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CIT V. Hariprasad Bhojnagarwala (2012) 342 ITR 69

This case is based upon the applicability of deductions under Section 23(2) of the Income Tax Act, 1961 on Hindu Undivided Family.

Background

The instant case (1) was a reference proceeding under the Income Tax Act, 1961 [hereinafter referred as ITA’] which was referred to the Full Bench of the Gujarat High Court, presided by Hon’ble Chief Justice Mr. S.J. Mukhopadhaya, Hon’ble Mr. Justice Akil Kureshi and Hon’ble Ms. Justice Harsha Devani. The said case was is fact first referred to the Division Bench of the Gujarat High Court [hereinafter referred as ‘HC’] but having convinced that the case involves a substantial question of law and deserves to be heard by a Full Bench, the Division Bench referred the matter to the Full Bench of the Gujarat HC. The question herein pertained to the applicability of deduction under Section 23(2) of the ITA (2) to a Hindu Undivided Family [hereinafter referred as HUF’]. 

Relevant Facts 

  1. The assessee in the present matter was an HUF which derived certain income from house property. Furthermore, at the time of filing of the Income Tax return the assessee made a claim of deduction under Section 23(2) of the ITA but the same was rejected by the Ld. Income Tax Assistant Commissioner who took a view that deduction under the said section can only be granted to an individual natural person. 
  2. Thereafter, the assessee preferred an appeal before the Ld. Commissioner of Income Tax [hereinafter referred as CIT’] but the Ld. CIT also rejected the claim of the assessee on the same grounds as applied by the Ld. Income Tax Assistant Commissioner. 
  3. In further appeal, the assessee approached the Hon’ble Income Tax Appellate Tribunal, which relying upon various precedents concluded that deduction under section 23(2) can also be availed by an HUF. 
  4. Accordingly, the instant case was referred to the Division Bench of the Gujarat HC under Section 256 of the ITA by the CIT, which further referred the matter to the Full Bench of the Gujarat HC. 

Issues Addressed

  • Whether the benefit of deduction under Section 23(2) of the ITA can be availed by an HUF?
  • Whether an HUF can be held to be a fictional entity?

Rules Applicable 

  1. Section 23 of the ITA
  2. Section 7 of the Wealth Tax Act, 1957 (3)
  3. Section 13 of the General Clauses Act, 1957 (4)
  4. Section 256 of the ITA

Analysis 

[Issue i] Whether the benefit of deduction under Section 23(2) of the ITA can be availed by an HUF?

It is submitted that for the purposes of claim of deduction under section 23(2) of the ITA, there are two essentials which shall be fulfilled by the assessee: 

  1. The assessee must be in self-occupation of the property; and
  2. The assessee must be a natural person. 

The entire facet of deduction under Section 23(2) is based on the central premise that the property of the assessee must be self-occupied and it must

not be used for purposes other than residence. Accordingly, the intent of the legislature is clear that it wants to provide the benefit of deduction from annual value of property only in cases where the use of the property is for residential purposes only. Reference can be made to the relevant provision of the ITA which states as follow:

“23. Annual value how determined. – 

(2) Where the property consists of a house or part of a house which 

(a) is in the occupation of the owner for the purposes of his own residence; or 

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, 

the annual value of such house or part of the house shall be taken to be nil.”

The use of the term owner in the aforesaid section of the ITA has been particularly a moot question and different HC(s) have expressed their opinions on the said term. For instance, the case of CIT v. Mohammad Tyamboo (5), wherein the Hon’ble Jammu and Kashmir HC held that the term owner under section 23(2) essentially refers to a natural person or in other words an individual and the benefit of deduction under the said section cannot accordingly be availed by a partnership firm. 

Similarly, in the case of CIT, Delhi v. Dewan Chand Dholan Dass (6), it was propounded by the Hon’ble Delhi HC that the nature of relief under Section 23(2) is available only to an assessable entity and not by a company or a partnership firm which constitute different individual assessable entities. 

