1. These two appeals are by the assessee. ITA No. 1002/Cal/89 is an appeal for the assessment year 1984-85. It is directed against the order of the CIT dated 6-3-1989 passed under Section 263 of the Income-tax Act. ITA No. 1116/Cal/91 relates to the assessment year 1988-89 and is directed against the order of the CIT(A) dated 22-2-1991.
2. Both the appeals involve the same issue. They were also heard together. We, therefore, dispose of both of them by a single consolidated order.
3. The assessee is a public limited company engaged in the business of purchasing or taking on lease land, putting up construction thereon and letting out the buildings for rent. The two major properties held by the assessee were at No. 50, Chowringhee Road, Calcutta and the property known as Tivoli Park building No. 225-C, A.J.C. Bose Road, Calcutta.
4. We may take up the appeal for the assessment year 1984-85 first. In the assessment made under Section 1.43(3) on 3-3-1987, the Assessing Officer allowed a deduction of Rs. 5,61,042 being interest payable to the Calcutta Municipal Corporation (CMC) on the amount of municipal taxes outstanding. In the assessment, though the rent received in respect of the Tivoli Park building was considered under the head 'Income from house property', the other income derived from the building at No. 50, Chowringhee Road, Calcutta appears to have been assessed under the head 'business'.
5. The CIT considered the assessment erroneous insofar as it related to the deduction of the interest on the outstanding municipal taxes. He referred to the decision of the Calcutta High Court in the case of Russel Properties (P.) Ltd. v. CIT [1982] 137 ITR 358 in support of his view. He, therefore initiated proceedings under Section 263 of the Act for revising of the assessment. After hearing the objections of the assessee, he was of the view that the Assessing Officer should have examined the allow ability of the claim in accordance with the provisions of Section 43B of the Act. According to the CIT, the interest payable to the Calcutta Municipal Corporation (CMC) was part of the municipal tax itself, and inasmuch as the Income-tax Officer did not examine the applicability of Section 43B in respect of the interest, the assessment was erroneous and prejudicial to the interests of revenue. He, therefore, partially set aside the assessment and directed the Assessing Officer to look into the matter afresh after giving the assessee an opportunity of being heard.
6. It is against this order that the assessee has come in appeal before us.
7. As far as the assessment year 1988-89 is concerned, the assessment for which was completed under Section 143(3) on 25-7-1989, the Assessing Officer himself considered that interest on outstanding municipal taxes was covered by the expression "rates and taxes" found in Section 43B of the Act. He, therefore, disallowed the claim of Rs. 8,83,508 representing interest. In this assessment also the rent received from Tivoli Park building was assessed as 'property income' and the rent received from No. 50, Chowringhee Road, Calcutta and some other properties was brought to tax as 'business income'.
8. On appeal, the CIT (A) upheld the disallowance. The assessee has come in appeal before us against the disallowance of the interest on outstanding municipal taxes.
9. The sum and substance of the argument of Mr. Murarka, the 1d.
counsel for the assessee, for both the years, is that there is a difference between the municipal tax as such under the Calcutta Municipal Corporation Act, 1980 and the interest payable on the outstanding the municipal tax. He pointed out that the two were treated distinctly and separately by the Act, and therefore the interest cannot be stated to form part of the municipal tax. Accordingly, Section 43B did not come into operation. He invited our attention to the relevant provisions of the aforesaid Act in support of the contention. The 1d.
departmental representative submitted that under the relevant provisions, the interest on the outstanding municipal tax was an automatic levy and became part of the municipal tax itself. He cited the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 in support of his contention.
10. On a consideration of the rival contentions, and on a perusal of the relevant provisions of the CMC Act, 1980, we are of the view that the contentions of Mr. Murarka should prevail. Section 217 of the Act, is as under: 217. Notice of demand, notice fee, interest and penalty.(1) Save as otherwise provided in this Act, if the amount of the tax for which a bill has been presented under Section 216 is not paid within thirty days from the presentation thereof or if the tax on professions, trades and callings or the tax on advertisements is not paid after it has become due, the Municipal Commissioner may cause to be served upon the person liable for the payment of the same a notice of demand in such form as may be specified by the Corporation by regulations.
(2) For every notice of demand which the Municipal Commissioner causes to be served on any person under this section, a fee of such amount, not exceeding twenty five rupees, as the Corporation may determine by regulations shall be payable by the said person and shall be included in the cost of recovery.
(3) On the amount of the bill remaining unpaid after thirty days of presentation of the bill under Section 216 simple interest at such rate as may be determined by the State Government from time to time shall be payable for the period commencing on the first day of the quarter following that in which the bill is presented and ending with the month preceding the month in which payment is made.
Explanation: In calculating the interest payable under this sub-section, a fraction of rupee in the amount of the bill on which the interest is to be calculated shall be rounded off to the nearest rupee, fifty paise being treated as rupee one.
(4) When the person liable for payment of any tax fails to pay the tax within the quarter for which the bill has been presented under Section 216, such sum, not exceeding fifteen per cent, of the amount of the tax as may be determined by the Corporation by regulation shall be recovered from him by way of penalty, in addition to the amount of the tax, the notice fee payable under Sub-section (2) and simple interest in accordance with Sub-section (3).
(5) The amount due as penalty or interest under this section shall be recoverable as an arrear of tax under this Act.
219. Recovery of tax.- (1) If any person liable for payment of tax does not, within thirty days (of the service of notice of demand under Section 217) pay the amount due, such sum together with all costs, interest due and penalty may be covered under a warrant, issued in such form as may be specified by the Corporation by regulations 2 (by distress and sale of the movable property).
(2) Every warrant issued under this section shall be signed by the Municipal Commissioner or any other officer authorised by him in this behalf.
Under Section 217(3), if the amount of the bill remains unpaid after a particular period, simple interest at such rate as may be determined by the State Government from time to time shall be payable by the person liable to pay the tax. It is to be noted that the rate of interest has not been prescribed by the Act itself. Secondly, it is clear from Sub-section (4) of Section 217 that the amount of interest is treated as separate and distinct from the amount of municipal tax. This is indicated by the use of the words "in addition to the amount of the tax". The interest payable in accordance with Sub-section (3) is not treated as part of the tax. Section 219(1) also gives a similar indication. Under that section, when the tax is not paid within the due date, the tax together with the interest due and penalty may be recovered under a warrant. The provisions of Section 3 of the Uttar Pradesh Sugar Cane Cess Act which were referred to by the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra) have to be contrasted. Under that Act, the Officer or authority empowered to collect the cess may forward to the Collector a certificate specifying the amount of arrears including interest. [Emphasis supplied]. The use of the words in Section 3(6) of the U.P. Act "specifying the amount of arrears including interest" was held by the Supreme Court to indicate the position that interest was part of the arrears of cess. But both Section 217(4) and Section 219 of the CMC Act with which we are presently concerned contain enough indications to show that the interest on the outstanding municipal tax is to be treated as a separate and distinct component, not to be mixed up with the arrears, of tax. In the case before the Supreme Court, as far as penalty provided by Section 3(7) of the U.P. Act was concerned, the Supreme Court observed that though the penalty was recoverable in the same manner as the arrears of cess, the Legislature has dealt with penalty as something distinct from the recovery of arrears of cess including interest. In the present case, the same can be said in respect of interest payable on the municipal taxes. Though the interest is to be recovered in the same manner as recovery of tax under Section 219(1) of the CMC Act, the Legislature, in the very same sub-section, has separately and specifically mentioned the interest due as well as the penalty. This also shows that the interest payable under Section 217(3) of the Act is distinct and separate from the tax as such.
