JUDGMENT
V. RAMASWAMI C.J. – These two references (Income-tax Reference No. 51 of 1978 and Income-tax Reference No. 168 of 1980) under section 256(1) of the Income-tax Act, 1961, relate to the assessment years 1974-75 and 1975-76, respectively. In the first reference, the following two questions of law have been referred by the Tribunal :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the word income used in the penultimate line of the second proviso to section 23(1) of the Income-tax Act, 1961, means annual letting value ?”
“2. If the answer to the above question is in the affirmative, whether the Tribunal was right in law in allowing loss which exceeded the annual letting value from the house property by Rs. 2,089 after allowing deduction of Rs. 1,200 under section 23(1) of the Act ?”
In the reference relating to the assessment year 1975-76, one compendious question has been referred through the point involved in the same and that question reads as follows :
“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in allowing a loss of Rs. 1,000 representing loss from a newly constructed property in the computation of the total income by holding that the word income used in the closing line of the second proviso to section 23(1) of the Income-tax Act, 1961, should be taken to mean annual letting value ?”
For the assessment year 1974-75, the assessee, who is an individual, had disclosed a loss of Rs. 2,000 in respect of his house property bearing No. 707, Sector 8-B, Chandigarh, which was let out by him on a monthly rent of Rs. 7000 on the basis of the following calculations :
Rs.
Rs.
“Annual letting value
8,400
Less : Deduction under section 23(1)
1,200
7,200
Less : 1/6th for repairs
1,200
6,000
Less : Collection charges
400
5,600
Less : Interest on borrowings :
(i) Smt. Vidya Jain
3,136
(ii) On Government loan
2,700
(iii) Sh. Lal Chand Jain
1,853
7,689
2,089.”
The Income tax Officer, by his order dated January 7, 1976, disallowed the claim of loss of Rs. 2,089 entirely on the ground that after claiming the deduction of Rs. 1,200 under section 23(1) of the Act, no loss from the said property could be allowed in view of the provisions of the second proviso to sub-section (1) of section 23. On appeal, the Appellate Assistant Commissioner, however, held that neither did the provisions of sub-section (1) of section 23 warrant such disallowance nor was there any logic or reason for disallowing the loss especially in view of the provisions of section 24. The Tribunal agreed with the view of the Appellate Assistant Commissioner and accepted the claim made by the assessee. At the instance of the Revenue, the two questions relating to the assessment year 1974-75 were referred by the Tribunal.
In respect of the assessment year 1975-76 also, the Income tax Officer disallowed the claim of loss of Rs. 1,057 in respect of the very same house property. The appeal of the assessee against that assessment order was heard by a different Appellate Assistant Commissioner who, without reference to the earlier order relating to the assessment year 1974-75, dismissed the appeal. The assessee went up in appeal before the Tribunal by the time the appeal came on for order, the appeal filed by the Revenue in respect of the assessment year 1974-75 had already been disposed of and, following the earlier decision, the Tribunal accepted the claim of the assessee and allowed the loss of Rs. 1,057. At the instance of the Revenue, the question as set out above for the assessment year 1975-76 has been referred to this court under section 256(1).
There is no dispute that the house property in respect of which the claim of loss has been made is a residential unit the erection of which began after the first day of April, 1961, and was completed after the 31st day of March, 1970, and that thereafter this is a case of which clause (b) of the second proviso to sub-section (1) of section 23 is applicable.
Section 22 provides that the annual letting value of property consisting of any building shall be chargeable to income-tax under the head “Income from house property”. This annual letting value is taxable subject to the allowances provided in sub-section (1) of section 24.
Under section 24, the income chargeable under the head “Income from house property” shall be computed after making the deductions provided in sub-section (1) of that section. Under clause (vi) of that sub-section, were the property has been acquired or constructed with borrowed capital, the amount of any interest payable on such capital shall be deducted from the income from the house property. That was the interest that was shown as Rs. 7,689 for the assessment year 1974-75 which we have extracted above. Section 23 provides for the determination of annual letting value. The main part of sub-section (1) provides that for the purposes of section 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year or where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable. The relevant portion of the second proviso to sub-section (1) of section 23 may conveniently be set out at this stage :
“Provided further that the annual value as determined under this sub-section shall, – …..
