Maintenance Charges for Amenities Under Separate Agreements Are Business Income: ITAT Delhi

Leon Realtors Pvt. Ltd. Vs ACIT (ITAT Delhi)

The ITAT Delhi disposed of cross appeals filed by the assessee and the Revenue for AYs 2015-16 and 2016-17 involving two principal issues: the head of income applicable to maintenance charges received from tenants and the allowability of deduction under Section 24(b) for interest on replacement loans.

On the first issue, the Tribunal noted that the assessee had entered into two independent agreements with its tenants—one for letting out the premises and another for providing maintenance services, amenities, car parking and other incidental facilities. The assessee had offered rental income under the head “Income from House Property” and maintenance receipts as “Business Income.” The Assessing Officer treated the maintenance charges as house property income, disallowed the related business expenditure, and the CIT(A) upheld that view. The Tribunal observed that the maintenance charges were separately identifiable under independent agreements and did not form part of a composite rental. Following the coordinate bench decision in LPR Company Pvt. Ltd. Vs. ACIT, it held that the maintenance charges were taxable as business income and directed the Assessing Officer to recompute the income accordingly. The issue relating to TDS credit was restored to the Assessing Officer for factual verification, while the challenge to initiation of penalty proceedings under Section 271(1)(c) was held to be premature.

In the Revenue’s appeals, the dispute concerned restriction of deduction under Section 24(b) on interest paid after replacement of earlier borrowings with fresh loans carrying higher interest rates. The Tribunal followed its earlier decisions in the assessee’s own case for AYs 2012-13 and 2013-14. It accepted the CIT(A)’s finding that the replacement loans and the related interest expenditure were relatable to the property, the amount utilized did not exceed the value of the asset, and the loan processing fees were proportionately claimed. Referring to CBDT Circular No. 28 dated 20.08.1969, the Tribunal held that borrowing a fresh loan to repay an earlier loan did not disentitle the assessee from deduction under Section 24(b). Accordingly, the Revenue’s appeals were dismissed. The Tribunal applied the same reasoning to AY 2016-17. The assessee’s appeals were partly allowed for statistical purposes, while the Revenue’s appeals were dismissed.

Cases Discussed

• LPR Company Pvt Ltd Vs. ACIT, ITA No. 2375/Del/2017 for AY 2012-13, dated 29.05.2023

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The appeal in ITA No.5316/Del/2025 for AY 2016-17, arises out of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Id. CIT(A), in short] dated 20.06.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 21.12.2018 by the Assessing Officer, ACIT, Circle-15(1), New Delhi (hereinafter referred to as ‘Id. AO’).

2. The appeal in ITA No.5315/Del/2025 for AY 2015-16, arises out of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Id. CIT(A), in short] dated 20.06.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 22.12.2017 by the Assessing Officer, ACIT, Circle-15(1), New Delhi (hereinafter referred to as ‘Id. AO’).

3. The appeal in ITA No.5383/Mum/2025 for AY 2015-16, arises out of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Id. CIT(A), in short] dated 20.06.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 22.12.2017 by the Assessing Officer, DCIT, Circle-13(1), New Delhi (hereinafter referred to as ‘Id. AO’).

4. The appeal in ITA No.5414/Mum/2025 for AY 2016-17, arises out of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Id. CIT(A), in short] dated 20.06.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 21.12.2018 by the Assessing Officer, ACIT, Circle-15(1), New Delhi (hereinafter referred to as ‘Id. AO’). Identical issues are involved in all these appeals and as these are cross appeals, they are taken up together and disposed of by this common order for the sake of convenience.

ITA No. 5315/De1/2025 for AY 2015-16 (assessee’s)

5. The ground No. 1 raised by the assessee is challenging the treatment of maintenance income received by the assessee as income from house property instead of income from business.

6. We have heard the rival submissions and perused the material available on record. The assessee company was incorporated on 15.02.2008 and engaged in renting of building/ premises and also into the business of providing various amenities/ services to the occupants/ tenants of the building. The assessee in the return of income has shown rental income of Rs. 18,44,14,006/- received from tenants under the head house property and maintenance service receipts of Rs. 2,99,15,524/- as income from business by categorizing the same as receipts on account of sale of services. Against this business income, the assessee also claimed certain deductions on account of business expenditure. Against the rental income shown under the head house property, the assessee claimed deduction u/s 24 of the Act as provided in the statute. The Id AO noted that assessee had entered two separate agreements for rental as well as for providing maintenance services. He observed that the maintenance charges received relate to the building given on rent and hence, the same cannot be taxed under the head income from business and instead the same also partakes the character of rental income liable to be taxed under the head income from house property. The Id AO accordingly treated the maintenance charges received from the tenants as income from house property and granted deduction only to the extent provided in Section 24 of the Act and disallowed the remaining business expenditure claimed by the assessee and completed the assessment. The Id AO also noted that this is a recurring issue and in earlier years also the same treatment was given to the assessee in the scrutiny assessment proceedings. The action of the Id AO was upheld by the Id CIT(A).

7. Before us, the Id AR submitted that even though maintenance charges received from tenants were taxed under the head income from business and consequential denial of business expenditure by the Id AO was done in earlier years, the assessee had not preferred any appeals against those assessments in earlier years in view of huge loss existing for the assessee and that it would not make any difference for the assessee by shifting the head of income. The Id AR also submitted that in AY 2023-24, the Id AO himself had accepted the split between the rental income and maintenance charges income and had accepted to the treatment of the assessee in the scrutiny assessment proceedings. The Id AR also placed on record the copy of the coordinate bench decision of Delhi Tribunal in the case of LPR Company Pvt Ltd Vs. ACIT in ITA No. 2375/Del/2017 for AY 2012-13 dated 29.05.2023 wherein, the similar issue was adjudicated in favour of the assessee. Per contra, the Id DR vehemently relied on the orders of the lower authorities by taking the consistent stand of the revenue.

8. At the outset, we find that assessee had entered into 2 different agreements with the tenants i.e. one for letting out of property and other for providing maintenance services. We find that the assessee is in the business of leasing of property and also providing the maintenance, amenities, car parking and other incidental and ancillary services. Bifurcation of rental income and maintenance charges is clearly and fairly determinable pursuant to the independent agreements entered into. This is not a case of composite rental collected by the assessee for providing all services under one roof to the tenants. We find that that the identical issue was subject matter of adjudication by the coordinate bench of this Tribunal as rightly relied upon by the Id AR before us in the case of LPR Company Pvt. Ltd (supra). The relevant operative portion of the said order together with its facts are reproduced hereunder:-

“4. Briefly, the facts relating to this issue are, the assessee is a resident corporate entity. As stated by the Assessing Officer, the source of income of the assessee is rental and other income received from letting out building owned by it. In course of assessment proceedings for the impugned assessment year, the Assessing Officer noticed that in the previous year relevant to assessment year under dispute, the assessee had offered rental income of Rs.73,21,536/- as income from house property. Whereas, the maintenance income of Rs.7,68,688/- received from the building let out has been treated as business income. The Assessing Officer was of the view that since, the rental income as well as the maintenance income was received by the assessee from the building let out, they cannot be given different treatment, only because, the assessee has received such income under two separate agreements. Thus, ultimately, he concluded that the maintenance income received by the assessee partakes the character of income from house property. Accordingly, the Assessing Officer included it as part of rental income and brought to tax as income from house property. 5. Before us, Id. Counsel for the assessee submitted that the assessee has entered into two separate agreements with the tenants, one for rental income and other for maintenance charges. He submitted, the maintenance charges cannot be treated as part of rental income since, they are for actual expenses incurred by the assessee for certain facilities provided to the tenant. In support of his contention, learned counsel for the assessee relied upon following decisions :

(i). M/s. Kirloskar Systems Ltd. vs. ACIT (ITAT, Bangalore Bench)(ITA Nos. 720 & 721/Bang/2011- order dated 29.11.2013).

(ii) CIT vs. Model Manufacturing Co. Pvt. Ltd. (1986) 159 ITR 270(Cal.)

(iii) CIT vs. Kanak Investments (Pvt) Ltd., (1974) 95 ITR 419 (Cal).

