A.V.R.A. Veerappa Chettiar vs The Commissioner of Income Tax, Madras

By these applications, which are consolidated for the sake of convenience, the assesses requires the Appellate Tribunal to refer to the High Court

certain questions of law which are said to arise out of the Tribunal''s consolidated order in I. T. A. Nos. 1024, 1025, 1026, 1027, 1028 and 1029

of 1953-54 and E. P. T. A. Nos. 33, 34 and 35 of 1953-54 and the order in T. T. A. No. 1119 of 1953-54, Inasmuch as, in our opinion,

questions of law do arise out of the aforesaid orders, we hereby draw up a statement of the case, agreed to by the parties, refer it to the High

Court of Judicature at Madras u/s 66(1) of the Indian Income Tax Act, 1922. The present reference is in respect of the four assessment years

1944-45, 1945-46, 1946-47 and 1947-43 the ""previous years"" of which ended on the respective 31st March immediately preceding. From 1944,

when his father Adaikappa Chettiar (senior) died, A. V. R. A. Vccrappa Chettiar became the karta of the Hindu undivided family with his two

sons, Ramannthan and Adaikappa (junior) as the other members thereof. This assessee family was, inter alia, carrying on, for a long time past

(even prior to 1918) business in groceries and oilman stores in the name and style of ""A. V. R. A. Adaikappa Chettiar"" hereinafter referred to as

the ""main shop"" at Nos. 15-22 Sea Street, Colombo, and had paid tax under the Indian Income Tax Act, 1918. In 1922, another shop in the

name of ''''Lanka Grocery Stores"" hereinafter referred to as the ""Stores""'' was started by the family at Nos. 11 and 12 Saa Street, Colombo,

dealing in groceries and oilman stores with a dispensing licence besides.

Though goods were transferred from the main shop to the Stores, the Stores was also indenting directly from foreign exporters and making

purchases from the market. There was an inter branch current account with the aforesaid main shop. - In the business names register, Veerappa

Chettiar was-registered as its proprietor. The profits of each year were independently arrived at in the books separately maintained therefore and

credited to the capital account therein.

In 1925. the assessee Purchased a quarter share an ""Seetha Mills"" Sidwa in Ceylon, hereinafter referred as the ""mills,"" from a debtor in satisfaction

of his debt to the main shop. Later on, the shares'' of the other partners in the mills were also sought over, in October 1928 and the assessee

thereby became the full owner of the entire undertaking. The mills manufactured cocoanut oil from copra, and soaps and lozenges. Separate books

have been maintained for this business too in which the annual profit or loss has also been independently arrived at and carried forward therein.

There was an inter-branch current account with the aforesaid main shop. The business was registered in the Business Names Register in the name

of Adaikappa Chettiar (senior) as its sole proprietor.

With effect from l-6-1944, all the aforesaid three businesses in Ceylon, viz., main shop, stores ''and mills, were transferred to a limited company

called ""Avra Ltd"" Colombo, incorporated in Ceylon on 1-6-1944, by an agreement dated 5-7-1944, for a consideration of Rs. 6,42,500 to be

discharged by allotment of 6425 fully paid up shares of Rs. 100/-each to the following persons:

Veerappa Chettiar 2125 shares

Ramanathan (son of Veerappa) 2125

Adaikeppa (junior) son of Veerappa 2125

J, M. Nadar (employee) 25

Balasubrarnaniam (employee) 25

6425 shares

The assessee contended before the Tribunal that relief u/s 25(4) of the Income Tax Act was due in respect of the profits and gains of all the

aforesaid three Ceylon businesses for the period from 1-4-1944 to 31-5-44 and that the same may be substituted for the profits of the year ended

31-3-44 in its assessments for 1944-45 and 1945-46 on the ground that the stores and the mills were only extensions of the main shop all of which

formed part and parcel of the single business that was being carried on, though under different names, as against the reilef granted by the Income

Tax Officer in respect of the profits of the main shop only.

