While calculating annual rental value for Income from House Property, expenses like brokerage, electricity expenses, legal expenses and bank charges would not be allowed as permissible expenditures as these expenses are not covered under sections 23 and 24 of Income Tax Act, 1961 as permissible expenditure.
Full Text of the ITAT Order is as follows:-
This is an appeal filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order Commissioner (Appeals) – 23, Mumbai and arises out of assessment made under section 143(3) of the Income Tax Act, 1961 (the ‘Act’).
2. The grounds of appeal filed by the assessee read as under :–
1. The learned Commissioner (Appeals) has grossly erred in confirming the dis allowance of brokerage of Rs. 5,00,565 from the annual letting value of the let out property at Maker Chamber, VI, Nariman Point.
2. The learned Commissioner (Appeals) has grossly erred in confirming the dis allowance of electricity expenses of Rs. 27,228 from the annual letting value of the let out property of Dada Manzil.
3. The learned Commissioner (Appeals) has grossly erred in confirming the dis allowance of legal and professional expenses of Rs. 1,25,000 from the annual letting value of the let out property of Dada Manzil.
4. The learned Commissioner (Appeals) has grossly erred in confirming the disallowance of bank charges of Rs. 100 from the annual letting value of the let out property of Dada Manzil.
5. The learned Commissioner (Appeals) has erred in not considering the ground of the assessee in respect of interest income which has been wrongly taken as Rs. 7,89,198 instead of Rs. 2,71,591.
6. We begin with ground number 1 to 4 of the appeal as they address a common issue. Briefly stated the facts are that the assessee filed his return of income for the assessment year 2009-10 on 19-8-2009 declaring total income of Rs. 64,11,000. The assessee has shown income from house property and other sources. The assessing officer (AO) on perusal of the computation of income found that the assessee has claimed the following expenditures as allowable deductions in respect of the income from the respective house properties —
|A.||35 Maker Chamber VI||Brokerage paid||Rs. 5,00,565|
|B.||Gitanjali||Society outgoings||Rs. 1,25,070|
|C.||37Maker Chamber VI||Society outgoings||Rs. 44,086|
|D.||Dada Manzil||Electricity expense||Rs. 27,228|
|Legal & Prof.||Rs. 1,25,000|
|Bank Charges||Rs. 100|
3.1 The assessing officer came to a finding that none of the above expenses appear as allowable as the Act has explicitly mentioned that while calculating the income from house property, only certain allowable deductions are allowed under section 23 and 24. In view of the above, the assessing officer disallowed the claim of the assessee of the above expenses and recomputed the income from house property shown by the assessee
4. The assessee preferred an appeal against the order of the assessing officer before the learned Commissioner (Appeals). We find that the learned Commissioner (Appeals) followed the order of the ITAT in the case of Sharmila Tagore v. Jt. CIT [IT Appeal No. 5705 (Mum.) of 2000, dt. 14-6-2004] and allowed the claim of maintenance charges paid by the assessee to the Society. However, in view of the specific provisions of the Act, the learned Commissioner (Appeals) disallowed the claim of the assessee of brokerage expenses, legal and professional fees, bank charges and electricity charges.