6. Learned departmental representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

7. We have considered rival submissions and perused the materials on record. It is observed, the assessee owns a property/building at 1-2 Aram Bagh, Community Centre, Panchkuian Road, New Delhi. It is observed, the first and second floor of the said building having super area of 2676 sq. ft. each have been leased out to M/s. Oriental Carbon & Chemicals Limited vide agreement executed on 17 December, 2007. On the very same day, the assessee has executed two separate agreements for the first and second floor of the same building towards maintenance and certain common facilities provided to the tenants such as lift from the main lobby to the leased out portion, uninterrupted power supply, provision for clean drinking water from water tank, access to staircase/landing, sufficient lighting arrangement, up-keeping the common area and common drainage, a generator set in running condition etc. For providing such facilities, the assessee received monthly service charges of Rs.26, 760/- for each floor. Thus, as can be seen from the aforesaid facts, the maintenance charges are no way connected to the rental income. Rather, they are for certain additional facilities provided to the tenants, which are unconnected to leasing out the tenanted premises. These facilities, even, could have been provided by a third party. Therefore, in our view, the maintenance charges has no connection with the rental income, hence, cannot be considered to be a part of rental income to treat it as income from house property. The decisions relied upon by the Id. Counsel for the assessee support this view. It has also been brought to our notice by the Id. Counsel for the assessee that this is the only year, in which, the Assessing Officer has assessed the maintenance income under the head ‘income from house property’ In view of the aforesaid, we hold that the maintenance income received by the assessee has to be treated as income from business. Since, the departmental authorities have not raised any doubt regarding expenses incurred against maintenance charges, the same has to be allowed. Accordingly, we decide the grounds in favour of the assessee.

8. In the result, appeal is allowed”

9. Respectfully following the same, we hold that the maintenance charges are to be taxed under the head income from business. The Id AO is directed to re-compute the total income accordingly.

10. Ground Nos. 2 to 6 raised by the assessee are consequential to our decision taken in Ground No. 1.

11. The Ground No. 7 is seeking credit of tax deducted at source of Rs. 1,07,51,324/-. This matter requires factual verification by the Id AO and accordingly, the Id AO is directed to verify whether the corresponding income is duly offered to tax by the assessee and then decide the grant of credit of TDS as per law.

12. Ground No. 8 is challenging the levy of interest u/s 2348 of the Act which is consequential in nature.

13. Ground No. 9 is challenging the initiation of penalty proceedings u/s 271(1)(c) of the Act which would be premature for adjudication at this stage and hence dismissed.

14. In the result, the appeal for AY 2015-16 is partly allowed for statistical purposes.

ITA No. 5383/2025 for AY 2015-16 (revenue’s appeal)

15. The only issue to be decided in this appeal is as to whether the Id CIT(A) was justified in deleting the disallowance of claim restricted to Rs. 11,26,43,978/- u/s 24(b) of the Act on account of interest in the facts and circumstances of the instant case.

16. We have heard the rival submissions and perused the material available on record. The Id AO in page 5 of the assessment order mentioned that assessee had acquired building in question entirely from borrowed funds. In AY 2011-12, the assessee had repaid these funds by taking fresh loans. Thereafter, the Id AO noted that the rate of interest of in fresh loans are more than that prevailing in earlier loans. Accordingly, the Id AO allowed interest u/s 24(b) of the Act only at the rate at which the original loans were taken. We find that this issue is no longer res integra in view of the decision of this Tribunal in assessee’s own case for AYs 2012-13 and 2013-14. We find that this Tribunal in AY 2013-14 in ITA No. 6155/Del/2017 dated 10.11.2023 had adjudicated the very same issue as under:-

“2. The brief facts of the case as mentioned in the order of the Ld. CIT(A) are that the Assessee company is engaged in the business of renting of immovable property and rendering of amenities and maintenance services. During the year, the Assessee earned rental income and maintenance charges from the same building. Return declaring loss of Rs.34,34,374/- was e-filed on 28/09/2013 for A.Y. 2013-14 respectively. The return was processed u/s 143(1) of the IT Act. The case was selected for scrutiny and notice u/s 143(2) was issued and duly served upon the assessee. The income was assessed at Rs.2,82,88,900/-, after re-computing income from house property by including income derived from maintenance services and limiting the deductions claimed u/s 24(a) and 24(b) of the Act as also limiting the interest expenditure allowable against ‘income from other sources’

3. Aggrieved by the assessment order dated 28/01/2016, the assessee preferred the appeal before the Ld. CIT(A), and the Ld. CIT(A) vide order dated 07/07/2017 partly allowed the appeal filed by the Assessee by deleting the addition of Rs.2,67,51,318/-.

