2011 (3) TMI 1353 - HC - Income Tax

Deductible expenditure section 24(1)(iv) - house property income - remuneration payable to Shebaits which is fixed by the founder of the Deed of Settlement - whether amount to annual charge on the property? - Held that - Once the assessee/deity itself is vested with the property and is the legal owner of the property, the expenditure incurred as remuneration of its Shebaits must be considered to be the expenditure incurred by the assessee for its own management and thus, would not be construed as incurred in discharge of an obligation of an annual charge on the property - Hence, it is unable to accept the contention of assessee that the remuneration payable to Shebaits should be treated to be annual charge within the meaning of section 24(1)(iv) - No merit in this appeal and the point formulated by the Division Bench is answered in the negative in favour of the Revenue - The appeal is, thus, dismissed.

Summary

Issues:
Interpretation of section 24(1)(iv) of the Income-tax Act, 1961 regarding deduction of remuneration paid to Shebaits as an annual charge on property.

Analysis:

Issue 1: Deductibility of enhanced remuneration as an annual charge
The appellant claimed deduction of remuneration paid to Shebaits as an annual charge under section 24 of the Act. The Assessing Officer disallowed the claim, which was upheld by the CIT (Appeals) and the Tribunal. The appellant argued that the enhanced remuneration fixed by the Court should be considered a charge on the property and deductible under the law. However, the Court held that the enhanced remuneration, even though higher than the original amount fixed by the settlor, cannot be considered an annual charge on the property. The Court emphasized that any expenditure incurred by an owner on itself or its obligations does not constitute an annual charge on the property.

Issue 2: Legal status of Shebaits and their remuneration
The Court discussed the unique position of a Shebait, who combines elements of office and property rights. Shebaits have heritable rights over the property with certain limitations. The Court clarified that a Shebait does not become a charge-holder over the property for protecting their remuneration. The Shebait collects rent on behalf of the deity and appropriates their remuneration as prescribed, but this does not create an annual charge on the property.

Issue 3: Application of legal principles
Referring to legal precedents, the Court highlighted that the nature of the obligation to incur expenditure determines its deductibility. The Court cited a Supreme Court decision to explain that if income is diverted before reaching the assessee, it is deductible; however, if income is required to discharge an obligation after reaching the assessee, it is not deductible. The Court concluded that the remuneration paid to Shebaits does not meet the criteria of an annual charge under section 24(1)(iv) of the Act.

Conclusion:
The Court dismissed the appeal, ruling in favor of the Revenue. It held that the remuneration payable to Shebaits should not be treated as an annual charge on the property under section 24(1)(iv) of the Act. The Court found no merit in the appellant's argument and denied the deduction claimed. The appeal was dismissed with no order as to costs.