The Tribunal, however, found that the stores Avas independently indenting for goods and making purchases in the local market, apart from the

transfer from the main shop and that it also dispensed medicines, which the main shop did not do, that the nature of business of the mills was totally

different from that of the main shop, and that separate books were maintained for the stores and for the mills where profits have been

independently arrived at and dealt with. The Tribunal, on the above findings and also considering the manner in which they were conducted

accordingly held that the stores and the mills were distinct and separate from the main shop, which alone was the subject-matter of the assess-

onent under the Act of 1918, and that the relief was, therefore to be restricted only to the profits of the main shop alone, as held by the Income

Tax authorities. Its decision is to be found in paragraphs 16 to 19 of its consolidated order dated 18-8-53, a copy whereof is annexed hereto, as

annexure A and forms part of the case. The question of law arising out of this decision, on the above facts, is set out as question (1) in para 14

infra.

By a deed dated 9-5-47, the copies of the tamil original and the English translation (without schedules) whereof are annexed hereto as annexures

B. 1 and B. 2 respectively and form part of the case, the assessee family claimed to have dismpted in status and to have partitioned all the family

assets in definite portions with effect from 10-2-47 and relied on the day book entries in its Ceylon and headquarters books in support thereof.

The division of the various assets of the family in India had been carried out to the satisfaction of the Income Tax authorities, but none of the

extensive Immovable properties in Ceylon, held in the name of Veerappa Chettiar for the family, were divided by any separate transfer deeds

according to the laws of Ceylon, nor were the 6375 shares held by the family in Avra Ltd., albeit standing in the names of the three members

separately, retrans-ferred to them in their individual status on partition. Copies of the Original and English translation of the day hook entries in the

Ceylon books purporting to divide the Immovable properties in Ceylon and the shares in Avra Ltd., are annexed hereto as annexures C. 1 and C.

2 and D. .1 and D. 2 respectively and form part of the case. Copies of the share ledger folios of Veerappa, Ramanatha and Adaikappa (junior) in

the share register of Avra Ltd. are annexed hereto as annexures E. 1 and E.2 and E. 3 respectively and"" form part of the case. It was contended

before the Tribunal that the family divided all its properties by metes and bounds on 10-2-47 and accordingly was entitled to an order u/s 25A(1)

in its favour. The Tribunal found that neither the Immovable properties in Ceylon, which continued to stand in the name of Veerappa Chettiar, nor

the shares in Avra Ltd., which only stood in the names of the three members, as the nominees of the family and not in their own right, at any time,

and continued to stand undisturbed as shown by the Annexure aforesaid, could be said to have been divided in definite portions'' within the

meaning of Section 25-A(1) of the Act, though their shares could be said to have been defined by virtue of the annexures C and D aforesaind, and

consequently held, in paras 4 to 10 of its order (annexure A) that the contention was untenable. The question of law arising out of this decision, on

the above facts, is set out as question, (ii) in Para 14 infra.

It was alternatively contended before the Tribunal, in the quantum appeal relating to the assessment year 1947-48, that even without an order u/s

25-A, the income from the Immovable properties and from the shares in Ceylon deserved to be deleted from the assessment as both the aforesaid

assets were, in fact, separated from the family assets and divided among the three constituent members thereof equally among themselves. The

tribunal found that the assessee family, which continued in existence under the legal fiction created by Section 25-A (3) of the Act, also continued

to own the aforesaid two assets in question, which were not established, as aforesaid, as having been divided among the members and accordingly,

it held, in para 15 of its order (annexure A) that the income from the two sources in question was rightly assessed on the assessee, in its opinion,

the present contention was substantially co-terminous with the claim u/s 25-A, already dealt with, as the assets the proper division whereof was the

subject matter of dispute were common to both. The question of law arising out of this decision, on the above facts, is set out as question (iii) in

para 14 infra, (this question will become otiose if answer to question (ii) is in favour of the assessee).

The assessee owned several house properties in Colombo. It paid by way of municipal taxes to the Colombo municipality sums of Rs. 9319, Rs.

9412, Rs. 10773 and Rs. 8307 in the years ended 31-3-1943 31-3-1946 and 31-3-1947, the ''previous years'' for the assessment years 1944-

45, 1945-46 and 1946-47 respectively and claimed them as deduction in computing the income from the aforesaid properties. It was contended

before the Tribunal that the aforesaid municipal taxes were ""an annual charge not being a capital charge"" within the meaning of Section 9 (1)fiv).

