Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.A No. 93 of 1999

Judges

D.K Seth
R.N Sinha, JJ.

Acts

clause (b) of section 24(1)(i) of the Income-tax Act, 1961.3.
section 24(1)(i)(a) of the Income-tax Act.
clause (a) or (b) of section 24(1)(i).6.
section 24(1)(i) of the 1961 Act.
sub-clause (b) of section 24(1)(i).
section 9(1)(i) of the 1922 Act.
7, 1983, and section 24(1)(i)(a)
provisions of sub-section (2),
FINANCE ACT 1992

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Smart Summary

Structured Summary of the Opinion (D.K. Seth, J.)

Factual and Procedural Background

The appeal concerns the tax treatment of repairs under the lease of a portion of a building (ground floor, 1st to 8th floors and some basement) and whether the assessee (lessor) was entitled to a deduction under clause (a) or clause (b) of section 24(1)(i) of the Income-tax Act, 1961 for the assessment year 1990–91. Initially, the benefit under the relevant provision was allowed to the assessee. Thereafter the case was reopened by the Commissioner of Income-tax in exercise of powers under section 263 of the 1961 Act, and the deduction under section 24(1)(i)(a) was withdrawn (amount Rs. 15,23,905). The Appellate Tribunal affirmed the Commissioner’s order, and this appeal challenges that affirmation.

The court examined the deed of lease (specific clauses cited and located at pages indicated in the paper book) to determine which clause of section 24(1)(i) applied, and whether the lessor had undertaken liability for substantial repairs such that clause (a) applied.

Legal Issues Presented

Whether, on a proper construction of the lease agreement dated January 7, 1983, and having regard to section 24(1)(i)(a) of the Income-tax Act, the Tribunal was justified in holding that all responsibilities of repair lay with the tenant or that the assessee had not undertaken to bear the cost of repairs and therefore was not entitled to the deduction under clause (a)?
Whether the Tribunal misdirected itself in law in upholding the order of the Commissioner of Income-tax under section 263 withdrawing the deduction under section 24(1)(i)(a) of Rs. 15,23,905?

Arguments of the Parties

Arguments Advanced on Behalf of the Assessee (as represented by Mr. Khaitan)

The lease, when read as a whole, shows that the lessor has a substantial responsibility to repair the demised premises — including the exterior, common areas and essential services (electricity, water, sewerage) — and therefore the lessor has undertaken to bear the cost of substantial repairs.
Because the lessor undertakes substantial repair obligations, clause (a) of section 24(1)(i) should apply and entitle the lessor to the one-sixth deduction of annual value.
The lessee’s obligations (clause 12) relate mainly to interior maintenance and are more akin to routine maintenance rather than a displacement of the lessor’s substantial repair liability; at best the liabilities might be joint but the lessor’s substantial liability remains.

Arguments Advanced on Behalf of the Respondent

Reliance was placed on clause 12 of the lease which places on the lessee responsibility to keep the interior in good repair, including sanitary and electrical fittings; thus it was argued the tenant undertook the cost of repairs and clause (b) of section 24(1)(i) applies.
The respondent relied on the Supreme Court decision in Sir Shadi Lal and Sons v. CIT (1988) to contend that the principles there implied that clause (b) should apply rather than clause (a), arguing an apparent inconsistency with Parbutty Churn Law (1965).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Parbutty Churn Law, [1965] 57 ITR 609 (Cal)	Where there is joint liability and the lessor is liable to bear the cost of a substantial part of repairs, the benefit of the provision (pari materia to section 24(1)(i)) is available to the lessor.	The court treated Parbutty Churn Law as authority supporting the proposition that if the lessor undertakes substantial repairs, clause (a) should apply. The decision was applied to hold that substantial repair liability by the lessor entitles him to the clause (a) deduction.
Sir Shadi Lal and Sons v. CIT, [1988] 169 ITR 510 (SC)	Distinction between repair and replacement/reconstruction: repair may include replacement or renewal but reconstruction of the entirety is not repair; restoration of stability or safety of a subsidiary part can be repair.	The court considered this authority but distinguished it on facts — in Sir Shadi Lal the landlord’s liability was not for substantial repair (it was contingent on collapse); the Supreme Court’s discussion concerned repair versus replacement, and did not displace the principle in Parbutty Churn Law. The court concluded Sir Shadi Lal did not impliedly overrule Parbutty Churn Law.

Court's Reasoning and Analysis

The court proceeded by textual and contextual interpretation of the deed of lease and statutory provision:

Identification of relevant lease clauses: the court referred to clauses in the lease (with page references in the paper book) showing a division of responsibilities:
- Clause 2.2 — lessor not liable for interior wiring/fittings and not to do whitewashing/painting inside demised premises; lessor undertakes painting of common areas, doors, windows and exterior walls at its cost.
- Sub-clause (k) of clause 11 — lessor's right to enter for repairs if necessary.
- Clause 12 — lessee liable to keep interior in good repair (sanitary, electrical fixtures and fittings) and to carry out interior repairs at its own cost.
- Clause 15(iv) and (v) — lessor responsible for continuous filtered tubewell water supply and to operate/maintain water pump and pay electricity for same; lessor to keep premises wind and water tight and maintain electric, sanitary and water fittings, pipelines, drains, sewage and common parts and execute necessary repairs, and whitewashing/painting of exterior and doors/windows.
- Clause 19(i) — lessee entitled to recover amounts if it carries out repairs which are not its liability, with interest, if lessor fails to keep premises wind and water tight.
Synthesis of lease terms: the court read the clauses together and concluded that the lessor has responsibility to repair substantially — notably the exterior, common areas and essential services — while the lessee’s obligations related to interior maintenance. The court characterized the lessee’s obligations as largely maintenance and the lessor’s obligations as substantial repair obligations.
Statutory interpretation of section 24(1)(i): the court explained the statutory consequences:
- Clause (a) applies where the property is let and the owner has undertaken to bear the cost of repairs — deduction equal to one-sixth of annual value.
- Clause (b) applies where the tenant has undertaken to bear the cost — deduction calculated differently (excess of annual value over rent or one-sixth of annual value, whichever is less).
- The statute does not expressly provide for joint liabilities or apportionment between landlord and tenant.
Application of principles: since the lessor had undertaken substantial repairs, the court held clause (a) was attracted. The court also held that where the statute is silent on joint liability, interpretation should be beneficial to the assessee; therefore, the fact of some interior maintenance by the tenant did not defeat the lessor’s entitlement under clause (a) when the lessor’s liability was substantial.
Consideration of precedents: the court relied on Parbutty Churn Law to support treating substantial landlord liability as attracting the benefit. It considered Sir Shadi Lal and Sons and found it distinguishable on facts (concerned with repair v. replacement and a landlord liability that was contingent and not substantial). The court concluded Sir Shadi Lal did not implicitly overrule Parbutty Churn Law and that Parbutty remains applicable.
Procedural point: the question of the validity of reopening the assessment under section 263 was not argued before the court by the appellant’s counsel (Mr. Khaitan), and the court therefore declined to deal with section 263 in this judgment.

Holding and Implications

Holding:

The appeal is allowed; the order appealed against is set aside; the assessee is entitled to the benefit of section 24(1)(i)(a) of the Income-tax Act.

Immediate consequences for the parties:

The assessee (lessor) is entitled to claim the deduction under clause (a) (one-sixth of the annual value) for the assessment year in question, because the lessor undertook substantial repair obligations under the lease.
The appellate order upholding the withdrawal of the deduction under section 263 is set aside; the appeal is allowed. There is no order as to costs. A signed copy to be provided on usual undertaking.

Broader implications: The court applied and affirmed existing principles (as in Parbutty Churn Law) regarding landlord liability for substantial repairs attracting clause (a). The opinion does not claim to establish a novel legal principle; it applies existing authorities to the facts and distinguishes contrary authority on factual grounds.

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Magma Leasing Ltd. v. Commissioner Of Income-Tax

D.K Seth, J.:— The appeal was admitted on the following grounds:

“(i) Whether on a proper construction of the lease agreement dated January 7, 1983, and section 24(1)(i)(a) the Tribunal was justified in law in holding that all the responsibilities of repair lay with the tenant or that the assessee had not undertaken to bear the cost of repairs or was not entitled to the deduction under the said provision?

(ii) Whether the Tribunal misdirected itself in law in upholding the order of the Commissioner of Income-tax under section 263 withdrawing the deduction under section 24(1)(i)(a) of Rs. 15,23,905?”

