Judgment:
1. The only issue raised by the assesses in this appeal is whether the municipal taxes paid could be deducted while computing the income from self-acquired property.
2. The assessee is an individual. In respect of a property used by him as his residence, he had disclosed an net annual value of Rs. 1,482.
The Income-tax Officer was of opinion that considering the built-up area of the house the income disclosed was low. He estimated the annual letting value at Rs. 10,000. Since the assessee had an income of Rs. 31,714 under all other sources put together before the deduction available under Chapter VI-A, he restricted the income of the self-occupied property at Rs. 3,171 being 10% of this income. From this figure, he allowed a deduction for repairs and arrived at an income of Rs. 2,643.
3. The assessee's contention was that in arriving at the income from self-occupied properties, the municipal tax payable in respect of that property should also have been deducted. The claim for deduction was Rs. 1,718. Before the Appellate Asstt. Commissioner, the assessee pressed this claim basing himself on the decision of the Gujarat High Court in the case of CIT v. Arvind Narottam Lalbhai Dalpatbhai Vada [1976] 105 ITR 378. The Appellate Asstt. Commissioner, however, found that this issue has been considered by the Bombay High Court in the case of CIT v. I. Chatterji [1986] 161 ITR 535/24 Taxman 251. In this decision, the Bombay High Court had considered the decision of the Gujarat High Court also. The Bombay High Court came to a finding that in computing the income from self-occupied property, there is no provision for deduction of municipal taxes. The Appellate Asstt.
Commissioner preferred the decision of the Bombay High Court on this point. He also rejected the alternate submission of the assessee that the tax could be deducted under Section 24(1)(vii).
4. The assessee is on further appeal before me. The submissions made before the Appellate Asstt. Commissioner were repeated. I have considered the submissions of both the sides. The Gujarat High Court in the decision reported has held that under Section 23(2), while computing the annual value of the self-occupied property, the municipal tax paid can be deducted. A similar decision has also been given by the Madras High Court in the case of Addl. CIT v. M.B. Rajeswari [1977] 110 ITR 443. Both these decisions have been considered by the Bombay High Court in I. Chatterji's case (supra). They had preferred to dissent from the view of the two High Courts mainly on the ground that it was a settled position in view of the judgment of a Full Bench of Bombay High Court in the case of New Piece Goods Bazar Co. Ltd. v. CIT [1947] 15 ITR 319 that in arriving at the annual value of property local or municipal taxes cannot be deducted. This Full Bench decision therefore is the basis of the Bombay High Court decision. As a matter of fact, the Bombay High Court Full Bench decision in New Piece Goods Bazar Co.
Ltd. 's case (supra) has been reversed by the Supreme Court and the Supreme Court's decision in New Piece Goods Bazar Co. Ltd. v. CIT [1950] 18 ITR 516. The Supreme Court has held that in computing the income from property under Section 9 of the Indian Income-tax Act, 1922 an assessee is entitled to deduct under Section 9(1)(iv) the municipal tax paid. In view of this, it would be safer to follow the ratio laid down by the other two High Courts and hold that in computing the annual letting value of a self-occupied property, the municipal tax payable would be deductible.
(2) where the property consists of one or more houses and such house or houses is or are in the occupation of the owner for the purposes of his own residence, the annual value of such house or where there are two such houses, the annual value each such house or where there are more than two such houses, the annual value of two of such houses (which the assessee may, at his option specify in this behalf) shall first be determined in the same manner as if the property had been let and further be reduced, in each case, by one-half of the amount so determined or one thousand eight hundred rupees, whichever is the less: Provided that where the sum so arrived at exceeds ten per cent of the total income of the owner (the total income for this purpose being computed without including therein any income from such property and before making any deduction under Chapter VI-A), the excess shall be disregarded.
It would be seen from the above that in the case of self-occupied property, the annual value of such house should first be determined in the same manner as if the property has been let. There is a legal fiction introduced that the property has been let out. Therefore, it is necessary to refer to the provisions for computing the annual letting value of the properties let out. That is contained in Section 23(1).
23. Annual value how determined: (1) For the purposes of Section 2, the annual value of any property shall be deemed to be - (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable: Provided that where the property is in the occupation of a tenant, the taxes levied by any local authority in respect of the property shall, to the extent such taxes are borne by the owner, be deducted in determining the annual value of the property.
It would be seen from the above that in case where the property is let out the taxes levied by any local authority in respect of the property shall be allowed as a deduction to the extent it is borne by the owner.
Since there is a legal fiction involved, we have to give full play to this fiction and assume that the property has been let out and so the municipal tax will have to be deducted in determining the annual letting value. Thereafter, the amount so arrived at should be further adduced by half or Rs. 1,800 whichever is less.
6. In view of the above, I uphold the assessee's contention. However, since the point had been argued, I have to deal with the alternative contention that the amount is admissible as a deduction under Section 24(1) (vii) also. I am unable to accept the assessee's submission that the municipal taxes would be admissible as a deduction under this section. Under Clause (vii) any sum paid on account of land revenue or any other tax levied by the State Government in respect of the property could be allowed as a deduction. The tax levied by the municipal Corporation is not tax levied by the State Government. Mr. Razack argued that for certain purposes, the corporation is considered as an arm of the State and therefore a tax levied by the Corporation is a tax levied by the State. It may be that under certain circumstances, corporation may be considered as a State. What we have to see here is the meaning to be ascribed to the expression 'tax levied by the State'.
It is well settled proposition that the provisions relevant to the computation of income from house property have to be read together. In Sections 23 and 24, there is a distinction made out between the taxes levied by the local authority like the municipality and the tax levied by the State. The proviso to Section 23(1) refers to the tax levied by the local authority only, while Section 24 refers to tax levied by the State Government. Thus, as far as these provisions are concerned, there is a distinction between local authority and the State. So in respect of this issue, we cannot allow this distinction to be blurred.
Therefore, this alternate argument is not acceptable.