1976 (8) TMI 3 - SC - Income Tax

Supreme Court clarifies exemption for irrecoverable rent under Indian Income-tax Act, 1922

The Supreme Court upheld the assessee's right to claim the benefit of exemption for irrecoverable rent in successive years, as long as the deduction did ... Whether the assessee is entitled to the exclusion from the income under the head 'property' of an amount equal to the irrecoverable rent which has not been so excluded in the preceding assessments - Where, however, the provisions are couched in language which is not free from ambiguity and admits of two interpretations a view which is favourable to the subject should be adopted - revenue's appeal is dismissed Issues:1. Interpretation of provisions related to exemption of irrecoverable rent under Indian Income-tax Act, 1922.2. Claiming deduction for irrecoverable rent in successive years.3. Applicability of item 38 of Notification No. 878F dated March 21, 1922.4. Dispute regarding the extent of exemption permissible for irrecoverable rent.5. Conflict between judgments of different High Courts on the same issue.Detailed Analysis:1. The judgment concerns three appeals against the Allahabad High Court's decision on the exclusion of irrecoverable rent from income under the head 'property'. The dispute arose regarding the irrecoverable rent of a building known as Grand Hotel for the assessment years 1957-58, 1958-59, and 1959-60. The issue was whether the assessee could claim deduction for the irrecoverable rent in each of these years, even after having claimed it in a previous assessment year.2. Section 9 of the Indian Income-tax Act, 1922 deals with tax payable under the head 'Income from property'. The annual value of property is deemed to be the sum for which the property might reasonably be expected to let from year to year. The Central Government, under section 60 of the Act, can make exemptions. Item 38 of Notification No. 878F dated March 21, 1922 provides for exemption of irrecoverable rent under certain conditions, which were fulfilled in the present case.3. The dispute centered on whether the assessee could claim the benefit of exemption for irrecoverable rent in successive years if the amount exceeded the rent payable for a year. The Tribunal and the High Court held that the benefit could be claimed in successive years as long as the deduction did not exceed the rent payable for a year. The language of item 38 placed a limit on the deduction permissible in one year but did not restrict the benefit to only one year.4. The Supreme Court analyzed the language of item 38 and concluded that there was no reason for the assessee to be disentitled from claiming the exemption for the balance of irrecoverable rent in subsequent years. The objective of the exemption was to allow deduction for notional rental income on which tax had been paid but was never received. The Court emphasized that if the taxing statute's provisions were clear, they must be given full effect, and in case of ambiguity, a view favorable to the subject should be adopted.5. The judgment referenced a conflicting view taken by the Punjab High Court in a different case. However, the Supreme Court preferred the interpretation of the Allahabad High Court and dismissed the appeals, upholding the assessee's right to claim the benefit of exemption for irrecoverable rent in successive years, subject to the limit specified in item 38 of the notification.Conclusion:The Supreme Court upheld the assessee's right to claim the benefit of exemption for irrecoverable rent in successive years as long as the deduction did not exceed the rent payable for a year, based on the provisions of item 38 of Notification No. 878F dated March 21, 1922. The judgment clarified the interpretation of the relevant provisions under the Indian Income-tax Act, 1922 and resolved the dispute regarding the extent of exemption permissible for irrecoverable rent.