Brokerage not deductible in computing Income from house property

CA Suraj R. Agrawal

Brief of the Case:-

The brokerage paid to the third party has nothing to do with the rental income paid by the tenant for enjoying the property to the owner therefore brokerage cannot be said to be a charge that has been created in the property for enjoying the rights and at best it is only an application of income received/receivable from rent

Case Summary:-

Facts of the case:

• The assessee company is in the business of finance and leasing of premises.
• In the books of account the assessee had shown rental income of Rs.1,29,13,475/- on letting out of office premises at 93, 9th floor, 2 North Avenue at Maker Maxity, Bandra Kurla Complex to M/s. Dow Jones consulting India Pvt. Ltd.
• While working out the “House property income’’ the assessee had shown the annual value of the property at Rs.17,21,348/- after reducing an amount of Rs.1,11,92,127 being brokerage paid for procuring tenant.
• Thereafter, the assessee has claimed standard deduction of 30% u/s. 24 of the Act of Rs.5,16,404/- and, accordingly, the income from house property was shown at Rs.12,04,944/-.
• In response to the show cause notice to justify the claim of brokerage as allowable expenditure under sections 23/24, the assessee submitted that an amount of Rs.1,11,92,127/- being two months license compensation and 2% of the security deposit was paid as brokerage to M/s. C B Richard Ellies South Asia P. Ltd., for sourcing and securing a suitable licensee for its office.
• Assessing Officer did not agree with the contention of the assessee and held that as per the expressed provisions of section 23, the computation has to be done only in accordance with the said section and standard deduction is allowable u/s. 24.
• Accordingly, he disallowed the claim of brokerage paid by the assessee. Thus, the Assessing Officer computed the income from house property at Rs.90,39,432/- after giving standard deduction @30% u/s. 24.
• The learned CIT(A) confirmed the findings of the Assessing Officer on the same ground that such deduction of brokerage against income from house property has nowhere been specified either in section 23 or in section 24. Therefore, such a claim is contrary to the provisions of law.

Contentions of Appellant:

• Brokerage was paid by the assessee company for sourcing the licensee and letting out the premises. The payment of Rs.1,11,92,127/- was paid to C B Richard Ellies South Asia Pvt. Ltd. as profession fees/brokerage. Such a payment is directly related to the earning of rental income and, therefore, the same has to be deducted from the gross rent because section 23(1)(b) contemplates the actual rent received/receivable.
• in various decisions, the Tribunal has held that stamp duty charges on license agreement, maintenance charges paid to the housing society etc., are allowable within section 23 itself, on the same analogy, brokerage paid also be allowed.

Contention by Revenue: