1981 (2) TMI 2 - SC - Income Tax

Whether it is open to the ITO while computing the liability of an assessee to tax under the Income-tax Act, 1961 (hereinafter referred to as the Act ), to include in the income of the assessee any amount calculated in accordance with s. 23(2) of the Act in respect of a house in the occupation of the assessee for the purposes of his own residence - held that provisions charging income in respect of house in the occupation of assessee are constitutional valid

Summary

Issues Involved:
1. Constitutionality of including notional income from a self-occupied house in the assessee's taxable income under Section 23(2) of the Income-tax Act, 1961.
2. Legislative competence of Parliament to impose such a tax under Entry 82 of List I of the Seventh Schedule to the Constitution.

Detailed Analysis:

1. Constitutionality of Including Notional Income from a Self-Occupied House:
The petitioner contended that the inclusion of any amount under Section 23(2) of the Income-tax Act, 1961, in his income was unconstitutional. The argument was based on the premise that no actual income accrues to him from residing in his own house, and thus, the liability imposed under the Act was essentially a tax on building, falling under Entry 49 of List II of the Seventh Schedule to the Constitution. This, according to the petitioner, was beyond the legislative competence of Parliament, which is authorized under Entry 82 of List I to levy taxes only on income other than agricultural income.

The court rejected this argument, stating that the word "income" should be interpreted broadly. The term "income" as per the Oxford Dictionary means "a thing that comes in," and it can be derived from land, capital, or labor. The court cited various precedents, including Resch v. Federal Commissioner of Taxation and Simon's Income-tax, to support the view that income tax can be levied on notional income or presumed income, even if no actual monetary benefit is derived.

The court referred to the case of Governors of the Rotunda Hospital, Dublin v. Coman, where it was observed that the possession of property gives rise to presumed income, and the tax is assessed based on this presumed income. The court also cited Navinchandra Mafatlal v. CIT, where it was held that the word "income" in legislative entries should be given its widest connotation.

2. Legislative Competence of Parliament:
The court examined whether Parliament had the legislative competence to include notional income from a self-occupied house in taxable income under Entry 82 of List I. The court noted that the entries in the Seventh Schedule should not be read narrowly and should include all ancillary and subsidiary matters.

The court observed that the Government of India Act, 1935, was enacted when the Indian Income-tax Act, 1922, was in force, which provided for the levy of income tax on the bona fide annual value of property, even when it was in the occupation of the assessee for his own residence. The court inferred that the British Parliament and the Constituent Assembly must have had this in view while enacting Entry 82 of List I.

The court concluded that the term "income" in Entry 82 includes all items taxable under the contemporaneous law relating to tax on incomes in force at the time the Constitution was enacted. The court emphasized that even in its ordinary economic sense, "income" includes not just what is received but also what one saves by using the property oneself. Therefore, the tax levied under Section 23(2) is on the income from house property, not on the house property itself, and falls under Entry 82 of List I, not Entry 49 of List II.

Conclusion:
The court found no merit in the petitioner's contentions and held that the inclusion of notional income from a self-occupied house in the assessee's taxable income under Section 23(2) of the Income-tax Act, 1961, is constitutional. The legislative competence of Parliament to impose such a tax under Entry 82 of List I of the Seventh Schedule to the Constitution was upheld. Consequently, the petition for special leave to appeal was dismissed.