The tribunal, for reasons set out in para 12 of its order (annexure A), held the contention to be untenable, as income from foreign properties was

required to be assessed u/s 9 of the Act and that the tax levied by ""a local authority or a State Government or Central Govemment of the Republic

of India"" covered the rates paid to the municipality of Colombo too mutatis mutandis. The question of law arising out of this decision is set out as

question (iv) in para 14 infra.

The assessee held 50000 shares of Rs. 10 each in the Beverley Estates Ltd., Madras, on which a dividend of 71/2 per cent, was declared by the

company at its annual general body meeting held on 20-11-44 out of its profits for the period ended 30-6-44 and Rs. 7500 paid to the assessee

as dividend in the previous year, for the assessment year 1945-46. The percentage of taxed profits of the company is admitted to represent only

.003 per cent, of the total profits out of which the dividend was declared. It was contended by the assessee before the Tribunal that the aforesaid

dividend constituted income from agriculture within the meaning of Section 2(1) and consequently exempt u/s 4(3)(viii) of the Income Tax Act. For

the reasons stated in para 13 of its order (annexure A) the Tribunal, following the ruling in Bacha F. Guzdar Vs. The Commissioner of Income Tax,

Bombay City, , rejected the contention. The question of law arising out of this decision is set out as question (v) in para 14 infra.

The assessee held, as aforesaid 6375 shares of the face value of Rs. 6,37,500 in Avra Ltd. a company incorporated in Ceylon. On this holding,

the company declared on 31-12-46, Rs. 47812 as gross dividend from which Rs. 9562 was also deducted on account of Ceylon Income Tax due

at source thereon, and the net sum of Rs. 38250 paid to the assessee during the ""previous year"" ended 31-3-47 for the assessment year 1947-48,

according to the dividend certificates, copies thereof are annexed hereto as annexures F. 1, F. 2 and F. 3 and form, part of the case. The assessee

returned the aforesaid gross income of Rs. 47812 for the assessment year 1947-48, but, before the appellate Assistant Commissioner, contended

that only the net sum of Rs. 38250 was assessable. The Appellate Assistant Commissioner accepted the contention and deleted Rs. 9562 from the

assessment.

On a departmental appeal before the Tribunal, the Tribunal, by its order dated 18-8-53, a copy whereof is annexed hereto as annexure C and

forms part of the case, found that the income in question did not call for consideration as ""dividend,"" as the aforesaid foreign company was not

registered under the Indian Companies Act, and generally did not fall within the scope of Sections 2(6), 2(6-A) and 16(2) of the Income Tax Act,

but only as income from a foreign investment; that there was no provision in the Ceylon Income Tax Ordinance which distinguished the position of

the tax deducted at source from dividends front that envisaged in the scheme of the Indian Income Tax Act and that, under both the enactments,

die tax deducted was deemed to be credited to the assessee and paid on his account. On the above findings, the Tribunal rejected the assessec''s

contention and held that the Ceylon Income Tax deducted was not an outgoing at all and consequently that the gross foreign income accrued in full

to the assessee in the ''previous year.'' The question of law arising out of this decision is set out as question (vi) in para 14 infra.

Out of the above facts, the question of law that arises are: (i) Whether there was material for the tribunal to hold that the businesses of Stores

and/or mills were separate and independent from the main shop, so as not to he entitled to any relief u/s 25(4) of the Act in respect thereof?

(ii) Whether the assessee is entitled to an order u/s 25-A(l) of the Act.

(iii) If the answer to question (ii) is in the negative, whether the Ceylon Immovable properties and/ or the shares in Avra Ltd., belonging to the

family ceased to he the assets of the joint family after 10-2-47 and the income therefrom arising thereafter required to be excluded from the

assessment of the year 1947-48.

(iv) Whether the rates paid to the Colombo municipality on the Ceylon house properties are deductible in computing the rental income therefrom in

the four assessment years 1944-45 to 1947-48.

(v) Whether the dividend of Rs. 7500 received in the ''previous year'' for 1945-46 assessment from tile Beverley Estates Ltd. Madras is income

exempt u/s 4(3)(viii) of the Income Tax Act, and

(vi) whether the assessment in the assessment year 1947-48 of the gross income from the investment of shares in Avra Ltd., before deduction of

the Ceylon Income Tax thereon, is valid and proper.

Rajagopalan, J.—Six questions were referred for the determination of this court u/s 66(1) of the Income Tax Act. It may not be necessary

to set out over again the relevant facts to answer some at least of the questions.

The fifth of the questions ran:

Whether the dividend of Rs. 7500 received in the ''previous year'' for 1945-46 assessment from the Beverley Estates Ltd., Madras, is exempt u/s

4(3)(viii) of the Income Tax Act.

The answer to this question is ''concluded by the authority of the decision of the Supreme Court in Bacha F. Guzdar Vs. Commissioner of Income

Tax, Bombay, . The ques-tion is answered in the negative and against the assessee.

The sixth question ran:

Whether the assessment in the assessment year 1947-48 of the gross income from the investment of shares in Avra Ltd., before deduction of the

Ceylon Income Tax thereon, is valid and proper.''''

A simiiar question with reference to the provisions of the Ceylon Income Tax Ordinance was considered by us in Ramaswami Naidu v. Commr. or

Income Tax, RC No. 27 of 1954 (C). The principles we laid down in that case apply. The question is therefore answered in the negative and in

favour of the assessee. The sum of Rs. 9562 which was deducted by the company before the dividends were paid to assessee was never the

income of the assessee.

The first question ran:

Whether there was material for the Tribunal to hold that the business of stores and/or mills were separate and independent from the main shop, so

as not to be entitled to any relief u/s 25(4) of the Act in respect thereof.

This question arises only in relation to the proceedings in the assessment year 1945-46. There was ample material on which the Tribunal could rest

its conclusion that what were referred to as stores, mills and the main shop, each constituted a distinct line of business. The Tribunal was therefore

justified in coming to the conclusion that the relief u/s 25(4) of the Act had to be restricted only to the profits from the business designated the

main shop''''. The question is answered in the affirmative and against the assessee.

Questions (ii) and (iii) arise out of proceedings or the assessment year 1947-48. Here again it may not he necessary to set out at any length the

relevant facts which have already been set out in the statement of the case. Question No. (ii) ran:

Whether the assessee is entitled to an order u/s 25-A(1) of the Act.

Question (iii) ran :

If the answer to question (ii) is in the negative whether the Ceylon Immovable properties aud/or the shares in Avra Ltd., belonging to the family

ceased to be the assets of the joint family after 10th February 1947 and the income therefore accruing thereafter required to be excluded from the

assessment of the year 1947-48.

The genuineness of the partition arrangements made with effect from 10-2-1947 was never in issue. In the course of his arguments the learned

counsel for the assessee could not really assail the correctness of the finding of the Tribunal, that though the shares of the three members of the

quondam Hindu undivided family were defined, there was no allocation of the individual items of the Immovable properties in Ceylon to each of the

sharers. All that the learned counsel for the assessee could point out was that the income from this Immovable property was divided in equal shares

as shown in the accounts, land that each sharer enjoyed his share of income separately.

That may not be sufficient to satisfy the requirements of Section 25-A. The Immovable property was certainly capable of division by metes and

bounds and there was no such division. The income from the Immovable properties in Ceylon even after 10-2-1947 wax therefore Hable to be

assessed as the income accruing to a Hindu/ undivided family. Question (ii) is therefore answered in the negative and against the assesses.

In view of what we have recorded in considering the second question, there should be no further need to refer again to the income from the

Immovable properties in Ceylon in considering question (iii). We shall, therefore, confine Ourselves to the dividend income from the shares held by

the three members of the quondam joint family in Avra Ltd. Even there our answer to question (ii) may have no real bearing on the assessment

proceedings for 1947-48, because it was not shown to us that any dividend income accrued in the relevant year of account subsequent to 10-2-

1947. But this is a point that will nave to be verified by the Tribunal in giving effect to our answer to the third question.

The relevant facts were as follows: The Hindu undivided family carried on three lines of business, referred to in the statement of the case as the

main shop, the stores and the Trills. With effect from 1st June 1944 these three businesses were transferred to ths limited company called Avra

Ltd., Colombo, with 6425 fully paid up shares of Rs. 100 each. Out of this each of the three members of the family, Veerappa Chettiar,

Ramamtha and Aiki-kappan was allotted 2125 shares, anrl this holding continued to be shown in the books of the company right through. It should

be remembered that in June 19-14 all the three constituted an undivided family-The partition was with effect from 10-2-1947. The Tribunal

recorded in paragraph 8 of the statement of the case :

.....nor were the 6375 shares held by the family in Avra Ltd., albeit standing in the names of three members separately, retransferred to them in

their individual status on partition.

The further statement in paragraph 9 was:

.....nor the shares in Avra Ltd., which only stood in the names of the three members, as the nominees of the family and not in their own right, at

any time, and continued to stand undisturbed as shown by annexure E aforesaid, could be said to have been divided in definite portions within the

meaning of Section 25-A(1) of the Act, though their shares could be said to have been defined by virtue of the annexures C and D aforesaid.....

We are really unable to follow the reasoning of the Tribunal. No doubt in 1G44, when the shares were allottee tri three individual members, they

constitute ed a Hindu undivided family. Each of them vise-a-vis the company was the shareholder. Inter se the members their rights and liabilities

were governed by their status as undivided members of a Hindu family. We really fail to see what more they need have done themselves to

continue the registry as separate shareholders in the books of the company after the partition on 10-2-1947. Their rights and obligations inter se as

members of an undivided family ceased on 10-271947. Their rights vis-a-vis the company continued undisturbed as individual shares. There can

be no question for example of transferring 2125 shares held by Veergppa to Vee-rappa himself on 10-2-1947.

The books of the assessee showed that the dividend income in the subsequent years was credited to each of the three members of the family. On

the material on record the only conclusion that was-possible was that the partition of the shires, which we would again stress governed the rights

inter se the three members of the family, was completed even on 10-2-1947 itself, and that there was nothing further to be done to give effect to

the allocation of the shares in the books qf the company. Even if a formal declaration by the members of the family were required, that was

forthcoming. The Assistant Commissioner referred to the statement on oath made by the members that there were no assets left in common. That

will certainly apply to the shares, though it may not help to satisfy the requirements of Section 25-A(1) in relation to the Immovable properties Held

in Ceylon.

Our answer to question (iii) is that the Immovable properties in Ceylon did not cease to be the assets of the joint family after 10-2-1947, but

that the shares in Avra Ltd., ceased to be the assets of the joint family after 10-2-1947. The income accruing from the shares to each of the three

members after 10-2-1947 hud to be excluded from the assessment of the Hindu undivided family.

The last of the questions we have to answer is question (iv) which ran:

Whether the rates paid to the Colombo Municipality of the Ceylon house properties are deductible in computing the rental income therefrom in the

four assessment years 1944-45 to 1947-48.

We have to answer this question with reference to-the relevant provisions of Section 9(1) of the Income Tax Act, and the provisions of the Ceylon

Municipal Councils Ordinance regulating the assessment, levy and collection of rates on houses in Ceylon.

The relevant provisions of Section 9(1) of the Income Tax Act ran;

The tax shall be payable by an assessee under the head ''income from property'' in respect of the bona fide annual value of property consisting of

any buildings or lands appurtenant thereto of which he-is the owner.....subject to the following allowances, namely.....(iv) Where the property is

subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge; where the property is subject to an annual

charge not being a capital charge, the amount of such charge; where the property is subject to a ground rent, the amount of such ground rent; and

where-the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable

on such capital.....

Explanation: For the purpose of Clause (iv) of this sub-section, the expression ''annual charge'' does not include any tax ii) respect of property or

income from property levied by a local authority or a State Government or the Central Government.

The relevant portion of Section 115(1) of the Municipal Councils Ordinance, Ceylon, ran-

.....the Council shall from time to time, so often as they think necessary, make and assess, with the sanction of the Governor any rate or rates-on

the annual value of all houses and buildings of every description, and of all lands and tenements whatsoever within the town. Such rate or rates--(a)

shall endure for any period not exceeding twelve months.....

(b) shall be payable by such instalments and at such times as the Chairman, with the sanction of the Council, shall direct.....

As the learned counsel for the assessee pointed out, that made it clear that the rates were annual; it was the annual rental value that furnished the

basis. That conclusion is reinforced by Section 117(S) which runs:

Every assessment against which no objection is made shall be final for the year.

Section 135 of the Ordinance provided for the recovery of unpaid rates assessed on house property. If authorised recovery by

seizure and sale of all and singular the move-able and Immovable property of the proprietor, or of any joint proprietor, or the premises on account

of which such rate or rates may be doe, and of all moveable property, to whomsoever the same may belong, which may be found in or upon any

such premises;

Under Section 138 of the Ordinance the property seized under the provisions of Section 135 could be sold. Section 142 directed that, if land, or

other iminovcable property, was thus sold, it was to vest in the purchaser free from all encumbrances.

There was nothing in the Ceylon Municipal Councils Ordinance to correspond for insfance to Section 103 of the Madras City Municipal Act

which runs:

The property tax on buildings and lands shall, subject to the prior payment of the land revenue, it , any, due to the Government, thereon, be the

first charge upon the said buildings Or lands and upon inoveable property if any, found within or upon such buildings or lands and belonging to the

person liable to such tax.

Section 85 is an analogous provision in the Madras District Municipalities Act V of 1920.

Thus the position m Ceylon is, that the owner of the house assessed to municipal rates is under a legal liability to pay those rates. Those rates

are annual, but provision is made under the Statute for payment of these rates in instalments. Whether factually any instalments were fixed is not

clear from the material made available to us. For non-payment of the rates any property of the defaulting owner is liable to seizure and sale. We

can leave out of account the liability of properties, belonging to others but found on the premises assessed to municipal rates, to seizure and sale for

nonpayment of these rates.

No provision is made by the laws in Ceylon for making the house property on which the rates are assessed security for the payment of those rates.

As we pointed Out, there is nothing analogous to Section 103 of the Madras City Municipal Act, which makes the tax a first charge on the house

property, and makes the house security for the payment of the house tax. There is nothing in the Ceylon law even to indicate that the income from

the house property is a source from which the assessed rates nave to be paid. That, of course, leaves intact the statutory liability imposed on the

owner of the house property to pay. the annual rate assessed on that property by the Municipal authorities.

Is the liability of the assessee to pay these Municipal rates in Ceylon an ""annual charge"" within the meaning of Section 9(1)(iv) of the Income

Tax Act is the question.

We have already pointed out that the liability to pay the rates was annual, though the Ceylon Ordinance permitted the payment in instalments. If

such a liability otherwise constitutes an annual charge, the statutory provision to discharge that liability in instalments does not make it any the less

an annual charge. That is concluded by the decision of the Supreme Court in NEW PIECE GOODS BAZAR CO., LTD., BOMBAY Vs.

COMMISSIONER OF Income Tax, BOMBAY.,

The next question is does the word ""charge"" in Section 9(1)(iv) import anything more than a liability to pay an ascertained or ascertainable

amount. We have pointed out that under the laws in Ceylon the house property itself was not constituted security for the discharge of the liability to

pay the assessed municipal rates. Nor was the income from that house property indicated as the source from which the rates had to be paid. The

learned counsel for the assessee contended that all that the expression ""annual charge"" in its context in Section 9(1)(iv) of the Act meant was that it

should be a payment of discharge of an annually recurring liability, that ""annual charge"" meant nothing more than an annual payment, and that there

was no scope to restrict it further by requiring that the house property in question should be security for that payment.

He relied on the observations of Chakravartti C J. in Commissioner of Income Tax, West Bengal, Calcutta Vs. State Bank of India, Calcutta, .

I would only add here that the word ''charge'' as used in S- 9(1)(iv) must mean payment and not security. The relevant words of Section are:

''Where the property is subject to an annual charge..... the amount of such charge.'' Clearly the phrase ''the amount of such charge'' indicates that

the word ''charge'' used in the earlier phrase also means payment. It would be singularly inappropriate to use the word ''charge'' if security was

intended, for ''annual security'' would be wholly meaningless. That the meaning is ''payment'' would also seem to be clear from the explanation

appearing after Clause (vii) of the sub-section where it is said that the expression ''annual charge'' in Clause (iv) does not include any tax in respect

of property or income from properly, if such tax is not of a certain kind.

The question, whether the expression ''annual charge'' should be construed as meaning only an annual payment without any reference to

security for that payment did not really arise for determination in Commissioner of Income Tax, West Bengal, Calcutta Vs. State Bank of India,

Calcutta, . The payments the learned Chief Justice had to consider in that case were specifically charged upon the house property in question there,

in the sense that the house property was constituted security for those payments. Though the observations are obiter, when they come from so

experienced and learned a Judge, they are certainly entitled to great respect. With all respect to the learned Chief Justice, we regret our inability to

accept as correct the interpretation he placed upon the expression ''annual charge'' in its context in Section 9(1)(iv) of the Act.

It is true that the question whether the expression ''annual charge'' meant annual payment plus security for that payment did not directly arise in

that form for consideration in the case decided by the Supreme Court NEW PIECE GOODS BAZAR CO., LTD., BOMBAY Vs.

COMMISSIONER OF Income Tax, BOMBAY., . The enactments their Lordships had to consider in that case specifically imposed a statutory

charge on the house properties for the unpaid arrears of house tax. Their Lordships, however, had to construe the scope of the expression ""capital

charge"" and ""annual charge"" as they occur in Section 9(1)(iv). It may not therefore be strictly accurate to view these observations as obiter dicta;

but even as obiter, the observations of their Lordships of the Supreme Court are entitled to the highest respect.

Section 9(1)(iv) of the Act, it should be remembered, refers to an annual charge Other than a capital charge. Earlier in Section 9(1)(iv) the

distinction is between a mortgage and a capital charge. Obviously the same meaning should be given, if possible to the expression ''capital charge''

wherever it occurs in Section 9(1)(iv). In construing the scope of capital charge and in dealing with the expression ''annual charge other than a

capital charge'' Maha-jan J. said NEW PIECE GOODS BAZAR CO., LTD., BOMBAY Vs. COMMISSIONER OF Income Tax, BOMBAY.,

;

We are therefore of opinion that capital charge here could only mean a charge created for capital sum, i.e., a charge to secure the discharge of a

liability of a capital nature"".

After recording with approval the principle laid down by the Allahabad High Court in GAPPUMAL KANHAIYALAL Vs. COMMISSIONER

OF Income Tax, C. P. and U. P., Mahajan J. proceeded,

It was said that if an annual charge means a charge to secure the discharge of an annual liability, ""then, capital charge means a charge to secure the

discharge of a liability of a capital nature. We think this construction is a natural construction of the section and is right.

His Lordship referred again to the need for the existence of a charge on the property for the discharge of the liability for, the annual payment when

he observed at p. 523 (of ITR): (at p. 168 of AIR);

Municipal taxes, on the other hand, do not stand on the same footing! as land revenue, The law as to them varies from province to province and

there may not be necessarily a charge on property in all cases. The legislature seems to have thought that so far as municipal taxes on property are

concerned, if they fall within the ambit of Clause (iv), deduction will be claimable in respect of them but not otherwise.

In view of the principles laid down by the Supreme Court in NEW PIECE GOODS BAZAR CO., LTD., BOMBAY Vs. COMMISSIONER

OF Income Tax, BOMBAY., we think that the question at issue before us is not really res integra.

In Burrows on ''Words and Phrases'' Vol. I pages 411-12, the first passage under the heading ''charge'' runs:

''A charge differs altogether from a mortgage. By a charge the title is not transferred, but the person creating the charge merely says that out of a

particular fund he will discharge a particular debt."" The next passage runs:

The word ''charge'' may well be used to describe a burden imposed upon land and if a payment has to be made in respect of land, and it can only

be enjoyed subject to the liability- for that payment, I cannot think that there would be any great straining of language if it were spoken of as

charged upon the land.

