Holding

The levy under section 23(2) is a tax on income from house property and falls within Entry 82 of List I, making it constitutionally valid.

Summary

Bhagwan Dass Jain, an assessee under the Income‑Tax Act, 1961, challenged the inclusion of a notional amount under section 23(2) for his self‑occupied house, arguing that no real income was derived and that the levy was in substance a tax on the building falling under Entry 49 of List II, which Parliament could not impose under its power under Entry 82 of List I. The Madhya Pradesh High Court dismissed the writ petition. On Special Leave, the Supreme Court held that the tax is levied on income (though computed artificially) from house property, that ‘income’ includes notional gains and savings from self‑use, and that such tax squarely falls within the constitutional power conferred by Entry 82 of List I. Consequently, the petition was dismissed.

Issues considered

The validity of including a notional income under s.23(2) of the Income‑Tax Act for a self‑occupied house within the meaning of ‘income’ under Entry 82 of List I of the Seventh Schedule.
Whether the tax on a self‑occupied house is a tax on the building (Entry 49, List II) and thus beyond Parliament’s legislative competence.
The proper construction of the term ‘income’ in the constitutional context.
The scope of legislative entries in the Seventh Schedule – whether they should be given a liberal or narrow interpretation.

Legislation cited

Government of India Act, 1935
Income Tax Act, 1922
Income Tax Act, 1961s. 14, s. 22, s. 23(2)(i), s. 23(2)(ii), s. 4

Subjects

income taxself‑occupied housesection 23(2)constitutional lawSeventh ScheduleEntry 82 List IEntry 49 List IIdefinition of incomeliberal construction

Judgment

808

A BHAGWAN DASS JAIN
v.
UNION OF INDIA
February 11, 1981
B
[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

c
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 a house in the occupation of the owner for the
purposes of his residence, the annual value of such house shall first be deter-
D 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.
E
The petitioner, an assessee under the Act, contended before the High Court
in a 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 a case accruing to him in a 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 a tax
F 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
a 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.
G 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
H scope of Entry 82 of List I of the Seventh Schedule to the Constitution.

Dismissing the Special Leave Petition,
BHAGWANDASS V. UNION 809

HELD ; 1. The tax levied under the Income-tax Act is on the income A
~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 B
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 a 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 C
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 D
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
E
(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 a
tax in the nature of excess profits tax. In the circumstance'> it would not be F
\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 a wider meaning than \Vhat was given to it in the Indian Income-tax Act. G
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 a residence of the assessee, computation
of income i5 on the basi<> of presumed income. [815 A]

v. The Fcd('r{lf Co111111issioner of Taxation, 66 C.L.R. 198 at p. 224
H
• Rcscl1

• and Gu1·c1·11ors of th1? Rotunda Hospital Dublin v. Conzan (7 T.C. 517 at 586·
587) Simon's Income tax (second Edn.) Vol. I p. 502 referred to.
810 SUPREME COURT REPORTS (1981] 2 S.C.R,

A 6. It is we11-settled that the entries in the Lists in the Seventh Schedule to
the Constitution should not be read in a 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 a liberal construction and should be interpreted in their widest
amplitude. [811 H-812 BJ
B
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.
c 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
D 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 a house in the occupation of
the assessee for the purposes of his own residence. The petitioner who
E is an assessee under the Act contended before the High Court of Madhya
Pradesh in a 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 a 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
F was, therefore, in its pith and substance a 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 a 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.
G 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
H 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 :
BHAGWANDASS v. UNION (Venkataramiah, J.) 811

A
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 B
'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 c
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 a 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 D
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
E
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.

--
F
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 G
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 ff
• <:mpowers Parliament to levy 'taxes on income other than agricultural
income'. Now it is well-settled that the entries in the list in the
812 SUPREME COURT REPORTS [1981] 2 S.C.R.

A Seventh Schedule to the Constitution should not be read in a 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 a liberal
construction and should be interpreted in their widest amplitude.
B
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.

C 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
D 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
E
owned by himself or used rent free and to fix it at five.
percent of the capital value has not been considered to
introduce a 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
F 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 a foreign-controlled
business, for taxable income ordinarily cakulated a per-
centage of gross receipts fixed by the discretionary judg-
G 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
H '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
BHAGWANDASS V, UNION (Venkataramiah, J.) 813

- "It is now clear however, that A
( l) income tax is but one tax imposed by the Income Tax
Acts;
(2) incon1e tax is a tax upon income; and
( 3) Sched. A is but ono of five Schedules which provide
varying methods of estimating the measure of that n
..' income from different sources for the purposes of
charge to tax.
The theory behind Sched. A is that the possession of an
interest i11 property gives rise to incon1e, a 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 c
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, D
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. A above) prevent it from being assessed under
Sched. A; but if a trade which is not one of those excepted
concerns is carried on property which is owned by the trader E
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 a case arising from Ireland, Lord Atkinson observed thus :
p
"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 a tax on
income". When the amount of the income to be taxed
under the Act of 1842 and the Acts amending it comes to
G
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 a measure of the amount
of the income to be taxed under Schedule A in respect of
lands, tenements, hereditaments and heritages capable of H
• occupation is the annual value. If the owner of such pro-
--(!) 7 T.C. 517 at 586-587
A
(J 1 4_ SUPREME COURT REPORTS [1981] 2 S.C.R.

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
B 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
c 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
D
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
E "income" is understood in a wide sense so as to include a
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-
F 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
G widest connotation in view of the fact that it occurs in a
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 a meaning wider than the connotation
H 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.
'

BHAGWANDASS v. UNION (Venkataramiah, J.) 815

Now coming to the specific question of the charge arising under A
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 a 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 a case ansmg n
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, c
Ahmedabad & A 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 D
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 E
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-
F
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 G
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
a tax in the nature of an excess profits tax. In the circumstances ii B
.. • (1) 14 I.T.R. 298.
(2) 100 J.T.R. 97.
816 SUPREME COURT REPORTS (1981] 2 S.C.R.

A 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 a wider meaning than what was given to it in the
B 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 a property but also what one saves by using it oneself. That
which can be converted into income can be reasonably regarded as
C 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.
D
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.

N.V.K. Petition dismissed.

•
..