1950 (5) TMI 2 - SC - Income Tax

Whether the municipal taxes paid by the applicant-company are an allowable deduction under the provisions of Section 9(1)(iv) of the Indian Income-tax Act? Whether the urban immoveable property taxes paid by the applicant-company are an allowable deduction under Section 9(1)(iv) or under Section 9(1)(v) of the Indian Income-tax Act? Held that - This appeal is allowed and the two questions which were referred to the High Court by the Income-tax Tribunal and cited above are answered in the affirmative.

Issues Involved:
1. Whether municipal property taxes are allowable deductions under Section 9(1)(iv) of the Indian Income-tax Act.
2. Whether urban immoveable property taxes are allowable deductions under Section 9(1)(iv) or Section 9(1)(v) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Municipal Property Taxes as Allowable Deductions:
The primary issue is whether municipal property taxes paid by the assessee company can be considered allowable deductions under Section 9(1)(iv) of the Indian Income-tax Act. The court examined the language of Section 9(1)(iv), which allows deductions for interest on mortgages, annual charges not being capital charges, ground rent, and interest on borrowed capital used for property-related purposes.

The court noted that the term "annual charge not being a capital charge" is central to this determination. It referenced prior judgments, including the Privy Council's decision in Bejoy Singh Dudhuria v. Commissioner of Income-tax, Calcutta, which influenced the 1939 amendment to the Income-tax Act. This amendment aimed to extend the principle to obligatory payments made from the income of the property charged with such payments.

The court reviewed the City of Bombay Municipal Act, 1888, which imposes a general tax on buildings and lands, with the primary responsibility for payment falling on the lessor. The tax is determined annually and can be paid in half-yearly installments. Section 212 of the Act creates a statutory charge on the property for unpaid taxes. The court concluded that municipal property taxes are annual liabilities, thus fitting within the scope of "annual charge not being a capital charge" under Section 9(1)(iv).

2. Urban Immoveable Property Taxes as Allowable Deductions:
The second issue concerns whether urban immoveable property taxes can be deducted under Section 9(1)(iv) or Section 9(1)(v). The court noted that these taxes are levied under Section 22 of Part VI of the Bombay Finance Act, 1932, and are collected similarly to municipal property taxes. Section 24(2)(b) of the Bombay Finance Act also makes the property security for the payment of these taxes.

The court rejected the argument that the liability to pay these taxes arises only upon the issuance of a demand notice and bill. Instead, it emphasized that the taxes are annual levies assessed on the annual value of the property, payable in half-yearly installments for convenience. The court found that both municipal property taxes and urban immoveable property taxes are of the same character and thus qualify as "annual charges not being capital charges" under Section 9(1)(iv).

The court also addressed the argument that these taxes are capital charges because the property serves as security for payment. It clarified that "capital charge" should be understood as a charge to secure a liability of a capital nature, not merely because the property is security for payment.

Conclusion:
The court concluded that both municipal property taxes and urban immoveable property taxes are allowable deductions under Section 9(1)(iv) of the Indian Income-tax Act. The appeal was allowed, and the questions referred to the High Court were answered in the affirmative. The appellants were awarded costs in the appeal.

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