Tenants' municipal tax collections are excluded from annual value and do not become taxable income when retained.

Amounts collected by a landlord from tenants towards the tenants' statutory municipal tax liability do not form part of annual value under the Income-tax Act and are not taxable income in the landlord's hands. The receipt is treated as distinct from rent and service charges, and a proviso cannot expand the main computation formula to give revenue character to an amount outside it. Any excess collection retained without remittance also remains outside assessable income, because retention does not alter the non-revenue character of the original receipt. The reference was answered against the revenue.

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Issues: (i) Whether the occupiers' share of property tax collected from tenants formed part of the annual value under section 23(1) of the Income-tax Act, 1961, and constituted income in the hands of the assessee; (ii) Whether any excess collection of occupiers' share of property tax retained by the assessee was assessable as income.

Issue (i): Whether the occupiers' share of property tax collected from tenants formed part of the annual value under section 23(1) of the Income-tax Act, 1961, and constituted income in the hands of the assessee.

Analysis: The amount recoverable from tenants towards their statutory liability for municipal tax was treated as distinct from rent and from service charges. It did not enter the computation of annual value under the main provision of section 23(1), and a proviso could not enlarge the scope of the main charging formula so as to give revenue character to an amount that was otherwise outside it. The assessee's position in relation to the amount collected was that of an agent or trustee, and the character of the receipt was not altered merely because the amount had not been remitted.

Conclusion: The occupiers' share of property tax did not form part of the annual value and was not income in the assessee's hands.

Issue (ii): Whether any excess collection of occupiers' share of property tax retained by the assessee was assessable as income.

Analysis: Since the amount collected towards occupiers' share of tax was not of a revenue character at the time of receipt, any unremitted balance did not acquire the character of taxable income merely because it was retained by the assessee. The excess, if any, remained outside the scope of assessable income on the same reasoning.

Conclusion: The excess collection was not assessable as income and the answer was in favour of the assessee.

Final Conclusion: The reference was answered against the revenue on both questions, with the occupiers' share of municipal tax excluded from the assessee's taxable receipts.

Ratio Decidendi: Amounts collected by a landlord from tenants towards the tenants' statutory liability for municipal tax do not form part of annual value under section 23(1) and do not become taxable income merely because they are collected or retained by the landlord.

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