5. Before us, the learned counsel of the assessee submits that brokerage expenses, legal and professional fees, bank charges and electricity charges were necessarily required to be incurred for the enjoyment/use of the relevant property by the tenant and therefore, the annual value of the property should be taken after reducing such expenses which are directly attributed to the earning of rental income. It is further stated that in the assessee’s own case for the assessment year 2001-02 and 2002-03, the learned Commissioner (Appeals) has allowed the above expenses. Hence, once the expenses are allowed by the learned Commissioner (Appeals) in the earlier years, dis allowance in the subsequent year is not warranted. Reliance is placed by him on the decisions in the case of J.B. Patel &Co. v. Dy. CIT (Asst.) (2009) 118 ITD 556 (Ahd.), ITO v. Gopichand P. Godhwani (2005) 1 SOT 374 (Mum), Sharmila Tagore (supra), CIT v. R.J. Wood (P.) Ltd. (2011) 334 ITR 358 (Del.), Saif Ali Khan Mansurali v. Asst. CIT [IT Appeal No. 1091 (MUM.) of 2009, dt. 23-9-2011], Bombay Oil Industries Ltd. v. Dy. CIT (2002) 82 ITD 626 (Mum.), Neelam Cable Mfg. Co. v. Asstt. CIT (1997) 63 ITD 1 (Delhi), Lek Raj Channa v. ITO (1990) 37 TTJ 297 (Delhi), Blue Mellow Investment & Finance (P) Ltd. [IT Appeal No. 175 (Bom) 1993, dt. 6-5-1993]. During the course of clarification on 10-3-2017, the attention of the learned counsel was drawn inter alia to the judgment of the Honorable Delhi High Court in CIT v. H.G. Gupta & Sons (1984) 149 ITR 253. The learned counsel of the assessee filed a paper book on 24-3-2017 placing reliance on the order of the Tribunal in Sir Sobha Singh & Sons (P) Ltd. v. IAC (1996) 55 TTJ 699 (Delhi); Suman Didwania v. ACIT [IT Appeal No. 5805/Mum/2010] TAT ‘H’ Bench-Mumbai; Asstt. CIT v. Mohanlal Rupesh Kumar [IT Appeal No. 70 (GAU.) of 1993, dt. 25-8-2000]; Asstt. CIT v. Sunil Kumar Agarwal [ITA No. 641/LUCK./2010, dt. 8-2-2011]; Varma Family Trust v. Sixth ITO (1984) 7 ITD 392 (Bom.) and Realty Finance & Leasing (P) Ltd. v. ITO (2006) 5 SOT 348 (Mum.).
6. The learned Department Representative submits that the Act clearly mentions that while calculating the income from house property, only certain allowable deductions are to be allowed under section 23 and 24 of the Act. What specific deductions are to be allowed in computing the income under the head income from house property have been categorically and unequivocally specified in the Act. Hence, no deduction of expenses other than what is specified in the Act can be allowed in computing the income from house property. She supports the order of the learned Commissioner (Appeals).
7. We have heard the rival submissions and perused the relevant material on record. The income from a let out house property is determined as under :–
Gross annual value
Less : Municipal taxes
Net annual value
Less: Deduction under section 24
— Standard deduction
— Interest on borrowed capital
Income from house property
Gross annual value is determined as follows :–
Step 1 — Find out reasonable expected rent of the property
Step 2 — Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy
Step 3 — Find out which one is higher: amount computed in Step 1 or Step 2
Step 4 — Find out loss because of vacancy
Step 5 — Step 3 minus Step 4 is gross annual value
We find that from the gross annual value, municipal taxes (including service taxes) levied by any local authority in respect of the house property are deducted. Municipal taxes are deductible only if (a) these taxes are borne by the owner, and (b) are actually paid by him during the previous year. The remaining amount left after deduction of municipal taxes is net annual value. As per provisions of section 24, the following two deductions are available :–
(a) Standard deduction
(b) Interest on borrowed capital
The list of allowance of section 24 is exhaustive. In other words, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of lift man etc.
7.1 Now we turn to the decisions relied on by the learned counsel of the assessee.
In J.B. Patel & Co. (supra), the issue was deduction from income from house property under section 24 read with section 23 of the Act. The assessment year was 1993-94. For the relevant assessment year, while computing income from house property, the assessee claimed deductions in respect of salaries paid to pump man, sweeper and lift man and also electricity charges for pump motor and common passage. The revenue authorities rejected the assessee’s claim. The Tribunal held that though the assessee, being entitled only to deductions in respect of expenditure in computation of income under the head ”income from house property” only in terms of provisions of Act, would not be entitled to impugned deductions, yet annual value of its house property be assumed at reduced value i.e. after deducting impugned amounts (from the rental) being, only in relation to expenditure required to be necessarily incurred for enjoyment/use of relevant property.
In Gopichand P. Godhwani (supra), the issue was determination of annual value of income from house property under section 23 of the Act. The assessment years were 1997-98 to 1998-99. As per rent agreement, in respect of certain premises, the assessee was to receive rent excluding water charges and had to bear all taxes, cesses and outgoings and lessee had to bear any further increase thereon. Further the assessee had to provide reserve parking space against monthly wages. The assessing officer, while computing income of assessee from house property, disallowed expenses on account of car parking, water charges and municipal and other charges paid by lessee and made addition. The Tribunal held that in view of section 23(1)(b), if outgoings were liabilities of assessee, same should be excluded from asses sable income as net amount only could be considered which was received and was receivable by the assessee. The matter was remanded to the assessing officer to determine whether outgoings claimed were assessee’s liability against rental income.