(b) in the case of a building comprising one more residential units, the erection of which is begun after the 1st day of April, 1961, and completed after he 31st day of March, 1970, for a period of five years from the date of completion of the building, be reduced by a sum equal to the aggregate of –
(i) in respect of any residential unit whose annual value as so determined does not exceed one thousand two hundred rupees, the amount of such annual value;
(ii) in respect of any residential unit whose annual value as so determined exceeds one thousand two hundred rupees, an amount of one thousand two hundred rupees,
so, however, that the income in respect of any residential unit referred to in clause (a) or clause (b) is in no case a loss.”
Thus, while section 22 provided that the profits chargeable to income-tax from house property is the annual value of such house property, section 23 provided as to how the annual value has to be determined and section 24 for the deductions to be made in computing the income from house property. If the house property is not one which would come within clause (b) of the second proviso, then, under the main part, the annual value of the property shall be determined when it is let out on the amount of rent received or where the property is not let out, the sum for which the property might reasonably be expected to be let from year to year. The deductions provided under section 24 shall also have to be made from such amount or sum as is referred to above. In our view, Parliament could not have intended that, while permitting the amount of interest payable on borrowed capital to be deducted under section 24 in respect of such a building, it wanted to take away such a benefit in respect of a building which would fall within the second proviso to that section, obviously for the reason that both are borrowed capital and the interest is paid on such borrowed capital. Further, the provision of section 23 itself is for the purpose of section 22 as specially stated therein and, therefore, it could not affect the deductions referred to in section 24. Nor is there any reason to restrict the deduction only to the extent of the income from the property and not beyond that. In the light of this set up, the proviso to sub-section (1) of section 23 shall be read, interpreted and understood as relating to the determination of the annual value and, therefore, that portion which stated that the income in respect of any resident unit referred to in clause (a) or clause (b) “is in no case a loss” shall be related only to the determination of the annual value with reference to the main part of sub-section (1) of section 23 and not for the purposes of admissibility of the total amount of deductions that could be made under section 24. In fact the second proviso specially states that “the annual value as determined under this sub-section shall” be reduced by the amounts specified in the clauses. It is true, as pointed out by learned counsel for the Revenue, that the words “is in no case a loss” will be meaningless if those will have to be restricted to the provisions of section 23 alone. That may be so, but on that ground, we cannot enlarge the scope of section 23 and restrict the applicability of the deductions under section 24. It may be pointed out that section 24, itself does not make any restrictions on the deductions referred to therein nor had it subjected the provisions of that section to the provisions of section 23. On the other hand, when any restriction of that category is to be made, the section has specifically referred to it as seen from sub-section (2) of section 24. If Parliament had any intention to restrict the deduction, that could have been made in section 24 itself. It may also be noted that by the Taxation Laws (Amendment) Act, 1984, the last portion of the second proviso to sub-section (1) of section 23 was omitted and the explanatory note relating to the same reads as follows :
“9. 2. Apprehensions had been expressed that the above-quoted words may be construed to imply that no loss shall be allowed in respect of such new residential units even when the loss may arise as a result of other deductions claimed by the assessee, as for instance, interest paid on borrowed capital for purposes of constructing the residential building. With a view of removing any controversy or doubt in the matter, the above quoted words have been omitted from the aforesaid second proviso. This would secure that the deduction admissible to the assessee under the provisions of section 24 of the Income-tax Act in computing the income from house property shall not be limited to the annual letting value of the house property as arrived at after proving for the deduction under the said second proviso.”
This explanatory note and the deletion of the two lines at the end of the proviso only bring out the real scope of the provision and in order to make it abundantly clear, they have omitted the provision.
We are, therefore, of the view that the loss claimed by the assessee is allowable. Accordingly, we answer the questions in respect of the assessment year 1974-75 in the affirmative and the question referred for the assessment year 1975-76 in the negative and in favour and in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 500 (one set).