Bombay High Court
Commissioner Of Income-Tax
Decided on- 9 February, 1993
Income-tax Reference No 206 of 1978
Equivalent citations: 1993 204 ITR 43 Bom
Author: S S Manohar
Bench: S V Manohar, U Shah
Smt. Sujata Manohar, J. 1. The assessment year involved is 1969-70. The assessee carried on business as a building contractor. It had constructed more than 17 buildings for the Government and other authorities. In the year 1950, it was assessed to tax under the Excess Profits Tax Act and a tax of Rs. 25 lakhs was demanded from him in 1950. The assessee mortgaged certain immovable property on August 12, 1955, for Rs. 5 lakhs. Under the terms of the mortgage, compound interest at the rate of 6 3/4 per cent. was payable on the mortgage loan. A charge was also created on the property for the payment of compound interest. This loan of Rs. 5 lakhs was raised for meeting the excess profits tax liability.
2. Similarly, on May 16, 1962, the assessee created an equitable mortgage on his Ghotkopar property for securing a loan of Rs. 1,50,000. A charge was also created on this property for the payment of interest. This loan was also raised for discharging the above excess profits tax liability.
3. For the assessment the assessment year 1969-70, the assessee became liable to pay interested of Rs. 34,534 on the mortgage loan of Rs. 5 lakhs and Rs. 26,660 on the mortgage loan of Rs. 1,50,000. In the computation of its income from these properties, the assessee deducted the above total interest liability of Rs. 61,194. The deduction was denied to the assessee by the Income-tax Officer on the ground that section 24(1)(iii) under which the interest liability had been allowed to be deducted in the preceding years had been deleted with effect from April 1, 1969, by virtue of the Finance Act, 1968. As a result of the amendments made in section 24 with effect from April 1, 1969, under the Finance Act, 1968, the assessee could not claim deduction of interest liability from the property in question. The Income-tax Officer rejected the assessee’s claim for deduction under the amended section 24(1)(iv). The assessee appealed before the Appellate Assistant Commissioner or Income-tax who upheld the findings of the Income-tax Officer. In appeal before the Tribunal, however, the Tribunal allowed the assessee’s claim for deduction under the amended section 24(1)(iv) of the Income-tax Act, 1961. It held that to attract the application of this clause, three conditions were required to be satisfied, viz., (1) that the property was subject to an annual charge; (2) that the charge had not been voluntarily created by the assessee; and (3) that the charge was not a capital charge. It held these conditions to be satisfied. The Tribunal, in this connection, construed the term “voluntarily” as meaning “without consideration”.
4. From the decision of the Tribunal, the following questions referred to us under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue :
“Whether, on the facts and in the circumstances of the case, interest liability of Rs. 1,194 was a permissible deduction under section 24(1)(iv) of the Act ?”
5. A similar question came up for consideration before a Division Bench of this Court (to which one of us, Mrs. Manohar J., was a party) in the case of CIT v. Central Bank Executor and Trustee Co. Ltd.  203 ITR 666 (Income-tax Reference No. 138 of 1977). This was decided by a Division Bench of Mrs. Sujata Manohar and B. N. Srikrishna JJ., on October 23, 1992. The Division Bench has construed the provisions of the amended section 24(1)(iv) and has come to the conclusion that the phrase, “not being a charge created by the assessee voluntarily” has reference to the charge which comes into being by operation of law or by virtue of an order of the Court or by an Act of parties other than the assessee, such as when the assessee gets a property already subject to a charge. The term “voluntarily” (?) does not cover cases where either the charge is created by the assessee on account of financial necessity or in case where the charge is created “without consideration”, the latter being a misnomer. The judgment has taken account of the cases which are referred to in the order of the Tribunal also.
6. The ratio of this judgment applies directly to the present case. The assessee has undoubtedly created a charge on this property to meet his excess profits tax liability or a portion thereof but that does not make the charge involuntary. Hence, the provisions of section 24(1)(iv) are not attracted in the present case.
7. It was submitted by learned counsel for the respondent that the present case can be distinguished from the case considered in Income-tax Reference No. 138 of 1977 CIT v. Central Bank Executor and Trustee Co. Ltd.  203 ITR 666 (Bom), because, in the present case, both the charges in question have been created prior to the amendment of section 24 by the Finance Act, 1968. In the present case, under the old section 24(iii) where the property was subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge was liable to be deducted. The assessee has been allowed the benefit of such deduction in the previous assessment years. Hence, after the amendment of section 24 on April 1, 1969, also the assessee must be given the benefit of such deduction and, for the purpose of amended section 24(1)(iv), the charge which is created prior to the amendment should be considered as an involuntary charge. This submission, however, does not appeal to us. The question whether the charge was voluntary or involuntary will have to be decided with reference to the facts relating to the creation of such charge. If the charge is created voluntarily, it remains so, whether it is created before the amendment or after the amendment. If the benefit of the deduction is taken away as a result of the amendment, then from the date of the amendment, such a deduction cannot be allowed in future. The second contention of the assessee, therefore, that by not granting the deduction, retrospective operation is given to the amendment also has no substance.
8. The question, therefore, which is referred to us is answered in the negative and in favour of the Revenue. No order as to costs.