Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 16 of 1989

Judges

Ajit K. Sengupta
Bhagabati Prasad Banerjee, JJ.

Acts

section 256(1) of the Income-tax Act, 1961,
section 23(1) of the Income-tax Act, 1961,
Taxation Laws (Amendment) Act, 1970,
section 23(1) of the 1961 Act.
section 9(2) of the 1922 Act
FINANCE ACT 1978

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Smart Summary

Structured Summary of the Judgment delivered by Ajit K. Sengupta, J.

Factual and Procedural Background

This is a reference under section 256(1) of the Income-tax Act, 1961, in respect of the assessment year 1982-83. The question referred was whether the Tribunal was justified in directing the Income-tax Officer to allow a deduction under the second proviso to section 23(1) of the Income-tax Act in respect of the portion of the property used by a bank.

In the assessment year 1982-83, the assessee claimed a deduction of Rs. 6,000 from house property income under the second proviso to section 23(1). The Income-tax Officer rejected this claim on the ground that four floors of the building were let out to a bank and were not utilised for residential purposes. The Commissioner of Income-tax (Appeals) confirmed the ITO's decision. The assessee appealed to the Tribunal, which allowed the deduction and directed the Income-tax Officer to permit it, giving reasons that the proviso refers to residential units and does not depend on the actual user by the occupant; also noting that the Calcutta Corporation had recognised the units as residential and that the ITO did not dispute that fact. The Revenue referred the question to this Court under section 256(1).

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Income-tax Officer to allow deduction under the second proviso to section 23(1) of the Income-tax Act, 1961, in respect of the portion of property used by the bank?

Arguments of the Parties

Revenue's Arguments

The object of the proviso to section 23(1) is to encourage construction of residential units which would be used as such (i.e., for residence) and not for commercial use.

Assessee's Arguments

There is no requirement under the law that the construction must be used for residence only; if the construction is of a residential unit, it is immaterial whether it is used for a commercial purpose.
The concept of user is irrelevant in the context of the proviso to section 23(1).
The assessee's counsel drew the court's attention to several judicial decisions supporting the assessee's position.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Mrs. Elizabeth Varghese, [1981] 132 ITR 605 (Kerala High Court)	Held that to constitute a "residential unit" for concessional tax treatment it must have a separate annual value; clauses (a) and (b) of the proviso apply to buildings comprising a plurality of dwelling units like flats which would constitute houses or homes.	The court noted the decision but observed that it does not expressly decide whether the construction must be used for residential purposes; the case was used to show judicial treatment of the concept "residential unit" as linked to separate annual value.
C.H. Kesava Rao v. Commissioner of Income-Tax, [1985] 156 ITR 369 (Madras High Court)	Held that the object of the second proviso to section 23(1) is to allow a reduction from the annual value of the two residential units and not from the annual value of the building as a whole.	The court cited this decision as authority about the nature of the concession (applies to residential units), without adopting the Kesava Rao decision as dispositive on the question of subsequent user by the tenant.
Dr. J.V. Desai v. Commissioner of Income-Tax, [1985] 154 ITR 828 (Andhra Pradesh High Court)	On facts where two units were let out (one used as office, one as guest house), the Andhra Pradesh High Court held that if the two units are residential when let out, the owner is entitled to the deduction irrespective of the tenant's subsequent user; no express words in the proviso restrict relief by reference to subsequent user.	The court recorded the Andhra Pradesh High Court's conclusion but distinguished it on the ground that that court did not consider the object of the concession; the present court took a contrary view on the relevance of subsequent user, relying on the object of the statutory concession.

