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Commissioner Of Income-Tax, Cochin v. Joy P. Jacob
Factual and Procedural Background
The Income‑tax Appellate Tribunal, Cochin Bench, referred the following question to the High Court at the instance of the Revenue:
“Whether, on the facts and in the circumstances of the case, and in view of the fact that the property in question was vacant throughout the year, the Income‑tax Appellate Tribunal is right in law in holding that the assessee is entitled to vacancy allowance under section 24(1) of the Income‑tax Act, 1961?”
The assessee constructed a building completed on December 30, 1968, consisting of four floors. During the period relevant to assessment year 1970‑71, the ground floor and first floor were let to the State Bank of Travancore and occupied as from October 12, 1969. The other two floors were let out later — on April 1, 1971 and April 22, 1972 — which relate to later assessment years and are not material to this reference.
For assessment years 1970‑71 and 1971‑72, the assessee claimed vacancy remission under s. 24(1)(ix) of the Income‑tax Act: (a) in respect of the two floors let to the bank, for the period April 1, 1969 to October 11, 1969; and (b) in respect of the other two floors (unlet in the relevant accounting years), for the entire period April 1, 1969 to March 31, 1971. The ITO initially allowed the claim.
The ITO reopened the assessments under s. 147 and completed them under s. 143(3) by orders dated September 30, 1975, holding that the vacancy benefit under s. 24(1)(ix) was not available where vacancy preceded letting or where parts of the building were not let out in the relevant accounting years. The assessee appealed to the AAC, who allowed the appeals. The Revenue then appealed to the Tribunal, which rejected the Revenue's contention by its order dated February 24, 1978. The Revenue caused the reference to be made to this Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, and given that the property (or parts thereof) was vacant during the relevant year, the assessee is entitled to vacancy allowance under section 24(1)(ix) of the Income‑tax Act, 1961.
- More specifically, whether vacancy that precedes letting (rather than follows it) falls within s. 24(1)(ix), and whether the clause applies where parts of a building remain unlet throughout the relevant accounting year.
Arguments of the Parties
Revenue's Arguments
- Where vacancy did not follow letting but preceded it, the first limb of s. 24(1)(ix) should not apply; remission requires that the property must have been let and then fallen vacant in the relevant year.
- The second limb (relating to properties let out in parts) does not apply where some parts of the building were not let in the relevant accounting years; the assessee must prove vacancy arose subsequent to letting of the part for which remission is claimed.
- Implicit in submissions is that the Explanation added by Finance Act, 1977 (stating deduction shall be made irrespective of whether vacancy precedes or follows the period of letting) is not intended to be retrospective.
Assessee's Arguments
- The Explanation inserted by the Finance Act, 1977 is clarificatory (ex abundanti cautela) of the meaning of clause (ix) and states what the law always was; it applies to the present case not by retrospectivity but as confirmation of the correct construction of clause (ix).
- On the facts, where parts of the building were let during the relevant year and parts remained vacant, the assessee is entitled to remission for the proportionate annual value appropriate to vacant periods/parts under s. 24(1)(ix).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mahamudabad Properties P. Ltd. v. CIT, [1980] 124 ITR 31 (SC) | Stated that vacancy remission would not be available where a building had not been let out during the year previous to the relevant assessment year. | The Court noted this authority as establishing that letting and vacancy must both occur within the same year for clause (ix) to be attracted, but also observed that this case did not directly consider the precise question now referred. |
| Commissioner Of Income Tax v. Pradeepkumar, [1981] 130 ITR 118 (Ker) (Full Bench) | Reinforced the position stated in Mahamudabad about the requirement that letting and vacancy be within the same year. | Referenced as supporting authority for the principle but, similarly, held not to have decided the exact issue raised in the present reference. |
| Mangaldas H. Verma v. Commissioner Of Income‑Tax, Bombay City‑III, [1980] 124 ITR 185 (Bom) | Also cited in relation to the construction of clause (ix) and the conditions for vacancy remission. | Noted by the Court as related authority, but not directly determining the precise factual question before the Court. |
| Abdul Latif v. Mt. Abadi Begam, AIR 1934 PC 188 | Principle cited in support of interpreting the Explanation/ clause in a clarificatory manner (cited as authority for principle of law referenced by the Court). | Used as one of several authorities to support the Court's statement that the Explanation clarifies that remission is available whether vacancy precedes or follows letting. |
