BHAGWAN DASS JAIN versus UNION OF INDIA

BHAGWAN DASS JAIN

UNION OF INDIA

February 11, 1981

[A. P. SEN AND E. S. VENKATARAMIAH, JJ.]

Income-tax Act, 1961, S. 23(2)(i) & Constitution of India 1950, Seventh Schedule List I, Entry 82 and List II, Entry 49-Income-Incorne froni hou.~e property-Self-occupied property-Whether on1ounts to income-Legislative practice-Interpretation of entries in Lists.

fYords and Phrases-'lncome'-Meaning of-Constitution of India, 1950. Seventh Schedule List I, Entry 82.

Section 22 tn 27 of the Income-tax Act, 1961 relate to the levy and com-putation of tax on income from house property. Section 23(2) (i) states that where the property consists of house in the occupation of the owner for the purposes of his residence, the annual value of such house shall first be deter-mined in the same manner as if the property had been let and further be re~ duced to one half of the amount so <let.ermined or one thousand eight hundred rupees whichever is less. Where the property consists of more than one house in the occupation of the owner for the purposes of his own residence. Section 23(2)(ii) provides that the provisions of clause (i) shall apply only in respect of one of such houses which the assessee may at his option specify in that behalf.

The petitioner, an assessee under the Act, contended before the High Court in petition under Article 226 of the Constitution, that inclusion of any amount under section 23(2) of the Act in his income was unconstitutional as there could be no income at all in such case accruing to him in true sense of that term and that the liability that was sought to be imposed under the Act in respect of his residential house was in its pith and substance tax on building falling under Entry 49 of List II of the Seventh Schedule to the Constitution and hence Parliament could not impose the said liability under law made in exercise of its legislative power under Entry 82 of List I of the Seventh Schedule which authorised it only to levy 'taxes on income other than agricultural income'. The High Court rejected the plea and dismissed the Writ Petition.

In the Special Leave Petition. to this Court it was contended on behalf of the petitioner that as he was not deriving any monetary benefit by residing in his own house, no tax could be levied on him, on the ground that he is deriv~ ing income from that house, and that the word 'income' only means realisation of monetary benefit and that in the absence of any such realisation. the inclusion of any amount by way of notional income under section 23(2) of the Act in the chargeable incon1e was impermissible as it was outside the scope of Entry 82 of List I of the Seventh Schedule to the Constitution.

Dismissing the Special Leave Petition,

HELD ; 1. The tax levied under the Income-tax Act is on the income ~ough computed in an artificial way) from house property and not on house property. Entry 49 of List II of the Seventh Schedule to the Constitution is not, therefore, attracted. The levy in question squarely falls under Entry 82 of Li't I of the Seventh Schedule to the Constitution. [816 C-Dl

2. The expression 'income' means 'a thing that comes in'. Income is also define.d. as the gain derived from land capital or labour or any two or more of them. Even in its ordinary economic sense, the expression 'income' include not merely what is received or what comes in by exploiting the use of pro-perty but al&o what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income.

[812 B, 816 BJ

3. (i) The Government of In<lia Act, 1935 was enacted when the Indian Income-tax Act, 1922 was in force. Section 9 of the Indian Income-tax Act, 1922 provided for levy of income tax on the basis of the bona fide annual value of th1! property even when it was in the occupation of the assessee for the purposes of his own residence. While enacting Entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935 the British Parliament must have had in its view the Indian Income-tax Act, 1922 which was probably the only law relating to tax: on incomes in force in British India. Similarly the Constituent Assembly while enacting Entry 82 of List I of the Seventh Schedule to the Constitution must have understood that the \Vord 'incun1e' us;:d in that Entry would in any event include within its scope all items which came within the definition of inco1nc and were subjected to charge in the Indian lncon1e-tax Act, 1922 which was in force at the time the Con<.;titutinn \\<IS adopted. [815 D-FJ

(ii) The Constitution makers had the Indian Income-tax Act, 1922 in their view is borne out from Article 270(1) of the Constitution 'Nhich provides fer collection of taxes on income by the Government of India and distribution thereof bet\vecn the Union and the States. Article 366(i) \Vhich Jcfinc~ 'agri-cultural income' <1s defined for the purposes of the enactments relating to Indian Income-tax and Article 366(29) which defines 'tax on income' as including tax in the nature of excess profits tax. In the circumstance'> it would not be \Vrong to construe the \VOn.1 incon1e in Entry 82 as including all items whil,:h were taxable under the conten1poraneous law relatJng to tax on inco1nes which \Vas in force at the time \Vhc11 the Constitution was enacted. [815 G-816 Al

4. This Court in 1\ra1'inclw11dra Mafadal v. Commissioner of fncome-ta:r. Bombay City 1955 SCR 829. held that the word 'income' in Entry 82 is capable of wider meaning than \Vhat was given to it in the Indian Income-tax Act. 1922 or the English Act of 1918. [814 HJ

'· In Australia the annual value of the tax payers' residence owned by him-.!elf or used rent free is taken for consideration for purposes of levy of inco1ne tax. In England too in the case of residence of the assessee, computation of income i5 on the basi<> of presumed income. [815 A]

Rcscl1 v. The Fcd('r{lf Co111111issioner of Taxation, 66 C.L.R. 198 at p. 224 and Gu1·c1·11ors of th[1]? Rotunda Hospital Dublin v. Conzan (7 T.C. 517 at 586· 587) Simon's Income tax (second Edn.) Vol. I p. 502 referred to.

6. It is we11-settled that the entries in the Lists in the Seventh Schedule to the Constitution should not be read in narrow or restricted sense and each and every subject mentioned in the entries should be read as including within · its scope all ancillary and subsidiary matters which can fairly Lnd reasonably be comprehended in it. Words in the Constitution conferring legislative power should receive liberal construction and should be interpreted in their widest amplitude. [811 H-812 BJ

CIVIL APPELLATE JURISDICTION : Special Leave Petition No. 872(1 of 1979.

From the Judgment and Order dated 27-10-79 of the Madhya Pradesh High Court in M.P. No. 636/78. and for the Petitioner.

Shiv Dayal, Mrs. Bagga and Mr. S. Bagga for the Petitioner.

The Order of the Court was delivered by

VENKATARAMIAH, J.-The short question which arises for considera-tion in this petition for special leave to appeal filed under Article 136 of the Constitution is whether it is open to the Income-tax Officer while computing the liability of an assessee to tax under the Income-tax Act, 1961 (hereinafter referred to as 'the Act') to include in the income of the assessee any amount calculated in accordance with section 23(2) of the Act in respect of house in the occupation of the assessee for the purposes of his own residence. The petitioner who is an assessee under the Act contended before the High Court of Madhya Pradesh in petition filed under Article 226 of the Constitution that inclusion of any amount under section 23(2) of the Act in his income was unconstitutional as there could be no income at all in such case accruing to him in the true sense of that term, the liability that was sought to be imposed under the Act in respect of his residential house was, therefore, in its pith and substance tax on building falling under Entry 49 of List II of the Seventh Schedule to the Constitution and hence Parliament could not impose the said liability under law m'ade in exercise of its legislative power under Entry S2 of List I of the Seventh Schedule to the Constitution which anthorised it only to levy taxes on income other than agricultural income. The High Court reject. ed the plea of the petitioner and dismissed the writ petition. The peti-tioner has now applied to this Court for special leave to appeal against the decision of the High Court.

When the petition came up for hearing on Febniary 5, !981 before us, we did not find that there wa• 'any ground to grant special leave to appeal but since the case was argued with some persistence, we decided to give reasons for rejecting the prayer of the petitioner which we proceed to give hereunder :

Section 4 of the Act lays down that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates income-tax at that rate or those rates shall be charged for 1hat yea~ in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year or previous years, as the case npy be, of every person. Section 14 of the Act mentions 'income from house property' as one of the heads of income liable to charge. Sections 22 to 27 of the Act relate specifically to the levy and computation of tax on income from house property. Section 22 provides that the annual value of property consisting of any buildings <Jr lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "income from house property". Section 23(2) (i) of the Act states that where the property consists of house in the occupation of the owner for the purposes of his own residence, the annual value of such house shall first be determined in the same manner as if the property had been let and further be reduced by one-half of the amount so determined or one thousand and eight hundred rupees, whichever is less. Section 23(2) (ii) of the Act provides that where the property consists of more than one house in the occupation of the owner for the purpooes of his owu residence, the provisions of clause (i) of section 23 (2) shall apply only in respect of one of such houses, which the assessee may, at his option, specify in that behalf. There are some other ancillary and incidental provisions in the Act dealing with the ·Computation of the annual value of such property with which we are not concerned in the present petition.

The argument urged on behalf of the petitioner is that as the petitioner is not deriving any monetary benefit by residing in his own b()use, no tax can be levied on him on the ground that he is deriving income from that house. It is contended that the word 'income' only means realisation of monetary benefit and that in the absence of any such realisation by the assessee, the inclusion of any amount by way of notional income under section 23 (2) of the Act in the chargeable income was impermissible, as it was outside the scope of Entry 82 ,of List I of the Seventh Schedule to the Constitution.