This second passage is an extract from the speech of Lord Herschell in Payne v. Esdaite, (1888) 13 AC 613. This passage taken by itself out of its

context might appear to support the contention of the learned counsel for the assesses, that the use of the expression ''charge'' by itself could imply

nothing more than a mere liability to pay. But to understand the scope of the observations of Lord Herschell we have to examine the context in

which he made these observations. At p. 622 of the report he prefaced a discussion of the meaning to be given to the expression ''charge'' in the

relevant statutes which their Lordships had to construe by saying :

The Court of appeal have held that the payment in question is not within this definition, because though an annuity or periodical payment it is not

charged upon or payable out of land, I gather that they interpreted the words ''charged upon'' as applicable only to those cases in which there was

some remedy against the land itself. It may be admitted that this is the most common signification of the words, and is tho meaning that would be

attributed to them if there, were nothing in the context to lead to a different conclusion."" Lord Herschell then proceeded to examine the context,

also in relation to the previous enactment on the same subject, and after pointing out at p. 625 ""the question is certainly not free from difficulty"", he

summed up : ""..... upon the whole I have come to the conclusion that the judgment of the Court below on this point was erroneous.....

If the test were, does the context of Section 9 (1) (iv) require a meaning different from what the norm ally accepted signification in law of the

expression ""charge"" justifies, our answer is in the negative. If we may say so with respect, Chakravartti C. J. appears to have isolated the passage

where the property is subject to an annual charge . . . the amount of such charge"", in his observations Commissioner of Income Tax, West Bengal,

Calcutta Vs. State Bank of India, Calcutta, . The expression charge'' occurs more than once in Section 9(1)(iv), and there is also the explanation to

consider. The familiar legislative pattern in India is to charge the house property with the liability for the house tax.

Often it constitutes the first charge on the house property, subject to the claims of the Government for land revenue. These were in fact the charges

excluded by the explanation. If the tax itself did not constitute an annual charge, obviously there would be no scope for recourse to the explanation

to exclude it from the scope of Section 9(1)(iv). As pointed out by the Supreme Court in NEW PIECE GOODS BAZAR CO., LTD., BOMBAY

Vs. COMMISSIONER OF Income Tax, BOMBAY., , if the expression capital charge has to be construed as a charge created for a capital sum,

that is, to secure the discharge of a liability of a capital nature, the expression annual charge in that context should mean, again in tho words of

Mahajan J. a charge to secure the discharge of an annual liability.

We are clearly of opinion that the word ""charge"" in the statutory expression ""annual charge"" in Section 9(1)(iv) connotes something more than a

mere liability to pay something more than the annual payment. Both the concepts are involved, liability to pay and a charge on the house property

for the discharge of that liability. That charge can be contractual or statutory. It can be expressed or it can be implied. If, for instance, the income

from the pro. perry is shown as the source from which the liability is to he discharged, law would imply a charge for that amount. In the present

case there was no charge for the payment of the assessed municipal rates, express or implied. To sum up, the annual charge in the context of

Section 9(1)(iv) means an annual payment charged upon the house property, just as capital charge means payment of a capital nature charged

upon the house property.

In rejecting the assessee''s claim to deduct the municipal rates assessed on the assessee''s house property in Ceylon, the Tribunal recorded :

It was argued that the explanation to Section refers only to the tax levied by a local authority or a State Government or Central Government of the

Republic of India and the rates paid to the Municipality of Colombo are not within, the aforesaid prohibition, the deduction claimed is undoubtedly

an annual charge, not of the nature of a capital charge and consequently permissible u/s 9(1)(iv). This argument, though attractive, is clearly

untenable as assessment of even foreign properties require to be made u/s 9 and the sub-section will consequently require to be read mutatis

mutandis.

It was on the application of the Explanation that the Tribunal rejected the claim. We have already pointed out that the explanation would apply

only if the Municipal rates had constituted an annual charge within the meaning of Section 9(1)(iv). We have held that they did not constitute such

an annual charge. There is therefore no necessity for us to examine in these proceedings the scope of the explanation, to verify if it would refer to

taxes or rates imposed by authorities outside India.

As the Municipal rates payable by the as-sessee under the laws in Ceylon did not constitute an annual charge within the meaning of Section

9(1)(iv) of the Act, the assessee was not entitled to claim the payments towards those rates as lawful deductions permitted by Section 9(1) of the

Act.

We answer the fourth question in the negative and against the assessee.

As neither side has wholly succeeded in this reference there will be no order as to costs.