| West Derby Union v. Metropolitan Life Assurance Society, [1897] AC 647 (HL) | Referenced as authority in the line of cases relied upon for the Court's interpretive approach. | Referred to in support of the proposition that the Explanation is clarificatory and that the clause's scope should be understood accordingly. |
| CWT v. Mahavirprasad Bubna, [1980] 122 ITR 570 (Bom) | Authority cited in the Court's analysis of the clause and explanatory principle. | Referred to as part of the authorities that support the Court's view about the proper construction of clause (ix) and the Explanation. |
| Central Bank Of India & Others v. Workmen, Etc, [1959] 29 Comp Cas 367 : AIR 1960 SC 12 | Cited as an authority relevant to interpretive principles relied upon by the Court. | Used among other authorities to justify the Court's view that the Explanation clarifies the law as it has always been and that letting need not necessarily precede vacancy. |
Court's Reasoning and Analysis
The Court began by setting out the text of s. 24(1)(ix) and the Explanation (added by the Finance Act, 1977, effective from April 1, 1977). The Court recorded the parties' competing submissions about the Explanation: Revenue urged non‑retrospectivity, while the assessee submitted the Explanation was clarificatory of the clause's original meaning.
The Court analysed clause (ix)'s wording: it applies "where the property is let and was vacant during a part of the year" and, as earlier authorities had stated, this indicates both letting and vacancy must have occurred within the same year. The Court emphasised that while letting and vacancy must fall in the same year, it is not necessary that letting precede vacancy; the benefit accrues whether letting precedes vacancy or vice versa. The Court treated the Explanation as clarificatory of this position (observing that the Explanation, though not retrospective, clarifies law as it always was).
The Court then turned to the second limb of clause (ix), concerning properties let out "in parts." It explained that where a building is subdivided into independent units (for example, distinct floors or houses), each independent unit may constitute a separate "house property" for the purposes of s. 24(1). Consequently, remission under the second limb applies only in relation to the particular separate house property that is vacant for a part of the year. The Court identified factual factors relevant to determining whether a part is an independent house property (nature of construction, separateness of floors, treatment by municipal/civic authorities for taxes or rates, independent identity of tenements, etc.) and emphasised that the question of separateness is one of fact for the appropriate authority to determine.
Applying this analysis to the present reference, the Court found that the question as posed could not be answered on the materials before it because there was no clear factual finding about the nature of the building and whether the floors constituted separate house properties. Consequently, the Court declined to answer the reference and permitted the Tribunal to consider the matter afresh, determining the relevant facts in light of the principles explained above. The Court also directed that the parties bear their respective costs in these tax referred cases and ordered that a copy of the judgment be sent to the Income‑tax Appellate Tribunal, Cochin Bench.
Holding and Implications
Holding: The Court did not answer the reference question as posed because the proper determination depends on factual findings about the nature and separateness of the building's parts. The Court held that (a) clause (ix) requires that letting and vacancy occur within the same year to attract the clause, (b) it is not essential that letting precede vacancy (the Explanation clarifies that remission is available irrespective of whether vacancy precedes or follows letting), and (c) where a building is let out in parts, remission under the second limb applies only to the separate house property (part) that is vacant for part of the year — a question of fact to be determined by the appropriate authority.
Implications:
- The matter is remitted to the Tribunal to determine the relevant facts (including whether the floors operate as separate "house properties") and to apply the legal principles explained by the Court.
- The Court's interpretation clarified that letting need not precede vacancy for s. 24(1)(ix) to apply; the Explanation added by the Finance Act, 1977 is understood by the Court as clarificatory of this position (the Court stated the Explanation is not retrospective but confirms the clause's intended meaning).
- There is no final adjudication on the entitlement to vacancy remission on the specific facts of the present case because the necessary factual determinations have not been made; the direct effect is that the Tribunal must re‑examine facts in light of the Court's guidance. The Court did not create a new precedent resolving the specific factual dispute here; it provided principled guidance for fact‑sensitive application of clause (ix).