Entry 82 of List I of the Seventh Schedule to the Constitution <:mpowers Parliament to levy 'taxes on income other than agricultural income'. Now it is well-settled that the entries in the list in the

Seventh Schedule to the Constitution should not be read in narrow or restricted sense and each and every subject mentioned in the entries should be read as including within its scope all ancillary and subsidiary matters which can fairly and reasonably be comprehended in it. Words in the Constitution conferring legislative power should receive liberal construction and should be interpreted in their widest amplitude.

The expression 'income' according to Oxford Dictionary means 'a thing that comes in'. Income may also be defined as the gain derived from land, capital or labour or any two or more of them.

In Resch v. The Federal Commissioner of Taxation(') Dixon, J. of the High Court of Australia observed :

"The subject of the income tax has not been regarded as income in the restricted sense which contrasts gains of the nature of income with capital gains, or actual receipts with increases of assets or wealth. The subject has rather been regarded as the substantial gains of persons or enterprises considered over intervals of time and ascertained or estimated by standards appearing sufficiently just, but never-theless practical and sometimes concerned with avoidance or evasion n1ore than \Vith ac(:uracy or precision of estimation. To include the annual value of the taxpayer's residence owned by himself or used rent free and to fix it at five. percent of the capital value has not been considered to introduce new subject [Hardinge's Case (1917) 23 C.L.R. 119]. To treat part of the undistributed profits earned during the current year as part of the assessable income of the shareholder imports no new subject [Cornell's case (1920) 29 C.L.R. 39 cf. Kellow-Falkiner Pty. Ltd. v. Federal Commissioner of Taxation (1928) 34 A.L.R. 276], nor does it to substitute, in the case of foreign-controlled business, for taxable income ordinarily cakulated per-centage of gross receipts fixed by the discretionary judg-ment of the Commissioner [British Imperial Oil Cases (1925) 35 C.LR. 422; (1926) 38 C.L.R. 153]. (em-phasis supplied)

In Simon's Income Tax (Second Edition) Volume I, page 502 dealing with the question of computation of income under Schedule 'A' to the English Income-tax Act, which related to tax on the income attributable to property, it is stated as follows :-

(I) 66 C.L.R. 198 at p. 224

"It is now clear however, that

( l) income tax is but one tax imposed by the Income Tax Acts;

(2) incon1e tax is tax upon income; and

( 3) Sched. is but ono of five Schedules which provide varying methods of estimating the measure of that income from different sources for the purposes of charge to tax.

The theory behind Sched. is that the possession of an interest i11 property gives rise to incon1e, theory which is 1wt always horne out in fact. That there may be no income in fact is disregarded when the asse,,,ment is made. The actual ur hypothetical income has to be measured by some standard for the purposes of taxation and the standard pres-cribed is the annual value. This principle has been subject to adverse comment, but once the theory is appreciated, the method may be understood and any confusion of thought, created by the words of the charging section, dispelled. The use to which land is put docs not (apart from the excepted concerns mentioned in the proviso to para. l of Sch ed. above) prevent it from being assessed under Sched. A; but if trade which is not one of those excepted concerns is carried on property which is owned by the trader and is assessed under Sched. A, an allowance for the annual value is made in computing the profits of the trade''. (emphasis supplied)

In the Governors of the Rotunda Hospital, Dublin v. Coman(') which was case arising from Ireland, Lord Atkinson observed thus :

"It would, I think, be well to bear in mind that, to use Lord Macnaghten's words in his celebrated judgment in the London County Council v. The Attorney General ( 4 T.C. 265) (1901 A.C. 35), ''Income Tax .... "is tax on income". When the amount of the income to be taxed under the Act of 1842 and the Acts amending it comes to be measured, different standards are selected, and the words "profits or gains" are used in reference to all the Schedules In the Act of 1842 to describe the income, the subject of charge. The standard selected as measure of the amount of the income to be taxed under Schedule in respect of lands, tenements, hereditaments and heritages capable of occupation is the annual value. If the owner of such pro---(!) 7 T.C. 517 at 586-587

perties as these should be himself in occupation of them, it by no means follows that he will, in fact, derive from them an income equal to this annual value; but, as he has the use and enjoyment of the properties, it is, for the purposes of the Statute, presumed that he does derive from them an income equal in amount to this annual value, and the tax is accordingly, under Schedule A, assessed upon this presumed income". (emphasis supplied) .