For the purposes of availment of benefit under Section 23(2) of the ITA by an HUF reliance can also be placed upon the provision of section 7(4) of the Wealth Tax Act, 1957 which was similar in application and interpretation to the section 23(2) of the ITA. The Gujarat HC while interpreting the applicability of the said section on an HUF held that HUF can own as well as reside in a property and accordingly can avail the benefit of deduction under Section 7(4) of the Wealth Tax Act, 1957. (7)

Moreover, the provision of Section 13 of the General Clauses Act, 1897 also holds special importance for the purpose of delineating the scope of deduction under Section 23(2) of the ITA. It states that: 

“13. Gender and number: In all Central Acts and Regulations, unless there is anything repugnant in the subject or context, 

(1) words importing the masculine gender shall be taken to include females; and

(2) words in the singular shall include the plural, and vice versa.”

Keeping in view the aforesaid, it is submitted that the interpretation of the term owner under Section 23(2) of the ITA shall accordingly include owners for the purpose of claim of deduction made thereof and an HUF can also be brought within the ambit of the said section. 

[Issue II] Whether an HUF can be held to be a fictional entity?

It is submitted that an HUF from the jurisprudential point of view is essentially a group of individuals as distinct partnership firms or a company who come together in order to function as a group for common economic benefits. An HUF being a person for the purposes of ITA and headed by a Karta cannot be treated as a legal fiction in stricto sensu as it is essentially a group of individuals who either connected by blood or through some other means and accordingly can avail deduction under Section 23(2) of the ITA. 

Similar Case Law  

  1. Income Tax Officer v. Tarlock Singh and Sons (8)

The instant case was an appeal filed by the Revenue Department before the Income Tax Appellate Tribunal [hereinafter referred as ITAT’] under Section 253 of the ITA. The appeal concerned the question of law as to whether deduction under section 23(2) can be claimed by an HUF. The Hon’ble ITAT after hearing both the parties concluded that deduction under Section 23(2) can be availed by a natural person who can physically occupy a premise. Further, the ITAT also observed Karta who is the representative of an HUF is also a natural person who can reside in a premise and accordingly the benefit of deduction can also be availed by an  HUF and the words ‘in occupation of the owner for the purposes of his own residence’ also includes an HUF. 

Conclusion 

It is concluded that the approach followed by the Hon’ble Gujarat High Court in the instant matter is plausibly good in law as it protects the interests of an HUF and gives due regard to the intention of the legislature as to provide benefit of deduction under Section 23(2) to an HUF. A literal interpretation of the words ‘in occupation of the owner’ as used under Section 23(2) would however have led to a flawed conclusion to the detriment of an HUF for the availment of deduction in case of self-occupied property. 

Additionally, the reasoning of the court while taking into account the jurisprudence of the existence of HUF is another plausible aspect of the judgement as it clearly distinguishes an HUF from other entities such as a partnership firm and a company which are fictional entities and cannot be allowed to claim deduction under Section 23(2) of the ITA due to the want of the requirement of self-occupation as mandated by the legislature for the purposes of deduction under section 23(2) of the ITA.  

(1) In Re: Commissioner of Income Tax v. Hariprasad Bhojnagarwala, Appeal No. 174 of 1995 (Guj. HC).
(2) § 23(2), The Income Tax Act, No. 43 of 1961, India Code (1961).
(3)  § 7, The Wealth Tax Act, No. 27 of 1957, India Code (1957).
(4)  § 13, The General Clauses Act, No. 10 of 1897, India Code (1897).
(5) Commissioner of Income Tax v. Mohd. Amin Tyamboo, 125 ITR 375.
(6) Commissioner of Income Tax, Delhi v. Dewan Chand Dholan Dass, 132 ITR 790.
(7) Commissioner of Wealth Tax v. Ashok Raje Gaekwad, 276 ITR 54.
(8) Income Tax Officer v. Tarlock Singh & Sons, 1989 29 ITD 139 (Delhi).


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