M. RAGHUNANDAN v. INCOME TAX OFFICER
[Citation -1984-LL-0926]

Citation 1984-LL-0926
Appellant Name M. RAGHUNANDAN
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 26/09/1984
Assessment Year 1977-78
Judgment View Judgment
Keyword Tags proportionate disallowance • business or profession • interest on securities • computation of income • proportionate basis • accrual of income • notional basis • house property • annual income • interest paid • annual value • monthly rent • actual rent • annual rent • letting out
Bot Summary: Deal with rational physical computation of income, s. 22 under Chapter IV dealing with property income deals with in the first place a notional charge of income. The necessary inference is that where property income cannot be computed as to give an annual value for the holding upto property income, no property income can be included in the hands of the owner of the property. In the case of business or other sources of income, it is not necessary that the sources should be owned by the assessee; mere accrual of income or receipt of income to him would by the assessee; mere accrual of income or receipt of income to him would make it taxable. No hesitation in holding that where a property does not give rise to an annual income or income for a lesser period- notional or otherwise the income from that property cannot be included in the total income. Counsel for the department urged that it would be shocking to note that an assessee received a substantial income form property for a good part of the year but merely because he does not own the property for the whole of the year that income should escape. If out of 365 days of the year, the assessee is the owner of the property for 364 days, no property income can be included in his total income because no annual value can be computed in that previous year. These may be summarised as under : Property income under the IT Act can be included in the total income of an assessee only if the assessee is the owner of the property or can be treated as such for a full year and not when it is for a period less than one full year.


V. BALASUBRAMANIAN, V.P. Order assessee-individual is employee of Madras Refineries Ltd. He constructed residential house at plot No. 12, New Colony, Tiruvengadam Street, Madras-28, for self-occupation and occupied same on 1st Jan., 1977. For asst. yr. 1977-78, his previous year ended on 31st March, 1977. assessee had taken loan for construction of building and for year he paid interest of Rs. 4,169. assessee had returned his income from property as under, claiming loss of Rs. 3,864 to be set-off against his other income : Rs. Annual value . 3,943 Less : Municipal tax 1,016 . . 2,927 . Pro-rata for occupation from 1-1- 732 . 1977 Less : 1/2 for self-occupation 366 . Less : 1/6th for repairs 61 . Interest payable 4,169 4,230 Less . . 3,864 ITO computed property . . income as under : Annual value . 3,943 Less : Municipal tax . 1,016 . . 2,927 Less : deduction for self-occupation . 1,463 . . 1,463 Less : 1/6th for repairs . 240 . . 1,220 Less : interest paid . 4,169 . Less 2,949 Proportionate less for three months . 737 On appeal, AAC confirmed ITO s order. It is thus that matter is in appeal before Tribunal. 2 . confirming ITO s order, AAC relied on decision of Tribunal in ITA No. 1529/Bom/1979-80 decided September, 1979, where it was held that where property was completed during course of year, interest relatable to period from date of completion of property to last day of previous year alone can be allowed under s. 24 of IT Act. Since there were other decisions of Tribunal such as in ITA No. 2381/1977-78 dt. 20th March, 1978 where full interest for year was allowed, matter was referred to Special Bench. 3. ld. counsel for assessee has pointed out that provisions of ss. 23 & 24 clearly entitled him to figure of loss worked out by him being set- off against his other income. There is no dispute about annual value of property concerned. It is only in manner of working out income that there is difference between ITO and assessee. assessee is entitled to take into account actual income for period that asset belonged to him. He is also entitled to relief for self-occupation on basis of this income. As regards expenditure, clear words of s. 24 entitled assessee to deduct interest payable by him during year. While there are references to proportions to calculation in other section, there is no such reference in s. 24. deductions under this section, therefore, are to be given fully irrespective of period for which they relate. At any rate, having worked out loss at Rs. 2,949 there was absolutely no justification for reducing loss proportionately to Rs. 737. Reliance is placed on decision of Tribunal in ITA No. 2381/1977-78. decision in case of Challapali Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) is given in different context. provisions of Act dealing with computation of property should be followed strictly in working out income. computation of property income is done primarily under s. 23. proviso to s. 23(1) and provisions of s. 23(2) are relevant. Sec. 24 comes in only at later stage in computation. Explanation inserted w.e.f. 1st April, 1984 also indirectly supports assessee s case. proviso to s. 23(1) speaks of "completed" period. All these, according to ld. counsel, clearly point out to allowability of full interest. Reference is also made to Circular issued by Board No. 363 dt. 26th June, 1983 which analogically supports assessee s case. 4. For department stress is laid on orders of authorities below. Sec. 23(1) clearly refers to computation of proportionate income. Income, according to ld. Counsel for department, must have reference to particular period. Automatically expenses relative to that period only can be allowed. asset in question having come into existence on 1st Jan., 1977, if income for period subsequent to this date has to be worked out, expenditure also for corresponding period only can be deducted. Since in present case income for months period only is computed, as natural corollary interest relevant to three months period only can be allowed. ld. Counsel for department also has relied on this Board s Circular dt. 24th June, 1983 which clarifies that interest accrues from any day to day and relevant interest accruing for period only can be taken into account. Reference is also made to decision of Orissa High Court in case of CWT vs. K.B. Pradhan (1981) 130 ITR 393 (Ori). 5. issue involved is simple. income from property is included only for part of year. question is whether some of expenses referred to in s. 24 of Act should be allowed as claimed in full or on some proportionate basis. According to assessee, interest, which is subject-matter of dispute in present case, should be allowed in its entirety since s. 24 does not speak of any proportion in this regard. main argument of department is that since credit side of account is considered only for part of year, it would not be proper to consider expenses side for full year. issue would not be proper to consider expenses side for full year. issue can be resolved by reading of relevant provisions. 6. Sec. 22 deals with computation of income from house property. Sec. 23 deals with how annual value is to be determined. Under IT Act ss. 4 and 5, which are charging section and section defining scope of total income spread out tax net. Sec. 14 deals with heads of income. Even though total income is single concept, income from different heads and sources are to be computed under s. 14 in accordance with various sections following thereon and relating to each category of income. reading of these sections, however, shows that while heads like salaries, interest on securities, business, etc., deal with rational physical computation of income, s. 22 under Chapter IV dealing with property income deals with in first place notional charge of income. More than that while all other sections under Chapter IV dealing with all heads of income deal with "income" obviously for specific period relevant to its earning, there is restriction with regard to period in s. 22 which runs as under : "22. annual value of property consisting of any buildings or lands appurtenant thereto of which assessee is owner, other than such portions of such property as he may occupy for purposes of any business or profession carried on by him profits of which are chargeable to income-tax, shall be chargeable to income-tax under head "Income from house property." basic concept in which s. 22 differs from all other sections is in bringing in taxable period by reference to "annual value". In other words, what is taxed under IT Act is only annual value of property. expression "annual" is adjective of word "year". What is taxed under s. 22 is, therefore, only yearly income of person derived from property. In other words s. 22 and sections following viz. ss. 23, 24, 25, 26 and 27 all are based on concept of taxation of property income through "the annual value of property". Legally and etymologically, annual value cannot mean monthly value, weekly value, daily or momentary value. Where property income is brought to tax, therefore, if there is no "annual value", there is no authority for taxing property income in IT Act at all. If legislature wanted taxing of property income for shorter period, there was no purpose in utilising expression "annual value of property". As pointed out earlier, concept of annual period for computation of income is completely absent with reference to all other sources and heads of income. 7 . ld. Counsel for department strongly stressed point that all incomes under all heads should be taxed in same manner. There is no justification for adopting any special method for property income. very same argument of ld. Counsel supports us in our above decision. It is noteworthy that computation of property income under IT Act is not only fictional but also contradicts very normal conceptional idea of income. It would perhaps be absurd to say that person who does not receive any rent or so from property, by more holding of it, earns income, In rational mind it would be still more ridiculous to hold that when he stays in property, he receives income therefrom taxable in his hands. In fact in some of advanced countries like United States property income is never assessed to tax especially when owners stays therein. We are, therefore, not surprised that having resorted to taxation of property income on notional basis legislature choose special method of taxation. It may be that this special method involved consideration of property income as "annual income", that is only when property income endured to benefit of owner for full year. 8. ld. Counsel for department also pointed out that right from inception of IT Act, property income was being assessed even for part of year. Be this as it may, mistake continuously perpetrated over years does not cease to be mistake. Merely because in past sufficient note was not taken of clear expression "annual value" utilised in s. 22. It cannot be assumed that monthly, weekly or daily value of property should also be brought to tax. necessary inference is that where property income cannot be computed as to give annual value for holding upto property income, no property income can be included in hands of owner of property. That property income has been dealt with in manner different from other heads of income is also clearly from fact that only in case of Property income liability to tax is based on ownership of property. In case of business or other sources of income, it is not necessary that sources should be owned by assessee; mere accrual of income or receipt of income to him would by assessee; mere accrual of income or receipt of income to him would make it taxable. We have therefore, no hesitation in holding that where property does not give rise to annual income or income for lesser period- notional or otherwise income from that property cannot be included in total income. 