Case: Commissioner of Income Tax Calcutta Vs. Dalhousie Properties Limited

This Special Leave Petition is filed under Article 136 of the Constitution by the Commissioner of Income-tax, West Bengal, Calcutta against the decision of the High Court of Calcutta in Income-tax Reference No. 573 of 1971.The respondent, Dalhousie Properties Limited was an assessee underthe Income-tax Act, 1961 (hereinafter referred to as the Act) in the assessment year 1966-67, the relevant previous year being the year ending March 31, 1966. It owned extensive properties and its income from rents realised was substantial. In the assessment year in question, the assessee claimed a deduction of Rs. 1, 78, 784 which represented the tax levied by the Corporation of Calcutta as a deductible item while computing its income from house property. It appears that the assessee had questioned the extent of liability which had just then been enhanced before the Corporation and on that account had not actually paid the whole of it. This led to a difference of opinion between the department and the assessee.In course of time the dispute regarding the assessment of the liability of the assessee under the Act reached the Income-tax Appellate Tribunal. The Tribunal held that the total liability for municipal taxes which the assessee could claim by way of deduction under the proviso to section 23 (1) of the Act in respect of the buildings during the accounting year was Rs. 1 , 78 , 784 and that the said amount was to be allowed as a deduction irrespective of the fact that the assessee had raised a dispute about the extent of the liability before the Corporation and that the assessee had not paid the whole of it to the Corporation of Calcutta. Aggrieved by the above decision of the Tribunal, the Department got the following question referred to the High Court under section 256 (1) of the Act:-"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the full taxes levied by the Corporation of Rs. 1, 78, 784 should be deducted under section 23 (1) ofthe Income-tax Act, 1961?The High Court answered the above question in the affirmative and in favour of the assessee. This petition is filed against the said decision of the High Court.

Reasoning:
It is true that the expression borne may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability. But we agree with the High Court that in the present context it should be construed as referring to the former namely, the amount of tax which the owner is liable to discharge as stated in the proviso to section 23 (1) of the Act and not the latter one. The reason for taking this view flows from the scheme of the Act itself. As mentioned earlier, the expression annual value is a national figure and it does not refer to any actual receipt. It is arrived at by deducting the taxes levied by a local authority for paying which the owner has assumed the responsibility from the sum for which the property might reasonably be expected to let from year to year. It is reasonable to treat the annual value of a house property as remaining more or less constant during the entire period covered by any given previous year except perhaps where the tax liability itself is modified by the local authority concerned. It cannot keep on changing as and when some payment towards the tax liability imposed by the local authority is made by the assessee during the year. In order to ensure that there is no unwarranted fluctuation in the annual value during the year in question such actual payment should be eliminated from consideration but only the tax liability imposed by the local authority which the assessee is liable to pay as contemplated by the proviso to section 23(1) of the Act should be allowed to be deducted under the said proviso. It is not, there fore, necessary that the assessee should have actually paid the amount of tax in question before such deduction is claimed. The position is not also different even where the assessee has disputed the correctness of the levy be. fore the local authorities concerned. A mere expection of success in the proceedings in which the asessee has disputed such levy does not disentitle him to the statuory deduction on the basis of the levy which is in force.The High Court was, therefore, right in deciding the case in favour of the assesseeIt is true that the expression borne may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability. But we agree with the High Court that in the present context it should be construed as referring to the former namely, the amount of tax which the owner is liable to discharge as stated in the proviso to section 23 (1) of the Act and not the latter one. The reason for taking this view flows from the scheme of the Act itself. As mentioned earlier, the expression annual value is a national figure and it does not refer to any actual receipt. It is arrived at by deducting the taxes levied by a local authority for paying which the owner has assumed the responsibility from the sum for which the property might reasonably be expected to let from year to year. It is reasonable to treat the annual value of a house property as remaining more or less constant during the entire period covered by any given previous year except perhaps where the tax liability itself is modified by the local authority concerned. It cannot keep on changing as and when some payment towards the tax liability imposed by the local authority is made by the assessee during the year. In order to ensure that there is no unwarranted fluctuation in the annual value during the year in question such actual payment should be eliminated from consideration but only the tax liability imposed by the local authority which the assessee is liable to pay as contemplated by the proviso to section 23(1) of the Act should be allowed to be deducted under the said proviso. It is not, there fore, necessary that the assessee should have actually paid the amount of tax in question before such deduction is claimed. The position is not also different even where the assessee has disputed the correctness of the levy be. fore the local authorities concerned. A mere expection of success in the proceedings in which the asessee has disputed such levy does not disentitle him to the statuory deduction on the basis of the levy which is in force.The High Court was, therefore, right in deciding the case in favour of the