Tax Case No. 33 of 1977 (Reference No. 28 of 1977)

Decided on September 24, 1982

The Judgment of the Court was delivered by

Ramanujam, J.:— At the instance of the Revenue the following question of law has been referred to this court by the Income-tax Appellate Tribunal, Madras, under the provisions of s. 256(1) of the I.T Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the payment of urban land tax to the extent of Rs. 16,130.52 relating to the period July 1, 1963, to June 30, 1970, was an admissible deduction in arriving at the income under the head ‘Other sources’ for the assessment year 1971-72?”

2. The dispute in this case relates to the computation of income from property jointly held by the assessee and certain others for the assessment year 1971-72, corresponding to the accounting year ended on March 31, 1971. The assessee has 24 per cent. interest in the joint property, which has been let on rent to others. The assessee computed the income to be assessed from house property in the assessment year 1971-72 by deducting two amounts, (1) Rs. 16,130.52, being the urban land tax paid for the period July 1, 1963, to June 30, 1970, and (2) Rs. 1,728.27, being the urban land tax paid for the period July 1, 1970, to June 30, 1971. The ITO, however, felt that in the computation of the income from house property for the assessment year 1971-72, only the urban land tax paid in relation to that assessment year could be deducted. In this view he recomputed the assessee's income and arrived at the share of the assessee's income from house property at Rs. 3,973. Aggrieved by the order of the ITO, the assessee filed an appeal before the AAC who, however, concurred with the ITO and held that for the computation of income from house property the deduction under s. 24 can be only the tax relatable to the assessment year and that any extra amount paid in respect of such taxes for the previous year is not allowable even though such arrears were paid during the previous year.

3. The assessee took the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal has held that the amount of Rs. 16,130.52 paid during the assessment year 1971-72 for the period from July 1, 1963, to June 30, 1970, was an admissible deduction and on this basis the Tribunal set aside the computation of income made by the ITO and remitted the matter to him with a direction to recompute afresh the total income of the assessee from house property and other sources. Aggrieved by the order of the Tribunal, the Revenue has come up before us.

4. The facts of the case can briefly be referred to for the purpose of appreciating the contentions advanced by the parties before us. In 1943 the assessee along with others had jointly taken on lease certain extent of land together with a building. One of the clauses in the lease deed provided that the lessee shall bear and discharge all existing and future rates, taxes, assessments, duties, imposition and outgoings, whatsoever imposed or charged upon, save the property tax and quit rent now being paid by the lessors and that all property tax attributable in the erection of any building by the lessee on the plot of land shall be borne and payable by the lessee himself. After taking the site on lease, the assessee jointly with others constructed a cinema house and let it put. The original building of the lessor which was there was given on lease by the assessee to Andhra Scientific Company on a rent of Rs. 250 per month. The rent received from the cinema house and the rent received from Andhra Scientific. Company constituted the two items of income returned from house property. The ITO and the AAC thought that both items of income fell under the single head “Income from house property”. But the Tribunal had made a distinction between the income from the house property owned by the assessee and from the property taken on lease for rent, for the reason that the difference will have a material impact in the classification of income. According to the Tribunal if the income is to be classified as income from house property, the assessee must be the owner of the house property and that the income from buildings, taken from another and then sublet, will have to be taken only as income from “other sources”. It is on the basis of the said classification that the Tribunal proceeded to consider the allowability of the urban land tax paid from the income of the assessee either from the house properties or from other sources. The classification of the rental income made by the Tribunal has not been disputed before us. Therefore, we have to proceed on the basis of the order of the Tribunal that the rental from the cinema theatre constructed by the assessee jointly with others should be taken to be income from house property and the rents received from the Andhra Scientific Company in respect of the building that was taken on lease by the assessee along with the land will have to be taken as income from other sources. According to the Tribunal since urban land tax is payable in respect of the land and not in respect of the property Which is the theatre building, in computing the rental income from the theatre building the urban land tax is not deductible and only a deduction relatable to the theatre building alone can be allowed and, therefore, the income from that property will have to be computed as income from the house property without giving any allowance for the urban land tax. However, the rental income from Andhra Scientific Company building, let on rent, of which the assessee is not the owner but only a lessee, has to be classified as income from other sources and is to be computed in accordance with s. 57 of the I.T Act, 1961. In the computation of such an income the sum of Rs. 16,130.52, being the urban land tax paid, will be an appropriate admissible deduction as it is an amount of expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income from other sources, which is the rental income from Andhra Scientific Company. The question is whether the decision of the Tribunal classifying the rental income into two categories, (1) income from house properties, and (2) income from other sources, and allowing the deduction of urban land tax paid for the period prior to the assessment year from the income from other sources, is correct.