9. above becomes of relevance firstly where as in present case property is in possession of assessee only for part of year having been built during course of previous year. This also is of importance where assessee has disposed of property during course of year. May, be therefore, if for one reason or other assessee is not "owner" of property for full year, income from property cannot be included while working out his total income. ld. counsel for department urged that it would be shocking to note that assessee received substantial income form property for good part of year but merely because he does not own property for whole of year that income should escape. Perhaps this is natural result of above interpretation forced on us by clear words of Act. But there is no inequity in this. Since as we pointed out above very manner of taxing of property income is notional, full of controversy and little artificial. This view is further strengthened by fact that in s. 23, which deals with determination of annual value ; "the annual value of any property shall be deemed to be sum for which property might reasonably be expected to let from year to year". When normally property can be lt out from month to month and in all tenancy legislation property concept is monthly rent, it is certainly intentional deviation to refer to letting from year to year. What IT Act unlike tenancy Acts clearly says is that there should be annual rent in order to bring property income within tax net. If, therefore, out of 365 days of year, assessee is owner of property for 364 days, no property income can be included in his total income because no annual value can be computed in that previous year. 10. ld. Counsel for department pointed out that annual value can always be computed on basis of letting out figures or bona fide annual value figures relevant to shorter period. In this connection reference is also made to newly introduced Explanation to s. 23(1) inserted by Taxation Laws Amendment Act, 1975 w.e.f. 1st April, 1976. We have seen this section. It is of limited application in scheme of computation of property income. actual mode of computing property income obtains in s. 23, which states that annual value of any property shall be deemed to be (1) sum for which property might reasonably be expected to let from year to year ; or (2) where property is let and annual rent received or receivable by owner in respect thereof is in excess of sum referred in (1) above, amount so received or receivable. It is in context of expression "annual value" referred to in s. 23(1)(b) that Explanation is inserted w.e.f. 1st April, 1976. Explanation provides that where rent is received by owner of property and rent for particular period is known " annual rent" is to be computed on basis of actual rent for shorter period. Addressing us and explaining provisions of Explanation, ld. Counsel for department referred to proportion in way to support his claim. Unfortunately proportion given in Explanation is not usual fraction with denominator larger than numerator, but reverse with numerator larger than denominator. In other words, what Explanation wants is that if property is let out for period of two months, proportion would be 18/2 for computation of annual rent and not usual faction 2/12 which is usually though of in context of proportions. Explanation, therefore, further confirms our view that what is intended is, therefore, annual rental or consideration. It may be mentioned that Explanation would fit in case where property is in ownership of assessee throughout year, but is let out only for part of year. For instance, Municipal, etc., valuation which would come up for consideration under s. 23(1)(a), say, may be Rs. 500 per month, but for last two months of year assessee could let out property at Rs. 5,000 per month. In such case under Explanation annual value for whole year should be taken at Rs. 60,000 (Rs. 5000 x 12) and not at Rs. 6,000 (Rs. 500 x 12). Except for this limited modification of computation of Explanation does not serve any purpose. 11 . On facts of case, though assessee s previous year ended on 31st March, 1977, he became owner of property and was in position to occupy it on 1st Jan., 1977 on which date construction was completed. For asst. yr. 1977-78, therefore, assessee was not owner of property for year so as to give "annual value" for property. In our view, therefore, there is no justification at all for including any property income from this property for this year. 12. ITO, however, has worked out property income and also given benefit of adjustment of some amount of interest though lesser than claim made by assessee. ld. Counsel for assessee has pointed out that if no property income is computed for year under appeal, assessees would virtually lose interest paid or payable during year. In this connection, reference is made to Explanation to s. 24 inserted w.e.f. 1st April, 1984 by Finance Act, 1983. Explanation runs as under : Explanation : "Where property has been acquired or constructed with borrowed capital, interest if any, payable on such capital for period prior to previous year in which property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for said previous year and for each of four immediately succeeding previous years." ld. Counsel has pointed out that anomaly would be that for all years prior to previous year interest would be allowable under Explanation. For all years after previous year interest would be allowable on basis of computation of income for previous year itself, but for only one year, year of purchase or occupation where assessee is not owner of property for full year. interest would not be allowable. This interest would not be allowable. This creates strange anomaly. 