Court's Reasoning and Analysis

The court proceeded in stages, relying on statutory text, legislative history and purposive analysis:

Statutory Text and Legislative History: The court reproduced the relevant portions of section 23(1) as it stood at the relevant time and traced the origin and evolution of the second proviso (initial concession in the 1922 Act as reflected in the 1961 Act; changes by Taxation Laws (Amendment) Act, 1970; further liberalisation by Finance Act, 1978). The court emphasised that the concession was introduced to stimulate construction of housing for persons in the low income group and had been described in the Budget Speech as a measure "to stimulate construction of housing for the use of persons in low income group."
Purpose of the Proviso: From the legislative history and the Finance Minister's Budget Speech, the court concluded that the object of the concession was to encourage the construction of residential houses. The court considered that this purposive context must inform the interpretation of "residential unit" in the proviso.
Meaning of "Residential Unit" and Relevance of User: The court analysed the phrase "residential unit" and rejected the submission that user by the occupant or tenant is irrelevant. The court held that if a building, though constructed as a residential unit, is used for commercial purposes it can no longer be said to be a residential unit for the purposes of the concession. Thus, the purpose for which the tenant uses the flat or house is important in determining entitlement to the deduction under clause (b) of the second proviso.
Application to the Facts: The court noted the uncontested factual findings of the authorities below: the building was constructed after obtaining a loan from Canara Bank, was let out to the bank, comprises five floors, the assessee occupies one floor, and the floors let to the bank were not utilised for residential purposes. On this factual basis, the court concluded the units let to the bank were not residential.
Consideration of Judicial Authorities: The court examined the Kerala, Madras and Andhra Pradesh High Court decisions. It observed that the Kerala decision dealt with the concept of separate annual value for a residential unit; the Madras decision addressed that the concession applies to residential units rather than the entire building; and the Andhra Pradesh decision held entitlement irrespective of tenant's subsequent use. The court distinguished the Andhra Pradesh decision on grounds that it had not considered the object of the concession.
Interpretative Conclusion: The court reasoned that if the Legislature had intended to give the concession irrespective of subsequent use, it would not have qualified the word "unit" by the adjective "residential." The court therefore held that the nature of the user (residential or otherwise) determines entitlement to the relief under clause (b) of the second proviso to section 23(1).

Holding and Implications

Holding: The court answered the reference in the negative and in favour of the Revenue: the Tribunal was not justified in directing the Income-tax Officer to allow the deduction under the second proviso to section 23(1) in respect of the portions of the building used by the bank.

Implications:

Direct effect: The assessee is not entitled to the claimed deduction (the units let to the bank were not residential in use and thus do not qualify for the concession under clause (b) of the second proviso to section 23(1)).
Costs: There will be no order as to costs.
Precedential effect: The court reversed the Tribunal's approach on the relevance of user and emphasised a purposive interpretation; the opinion did not state that it was creating a broader rule beyond the facts of this reference. The decision rests on the statutory text, legislative history and the factual finding that the units were not used for residential purposes.

Justice Bhagabati Prasad Banerjee concurred with the judgment.

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Commissioner Of Income-Tax v. Smt. Shyama Devi Dalmia

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1982-83:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Income-tax Officer to allow deduction under the second proviso to section 23(1) of the Income-tax Act, 1961, in respect of the portion of property used by the bank?”

2. The facts in brief are that, in the assessment year 1982-83, the assessee claimed deduction of Rs. 6,000 out of the house property income under the second proviso to section 23(1) of the Act. The Income-tax Officer rejected this claim of the assessee as, according to him, four floors of the building stood let out to the bank and were not utilised for (“residential purposes”. On appeal, the Commissioner of In???ome-tax (Appeals) confirmed the action of the Income-tax Officer. Being aggrieved, the assessee preferred a second appeal before the Tribunal. For the following reasons, the Tribunal held that the assessee was entitled to deduction under the second proviso to section 23(1) of the Act:

“We have considered the contentions of both the parties as well as the facts on record. In our opinion, the contentions raised for the assessee carry force. The second proviso to section 23(1) of the Act refers to residential units. It does not refer to the purpose for which the occupant actually uses it. In any case, it has been recognised as a residential unit by the Calcutta Corporation. The Income-tax Officer also does not dispute this basic fact. Hence, we hold that the assessee is entitled to the deduction envisaged under the said proviso and so we direct that the same be allowed to the assessee.”

3. At the hearing, it has been contended on behalf of the Revenue that the object of the proviso to section 23(1) of the Act is to encourage construction of residential units which would be used as such and not for construction of houses which would be put to Commercial use.

