Case: Bhagwan Dass Jain Vs. Union Of India

The petitioner who is an assessee under the Act contended before the High Court of Madhya Pradesh in a petition filed under Article 226 of the Constitution that inclusion of any amount under section 23(2) of the Act in his income was unconstitutional as there could be no income at all in such a case accruing to him in the true sense of that term, the liability that was sought to be imposed under the Act in respect of his residential house was, therefore, in its pith and substance a tax on building falling under Entry 49 of List II of the Seventh Schedule to the Constitution and hence Parliament could not impose the said liability under a law made in exercise of its legislative power under Entry 82 of List I of the Seventh Schedule to the Constitution which authorised it only to levy taxes on income other than agricultural income. The High Court rejected the plea of the petitioner and dismissed the writ petition. The petitioner has now applied to this Court for special leave to appeal against the decision of the High Court.

Court's reasoning:
The theory behind Sched. A is that the possession of an interest in property gives rise to income, a theory which is not always borne out in fact. That there may be no income in fact is disregarded when the assessment is made. The actual or hypothetical income has to be measured by some standard for t he purposes of taxation and the standard prescribed is the annual value. This principle has been subject to adverse comment, but once the theory is appreciated, the method may be understood and any confusion of thought, created by the words of the charging section, dispelled. The use to which land is put does not (apart from the excepted concerns mentioned in the proviso to para. 1 of Sched. A above) prevent it from being assessed under Sched. A; but if a trade which is not one of those excepted concerns is carried on property which is owned by the trader and is assessed under Sched. A, an allowance for the annual value is made in computing the profits of the. (emphasis supplied)There is one other circumstance which persuades us to take the view that computation of income for purposes of levy of income tax in accordance with section 23(2) ofjustifiable under Entry 82 of List I of the Seventh Schedule to the Constitution. It is to be borne in mind thatthe Government of India Act, 1935 was enacted when the Indian Income-tax Act, 1922 was in force. Section 9 of th e Indian Income-tax Act, 1922 provided for levy of income tax on the basis of the bona fide annual value of the property even when it was in the occupation of the assessee for the purposes of his own residence. While enacting entry 54 of list I of the Seventh Schedule tothe Government of India Act, 1935, the British Parliament must have had in its view the Indian Income-tax Act, 1922 which was probably the only law relating to tax on incomes in force in British India then. Similarly the Constituent Assembly while enacting Entry 82 of List I of the Seventh Schedule to the Constitution must have understood that the word income used in that Entry would in any event include within its scope all items which came withi n the definition of income and were subjected to charge in the Indian Income-tax Act, 1922 which was in force at the time the Constitution was adopted. That the Constitution makers had the Indian Income- tax Act, 1922 in their view is borne out from Article 270(1) of the Constitution which provides for collection of taxes on income by the Government of India and distribution thereof between the Union and the States, Article 366(1) which defines agricultural income as agricultural income as defined for the purposes of the enactments relating to Indian Income-tax and Article 366(29) which defines tax on income as including a tax in the nature of an excess profits tax. In the circumstances it would not be wrong to construe the word income in Entry 82 as including all items which were taxable under the contemporaneous law relating to tax on incomes which was in force at the time when the Constitution was enacted when as observed by this Court in the case of Na vinchandra Mafatlal (supra) the word income in Entry 82 is capable of a wider meaning than what was given to it in the Indian Income-tax Act, 1922 or the English Act ofn in its ordinary economic sense, the expression income includes not merely what is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. The tax levied under the Act is on the income (though computed in an artificial way) from house property in the above sense and not on house property. Entry 49 of List II of the Seventh Schedule to the Constitution is not, therefore, attracted. The levy in question squarely falls under Entry 82 of List I of the Seventh Schedule to the ConstitutionHence we do not find any merit in the contentions urged on behalf of the petitionerWhen the petition came up for hearing on February 5, 1981 before us, we did not find that there was any ground to grant special leave to appeal but since the case was argued with some persistence, we decided to give reasons for rejecting the prayer of the petitioner which we proceed to give hereunder: