1984 (9) TMI 136 - AT - Income Tax

Annual Value Deduction Of Interest Income From House Property Previous Year Property Tax Total Income

Issues Involved:
1. Computation of property income for partial ownership during the year.
2. Allowability of full interest deduction under Section 24 of the Income-tax Act, 1961.
3. Proportionate calculation of property income and expenses.
4. Interpretation of "annual value" under Section 22 and Section 23 of the Income-tax Act.
5. Application of newly introduced Explanation to Section 24.

Detailed Analysis:

1. Computation of Property Income for Partial Ownership During the Year:
The primary issue was whether the property income should be computed for the entire year or only for the period during which the assessee owned the property. The Tribunal noted that the property income is based on the "annual value" as per Section 22 of the Income-tax Act, which implies that property income should be computed for a full year. The Tribunal held that property income could not be included in the total income if the assessee owned the property for less than a full year. This interpretation is supported by the language of Section 22, which refers to the "annual value" of the property.

2. Allowability of Full Interest Deduction under Section 24 of the Income-tax Act, 1961:
The assessee claimed that the full interest paid during the year should be deductible under Section 24, which does not specify any proportionate calculation. The Tribunal agreed with the assessee, stating that Section 24 allows for the deduction of interest payable during the year without any reference to the period of ownership. The Tribunal emphasized that the clear words of Section 24 entitled the assessee to deduct the full interest paid during the year.

3. Proportionate Calculation of Property Income and Expenses:
The Income Tax Officer (ITO) had computed the property income and expenses on a proportionate basis for the period the property was owned by the assessee. The Tribunal rejected this approach, stating that the concept of "annual value" under Section 22 does not allow for proportionate calculation. The Tribunal clarified that property income should be computed on an annual basis, and any expenses, including interest, should be allowed in full for the year.

4. Interpretation of "Annual Value" under Section 22 and Section 23 of the Income-tax Act:
The Tribunal delved into the interpretation of "annual value" as mentioned in Sections 22 and 23. It was emphasized that the term "annual value" means the yearly income derived from the property, and the Act does not provide for taxing property income for a period shorter than a year. The Tribunal noted that the use of the term "annual" in Section 22 indicates that property income should be computed for a full year, and any deviation from this would be contrary to the legislative intent.

5. Application of Newly Introduced Explanation to Section 24:
The Tribunal also considered the newly introduced Explanation to Section 24, which allows for the deduction of interest payable for periods prior to the previous year in equal installments over five years. The Tribunal reconciled this provision with the general principles of computing property income, stating that the interest for the period of construction or acquisition should be allowed in the first year when the property income is taxed. This ensures that the assessee does not lose the benefit of interest deduction for the year of construction.

Conclusion:
The Tribunal concluded that property income should be computed on an annual basis, and the full interest paid during the year should be deductible under Section 24. The proportionate calculation of property income and expenses, as done by the ITO, was rejected. The Tribunal allowed the assessee's appeal to the extent of recognizing the loss of Rs. 2,949 for the year, as computed by the ITO, without proportionate reduction. The appeal was partly allowed.

Separate Judgment by Judicial Member:
While generally agreeing with the order, the Judicial Member added that income tax is an annual tax on annual income, and there is no scope for taxing property income for a period less than a year. The Judicial Member emphasized that the computation of loss for a period of three months has no statutory sanction. However, to avoid putting the assessee in a worse position, the annual loss computed by the ITO was adopted and allowed to be set off against other income. The assessee was entitled to the loss of Rs. 2,949 instead of Rs. 3,864 as claimed or Rs. 737 as computed by the ITO.

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