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Issues Involved
1. Validity of assessment when the source of income is non-existent in the assessment year. 2. Allowability of interest on mortgage debt not actually paid as an expenditure under "house property income" under Section 9 of the Indian Income Tax Act, 1922. Detailed Analysis Issue 1: Validity of Assessment When the Source of Income is Non-Existent in the Assessment Year Background: The assessee declared income from house property and bustee lands for the previous year (1923-24). However, he claimed that due to a mortgage suit and subsequent sale of the properties in 1924, he had no income from these sources in the assessment year (1924-25). Contention: The assessee argued that according to the principle established in English cases (Brown v. National Provident Institution and Whelan v. Henning), if there is no income in the assessment year from a particular source, no income tax is due, even if income was derived from that source in the previous year. Court's Analysis: 1. English Income Tax Acts: Under the English Acts, tax for each year was charged on the income of that year, with the statutory income computed by reference to previous years. If no income was derived in the assessment year, the statutory rules did not apply to impute income. 2. Indian Income Tax Act, 1922: The Indian legislature intentionally departed from the English principle, levying tax on the income of the previous year. Section 3 of the Act states that income tax shall be charged "for" any year "in respect of" the income of the previous year. 3. Legislative Intent: The Act of 1922 consolidates and amends the law, specifying that tax is charged for the year in respect of the income of the previous year. This retrospective approach avoids the complexities of adjustments and refunds inherent in the English system. 4. Section 25: This section addresses the discontinuance of business, allowing for an accelerated assessment on the profits of the period between the end of the previous year and the date of discontinuance. For businesses existing before 1922, it provides relief to avoid double taxation on the income of 1921-22. Conclusion: The court concluded that under the Indian Income Tax Act, 1922, the tax is levied on the income of the previous year, not on the income of the assessment year. Therefore, the first question was answered in favor of the Inland Revenue and against the assessee. Issue 2: Allowability of Interest on Mortgage Debt Not Actually Paid as an Expenditure Background: The second question concerned whether interest due on a mortgage debt but not actually paid could be allowed as an expenditure under "house property income" under Section 9 of the Act. Contention: The assessee argued that the interest should be allowed as an expenditure, even if not actually paid. Court's Analysis: 1. Statutory Interpretation: Taxing statutes should be construed according to the ordinary meaning of the words used. Sections 9 and 10 of the Act of 1922 must be interpreted such that when the legislature means "paid," it explicitly states so. 2. Allowances Under Section 9: The allowances for repairs do not depend on actual expenditure, while others explicitly depend on actual payment. The absence of the word "paid" in the fourth clause of Section 9 suggests that the interest on mortgage debt need not be actually paid to be allowable. 3. Legislative Intent: The legislature intended to charge based on the hypothetical annual value of the property, assuming that the real income of an incumbrancer is the difference between the yearly value and the interest. Conclusion: The court concluded that the interest on the mortgage debt, even if not actually paid, is an allowable item of expenditure under Section 9. The second question was answered in favor of the assessee. Separate Judgments Charu Chander Ghose, J.: Agreed with the conclusions and reasoning provided. P.L. Buckland, J.: Focused on the interpretation of the sections directly related to the issues. Emphasized that under Section 3, the income of the previous year is both the basis of assessment and the subject of taxation, making the state of income in the current year irrelevant. Costs As the assessee succeeded on one of the two questions, the court ordered that the assessee's costs before the court should be paid by the Inland Revenue.
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