1968 (2) TMI 14 - HC - Income Tax

Summary

Issues Involved:

1. Whether the sum of Rs. 17,000 paid as municipal taxes was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Preliminary Objection:

A preliminary objection was raised by the assessee's counsel, Mr. Mukherjee, arguing that the question did not arise out of the Tribunal's order. The court rejected this contention, stating that the question indeed arose from the Tribunal's order. The Tribunal had initially refused to refer the question, deeming it a factual matter, but the High Court directed the Tribunal to state the case. The court emphasized that the question was a legal one and arose directly from the Tribunal's order.

2. Deduction Under Section 12(2):

The core issue was whether the payment of Rs. 17,000 as municipal taxes could be deducted under section 12(2) of the Income-tax Act, 1922. Section 12(2) allows deductions for any expenditure incurred solely for the purpose of making or earning such income, profits, or gains, provided it is not capital expenditure or personal expenses. The court held that the municipal taxes were not incurred solely for earning the guarantee commission but were an incident of ownership of the property. The assessee's contention that the taxes were paid to earn the guarantee commission was rejected.

3. Mutual Exclusivity of Income Heads:

The court referred to the principle that different heads of income under the Income-tax Act are mutually exclusive, similar to the British Income Tax Schedules. The municipal taxes had already been partly deducted under the head "Property" (Section 9 of the Income-tax Act). Allowing the remaining taxes as a deduction under section 12(2) would contradict the exclusivity principle and lead to an absurd result where one section's limitation could be bypassed by another section.

4. Relevant Case Law:

The court cited several precedents to support its decision:
- Mitchell v. Ross: Emphasized that different income schedules are mutually exclusive.
- Fry v. Salisbury House Estate Ltd.: Asserted that income from property should be assessed only under the relevant schedule.
- United Commercial Bank Ltd. v. Commissioner of Income-tax: Highlighted the mutual exclusivity of income heads under the Indian Income-tax Act.
- Eastern Investment Ltd. v. Commissioner of Income-tax: Discussed permissible deductions for investment companies.
- Commissioner of Income-tax v. Maharani Janki Kuar Sahiba: Held that cess on forest produce was not deductible under section 12(2) as it was not incurred to earn the income.

5. Tribunal's Error:

The court found that the Tribunal erred in applying the Privy Council's decision in Probhat Chandra Barua v. King Emperor. The Privy Council case involved a different context where the liability was directly related to the zamindari income. In contrast, the municipal tax in the present case was a pre-existing liability due to property ownership and not incurred to earn the guarantee commission.

Conclusion:

The court concluded that the sum of Rs. 17,000 was not allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922. The assessee was ordered to pay the costs of the reference. Both judges agreed with this conclusion.