11. We may refer to the decision of the Calcutta High Court in the case of Russel Properties (P.) Ltd. (supra) which is relied on by the CIT in proceedings under Section 263 and by the CIT (A) in his appellate order. Apparently, this decision supports the claim of the Department that the interest bears the same character as the tax under the CMC Act, and therefore the provisions of Section 43B are applicable in respect of the interest. But on closer reading of the judgment, it appears to us that, that decision is not of any assistance to the Department in the present case. In that decision, the Calcutta High Court was concerned with the provisions of the CMC Act, 1951. The main question before the Calcutta High Court was whether the interest paid to the CMC was an allowable deduction in computing the income of the assessee from business. The Income-tax Officer disallowed the claim for deduction on the ground that the interest cannot be stated to have been incurred for the purpose of earning any income. The Appellate Assistant Commissioner held that the interest was penal in nature, and therefore was not allowable. The Tribunal also took the view that the interest was paid on account of defiance of the provisions of the CMC Act and was therefore not allowable. It was in this background that the High Court examined the provisions of the Calcutta Municipal Act, 1951.
Applying the test laid down by the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra), the High Court held that the interest paid under Section 236(3) of the CMC Act, 1951, which is akin to Section 3(3) of the U.P. Act, was in the nature of compensation paid to the Government for delay in the payment of cess and it was not in the nature of penalty. It was in this view of the matter that the High Court held that the interest was allowable as a deduction. Two propositions stand out in the judgment of the High Court: (1) that interest is compensatory and is not penal in nature, and (2) it is to be allowed as deduction against the income of the assessee. It must be noticed that the Calcutta High Court was not concerned with the precise question that has arisen before us in view of the provisions of Section 43B of the Act. The question whether interest formed part of the municipal tax was not specifically before the High Court and the only question was whether the interest was allowable as a deduction on the ground that it was just compensation for the delay or it was penalty for defiance of law. It was not necessary, on the facts of the case before the High Court, for the High Court to examine or pronounce on the question whether the interest formed part of the municipal tax itself. A close reading of the observations of the High Court in the last paragraph at page 365 of the report does not show that the High Court have laid down as a proposition that the interest for the delayed payment of municipal tax formed part of the municipal tax, and was therefore deductible from the total income. We are therefore unable to understand the judgment of the Calcutta High Court as in any way deciding the question before us against the assessee.
12. It follows therefore that the interest being separate from the tax as such under the Calcutta Municipal Act, 1980, the provisions of Section 43B are not applicable and the interest cannot be disallowed on the ground that the same has not been paid.
13. At this juncture, the 1d. departmental representative sought to raise a new argument in support of the disallowance. He contended that the interest cannot be allowed at all, since there was no provision to allow such interest against the income assessed under the head 'House property'. He contended that only interest paid on borrowings made for the construction or aquisition of the property can be deducted against the income from property under Section 24(l)(vi) of the Act. The interest in the present case does not fall under that provision.
According to the departmental representative, there was no other provision to allow interest against the 'property income'. He, therefore, submitted that even if the provisions of Section 43B are not applicable to the present case, the assessee will not be entitled to the deduction of the interest.
14. Having regard to the decision of the Supreme Court in the case of Hukumchand Mills ltd. v. CIT [1967] 63 ITR 232, and the judgment of the Calcutta High Court in the case of P.R. Mukherjee v. CIT [1979] 116 ITR 554, we permit the Departmental Representative to raise the aforesaid argument since what in effect he was doing was only to point out some other provisions in the Act in support of the disallowance. The 1d.
counsel for the assessee, however, pointed out that on the facts of the present case, the point does not arise for consideration. He pointed out that in the return of income and the computation of income the assessee had claimed the interest payable on outstanding municipal tax as deduction only against the business income of the assessee and not against the 'property income'. He also relied on the judgment of the Calcutta High Court in the case of CIT v. New India Investment Corpn.
Ltd. [ 1978] 113 ITR 778 in support of his alternative contention that even if the income is assessed under the head 'property', the interest has to be allowed against the 'business income' of the assessee. He also drew our attention to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT[ 1965] 56 ITR 52 in support of his contention that interest paid on outstanding balance should be treated as business expenditure and allowed under Section 37(1) of the Act.
15. We have carefully considered the rival contentions. We have perused the computation of income as filed by the assessee. In respect of the assessment year 1984-85, the profit as per the Profit and Loss Account was Rs. 11,21,441. This included the rent from all the properties owned by the assessee. In the computation as well as the assessment order, however, the rent received from Tivoli Park building was taken out from the head 'business' and considered for assessment as 'property income'.
The rental income from the other properties including No. 50, Chowringhee Road, Calcutta was brought to tax under the head 'business'. It is against the business income of the assessee that the claim for deduction of Rs. 5,61,042 was made. In the assessment also the same was allowed only against the 'business income' and not against the 'property income'. The same position obtained in the return for the assessment year 1988-89. It is to be noticed that the outstanding liability for interest was not debited in the accounts of the assessee, but was claimed as deduction against the business income' only in the returns of income. In the "sundry creditors" account, the outstanding municipal taxes have been included as liability of the assessee. The case of the assessee before us is that this position has been exhibited sufficiently clearly both in the printed accounts of the assessee filed before the Assessing Officer as well as the statements accompanying the returns of income. Therefore, it. was claimed that no fresh investigation is required. On these facts, it is claimed that the assessee having had the benefit of funds in the form of unpaid municipal taxes, which funds have been utilised in the assessee's business, the interest payable was allowable as deduction against the 'business income' as per the ratio of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. (supra). Mr. Murarka also referred to the judgment of the Calcutta High Court in the case of New India Investment Corpn. Ltd. (supra) in support of his contention that though for the purpose of the Income-tax Act, the income from 'propertys assessed under Section 22 of the Act under the head 'property', the income was really the business income of the assessee in the general sense, and therefore the interest should be allowed even though the income from the property was assessed under that head.
16. We find force in the submissions of Mr. Murarka. The factual position as exhibited by the printed accounts of the assessee and the statements accompanying the returns of income cannot be disputed. In those papers, the claim of the assessee was that the interest was to be deducted against the business income of the assessee. This business income consisted of the rentals received in respect of the properties other than the Tivoli Park property. Whatever might be the reason for bifurcating the rentals received by the assessee from all the properties into two heads, namely, 'business' and 'property', the fact remains that the business of the assessee consists of letting out properties and deriving income therefrom. As held by the Supreme Court in the case of CIT v. Cocananda Radhaswami Bank Ltd. [1965] 57 ITR 306, though for the purpose of computation of the income under the Income-tax Act, income from property is separately classified, such income does not cease to be part of the income from business. Whether a particular income is part of the income from a business activity has to be decided not on the provisions of the Income-tax Act, but should be decided on commercial principles. Factually, the assessee is found to have claimed the interest against the business income. If that is so, the decisions of the Calcutta High Court in the case of Russel Properties (P.) Ltd. (supra) is directly in its favour. In that case, the interest payable on the outstanding municipal taxes was held allowable against the business income of the assessee, on a specific question being raised before the High Court by means of an additional question which is extracted at page 359 of the report. Even assuming that the rental income from the properties other than the Tivoli Park property was wrongly assessed under the head 'business' and should have been properly assessed only under the head 'property', the judgment of the Supreme Court in the case of Cocananda Radhaswami Bank Ltd. (supra), followed by the Calcutta High Court in the case of New India Investment Corpn. Ltd. (supra), are directly in favour of the assessee's contentions. Whichever way the matter is looked at, it is clear that the assessee is entitled to the deduction of the interest payable on the outstanding municipal taxes. We, therefore, accept the contentions of the assessee in the appeals. The order of the CIT for the assessment year 1984-85 is cancelled. The order of the CIT (A) for the assessment year 1988-89 is reversed.