In Sharmila Tagore (supra), the Tribunal held that maintenance charges paid to housing society have to be deducted even while arriving at annual letting value of property under section 23. Also it held that non-occupancy charges levied by housing society will have to be considered under section 23 even while arriving at estimate of annual letting value of the property.
R.J. Wood (P) Ltd. (supra) is discussed at para 7.3 infra.
In Bombay Oil Industries Ltd. (supra), the issue before the Tribunal was capital gains and tax planning. This is not so in the instant case.
In Neelam Cable Mfg. Co. (supra), the Tribunal held that the amount of security service charges claimed by the assessee was deductable from gross rent received while computing annual value under section 23. Also it held that in view of proviso to section 23, entire amount of house tax actually paid by the assessee in year under consideration should be allowed as deduction.
In Lekh Raj Channa (supra), the Tribunal has held in respect of collection charges that the assessee can claim only that part of the expenditure which is referable to collection; other expenses on security and services to tenants can be deducted from ALV.
The learned counsel of the assessee has not filed a copy of the unreported order in Saif Ali Khan (supra) and Blue Mellow Investment & Finance (P) Ltd. (supra). Therefore, we are not in a position to analyse the said decisions.
In Sir Sobha Singh & Sons (P) Ltd. (supra), for the assessment year 1985-86 the assessee claimed deduction of Rs. 74,372 on account of salaries paid to watchman, sweepers, gardeners and pump operators and one-third of manager’s salary of Rs. 1,880 while computing the income under the head ‘Income from house property’. The assessee submitted before the Commissioner (Appeals) that while computing the income for the assessment years 1983-84 and 1984-85 the said deductions had been allowed as was evident from the fact that the property income had been taken as declared by the assessee. The Commissioner (Appeals) accepted the assessee’s claim. On further appeal, the Tribunal held though under the existing provisions relating to computation of income from house property, the aforesaid deductions were not allowable, yet considering the past history of the assessee and the fact that the said deductions had been allowed to the assessee right upto the assessment year 1984-85 and with a view to maintain consistency in the case of the assessee, the deductions had to be allowed to the assessee for the aforesaid services and amenities which were purely ancillary to the letting out of the buildings.
In Suman Didwania (supra), for the assessment year 2006-07 the assessee had declared income from house property and claimed deduction of the maintenance charges from the rent received of Rs. 19,25,000 which was claimed to have been paid by the assessee to the said society. The assessee stated that society charges are for NOC charges and maintenance charges over and above ‘municipal taxes’ and hence same are deductable. The Tribunal followed the decision in the case of Sharmila Tagore (supra), and allowed the appeal of the assessee.
In Mohanlal Rupesh Kumar (supra), the assessee’s claim for deduction of depreciation and electrical charges from income from house property for the assessment year 1989-90 was disallowed by the assessing officer on the ground that there was no provision for allowing the same. On appeal, the Commissioner (Appeals) directed the assessing officer to allow the claim as allowed in the past. On further appeal, the Tribunal held that in view of legal position and facts of instant case, gross rental income was required to be split into components of rent for building and rent for furniture, fixtures and additional facilities provided to tenant and while former would be asses sable as income from house property from which no deduction on account of depreciation on building could be allowed, latter would be asses sable as income from other sources and all outgoings such as electrical charges and depreciation of furniture and fixtures would be allowable there from.
