A) ABSTRACT / HEADNOTE (150–250 words)

This case concerns the deductibility of municipal property tax and urban immoveable property tax under Section 9(1)(iv) of the Indian Income-tax Act, 1922. The Supreme Court examined whether these levies qualify as “annual charges not being capital charges” deductible when computing income from property. The appellant, The New Piecegoods Bazar Co. Ltd., sought deduction of municipal and urban property taxes from gross rental income. The Income Tax Officer disallowed most of these deductions. Appeals to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal failed. The Supreme Court reversed the High Court’s interpretation and held that both taxes were annual in character, statutory in nature, and created charges on property, and thus satisfied the conditions under Section 9(1)(iv).

 

The Court elaborated on the definitions of “capital charge” and “annual charge”, asserting that the former relates to charges created to secure discharge of capital liabilities, whereas the latter relates to recurring annual liabilities. Citing provisions from the City of Bombay Municipal Act, 1888 and Bombay Finance Act, 1932, the Court concluded that these taxes were legitimate deductions. The decision harmonized earlier conflicting interpretations and laid down essential clarifications regarding statutory deductions under the Income-tax Act.

Keywords: Income from property, Annual charge, Capital charge, Income-tax deductions, Municipal property tax, Urban immoveable property tax, Section 9(1)(iv), Supreme Court 1950, Income Tax Act 1922.

B) CASE DETAILS

i) Judgement Cause Title:
The New Piecegoods Bazar Co. Ltd., Bombay v. The Commissioner of Income-tax, Bombay

ii) Case Number:
Civil Appeal No. LXVI of 1949

iii) Judgement Date:
26th May, 1950

iv) Court:
Supreme Court of India

v) Quorum:
Justice Saiyid Fazl Ali, Justice Patanjali Sastri, Justice Mehr Chand Mahajan, and Justice B.K. Mukherjea

vi) Author:
Justice Mehr Chand Mahajan

vii) Citation:
The New Piecegoods Bazar Co. Ltd. v. Commissioner of Income-tax, Bombay, (1950) SCR 553

viii) Legal Provisions Involved:
Section 9(1)(iv) of the Indian Income-tax Act, 1922,
Section 212 of the City of Bombay Municipal Act, 1888,
Section 22 of the Bombay Finance Act, 1932

ix) Judgments overruled by the Case (if any):
No judgment overruled, but earlier decisions in Commissioner of Income-tax, Bombay v. Mahomedbhoy Rowji, I.L.R. 1943 Bom. 628, and Mamad Keyi v. Commissioner of Income-tax, Madras, I.L.R. 1944 Mad. 399 were distinguished and disapproved.

x) Case is Related to which Law Subjects:
Taxation Law, Income Tax Law, Property Law, Municipal Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This case revolved around the interpretation of Section 9(1)(iv) of the Indian Income-tax Act, 1922 which allowed certain deductions while computing income from property. The central question was whether taxes such as municipal property tax under the City of Bombay Municipal Act, 1888 and urban immoveable property tax under the Bombay Finance Act, 1932 qualify as deductible annual charges that are not capital in nature. Historically, courts had diverged on this interpretation. Earlier, the Bombay High Court in Commissioner of Income-tax v. Mahomedbhoy Rowji had held that such municipal taxes were capital charges and hence not deductible. This led to confusion and inconsistency.

The New Piecegoods Bazar Co. Ltd., being an investment company earning rental income from properties in Bombay, had claimed deduction of such taxes. These were disallowed by tax authorities. This led to a reference under Section 66 of the Income-tax Act to the Bombay High Court, which also ruled against the assessee. The matter was thus escalated to the Supreme Court, which had to decisively determine the correct legal meaning of “annual charge not being a capital charge”.

D) FACTS OF THE CASE

The appellant, The New Piecegoods Bazar Co. Ltd., is an investment company deriving rental income from properties located in Bombay. For the Assessment Year 1940-41, the Income Tax Officer (ITO) computed a net income of ₹6,21,764 under the head “property” after deducting standard expenses from gross rents.

During this assessment year, the assessee paid:

• • ₹1,22,675 as Municipal Property Tax under the City of Bombay Municipal Act, 1888

• • ₹32,760 as Urban Immovable Property Tax under the Bombay Finance Act, 1932

The company claimed these payments as deductions under Section 9 of the Indian Income-tax Act, 1922. However, the ITO only allowed ₹48,572 (pertaining to tenants’ burdens), disallowing the remaining portion. Appeals made to both the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were unsuccessful.

Two legal questions were referred to the Bombay High Court:

Whether municipal taxes paid were deductible under Section 9(1)(iv)

Whether urban immoveable property tax was deductible under Section 9(1)(iv) or Section 9(1)(v)

The High Court answered both questions in the negative, prompting the appeal to the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the municipal property tax qualifies as an “annual charge not being a capital charge” under Section 9(1)(iv)?

ii) Whether the urban immoveable property tax is similarly deductible under Section 9(1)(iv) or under Section 9(1)(v)?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that:

The appellant’s senior counsel, K.M. Munshi, argued that both taxes were annual in nature as they are assessed yearly based on the annual letting value of properties. He emphasized that the taxes were statutory obligations and recurrent, thus fulfilling the conditions of an “annual charge”.

It was also argued that the expression “capital charge” refers to obligations arising from capital liabilities, like securing repayment of borrowed capital. In contrast, property tax obligations arise annually by statute, and therefore are not capital charges.

Counsel stressed that Section 212 of the Bombay Municipal Act and Section 24(2)(b) of the Bombay Finance Act, 1932 explicitly create a first charge on property for the taxes. This legal charge satisfies the condition of the property being “subject to a charge.”

He also drew parallels to the principles enunciated in the Privy Council case Bijoy Singh Dudhuria v. Commissioner of Income-tax, Calcutta, 60 Cal. 1029, where mandatory statutory charges were considered not part of real income and thus deductible.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that:

M.C. Setalvad, the Attorney-General for India, argued that although the taxes were recurring, the liability to pay arose half-yearly, not annually. He contended that until a bill and notice of demand were issued, no charge existed. Therefore, such a liability was not an annual charge, nor could it be deducted under Section 9(1)(iv).

He further asserted that since the municipal laws created a charge on the property, it was more in the nature of a capital charge, being attached to the property itself, rather than being merely an annual outgoing.

Setalvad also argued that if Parliament had intended such deductions, it would have explicitly stated them, just like it did in Section 10 which deals with business deductions.