Ownership-based municipal taxes not deductible unless incurred solely to earn income; reallocation across income heads rejected.

A municipal tax payment attributable to ownership of property was held not deductible under section 12(2) of the Indian Income-tax Act, 1922, because the expenditure was not incurred solely for earning the relevant income. The court held that the fact that the building was offered as security did not convert an ownership liability into a commission-earning expense, and rejected any attempt to shift the same outgoing between different heads of income to secure a further deduction. It also held that the reference question properly arose out of the Tribunal's order, since the deductibility issue had been in controversy before the Tribunal. The claimed deduction was disallowed and the reference answered against the assessee.

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Issues: (i) Whether the reference question arose out of the Tribunal's order. (ii) Whether the sum of Rs. 17,000, being part of municipal taxes paid on the Mercantile Building, was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Issue (i): Whether the reference question arose out of the Tribunal's order.

Analysis: The Tribunal had itself treated the controversy as one whether municipal taxes on the building could be deducted under section 12(2), and the question was therefore within the scope of the order. A question of law which was in issue before the Tribunal can properly be referred and answered, even if one party later seeks to re-characterise it as outside the reference.

Conclusion: The question did arise out of the Tribunal's order.

Issue (ii): Whether the sum of Rs. 17,000, being part of municipal taxes paid on the Mercantile Building, was allowable as a deduction under section 12(2) of the Indian Income-tax Act, 1922.

Analysis: Deduction under section 12(2) requires expenditure to have been incurred solely for the purpose of making or earning the relevant income. The municipal tax was an incident of ownership of the building and was payable whether or not guarantee commission was earned. The fact that the property was offered as security for the loan to the associate concern did not convert that ownership liability into an expenditure incurred solely to earn the commission. Allowing the balance after a partial deduction under the head "property" would also amount to impermissibly shifting the same outgoing between different heads of income, contrary to the principle that the heads are mutually exclusive.

Conclusion: The amount was not allowable as a deduction under section 12(2).

Final Conclusion: The reference was answered against the assessee, and the claimed deduction was disallowed.

Ratio Decidendi: An outgoing which is an incident of ownership of property cannot be deducted under section 12(2) unless it is incurred solely for earning the relevant income, and the same expenditure cannot be re-allocated across different heads of income to obtain a further deduction.

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