5. It is not in dispute that under the lease arrangement as between the assessee and the lessor the assessee has to bear the burden relating to urban land tax. For the period from July 1, 1963, to June 30, 1970, the demand for urban land tax was made on the lessees on July 30, 1970, and it was paid during the accounting year 1970-71. Though the ITO and the AAC took the view that the deduction can be claimed only in relation to the urban land tax relatable to the assessment year and that deduction cannot be claimed in respect of the payment of urban land tax relatable to the earlier previous years, the Tribunal has taken the view that so far as the urban land tax is concerned, the liability to pay the same arises only on a demand being made, and that the demand in this case having been made for payment of Rs. 16,130.52 only on July 30, 1970, within the year of assessment, the said amount can be claimed as deduction during the accounting year in question. On this aspect of the case, we are inclined to agree with the view of the Tribunal that the dates of demand and payment of the urban land tax alone are material for the purpose of claiming deduction and not the period for which the urban land tax has been paid. This is clear from a reading of the provisions of the Urban Land Tax Act, apart from the decision of this court in Commissioner Of Income-Tax, Tamil Nadu-I v. M. Ct. Muthiah., [1979] 118 ITR 104.; In that case the assessee paid for the assessment year 1970-71, a sum of Rs. 8,564 representing the urban land tax relating to earlier years claimed from him during that year. He claimed deduction of the amount under s. 24(1)(vii) of the I.T Act, 1961, in computing his income from property. This was negatived by the ITO as well as by the AAC but upheld by the Tribunal. When the matter was taken to this court, this court took the view that having regard to the scheme of the Tamil Nadu Urban Land Tax Act, which levies urban-land tax, it is clear that there is no question of accrual of the liability every year, that the amount became payable only as and when it is demanded, that in so far as s. 24(1)(vii) used the word “paid” and not “payable” or “chargeable”, the emphasis should be placed on the actual payment and not payability and that, therefore, the assessee was eligible for deduction of the urban land tax paid during the year though the amount related to some earlier years. The same view has also been taken by this court in CIT v. Woodlands Hotel, [1981] 128 ITR 603.

6. The only question then remains to be considered is whether the payment of Rs. 16,130.52 can be claimed as an admissible deduction for arriving at the income under the head “Other sources” for the year 1971-72, as has been held by the Tribunal.

7. The contention of the Revenue on this aspect of the case is that the assessee has got two capacities, one as a lessee and the other as a landlord and that the amounts should be taken to have been paid only in his capacity as landlord and not in his capacity as a lessee in which case he is not entitled to claim deduction. It is also pointed out by the Revenue that in any event the deduction can be claimed only from the income from house properties and not from the income from other sources. Reference has been made to the decision of the Supreme Court in Indian Aluminium Co. Ltd. v. Cit, West Bengal, Calcutta ., [1972] 84 ITR 735, wherein the Supreme Court expressed the view that when a person has a dual capacity of a trader-cum-owner and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles and that to be a permissible deduction there must be a direct and intimate connection between the expenditure and the business, i.e, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. In that case the court pointed out the distinction between ss. 37 and 57 of the I.T Act and stated that while s. 37 deals with the allowability of an expenditure wholly or exclusively made for the purpose of the business or profession, s. 57 deals with the allowability of deductions of any expenditure from the income chargeable under the head “Income from other sources”, and held that the deduction for payment of tax cannot be claimed under s. 57(iii) as an expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. Reference is also made to the decision of the Supreme Court in T.S Krishna v. Cit, Madras, [1973] 87 ITR 429, where the wealth-tax paid by an assessee in respect of the shares held by him was held as not a deductible expenditure as it did not bear any relationship direct or incidental to the earning of the income from dividends and could not also be said to be laid out or expended exclusively for the purpose of making or earning such income within the meaning of s. 57(iii).

8. It is not possible for us to agree with the Revenue that the assessee is not entitled to a deduction under s. 57(iii). As already stated, deduction has been allowed from the rental receipts from Andhra Scientific Company. The assessee has taken a building on lease and is earning an income by sub-leasing it. It is only by taking a lease of the property and sub-leasing it he earns income. As a lessee he had undertaken to pay the urban land tax payable on the land in respect of which the lessor is principally liable. Therefore, the amount of urban land tax actually paid should be taken to be an amount paid in addition to the lease amount by the lessee to the landlord. Though the amount is paid by the assessee as a lessee to the Government, he is discharging the liability of the owner of the land in pursuance of a lease agreement and not as owner of the land. The liability to pay urban land tax on behalf of the lessor, undertaken by the lessee, is a contractual liability entered into as part of the lease arrangement which has been entered into between the lessor and the lessee for the purpose of making or earning an income. Therefore, the urban land tax which the assessee has undertaken to pay to the Government on behalf of the lessor should be taken to be a payment in addition to the lease amount. It cannot be disputed that the lease amount paid by the lessee to the lessor will be a deductible expenditure in the computation of income from other sources. If the lease amount could be deducted under s. 57(iii), we do not see why the urban land tax paid by the lessee to discharge the liability of the lessor cannot be taken as a deduction made for the purpose of earning income. In this view of the matter, we have to hold that the urban land tax paid is a deductible expenditure under s. 57(iii) from the rental income received from Andhra Scientific Company.

9. The learned counsel for the Revenue would then contend that the giving of such a deduction from the income from other sources goes to the benefit of a third party like the lessee of the cinema theatre as the urban land tax liability which is in respect of the entire land is sought to be deducted only from the income from one building. It is no doubt true that the benefit of deduction goes to a third party. But that is not a ground for denying the assessee the benefit of s. 57(iii). Lord Sumner in Usher's Wiltshire Brewery v. Bruce, [1914] 6 TC 399 (HL) had expressed the view thus (p. 437):

“Where the whole and exclusive purpose of the expenditure is the purposes of the expender's trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, or that the expender incidentally obtains some advantage, in some character other than that of a trader cannot in law defeat the effect of the finding as to the whole and exclusive purpose.”

10. The same principle was laid down by the Supreme Court in CIT v. Chandulal Keshavlal & Co., [1960] 38 ITR 601, CIT v. Royal Calcutta Turf Club, [1961] 41 ITR 414 and Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, [1951] 20 ITR 1. Thus, on a due consideration of the matter, we have to agree with the ultimate conclusion arrived at by the Tribunal. The reference is, therefore, answered in the affirmative and against the Revenue. The assessee will have his costs from the Revenue.

11. Counsel's fee Rs. 500.