1 3 . We have considered this case. We find that this does acquire reconciliation of provisions of Act so as to make them meaningful. Explanation was introduced w.e.f. 1st April, 1984. Even so it clearly provides that where property is acquired, constructed, etc., with borrowed capital, interest payable for period prior to previous year of acquisition, construction, etc., shall be deducted in equal instalments during year of construction or acquisition and subsequent four years. Where property is constructed during course of year, this provision cannot be given effect to in view of our earlier clarification with regard to annual income of property. Before introduction of this Explanation assessee could perhaps validly claim deduction of interest payable right from date of borrowing but paid during that previous year. This is because there is no provision for referring interest to any particular year or proportionate disallowance of same in s. 24 which deals with deductions from house property income. After introduction of this Explanation, this position has been modified. interest payable for all previous year is allowed to be spread over five years. As pointed out by ld. Counsel for assessee interest for succeeding years would be allowable in respective years. Certainly when legislature has taken care to allow even interest paid prior to previous year though on instalment basis, there is no logic in not allowing interest payable during previous year when property was constructed. only way to reconcile this provision would be to allow interest for period of construction or acquisition in computing property income for earliest assessment year subsequent to acquisition, when property income is brought to tax. 1 4 . We have clarified above general principles for computing property income of assessee for inclusion in his total income. These may be summarised as under : (1) Property income under IT Act can be included in total income of assessee only if assessee is owner of property or can be treated as such for full year and not when it is for period less than one full year. (2) scheme of allowance of interest would be : interest for all previous year included in period prior to previous year in which property was acquired or constructed would be deducted in equal instalments in five years. 1/5th of this and interest for previous year of construction would be allowed in first year when property income is taxed. interest for all subsequent years would be allowed from year to year. 15. As far as present appeal is concerned, ITO has already worked out loss allowable to assessee at figure of Rs. 2,949. His calculation of proportionate loss for three months is not correct or justified for reasons above mentioned. assessee has come to Tribunal for greater relief than what ITO has granted. It would not be proper, therefore, to put assessee, who has come up on appeal, in position worse than he is. While, therefore, above would be general principles for computation of property income, in peculiary circumstances of present case, ITO not being on appeal before Tribunal, loss of Rs. 2,949 has to be allowed to assessee during year itself. We direct accordingly. 16. appeal is partly allowed. PER A. KRISHNAMURTHY, J.M. While generally agreeing with order of my ld. brother, Vice- President, I desire to add following to reinforce our conclusion. 2. Income-tax, under scheme of our taxing statute, is annual tax on, ordinarily, annual income from different sources, subject to certain exceptions. Definition of "previous year" in s. 3 will show that normally twelve months period included in financial year or for which accounts are made up is period, income of which is to be computed. Exception to twelve months period are provided in cls. (c) to (e) of that section. Property income not arising from business is covered by clauses either (a) or (b). It follows there is no scope for taxing income from property for period less than full year. However, income from this source, charge of which is attracted by fact of mere ownership thereof, is computed on notional basis annual value irrespective of whether it produces income or not, but where basis of actual rent received for computing income will yield higher figure it would be computed on such actual rent basis (s. 23(1)(b) and cls. (a) and (b) of Explanation to said sub- section), subject to certain reliefs provided on account of its lying vacant for any part of year, vide ss. 23(3), 24(1)(ix). It must follow as corollary that there can be no charge in respect of income from property for period less than year. Computation of loss of either assessee or ITO, adopting proportionate basis for period of three months has, according to me, therefore, no statutory sanction. 3. However, having regard to scope of appeal before us, where we cannot put assessee in worse position than he already is, and fact that neither party disputed charge for year and both agree that computation may be made for full year, annual loss computed by ITO has to be adopted and allowed to be set-off against other income. There is no warrant for restricting allowance interest as held to accrue only after construction of property. Indeed, ITO himself in his computation of loss for year has deducted full interest as claimed by assessee. assessee is accordingly entitled to loss of Rs. 2,949 instead of either Rs. 3,864 as claimed by him or Rs. 737 as computed by ITO. *** M. RAGHUNANDAN v. INCOME TAX OFFICER
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