1933 JTR(SC) 34
1933 AIR(PC) 180 ; 1932 60 LawReportsInd.App. 307 ; 1933 1 ITR 197 ; 1933 35 BomLR 823 ; 1933 37 CWN 881 ; 1933 38 LW 443 ; 1933 AllLJ 1021 ; 1933 MWN 785
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD TOMLIN, LORD RUSSELL OF KILLOWEN, AND SIR GEORGE LOWNDES.
COMMISSIONER OF INCOME-TAX, UNITED PROVINCES OF AGRA AND OUDH - Appellant
Versus
BASANT RAI TAKHAT SINGH - Respondents
On Appeal from the High Court at Allahabad.
Decided On : April 28, 1933.
Under Section 12(2) of the Indian Income-tax Act, 1922, deductions for expenditure are only permissible if the expenditure was incurred in the same year as the income being assessed; expenditure from previous years cannot be deducted from current profits.
Act
Referred
:INCOME TAX ACT
: S.12, S.2
(A) Indian Income-tax Act, 1922 - Sections 3, 4, 6, 9, 10 and 12 - Income from "Other sources" - Section 12(2) - Deduction for expenditure - Expenditure incurred in previous years - Whether deductible in the current year of assessment - Allowance for expenditure under Section 12(2) must be for expenditure incurred in the year in respect of which the income, profits and gains forming the basis of the assessment arise - No justification for deducting expenditure occurred many years before, regardless of whether it is regarded as capital expenditure or not.
(B) Nature of Expenditure - Expenditure on buildings reverting to lessor at the end of a lease - Whether such expenditure is of a capital nature - Lower court held it was not capital as the advantage is lost at the end of the lease - Appellate court reversed this on the basis of the timing of the expenditure under Section 12(2).
Facts of the case:
A joint Hindu family was assessed on income derived from rents of buildings erected on land held under a long-term lease. The lease provided that the buildings would revert to the lessor upon expiration. The assessee claimed a deduction for the cost of erecting the buildings, proposing an annual deduction based on the lease term. The lower court allowed this deduction, treating the expenditure as non-capital because the assessee would lose the asset at the end of the lease.
Findings of Court:
The court found that under the construction of Section 12(2), any allowance for expenditure must relate to expenditure incurred during the specific year of assessment. Expenditure incurred several years prior to the assessment year cannot be deducted from the current profits and gains.
Issues: Whether an assessee is entitled under Section 12(2) of the Act to an allowance for expenditure incurred in erecting buildings prior to the year of assessment, and whether such allowance can be claimed as an annual deduction over the term of the lease.
Ratio Decidendi: The court reasoned that each year is a self-contained period for assessment. Therefore, Section 12(2) only permits deductions for expenditure incurred in the same year as the income being taxed. Expenditure incurred in previous years is not deductible in the current year, irrespective of its classification as capital or revenue expenditure.
Result: Appeal allowed.
(B) Nature of Expenditure - Expenditure on buildings reverting to lessor at the end of a lease - Whether such expenditure is of a capital nature - Lower court held it was not capital as the advantage is lost at the end of the lease - Appellate court reversed this on the basis of the timing of the expenditure under Section 12(2).
Facts of the case:
A joint Hindu family was assessed on income derived from rents of buildings erected on land held under a long-term lease. The lease provided that the buildings would revert to the lessor upon expiration. The assessee claimed a deduction for the cost of erecting the buildings, proposing an annual deduction based on the lease term. The lower court allowed this deduction, treating the expenditure as non-capital because the assessee would lose the asset at the end of the lease.
Findings of Court:
The court found that under the construction of Section 12(2), any allowance for expenditure must relate to expenditure incurred during the specific year of assessment. Expenditure incurred several years prior to the assessment year cannot be deducted from the current profits and gains.
Issues: Whether an assessee is entitled under Section 12(2) of the Act to an allowance for expenditure incurred in erecting buildings prior to the year of assessment, and whether such allowance can be claimed as an annual deduction over the term of the lease.
Ratio Decidendi: The court reasoned that each year is a self-contained period for assessment. Therefore, Section 12(2) only permits deductions for expenditure incurred in the same year as the income being taxed. Expenditure incurred in previous years is not deductible in the current year, irrespective of its classification as capital or revenue expenditure.
Result: Appeal allowed.