4. Aggrieved by the order of the Ld. CIT(A) dated 07/07/2017 in deleting the addition made by the AO, the Department of Revenue is in appeal before us on the grounds mentioned above. The Ld. DR relied on the order of the AO and sought for allowing the appeal. The Ld. AR relied on the order of the Ld. CIT(A) and submitted that, borrowing new loan for purposes of repaying old loan and the claiming of interest paid on such second loan could also be allowed as deduction u/s 24(1)(4 of the Act, the interest paid on the loan claimed is thus per se allowable under the provisions of section 24(b) of the Act, therefore, submitted that the order of the Ld. CIT(A) requires no interference.

5. We have heard both the parties and perused the materials available on record. The Ld. AO while restricting the amount of deduction of interest claimed Under Section 24(b) of the Act Rs.11,26,43,978/- as against Rs.13,93,95,296/- claimed by the assessee observed as under:

“Deduction u/s 24(b) of the IT Act Further the assessee is claiming deduction u/s 24(b) of the IT Act, 1961 amounting to Rs.13,93,95,296/- on account of interest paid. From the perusal of the accounts it is seen that assessee has claimed interest expense of Rs. 16,54,25,141/- in its P&L Account. From the details filed it is not discernible that what portion of the interest paid pertains to the House Property in question because the assessee has used the borrowed funds for various activities but is claiming almost all of the interest u/s 24(b) of the IT Act, 1961.

The background of the case is that the assessee had acquired the building under question entirely from the borrowed funds. The funds were borrowed at the rate of 10% p.a. However, in the AY 2011-12, the assessee company repaid these funds by taking fresh loans ranging from @10% to 16% rate of interest. It is not clearly established as to which money is attributable for acquisition of the property and which money to the other activities.

The opening value of the property is 112,64,39,775/- and the assessee has claimed interest expenses of Rs. 13,93,95,296/- which comes to 12.37%. the original loan taken for the property, was at the rate of 10% which was repaid by taking loan at a higher rate. It is not out of place to mention here that in the assessment for the A.Y. 2011-2012 and 2012-13, the Assessing Officer has restricted the deduction u/s 24(b) to 10 % of the value of the property, primarily for the reason that the assessee could not establish the nexus of the funds borrowed for the second time to the property in question. The matter is sub-judiced with the CIT (A). Keeping all the above facts in view the assessee is allowed deduction u/ 24(b) to the extent of Rs. 11,26,43,978/-.

6. The Ld. CIT(A) while deleting the addition held as under:

“3.8.1 Thus, in the preceding AY, it was seen that loans totaling Rs. 113 cr. had been utilized in the gross value of building (excluding depreciation) totaling Rs. 131.48 cr. During the assessment year 2012-13 as per the chart furnished before the undersigned the appellant has claimed interest cost of Rs. 19.61 crores u/s 24(b) on loans totaling Rs. 114.34 cr. Out of the total loan of Rs. 139.70 crores utilized during the year the appellant has claimed the pro rata interest of Rs. 19.61 crores on the loan of Rs. 114.34 crores utilized towards the impugned house property, on the basis of percentage of loan utilized for house property out of total borrowings which comes to 81.85%. As already discussed in the earlier appellate order, in the present case also, all the details were filed before the AO. However, it seems that the A.O. has chosen to ignore these details and to comment upon the nexus sought to be established by stating that the appellant has not been able to establish that the loans on which interest have been paid, were attributable for acquisition of property. From the perusal of the balance sheet as on 31.03.2012 in addition to the written down value of the impugned property after claim of depreciation, the appellant has included the work in progress of Rs. 14.89 crores. In the value of the property. The claim of interest is on Rs. 114.34 crores and hence it cannot be called as excessive or unreasonable. The breakup of Interest paid is Rs. 18,10,67,510/- paid to banks & NBFCs/others & loan processing fees categorized as “Other Borrowing Costs” of Rs. 6,78,29,546/- for structure fee, loan processing fee and advisory fee. The details of the Interest claimed and allowed filed before the undersigned are as under:

3.8.2 During the year the loans taken in the earlier years of Rs. 50 crores from Religare Finvest has been repaid by new loan from ANR Securities on 15.04.2011 and on sanction of the loan of Rs. 139 crores from the Standard Chartered Bank in May, 2011, the loan account of ANR Securities has been repaid. It is understood that following foreclosure of the loan account of Standard Chartered Bank the outstanding loan of Rs. 55 crores of SCB was replaced by a loan from Today Holding on 13.05.2011 and replaced by the sanction and drawal of loan of Rs. 139 crores from the Standard Chartered Bank on 18.05.2011. It is further understood that the SCB loan totaling Rs. 74.70 crores was downsold to IDFC on 29.07.2011 and continued in the balance sheet till the end of the subsequent FY ending 31.03.2013. Undoubtedly, there have been many loan transactions, by way of replacement of loans taken with new loans, but nowhere it is seen that total Interest cost allocated or the loan amount utilized is more than the gross value of asset standing in the balance sheet. The loan amounts have been received and repaid to the appellant’s bank accounts In Standard Chartered Bank and HDFC Bank and are entirely relatable. The cost of borrowing that has been claimed has been restricted to Rs. 114.34 crores that has been actually utilized in the building as well as interior and other installations. Moreover, during the year the appellant has incurred loan processing fees of Rs. 6.87 crores as per details mentioned in the preceding para. It appears that these fees have been paid to Standard Chartered Bank in respect of a loan availed of by a syndicate of some of the group companies such as Sharan Hospitality P. Ltd, Pawan Impex P. Ltd., SI/IIT Software P. Ltd., GYS Real Estates P. Ltd. and Payne Realtors P. Ltd. and it is noted that the claim out of Rs. 6.78 crores under house property income has been restricted and claimed 081.85% Rs. 5.55 crores. Notably, even as per, the Board’s circular no. 28F.No.8/8/69-1T(A-1)], dated 20.08.1969, there is no restriction on borrowing new loan for purposes of repaying old loan and the claim of interest paid on such second loan could also be allowed as deduction u/s 24(1)(4 The interest paid on the loan claimed is thus per se allowable under the provisions of the present provisions of section 24(b) of the 1.T Act. Similar facts obtain for AY 2013-14 wherein interest has been paid to Standard Chartered Bank, IDFC Bank Ltd. towards the building as well as interior work. Thus, as per the preceding discussion, it is held that the interest claimed in both the years u/s 24(b) is fully allowable and is not to be restricted. Ground no. 4 for A.Y. 2012-13 & Ground no. 2 for A.Y. 2013-14 are allowed.”

7. The Ld. CIT(A) observed that there have been many loan transactions, by way of replacement of loans taken with new loans, but nowhere it is seen that total interest cost allocated or the loan amount utilized is more than the gross value of asset standing in the balance sheet. The loans amount have been received and repaid to the Assessee’s bank accounts in Standard Chartered Bank and HDFC Bank and are entirely found to be relatable. The cost of borrowing that has been claimed has been restricted to Rs.114.34 crores that has been found to be actually utilized in the building as well as interior and other installations and during the year the Assessee has incurred loan processing fees of Rs.6.78 crores, the Ld. CIT(A) has also found that the fees have been paid to Standard Chartered Bank in respect of a loan availed of by a syndicate of some of the group companies and it has noted that the claim out of Rs.6.78 crores under house property income has been restricted and claimed @81.85 @5.55 crores. Considering the fact that Board’s Circular No.28F.No.8/8/69-1T(A-I)], dated 20/08/1969, there is no restriction on borrowing new loan for the purposes of repaying old loan and the claim of interest paid on such second loan cold also be allowable as deduction u/s 24(1)(vi). Therefore, in our considered opinion, the Ld. CIT(A) has committed no error in deleting the addition made by the AO. Accordingly, grounds of appeal of the Revenue are dismissed as devoid of merit.

8. In the result, the appeal filed by the Revenue is dismissed.”

17. Respectfully following the same, grounds raised by the revenue are dismissed.

18. Grounds raised by the assessee as well as by the revenue for AY 2016­17 are exactly identical with AY 2015-16 and hence, the decision rendered by us hereinabove for AY 2015-16 in the cross appeals, shall apply mutatis mutandis for cross appeals in AY 2016-17 also except with variance in figures.

19. In the result, both the appeals of the assessee are partly allowed for statistical purposes and both the appeals of the revenue are dismissed.

Order pronounced in the open court on 29/06/2026.