4. On the other hand, the contention of Mr. Bajoria, learned counsel for the assessee, is that there is no requirement under the law that the construction has to be used for residence only. If the construction is of a residential unit, it is immaterial whether it is used for a commercial purpose. The concept of user is irrelevant in the context of the proviso to section 23(1). Our attention has also been drawn to several decisions to which we shall presently refer. We have considered the rival contentions. Section 23 aims at the determination of annual value in respect of house property where it is either fully or partly let out or is used for the owner's own residence.

5. The material portions of section 23(1) of the Act as it stood at the relevant time run thus:

“23(1) For the purposes of section 22, the annual value of any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to be let from year to year; or

(b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable:

Provided 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 deducted in determining the annual value of the property:

Provided further that the annual value as determined under this sub section shall,…

(c) in the case of a building comprising one or more residential units, the erection of which is begun after the 1st day of April, 1961, and completed after the 31st day of March, 1970, but before the 1st day of April, 1978, for a period of five years from the date of completion of the building, be reduced by a sum equal to the aggregate of—

(i) in respect of any residential unit whose annual value as so determined does not exceed one thousand two hundred rupees, the amount of such annual value;

(ii) in respect of any residential unit whose annual value as so determined exceeds one thousand two hundred rupees, an amount of one thousand two hundred rupees;

so, however, that the income in respect of any residential unit referred to in clause (a) or clause (b) is in no case a loss.”

6. We may usefully refer to the legislative history concerning the concession introduced in the second proviso:

This concession was first introduced in the fourth proviso to section 9(2) of the 1922 Act with effect from April 1, 1961, i.e, for and from the assessment year 1961-62. It was reflected in the second proviso to section 23(1) of the 1961 Act. The concession was available in respect of one or more residential units comprised in a building, the erection of which was begun after April 1, 1961, and completed before April 1, 1970. The extent of deduction from the annual value of the building for each residential unit was the whole of the annual value of the unit in cases where such annual value did not exceed Rs. 600 and Rs. 600 in cases where such annual value exceeded Rs. 600. There was a further condition attached, that the income in respect of any such residential unit should in no case be a loss. The deduction was available for a period of three years from the date of completion of the building.

7. The object and purpose underlying the introduction of the said proviso was explained by the then Finance Minister in his Budget Speech while introducing the Finance Bill, 1961, in the following terms (see [1961] 41 ITR (St.) 33, 56):

“In order to stimulate construction of housing for the use of persons in low income group, I propose to provide for a deduction of Rs. 600 per annum from the annual value of new residential units completed after 31st March, 1961. This concession will be available for a period of three years only from the date of completion.”

8. The substitution of the new proviso for the former second proviso by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, i.e, for and from the assessment year 1971-72, has the effect of a two pronged enlargement in the extent of the concession, in relation) to one or more residential units comprised in a building, the erection of which is begun after 1st April, 1961, and completed after March 31, 1970, but before April 1, 1978. Firstly, the quantum of deduction has been enhanced to Rs. 1,200 in place of the former Rs. 600; and, secondly, the duration of concession has been enhanced to a period of five years from that of three years. In respect of residential units constructed between April, 1961, and March 31, 1970, the extent and duration of the concession remains the same, i.e, Rs. 600 for a period of three years.

9. With a view to encouraging the construction of houses particularly for persons in the low and middle income groups, the Finance Act, 1978, has liberalised the “tax holiday” for newly constructed residential, units. The Finance Act, 1978, has inserted a new clause (c) in the second proviso to section 23(1) to provide that in the case of a house property comprising one or more residential units, the erection of which is completed after March 31, 1978, the annual letting value of the house property will be reduced by an amount up to Rs. 2,400 in respect of each residential unit for a total period of five years from the date of completion of the property. This amendment is operative for and from the assessment year 1979-80.

10. From the legislative history, it will be evident that the object of allowing this concession was to encourage the construction of residential houses. Even if a house is constructed as a (residential unit, but used for commercial purposes, it can no longer be said to be a residential unit. The purpose for which the tenant uses the flat or the house is important in deciding this issue. It is true that the second proviso to section 23(1) of the Act refers to residential units and it does not refer to the purpose for which the occupant actually uses it. But some meaning has to be assigned to the expression “residential units”. In this case, as would appear from the orders of the authorities below which have not been disputed, the building was constructed after obtaining a loan from Canara Bank, Calcutta, and it was let out to the said bank. The building consists of 5 floors and the assessee has been staying in one of the floors. The flows which have been let out to the bank are not utilised for residential purposes by the bank.

