the admissibility of cess as a deduction under S. 12 of the Incometax Act. It is significant that in S. 12 there is no provision corresponding to S. 10(4) of the Incometax Act.”

    In the Patna case referred to, it appeared that the local cess in question was a cess on the annual net profits of the immoveable property. The learned Judges observed:

    “As a matter of fact there is no relation between this expenditure and the income derived from the forest produce. Again, the expenditure must be incurred as a condition precedent to the production of the income. In this case, the cess was assessed after the income from the forest had already been derived. There was assessment of cess on the income from the forest produce, and the Incometax authorities assessed tax upon such income. It cannot be reasonably argued that in assessing the cess, the incometax payable on that produce would be deducted. Similarly, on the same reasoning it cannot be reasonably argued that the amount of cess will be deducted from the amount of forest produce in assessing the incometax. The cess paid in this case cannot be incidental to the making of the income……”

    The basis of the Patna decision seems to be that since the cess itself was assessed on the net income derived from the property, it could not be said that that expenditure was incurred for the purpose of earning the income. The case of a Municipal Tax would, however, appear to stand on a different footing. Municipal Taxes are levied on the basis of a percentage of the capital value of the property and are not based on the income that is derived from the property. We are unable to agree with the contention of the department that the expenditure in question was not incurred for the purpose of earning the income from the property. The Calcutta decision seems to us to be more to the point in the circumstances of the present case.

    We answer the question in favour of the assessee, who is entitled to his costs. Counsel's fee, Rs. 250.

    V.C.S

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    The Commissioner Of Incometax, Madras v. Jagannatha Govindas.
    (Nov 1, 1961)