Depreciation - Recognizes that no allowance could be made under section 12 for the wasting of an asset.
Assessment-Period - Establishes that each year is a self-contained period for the purpose of tax assessment.
Solicitor for appellant: Solicitor, India Office.
Judgement
Appeal (No. 68 of 1932) from a judgment of the High Court (July 10, 1931) upon a reference to that Court under s. 66 of the Indian Income-tax Act, 1922.
The respondents, a joint Hindu family, had been assessed to tax for the year 1928- 1930 under the Indian Income-tax Act, 1922, in respect of the income, profits and gains derived by them from (inter alia) buildings erected by them upon land leased to them. They had not appealed from the decision of the High Court that the assessment in question was properly made under s. 12 (" Other sources"), not
s. 9 ("Property"), nor s. 10 ("Business"). The only question arising upon the present appeal by the Commissioner was whether the respondents were entitled under s. 12, sub-s. 2, to an allowance in respect of expenditure incurred by them before April 1, 1928, in erecting the buildings.
The terms of the reference to the High Court, and the facts of the case, together with the terms of the material provisions of the Act, appear from the judgment of the Judicial Committee.
The learned judges of the High Court (Mukerji and Allen JJ.) were of opinion that as the assessee would lose the advantage of his expenditure upon erecting the buildings at the conclusion of the lease the expenditure was not of a capital nature and that he was entitled to an allowance in respect of it ; they held that the allowance should be in the form of an annual deduction
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of a thirtieth part of the expenditure— the lease being for thirty years.
1933. April 27, 28. Dunne K.C. and R. P. Hills for the appellant. The only question upon this appeal is whether the allowance claimed is permissible under s. 12, sub-s. 2, of the Act.
[LORD TOMLIN. Should not the assessment have been under s. 9 ?]
That question does not arise, as the assessee has not appealed from the decision of the High Court that in respect of the income in question he was assessable under s. 12, not under s. 9 or s. 10 ; the assessee contended that either s. 9 or s. 10 applied.
By s. 4 "all income " under each of the heads mentioned in s. 6 is taxable subject to the deductions specifically allowed. Sect. 12 does not provide for an allowance for depreciation of capital value. It is a well established principle under the English income-tax Acts that even if sums are actually set aside for that purpose they still form part of the taxable income. In re Gooptu Estates , Ld. (( 1929) I. L. R. 57 C. 910, 917.), referred to by the High Court, appears to recognize that no allowance could be made under s. 12 for the wasting of an asset.
[LORD RUSSELL OF KILLOWEN. Must not the " expenditure " referred to in s. 12, sub-s. 2, be made in the year of assessment ?]
Yes, each year is a self-contained period for the purpose of assessment Income-tax Commissioner v. Chitnavis . (( 1932) L. R. 59 I. A. 290.) If the Board take that view it is not necessary now to discuss further the other question which, however, is of great importance.
The respondents did not appear.
April 28. The judgment of their Lordships was delivered by
LORD TOMLIN. This is an appeal by the Commissioner of Income-tax of the United Provinces of Agra and Oudh from a judgment of the High Court of Judicature at Allahabad, dated July 10, 1931, upon a reference of questions made to the High Court by the Commissioner of Income-tax under s. 66 of the Indian Income-tax Act, 1922.
The question arises in this way The assessee is a Hindu undivided family. The assessment in question was an assessment made for the year 1929-30. The assessee was assessed on an income of Rs. 57,979. Of this Rs. 14,425 were derived from property owned by the assessee and were assessed under s. 9 of the Income-tax Act. The remainder, Rs. 43,554, were assessed under s. 12 and were derived from the rents of buildings erected by the assessee upon land leased from the Agra Cantonment authority.
The assessee appealed and his appeal was rejected by the Assistant Commissioner. He then applied under s. 66 that certain questions of law alleged to arise should be referred to the High Court.
The material facts are these The assessee took a lease for twenty-five years from the Agra Cantonment authority. It does not appear when that lease commenced. Under the terms of the lease he had to erect certain permanent buildings which would become the property of the lessors on the determination of the lease. He erected those buildings. As from April 1, 1928, he had a fresh lease of the same property for thirty years. It does not appear whether the second lease was taken at or before the expiration of the first lease. The second lease also contained covenants as to building similar to
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those in the first lease, but in fact, of course, the buildings had already been erected. Under the second lease the buildings would become the property of the lessors at the determination of the lease. The second lease also contained provisions under which the lessee had the right of renewal for two consecutive periods of thirty years. In the case of each renewal it was open to the lessors to increase the rent by an amount not exceeding 50 per cent, of the rent for the preceding period.