11. Our attention has been drawn to a decision of the Kerala High Court in CIT v. Mrs. Elizabeth Varghese, [1981] 132 ITR 605. In that case, it was held that, in order to constitute a residential unit for the purposes of concessional tax treatment, it must have a separate annual value. It is true that the decision does not lay down as to whether the construction in respect of which concession is allowed should be used for residential purpose or not. It may, however, be mentioned that it was held that clauses (a) and (b) of the proviso to section 23(1) would take within their control only buildings comprising a plurality of dwelling units like flats which would constitute houses or homes.

12. Our attention has been drawn to a decision of the Madras High Court in C.H Kesava Rao v. Commissioner Of Income-Tax, [1985] 156 ITR 369, where it has been held that the object of the second proviso to section 23(1) of the Act is to allow a reduction from the annual value of the two residential units and not from the annual value of the building.

13. Our attention has also been drawn to a decision of the Andhra Pradesh High Court in Dr. Dr. J.V Desai v. Commissioner Of Income-Tax., [1985] 154 ITR 828. In that case, the assessee who owned a two-storeyed building the construction of which was done between April 1, 1970, and April 1, 1978, let out both the units to the National Textile Corporation. The first floor of the building was used for housing the office of the National Textile Corporation while the ground floor was used as a guest house. The assessee claimed deduction of a sum of Rs. 2,400 from the annual rent of the building. The Income-tax Officer and, on appeal, the Appellate Assistant Commissioner rejected the claim of the assessee. The Tribunal held that the benefit conferred by clause (b) of the second proviso to section 23(1) could be availed of only if the building was actually used for residential purposes and not otherwise. On a reference, it was held that since both the units were residential when let out, the assessee was entitled to a deduction of Rs. 1,200 from out of the annual rent received from each unit of the building in the computation of his income irrespective of its user by the tenant. The Andhra Pradesh High Court held that so long as the two units of the building let out are residential, the assessee is entitled to the benefit irrespective of its user by the tenant either with or without or against his consent. The benefit envisaged under clause (b) of the second proviso to section 23(1) of the Act is to a building comprising one or more residential units constructed during the period specified therein and is not dependent upon its user by the tenant to whom the building was subsequently let out. There are no express words employed in the second proviso to section 23(1) of the Act restricting the grant of relief envisaged therein with reference to the subsequent user of the building.

14. The Andhra Pradesh High Court did not consider the object of the concession. A benefit which is given to the owner-occupier is not given to an owner who lets the residential unit to a tenant which is treated as an independent unit having a separate annual value.

15. In our view, the benefit conferred by clause (b) of the second proviso to section 23(1) of the Act could only be availed of if the building was actually used for residential purposes and not otherwise. The nature of the user of the building let out determines the grant or denial of relief envisaged by clause (b) of the second proviso to section 23(1) of the Act. Had the object of the Legislature been to allow this concession irrespective of the user of the building, it was not necessary to qualify the word “unit” by the expression “residential”. An owner may construct a building with self-contained floors with the object of letting out the same to tenants, but such letting out has to be for the purpose of residence of the tenants and not otherwise. Admittedly, in this case, the units which were let out to the bank were not constructed as residential units. A residential unit is that which is used as a residence. A distinction has been made between a residential unit in the occupation of the owner for the purposes of his own residence and a residential unit let out to tenants. Where the residential unit referred to in the second proviso to section 23(1) is in the occupation of the owner for the purposes of his own residence, he does not get the concession as provided therein. Where, however a residential unit is not in the occupation of the owner but has been let out to tenants for the purpose of their residence, the concession as admissible under the second proviso to section 23(1) will be available to the owner of the residential unit. The expression “residential unit”, in the context in which it is used, necessarily denotes a dwelling unit for residence.

16. For the foregoing reasons, we answer the question in this reference in the negative and in favour of the Revenue. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.

Commissioner Of Income-Tax v. Smt. Shyama Devi Dalmia

Structured Summary of the Judgment delivered by Ajit K. Sengupta, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Smt. Shyama Devi Dalmia

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