1979 (10) TMI 43 - HC - Income Tax

Business Income, Income From Business, Income From Property, Interim Dividend, Mercantile System, Municipal Taxes

Issues Involved:

1. Deduction of interest on mortgage under different heads.
2. Taxability of interest income.
3. Deduction of municipal taxes.
4. Withdrawal of rebate on interim dividends.

Issue-wise Detailed Analysis:

1. Deduction of Interest on Mortgage:

The primary issue was whether the assessee could claim a deduction for the interest on mortgage under both 'Property' and 'Business' heads for the assessment years 1963-64 and 1964-65. The assessee, running a newspaper, had mortgaged properties and paid interest, which was initially allowed under Section 24(1)(iii) of the I.T. Act. The assessee also claimed this interest under Section 36(1)(iii) for business income computation. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) disallowed this dual claim. However, the Tribunal allowed it, holding that income under different heads should be computed separately, and deductions under each head should be allowed independently. The court upheld this view, emphasizing that the heads of income are mutually exclusive and must be treated as separate codes, thus allowing the dual deduction.

2. Taxability of Interest Income:

The second issue was whether the interest amounts of Rs. 16,600 and Rs. 17,596 for the assessment years 1963-64 and 1964-65, respectively, were taxable. The assessee had debited these amounts to the debtor's account but credited them to an "interest suspense account," arguing that the interest did not accrue due to the doubtful recovery. The ITO, AAC, and Tribunal held that since the assessee followed the mercantile system of accounting and had debited the interest, it was taxable. The court agreed, stating that the interest in mortgage suits is governed by Order 34 and not Section 34 of the Code of Civil Procedure, thus confirming the taxability of the interest income.

3. Deduction of Municipal Taxes:

The third issue concerned the deduction of municipal taxes. The assessee paid Rs. 1,32,978 as municipal tax for a building, half of which was used for business and the other half let out. The ITO allowed only 50% of the taxes related to the let-out portion under Section 23(1) and disallowed the balance in the business income computation. The AAC and Tribunal upheld this decision, and the court agreed, citing Section 38(1)(b) and the principle that deductions under different heads are mutually exclusive. Thus, the balance of municipal taxes could not be claimed under the business head.

4. Withdrawal of Rebate on Interim Dividends:

The fourth issue was whether the interim dividend declared by the board of directors but payable in the next year could be considered for withdrawing the rebate under the Finance Act, 1964. The Tribunal held that only dividends declared by the company in a general meeting could attract the rebate withdrawal, not interim dividends declared by the directors. The court disagreed, stating that dividends declared by the board under the company's articles are also considered dividends declared by the company. The court reframed the question and concluded that the interim dividend declared by the board should be considered for rebate withdrawal, thus ruling in favor of the assessee.

Conclusion:

The court affirmed the mutual exclusiveness of income heads, allowing dual deductions under different heads, confirmed the taxability of interest income under the mercantile system, upheld the disallowance of municipal taxes balance under the business head, and ruled that interim dividends declared by the board should be considered for rebate withdrawal. The questions were answered accordingly, with no order as to costs.

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