Previous-year income charge and mortgage-interest deduction shape income tax treatment under the 1922 Act.

Under the Indian Income Tax Act, 1922, the charge was treated as attaching to the income of the previous year, so an assessment was not invalid merely because the income source had disappeared by the year of assessment; the assessment therefore remained sustainable. On house property income, interest due on a mortgage debt was held deductible even if not actually paid, because the statutory allowance did not require actual payment and the annual value was assessed on a net basis after recognising the mortgage liability.

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Issues: (i) Whether, under the Indian Income Tax Act, 1922, an assessment for a year can be invalidated because the source of income did not exist during the year of assessment though income was received from that source in the previous year; (ii) whether interest due on a mortgage debt but not actually paid is an allowable deduction under the head of house property income.

Issue (i): Whether, under the Indian Income Tax Act, 1922, an assessment for a year can be invalidated because the source of income did not exist during the year of assessment though income was received from that source in the previous year.

Analysis: The charging scheme of the 1922 Act was read as making the tax for the year chargeable in respect of the income of the previous year. The return required under the Act was for the previous year, and the assessment was to be made according to that return without any general enquiry into current-year receipts. The language of the Act, especially the charging provision and the machinery provisions, was held to show that the previous year supplied the subject-matter of charge, not merely a basis of computation for current-year income. On that construction, the disappearance of the source during the year of assessment did not by itself defeat the assessment.

Conclusion: The question was answered against the assessee and in favour of the revenue.

Issue (ii): Whether interest due on a mortgage debt but not actually paid is an allowable deduction under the head of house property income.

Analysis: The deductions under the house property provisions were construed on the footing that where the legislature intended actual payment it said so expressly. The structure of the allowances under the relevant section showed that certain items depended on payment, while the mortgage interest allowance did not carry the same express limitation. The annual value was treated as a hypothetical figure, and the real income from mortgaged property was taken to be the balance after allowing the interest liability.

Conclusion: The question was answered in favour of the assessee.

Final Conclusion: The reference was answered partly against the assessee and partly in his favour, with the charging question decided for the revenue and the mortgage-interest deduction question decided for the assessee.

Ratio Decidendi: Under the Indian Income Tax Act, 1922, the charge is attracted to the income of the previous year, and a deduction expressly or by necessary implication allowed under the house property head is not confined to amounts actually paid where the statute does not so require.

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