2. The moot question that falls for our consideration is whether, having regard to the terms of the deed of lease, the assessee is entitled to the benefit under clause (a) or the case falls under clause (b) of section 24(1)(i) of the Income-tax Act, 1961.

3. Initially, in the earlier order, such benefit was allowed to the assessee under the said provision. But subsequently, in exercise of power conferred under section 263 of the 1961 Act, the appellate authority had re-opened the case and reversed the finding and held that clause (a) is not applicable in this case in respect of the assessment for the assessment year 1990–91. The Tribunal had affirmed the said order out of which this present appeal arises.

4. The question is to be determined on the basis of the interpretation of the deed of lease. Therefore, we need to refer to the different clauses of the lease as appears at page 57 of the paper book. The lease was granted (page 59 of the paper book) in respect of the portion of the ground floor, 1st to 8th floors and some portion of the basement area to the lessee. In clause 2.2 (page 62 of the paper book) it is provided that the lessor shall not be liable to provide electrical wiring and fittings and shall not do any whitewashing and painting inside the demised premises. However, the lessor undertook the painting of the common areas, doors and windows and the exterior walls of the said building at its own cost. Under sub-clause (k) of clause 11 (page 75 of the paper book), the lessor has a right to enter, if necessary, for repair of the demised premises. Clause 12 (page 77 of the paper book) has been relied upon by learned counsel for the respondent. This clause provides that the lessee is liable to keep the interior of the demised premises in good repair, particularly, the sanitary, electrical, fixtures and fittings. The lessee is to carry out all repairs in the interior at its own cost. Much reliance has been placed on this clause to show that it is the responsibility of the lessee to undertake repairs in terms of sub-clause (b) of section 24(1)(i). It appears from clause 15(iv) (page 80 of the paper book) that the lessor is responsible for continuous supply of filtered tubewell water by means of electrical pumps and overhead tanks for the use of the lessee in the demised premises and to operate and maintain water pump in proper repair and condition and also to pay electricity and other charges for operating the said water pump. Sub-clause (v) thereof (page 81 of the paper book) provides that the lessor has to keep the demised premises wind and water tight and maintain in proper repair and condition the electric, sanitary and water fittings, equipment and appliances, pipelines, drains and sewage and common parts of the said building and execute all repairs of the demised premises as and when required and also execute whitewashing and colour washing of the exterior of the demised premises and also to paint the doors and windows in the demised premises with good paint. Under clause 19(i) (page 83 of the paper book) the lessee is entitled to recover the amount of repair if it carries out any such repair which is not its own liability to do so under the covenant together with interest at 2 per cent, above the Reserve Bank of India rate subject to a minimum rate of 16.5 per cent, in case the lessor fails to keep the demised premises wind and water tight.

5. If we read this clause together, then it appears that the lessor has the responsibility to repair the interior to a limited extent and whole of the exte-rior and maintain the essential services in good repair. This shows that the lessor has the liability to repair the demised premises substantially. There cannot be any other interpretation of the said deed of lease as rightly pointed out by Mr. Khaitan. The contention of learned counsel for the respondent, relying on clause 12 (page 77 of the paper book) relates to the interior and virtually is in the nature of maintenance. Be that as it may, the liability to repair substantially by the lessor cannot be ruled out altogether. At the best, it can be treated to be a joint liability. On a comparison of the liability of the lessor and the lessee, as pointed out by Mr. Khaitan, the liability of the lessor is substantial. If the lessor is liable for substantial repair, in that event, it has to be considered whether he is entitled to the benefit of clause (a) or (b) of section 24(1)(i).

6. The question of reopening of the assessment has not been mooted before this court by Mr. Khaitan. Therefore, we need not deal with section 263 of the 1961 Act. We are primarily concerned with section 24, which provides in subsection (1) that an assessee is entitled to deduction while computing his income from house property. Such deduction, as it stood prior to the Finance Act, 1992, which came into effect on April 1, 1993, relevant for our purpose, provides as follows:

“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:—

(i) in respect of repairs,—

(a) where the property is in the occupation of the owner, or where the property is let to a tenant and the owner has undertaken to bear the cost of repairs, a sum equal to one sixth of the annual value;

(b) where the property is in the occupation of a tenant who has undertaken to bear the cost of repairs,—