In those circumstances the Commissioner referred to the High Court three questions. The first was " Where the assessee has taken land on a long lease under which the land together with the buildings thereon will revert to the possession of the lessor on the expiry of the lease, has erected thereon masonry buildings and has received rents from lessees of the buildings, is the tax payable by the assessee in respect of the rents to be determined in accordance with s. 9, or with s. 10, or with s. 12 ? " The second question was " In the circumstances stated in question (i.) is the assessee entitled, in accordance with s. 12, to allowance for the expenditure incurred in the erection of the buildings ?" The third question was "Is the allowance receivable in the form of an annual deduction equal to the amount of the expenditure divided by the years of the term for which the assessee holds the land on lease ? "
The first of those questions was answered by the Court holding that the assessment should be made under s. 12, which was in fact the section under which the Commissioner had proceeded. In regard to the second and third questions, the Court held that the assessee was entitled to a deduction from the rents in order to ascertain the taxable amount and that the deduction for the year of assessment should be one-thirtieth of the amount expended in erecting the buildings.
The assessee has not appealed from the decision of the Court that the assessment was properly made under s. 12, but the Commissioner has appealed against the answers to the second and third questions by virtue of which a deduction is to be allowed to the assessee. The assessee has not appeared before their Lordships Board.
The relevant sections of the Act are ss. 3, 4, 6, 9, 10 and 12.
Sect. 3, which creates the charge, says " Where any Act of the Indian Legislature enacts that income-tax shall be charged for any year at any rate or rates applicable to the total income of an assessee, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of all income, profits and gains of the previous year of every individual, Hindu undivided family, company, firm and other association of individuals."
Sect. 4, sub-s. 1, is as follows " Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in s. 6, from whatever source derived, accruing or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India."
Then there are certain exceptions which need not be referred to, and s. 6 provides " Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing, namely "—then there is a number of items of which the third is " Property " ; the fourth is " Business," and the sixth is " Other sources."
Sect. 9 deals with the head " Property," and states “The tax shall be payable by an assessee under the head l Property in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he
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may occupy for the purposes of his business, subject to the following allowances, namely "—then a number of allowances is set forth which may be made.
Sect. 10 deals with " Business," and provides " The tax shall be payable by an assessee under the head Business in respect of the profits or gains of any business carried on by him." It also makes provision as to how those profits are to be calculated.
Sect. 12 deals with " Other sources " and provides " The tax shall be payable by an assessee under the head (Other sources in respect of income, profits and gains of every kind and from every source to which this Act applies (if not included under any of the preceding heads)." It is to be noted that s. 12 does not come into operation until the preceding heads are excluded. Then under sub-s. 2 of s. 12 it is provided " Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee."
Now in the circumstances of this case, and having regard to the course which the case has taken and the attitude of the respondents, their Lordships feel themselves constrained to consider the matter upon the footing that s. 12 is the proper section under which the assessment should be made, and accordingly they propose to deal with the matter upon that footing, but in so doing their Lordships must not be taken to be accepting the view that in fact s. 12 is the proper section, or that s. 9 is not applicable to this case.
The question, therefore, is whether the allowance which the High Court have considered a permissible allowance is in fact justified by the terms of s. 12. In their Lordships judgment it is not. Under s. 12, sub-s. 2, is specified what may be allowed as an " allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee." In their Lordships view, on the true construction of that sub-section, the allowance for any expenditure incurred must be an allowance for expenditure incurred in the year in respect of which arise the income, profits and gains forming the basis of the assessment. Upon that footing, therefore, there can be no justification for deducting from the profits and gains something in respect of expenditure, whether it be regarded a& capital expenditure or not, which occurred many years before.
In those circumstances their Lordships are of opinion that upon the footing already indicated the respondents were not entitled to the deduction, and that the answers given to the second and third questions, the subject of this appeal, are wrong and should be reversed and the appeal allowed accordingly. Their Lordships will humbly advise His Majesty to that effect. The respondents will pay the costs of the appeal.