In Navinchandra Mafatlal '. The Commis,sioner of Income-tax, Bombay City(!) while justifying the levy of income tax on capital gains under section 12-B of the Indian Income-tax Act, 1922 enacted by the Central Legislature in exercise of the power conferred under Entry No. 54 of List I of the Seventh Schedule to the Government of India Act, 1935 corresponding to Entry 82 of List I of the Seventh Schedule to the Constitution, Das, J. (as he then was) having observed at page 837 thus:

"What, then, is the ordinary, natural and grammatical meaning of the word "income"? According to the dictionary it means "a thing that comes in". (See Oxford Dictionary, Vol. V, page 162; Stroud, Vol. II, pages 14-16). In the United States of America and in Australia both of which also are English speaking countries the word "income" is understood in wide sense so as to include capital gain. Reference may be made to Eisner v. Macom-ber (1920) 252 U.S. 189; 64 L.Ed. 521, Merchants' Loan & Trust Co. v. Smietanka (1925) 255 U.S. 509; 65 L.Ed. 751, and United States v. Stewart (1940) 311 U.S. 60; 85 L. Ed. 40, and Resch. v. Federal Commissioner of Taxa-tion (1942) 66 C.L.R. 198. In each of these cases very wide meaning was ascribed to the word "income" as its natural meaning''

proceeded to hold at page 838:

"As already observed, the word should be given its widest connotation in view of the fact that it occurs in legislative head conferring legislative power".

In the above case this Court held that the word "income" in Entry No. 54 of List I of the Seventh Schedule to the Government of India Act, 1935 should be given meaning wider than the connotation given to it in the English Income-tax Act, 1918 under which income attributable to property was chargeable under Schedule 'A' thereof.

(I) [1955] S.C.R. 829.

Now coming to the specific question of the charge arising under section 23(2) of the Act it is already seen that in Australia the annual value of the tax payer's residence owned by himself or used rent free is taken for consideration for purposes of levy of income tax. In England too in the case of residence of the assessee, computation of income is made on the basis of presumed income. In D. M. Vakil v. Commissioner of Income-tax(') which was case ansmg under the Indian Income-tax Act, 1922, the High Court of Bombay held that under section 9 of that Act the tax was payable by an assessee in respect of the bona fide annual value of the property irres-pective of the question whether he received that value or not. The High Court of Gujarat has also !&ken the same view in Sakarlal Balabhai v. Income Tax Officer, Special Investigation Circle IV, Ahmed bad & nr. (')

There is one other circumstance which persuades us to take the view that computation of income for purposes of levy of income tax in accordance with section 23(2) of the Act is justifiable under Entry 82 of List I of the Seventh Schedule to the Constitution. It is to be borne in mind that the Government of India Act, 1935 was enacted when the Indian Income-tax Act, 1922 was in force. Section 9 of the Indian Income-tax Act, 1922 provided for levy of income tax on the qasis of the bona fide annual value of the property even when it was in the occupation of the assessee for the purposes of his own residence. While enacting entry 54 of list I of the Seventh Schedule to the Government of India Act, 1935, the British Parliament must have had in its view the Indian Income-tax Act, 1922 which was pro-bably the only law relating to tax on incomes in force in British India then. Similarly the Constituent Assembly while enacting Entry 82 of List I of the Seventh Schedule to the Constitution must have under-stood that the word 'income' used in that Entry would in any event include within its scope all items which came within the definition of income and were subjected to charge in the Indian Income-tax Act, 1922 which was in force at the time the Constitution was adopted. That the Constitution makers had the Indian Income-tax Act, 1922 in their view is borne out from Article 270 ( 1) of the Constitution which provides for collection of taxes on income by the Government of India and distribution thereof between the Union and the States, Article 366(1) which defines 'agricultural income' as agricultural income as defined for the purposes of the enactments relating to Indian Income--tax and Article 366(29) which defines 'tax on income' as including tax in the nature of an excess profits tax. In the circumstances ii

(1) 14 I.T.R. 298.

(2) 100 J.T.R. 97.

would not be wrong to construe the word 'income' in Entry 82 as including all items which were taxable under the contemporaneous law relating to tax on incomes which was in force at the time when the Constitution was enacted when as observed by this Court in the case of Navinchandra Mafatlal (supra) the word 'income' in Entry 82 is capable of wider meaning than what was given to it in the Indian Income-tax Act, 1922 or the English Act of 1918.

Even in its ordinary economic sense, the expression 'income' includes not merely what is received or what comes in hy exploiting the use of property but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. The tax levied under the Act is on the income (though computed in an artificial way) from house property in the above sense and not on house property. Entry 49 of List II of the Seventh Schedule to the Constitution is not, therefore, attracted. The levy in question squarely falls under Entry 82 of List I of the Seventh Schedule to the Constitution.

Hence we do not find any merit in the contentions urged on behalf of the petitioner.

For the foregoing reasons, the leave prayed for is refused and the petition is dismissed.

Petition dismissed.