(i) the excess of the annual value over the amount of rent payable for a year by the tenant; or

(ii) a sum equal to one-sixth of the annual value, whichever is less

7. A plain reading of the said provision shows that if the lessor is liable for repair, in that event, he is entitled to deduction of one-sixth of the annual value. If the tenant is responsible for repair, in that event, the assessee shall be entitled to deduction of an amount being the difference between the annual value exceeding the annual rent or one-sixth of the annual value whichever is less. This section does not provide for joint liability. Neither does it provide for any apportionment on account of such joint liability. Therefore, as soon clause (a) states that if the lessor undertakes to bear the cost of repairs of the property occupied by the lessee, then the lessor would be entitled to a deduction equivalent to one-sixth of the annual value. When the statute is silent, it has to be interpreted in a manner beneficial to the assessee. If the liability of the assessee cannot be denied, when he undertakes the liability of substantial repair, may be it relates to the exterior or the common areas, he cannot be deprived of the benefit of clause (a) simply because the lessee has undertaken the liability to repair the interior of the portion in his occupation. The intention was to determine the question on the basis of undertaking of the liability to bear the cost without making any distinction with regard to joint liability. Therefore, as soon as it appears that the liability for substantial repairs is undertaken by the landlord, clause (a) is attracted. The expression “cost of repairs”, therefore, has to be interpreted to mean substantial repairs. In this case, the liability to repair the exterior is upon the lessor together with the maintenance of the supply lines of electricity, water and sewerage and other essential services in the demised premises, which are integral parts of the demise, as well as of the interior other than those undertaken by the lessee. The liability is, therefore, a substantial one.

8. This question came up for consideration by this court in the case of CIT v. Parbutty Churn Law, [1965] 57 ITR 609. The said case related to section 9(1)(i) of the 1922 Act. Mr. Khaitan pointed out that the substance of the said section is pari materia with that of section 24(1)(i) of the 1961 Act. In the said case when there was a joint liability and the lessor was liable to bear the cost of a substantial part of the repairs, the benefit of section 9(1)(i) was made available to him.

9. Though in a different context, on a different point, a similar question arose before the Supreme Court in Sir Shadi Lal and Sons v. CIT, [1988] 169 ITR 510, where Parbutty Churn Law, [1965] 57 ITR 609 (Cal), was considered and it was held that in the said case clause (b) was applicable and not clause (a). But the principle laid down in Parbutty Churn Law, [1965] 57 ITR 609 (Cal) was not deviated from. On the facts in the said case, it was found that the landlord was not liable for carrying out any substantial repair. The only repair that the landlord was liable to carry out was in case of collapsing of the building. This was held not to be a liability to undertake substantial repairs. This was a contingent liability that would arise only if the building collapses and not otherwise. Learned counsel for the respondent had relied on this decision and sought to contend that it has overruled in Parbutty Churn Law, [1965] 57 ITR 609 (Cal) by implication. Therefore, in this present case, clause (b) would be applicable. We are unable to persuade ourselves to agree with the said contention, inasmuch as, the apex court in Sir Shadi Lal and Sons v. CIT, [1988] 169 ITR 510 (SC) was concerned with a distinction between repair and replacement. It was held that repair may include replacement or even a renewal but the converse may not be true. In respect of a building, reconstruction of the entirety was held not to be a repair, though restoration of stability or safety of a subordinate or subsidiary part of it or any portion of it can be considered as repair. The facts of the said case seem to be distinguishable from the present one. The ratio decided in Parbutty Churn Law, [1965] 57 ITR 609 (Cal) was considered and it seems that the principle was affirmed through expressed observations made in the said judgment. There is no question of implied overruling of the said decision.

10. In the circumstances, we are of the view that in this case, the assessee is entitled to get the benefit of section 24(1)(i)(a) of the Income-tax Act. The order appealed against is hereby set aside. The appeal is allowed. There will, however, be no order as to costs. Signed copy, if applied for, be given upon usual undertaking.

Magma Leasing Ltd. v. Commissioner Of Income-Tax

Structured Summary of the Opinion (D.K. Seth, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Arguments Advanced on Behalf of the Assessee (as represented by Mr. Khaitan)

Arguments Advanced on Behalf of the Respondent

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Magma Leasing Ltd. v. Commissioner Of Income-Tax

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