In Sunil Kumar Agarwal (supra), the assessee had purchased commercial space in a society which had been let out to a company. The agreement with the tenant stipulated that the property tax and the maintenance charges payable to the society would be borne by the owner as the same was duly compensated in the gross rent. In his return of income, the assessee had shown gross rent and claimed deduction on account of charges paid to the society for maintenance. The assessing officer disallowed the claim holding that 30 per cent deduction allowed under section 24 takes care of such expenses. On appeal, the Commissioner (Appeals) deleted the addition. The Tribunal held that “the assessee was paying the charges to the society for the common area amenities which was deductible from the gross rent received by the assessee. The charges paid to the society by the assessee were not covered in the allowable deduction as enumerated under section 24 since the gross rent received by the assessee also included the society charges which were to be paid by the assessee. Therefore, the annual value of the actual rent received by the owner is to be determined as per the provisions of section 23. As such the deduction on account of charges paid to the society for availing of the facilities of generator, lift, lighting, common area sweeping etc., was allowable from the gross rent.”
In Varma Family Trust (supra), the assessee, a private discretionary trust, leased out its house property along with furniture for a period of 9½ years and paid Rs. 35,743 as stamp charges and legal fees for drawing up the lease deed. While computing the annual value under section 23(1)(b) on the basis of actual rent as per lease deed, the ITO rejected the assessee’s claim to deduct this expenditure from the rent for purposes of determining annual letting value. The AAC also rejected the claim on the ground that the expenditure was of a capital nature. In second appeal, the assessee contended that what was taxable was ‘real’ income after deduction of expenses, whereas the revenue contended that ‘income from house property‘ was a notional computation and did not permit of any deductions other than those listed in sections 23 and 24. The Tribunal held that ‘in computing annual value under rental method, outgoings like stamp charges and legal fees paid by owner for drawing up lease deed are deductible from actual rent fixed.’
In Realty Finance & Leasing (P) Ltd. (supra), for the assessment year 1999-2000, the assessing officer disallowed the society charges on the ground that the said expenses were not allowable under section 24 out of the rent received by the assessee. On appeal, Commissioner (Appeals) upheld the assessing officer’s view. The Tribunal held that “it was an admitted fact that the gross rent receipt also included the society charges which were to be paid by the assessee. Therefore, while computing the annual value the amount of rent which actually went into the hands of the owner in respect of leased property should be taken into consideration. As per the provisions of section 23, the annual value of property is to be determined on the basis of actual rent received by the owner.”
7.2 It is a settled law that the doctrine of res judicata or estoppel by record does not apply to assessing offier’s decisions. A finding or decision of the income tax authorities in one year may be departed from in a subsequent year. It has been held so in New Jehangir Vakil Mills Co. Ltd. v. CIT (1963) 49 ITR 137 (SC) and Sanakarlinga v. CIT 4 ITC 226 (FB). Therefore we are not addressing to the decisions relied on by the learned counsel of the assessee that consistency should be made.
7.3 The learned counsel of the assessee has relied on the orders of the Tribunal as discussed at para para 7.1 here-in-above. There is only one judgment of the High Court he has relied on i.e. R.J. Wood (P) Ltd. (supra). In that case, the assessee had leased out its premises to five tenants. Lease agreements were entered into in this behalf wherein rent to be received by the assessee from those tenants was specified. The tenancies became operative with effect from October, 1992. However, dispute arose about payment of the said rent. Said premises were in a multi-storey building and maintenance charges were payable by the occupier to the agency/builder maintaining the building. The tenants claimed that the rent payable by them to the assessee included maintenance charges and, therefore, it was the obligation of the assessee to pay the maintenance charges. The assessee, on the other hand, wanted these tenants to pay the maintenance charges exclusive of contractual rent. Because of this dispute, the tenants filed a suit in Small Causes Court for fixation of standard rent. In that case, the Small Causes Court passed an interim order in 1994 fixing the rent at Rs. 30,000 per month, which was less than the contractual rent agreed upon between the parties in the rent agreement. Since the rent was fixed on lump sum basis at Rs. 30,000 per month, the assessee had to pay the maintenance charges, which were claimed as deduction. The assessing officer disallowed the claim on the ground that as per the lease agreement these maintenance charges were to be borne by the tenants. The Commissioner (Appeals), however, allowed this claim which view of the Commissioner (Appeals) was affirmed by the Tribunal as well. The Honorable High Court held that that since the maintenance and other charges were paid by the assessee, it was rightly held to be deductible from the rent while computing the annual letting value.
In the instant appeal, no dispute arose about payment of rent nor the tenants have filed any suit in the Court for fixation of standard rent nor the Court has passed any order fixing the rent. Therefore, the case of the assessee is distinguishable from R.J. Wood (P) Ltd. (supra) relied on by the learned counsel of the assessee.
7.4 We have discussed at para 7.1 here-in-above, the orders of the Tribunal relied on by the learned counsel of the assessee. It would now be apposite to refer to the judgment of the Honorable Delhi High Court in H.G. Gupta & Sons (supra). The assessee- firm owned some property which was given on lease to a company. The lease deed provided that the stamp duty and registration charges in respect of the lease were to be borne by the lessee and the assessee equally. The claim of the assessee for deduction of Rs. 5,977 i.e. its half share of stamp duty etc. was disallowed by the ITO. The AAC upheld the ITO’s order. On further appeal, the Tribunal, however, allowed the asssessee’s claim. On appeal by the revenue, the Honorable High Court held that the impugned expenditure was not allowable as a deduction in assessing annual value of the property. Their Lordships held as under :–
“5. The annual value of the property, which is the subject of charge, was originally defined in section 23(1) as ‘the sum for which the property might reasonably be expected to let from year to year’. The annual value is thus the sum for which a landlord could let the premises having regard to the conditions of the property and of the prevailing circumstances, as the language suggests the taxes are charged on the artificial or notional income. It is based on the annual value of the property. The authorities under the Act, therefore, have to make the assessment on the basis of the notional annual value. Section 23 lays down how the annual value is to be determined. Section 24 provides that income chargeable under the head “Deductions from Income from house property” shall, subject to the provisions of sub-section (2), be computed after making the deductions specified therein. The Legislature has used the word ‘namely’ and this shows that the heads of expenditure where for deduction can be claimed are exhaustive. The expenses incurred in providing the proper stamp paper in case of a lease or agreement to lease is by virtue of the provisions contained in section 23 of the Indian Stamp Act, 1899, and is on the lessee or intended lessee, in the absence of an agreement to the contrary. It may be for this reason, that the Legislature did not include such expenses in the permissible deductions under section 23 or section 24. If a particular type of expenditure is not specifically provided to be deductible, deduction, therefore, cannot be claimed from out of the annual value. Neither section 23 nor section 24 provides for the deduction of the expenses incurred towards the stamp duty or registration charges in respect of the lease.
6. If the view of the Tribunal is accepted that the expenditure incurred has to be deducted from the gross rent in order to arrive at the reasonable annual letting value, then the annual letting value would be different in the first year as compared to the subsequent years, The expenditure incurred on a lease for a period of 5 years towards the stamp duty and registration charges is only in the first year. The annual value of any property is deemed to be the same for which the property might reasonably be expected to let from year to year. It is a notional income to be gathered from what a hypothetical tenant would pay which is to be objectively ascertained on a reasonable basis. The annual value cannot be left to fluctuate when the lease is for a period of 5 years.
7. We, therefore, answer the reference in the negative, i.e., in favour of the department and against the assessee. As the assessee has not put in appearance, we leave the parties to bear their own costs.”
7.5 The obtaining factual matrix has to be tested on the anvil of the aforesaid pronunciation of law. Respectfully following the judgment of the Honorable Delhi High Court in the case of H.G. Gupta and Sons (supra), we dismiss ground No. 1 to 4 of the assessee.
8. Now we turn to ground No. 5 of the appeal. It relates to the grievance of the assessee that interest income has been wrongly taken as Rs. 7,89,198 instead of Rs. 2,71,591. It is the contention of the learned counsel that there was a clerical error in taking interest income as Rs. 7,89,198 in the profit & loss account of the assessee; however the actual interest income is only Rs. 2,71,591 and this can be verified from the TDS certificate.
8.1 We have heard the rival submissions and perused the relevant material on record. The actual interest income received by the assessee can be verified from the TDS certificates. Therefore, the order of the learned Commissioner (Appeals) relating to this ground of appeal is set aside and the same issue is restored to the file of the assessing officer. We direct the assessing officer to verify the TDS certificates and bring to tax the actual interest income as per the provisions of the Act. Needless to say, the assessing officer would give a reasonable opportunity to the assessee to represent before him this issue. The assessee is also directed to file the relevant details before the assessing officer.
9. In the result, the appeal is partly allowed.