- The parties were directed to bear their own costs in these tax referred cases.
Kochu Thommen, J.:— The following question has been referred to us, at the instance of the Revenue, by the Income-tax Appellate Tribunal, Cochin Bench.
“Whether, on the facts and in the circumstances of the case, and in view of the fact that the property in question was vacant throughout the year, the Income-tax Appellate Tribunal is right inlaw in holding that the assessee is entitled to vacancy allowance under section 24(1) of the Income-tax Act, 1961?”
2. The assessee constructed a building which was completed on December 30, 1968. The building has four floors. The ground floor and the first floor were let out to the State Bank of Travancore and they were occupied as from October 12, 1969, within the period relevant to the assessment year 1970-71. The other two floors were let out on April 1, 1971, and April 22, 1972, within the previous years relevant to the assessment years 1972-73 and 1973-74, respectively. With these two years we are not concerned in this case. For the assessment years 1970-71 and 1971-72, the assessee claimed/vacancy remission, in terms of s. 24(1)(ix) of the I.T Act, in respect of the two floors let out on October 12, 1969, for the period from April 1, 1969, to October 11, 1969. In respect of the other two floors which were not let out in the relevant accounting years, namely, 1970-71 and 1971-72, the assessee claimed vacancy remission for the entire period from April 1, 1969, till March 31, 1971. The claim of the assessee was allowed by the ITO. However, by his orders dated September 30, 1975 (annexures A & A1), the officer reopened the proceeding under s. 147 and completed the same under s. 143(3). He held that in so far as the vacancy of the ground floor and first floor preceded the date of letting out of those two floors and also in so far as the other two floors had not been let out at all in the relevant accounting years, the vacancy benefit in terms of s. 24(1)(ix) was not available. Against these orders, the assessee appealed to the AAC. The appeals were allowed by him. Thereupon, the Revenue appealed to the Tribunal.
3. It was contended on behalf of the Revenue that in a case where the vacancy did not follow letting out, but preceded it, the benefit of the first limb of s. 24(1)(ix) would not be available. Nor would the second limb be attracted in a case where a part or parts of the building in respect of which remission is claimed had not been let out in the relevant accounting years. The Revenue pointed out that before remission was granted, the assessee had to prove that the building in question had been let out before it fell vacant during the relevant accounting year. The same principle would apply in relation to a part or parts of the building where remission is claimed. The assessee had to prove that vacancy arose subsequent to the letting out of those parts. This argument was rejected by the Tribunal by its order dated February 24, 1978. Hence, the present question, at the instance of the Revenue.
4. Before we read the relevant clause, it must be stated that there is no direct authority on the construction of this clause in regard to the points arising for decision. In Mahamudabad Properties P. Ltd. v. CIT, [1980] 124 ITR 31 (SC), the Supreme Court stated that vacancy remission would not be available in a case where a building had not been let out during the year previous to the relevant assessment year. To this effect, a Full Bench of this court stated in Commissioner Of Income Tax v. Pradeepkumar, [1981] 130 ITR 118 (Ker). (See also Mangaldas H. Verma v. Commissioner Of Income-Tax, Bombay City-Iii., [1980] 124 ITR 185 (Bom)). But, in none of these cases, the question now directly posed before us was considered. The question is whether or not the benefit of remission would accrue in respect of a building which was vacant for a part of the year preceding the letting out and also in respect of parts of that building which had not been let out in the relevant accounting year.
5. Section 24(1) in so far as it is material reads:
“24. (1) 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, namely:……………
(ix) where the property is let and was vacant during a part of the year, that part of the annual value which is proportionate to the period during which the property is wholly unoccupied or, where the property is let out in parts, that portion of the annual value appropriate to any vacant part, which is proportionate to the period during which such part is wholly unoccupied.
Explanation:— The deduction under this clause shall be made irrespective of whether the period during which the property or, as the case may be, part of the property was vacant precedes or follows the period during which it is let.”
6. The Explanation was added to this clause by the Finance Act, 1977, with effect from April 1, 1977. Counsel for the Revenue contends that the Explanation is not intended to be retrospective. Sri Narayanan Poti, appearing for the assessee, submits that the Explanation is inserted ex abundanti cautela. He points out that it applies in terms to the instant case, not because it is retrospective, but because it is clarificatory of the law as embodied in clause (ix). It says that the law has always been so. Its object is to remove any doubt as to the meaning of clause (ix).
7. Clause (ix) says “where the property is let and was vacant during a part of the year…………” This part of the clause, as stated by the Supreme Court and by this court in the cases referred to above, shows that in order that the clause is attracted, the property in question must have been let and also vacant during a part of the year. Both the events must have occurred within the same year. If the property had been let, not in the relevant year, but in an earlier year, the clause will not be attracted. Nor would it be attracted if the property was let in the relevant accounting year but became vacant in a subsequent year. It is, however, not, in our view, necessary that letting must precede vacancy. The benefit will accrue equally if the order is reversed as in the present case. Where a building was vacant for a part of the year and was let out for the remaining part of that year, the clause is attracted in full force. This is in fact what is clarified by the Explanation which, although not retrospective, is clarificatory of the law as it always has been ever since the clause was enacted. See the principle stated in Abdul Latif v. Mt. Abadi Begam, AIR 1934 PC 188, 191; West Derby Union v. Metropolitan Life Assurance Society, [1897] AC 647, 655 (HL), CWT v. Mahavirprasad Bubna, [1980] 122 ITR 570 (Bom) and Central Bank Of India & Others v. Workmen, Etc, [1959] 29 Comp Cas 367 : AIR 1960 SC 12, 27.
8. The second limb of the clause refers to a property which is let out in parts and a portion or portions thereof remain vacant. This means that if a part of the building is let out during the relevant year while: the other part or parts remain unoccupied during that year, the benefit of remission would accrue to the assessee.
9. Accordingly, the assessee can deduct that part of the annual value which is proportionate to the period during which the property is wholly unoccupied, or, in a case, where the property is let out in parts, that portion of the annual value appropriate to any vacant part which is proportionate to the period during which such part is wholly unoccupied.
10. Where; the whole property has been let out and a remission is claimed in respect of the period of vacancy, there is no difficulty in applying the first limb of the clause for the purpose of remission. As we have stated earlier, remission would be available whether the letting preceded or followed the vacancy. But where the property is let out in parts, and the benefit of the second limb of the clause is claimed, the question may arise as to what is the property in regard to which remission is available.-The second limb of the clause refers to the property which is let out in parts. The property mentioned in clause (1) of the section is house property, meaning a building. But there may be many house properties in one building where the building is divided horizontally or vertically into parts which are independent units and let out or intended to be let out as separate house properties. In the case of a building having several floors or where several houses are attached to each other, it may be possible to consider each floor or house as an independent unit or a house property forming part of the whole building. In a city, where tall buildings having many floors or houses inseparably built from each other are common, each floor or house may be treated as an independent and separate unit constituting by itself a house property for the purpose of the section. In such cases, the benefit of clause (ix) would not accrue except in regard to the separate house property in question. Merely because one independent floor of a building, which is a separate house property, is vacant during a part of the year and the other floors remain vacant throughout the year, the second limb of clause (ix) would not be attracted. In order to attract that, the property must be of such a nature as we have described. This is a question of fact which has to be considered in each case. The nature of the construction, the separateness of the floors from each other, the manner in which each floor is treated by the Corporation or other civic bodies for the purpose of taxes or rates, the independent identity of the tenements and the like, are matters which must be considered by the appropriate authority in evaluating the nature of the building in a given case for the purpose of applying clause (ix).
11. In the present case, the question posed before us cannot be answered in the form in which it has been raised, for, during the relevant year, only two floors were let out and the other two floors were unoccupied. Even if the question is recast on the basis of those facts, it would still not admit of an easy answer in the absence of a clear finding as to the nature of the building. In the circumstances, we do not answer the question referred, but we make it clear that the answer must necessarily depend upon a proper determination of the relevant facts. In the circumstances, it is open to the Tribunal to consider the question afresh by determining the relevant facts in the light of what is stated above. We direct the parties to bear their respective costs in these tax referred cases.
12. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
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