ITAT Allows Section 57 Deduction for Rent and Maintenance on Sublet Property

Suman Devi Vs ITO (ITAT Delhi)

AO ACCEPTED ₹13.20-LAKH SUB-RENT BUT DENIED EVERY RUPEE SPENT TO EARN IT-₹6.90-LAKH DEDUCTION ALLOWED u/s 57

The Delhi ITAT has held that where an assessee takes a property on rent, sub-lets it & offers the receipts as income from other sources, the rent paid to the owner cannot be denied merely because the assessee is not the property’s owner. Reasonable expenditure necessary for maintaining the property must also be allowed u/s 57(iii). Against the assessee’s claim of ₹9.90 lakh, the Tribunal allowed deductions aggregating to ₹6.90 lakh.

Facts of the case

The assessee, Mrs. Suman Devi, filed her return for AY 2023-24 on 31.08.2023 declaring total income of ₹5,21,748.

During the relevant year, she received rental income of ₹13,20,000 from a property taken by her on rent & subsequently sub-let to another person.

Since the assessee was not the owner of the property, she offered the receipts under the head “Income from Other Sources” rather than “Income from House Property”.

Against the rental receipts, the assessee claimed expenditure of ₹9,90,000 u/s 57.

The case was selected for scrutiny under CASS specifically to verify the genuineness of these expenses. Notices u/ss 143(2) & 142(1) were issued & the assessee furnished information in response.

AO disallows the entire expenditure

The AO observed that the assessee had claimed rent paid to the property owner but had not furnished a rental agreement or bank statement evidencing the payment.

The AO also considered the evidence relating to maintenance & other expenses inadequate. He therefore disallowed the entire expenditure of ₹9.90 lakh.

The assessment was completed u/s 143(3) r.w.s. 144B on 17.03.2025.

The CIT(A), NFAC, sustained the full disallowance & dismissed the assessee’s appeal.

Breakup of expenditure

The assessee explained that the property was taken on rent & sub-let. Since she collected monthly charges from the occupant, she was responsible for keeping the property in usable condition.

The total expenditure of ₹9.90 lakh comprised ₹5,40,000 as rent paid to the owner, ₹1,80,000 as salary to a caretaker or gardener, ₹1,20,000 as salary to a maid, ₹1,20,000 towards painting, ₹11,000 for water-pipe repairs & ₹19,000 as electrician charges.

The assessee submitted that these expenses were incurred wholly & exclusively for earning the rental receipts & therefore qualified for deduction u/s 57(iii).

Ownership cannot be used against assessee

The assessee contended that the AO’s observation that she was not the property’s owner actually supported her treatment of the receipts as income from other sources.

Had she owned the property, the rental income would ordinarily have been offered under the head “Income from House Property”. Precisely because she was a tenant who sub-let the premises, the net income was taxable under the residuary head.

Once the AO accepted ₹13.20 lakh as income from sub-letting under “Income from Other Sources”, he could not compute that income on a gross-receipt basis by ignoring the rent necessarily paid to acquire the right to sub-let.

Section 57(iii) permits deduction of expenditure, other than capital expenditure, laid out or expended wholly & exclusively for making or earning income taxable under that head.

Difficulty in preserving supporting records

The assessee explained that she was an elderly lady & had lost her husband to COVID-19 in April 2021, which adversely affected her health & ability to maintain documentation.

She had difficulty obtaining the owner’s PAN or Aadhaar particulars. Payments to the maid, plumber, painter & other daily-wage workers were made in cash. Such workers did not possess PAN or adequate local identity documents, making formal documentation difficult.

Nevertheless, the assessee claimed that details & available receipts had been submitted before the AO during assessment.

Before the ITAT, the assessee produced an unregistered rental agreement showing monthly rent of ₹45,000 & rent receipts supporting the payment.

ITAT accepts commercial reality

The Tribunal observed that the assessee had admittedly taken the property on rent & earned rental receipts of ₹13.20 lakh. The AO had accepted the income offered from the arrangement.

Since the assessee was not the owner, payment of rent to the actual owner was integral to earning the subletting income. Therefore, the rent expenditure could not be denied altogether.

The unregistered rental agreement & rent receipts supported the monthly payment of ₹45,000. The ITAT accordingly allowed the full annual rent of ₹5,40,000.

The Tribunal further accepted that a property generating substantial rental receipts would necessarily require some maintenance. It allowed ₹11,000 towards water-pipe repairs & ₹19,000 towards electrical repairs, aggregating to ₹30,000.

It also recognised that the assessee needed a caretaker to manage the premises. A reasonable allowance of ₹10,000 per month, totalling ₹1,20,000, was granted towards caretaker charges.

Thus, the Tribunal allowed aggregate expenditure of ₹6,90,000, comprising rent of ₹5.40 lakh, repairs of ₹30,000 & caretaker charges of ₹1.20 lakh.

The balance expenditure of ₹3 lakh, relating to the maid, painting & excess caretaker or gardener claim, remained disallowed. The assessee’s appeal was partly allowed.

Author’s comments

The decision correctly applies the concept of real income. Subletting receipts cannot be earned without first obtaining the premises on rent. Once the AO accepts the source & head of income, denying the corresponding rent expenditure produces an artificial gross income which the assessee never economically enjoyed.

The ruling also adopts a pragmatic approach to small maintenance expenses. Payments to plumbers, electricians, caretakers & casual workers may not always carry perfect documentation. Absence of ideal vouchers may justify reasonable estimation, but not necessarily a 100% disallowance when the expenditure is commercially unavoidable.

At the same time, section 57(iii) requires a direct nexus with earning the income. The Tribunal therefore allowed rent, essential repairs & reasonable caretaker charges while sustaining the disallowance of less-substantiated items.

The case offers a useful proposition: where subletting income is taxed under “Other Sources”, rent paid to the owner & necessary maintenance expenses are deductible u/s 57(iii), subject to evidence & reasonableness.

The Department accepted the fruit of ₹13.20 lakh; the Tribunal rightly reminded it that even a rented tree has a cost.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the order of ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)”, for short] dated 09.01.2026 for the Assessment Year 2023-24.

2. Brief facts of the case are, assessee filed her return of income on 31.08.2023 declaring total income of Rs.5,21,748/-. The Assessing Officer noticed that assessee had received rental income of Rs.13,20,000/- against which assessee has claimed expenses of Rs.9,90,000/- under section 57 of the Income-tax Act, 1961 (for short ‘the Act’). The case was selected for scrutiny under CASS to verify the genuineness of the expenses claimed. Accordingly, notice u/s 143(2) and 142(1) were issued and served on the assessee. In response, assessee filed relevant information.

3. During assessment proceedings, the Assessing Officer observed that assessee has claimed the expenditure towards payment of rent, however, has not provided any rental agreement between the owner and assessee and also not filed copy of bank statement through which the payment was made to the owner. He further observed that assessee has claimed rental and other expenses for which no evidences were submitted. Accordingly, he proceeded to disallow all the expenditure claimed by the assessee.

4. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions. For the sake of brevity, the same is reproduced below :-

“Ground of appeal 1: The learned Assessing Officer has erred in facts and in law by disallowing the expenses incurred in maintaining the property being managed by the Appellant.

Ground of appeal 2: The learned Assessing Officer has erred in facts in disregarding the receipts submitted by the Appellant before the Assessing Officer

11. Appellant is allowed to claim maintenance expenses

It is humbly submitted before your honor that the Appellant had sub-let the property to a third party. Since the Appellant was charging monthly charges from the tenant, the Appellant was both responsible and liable to maintain the property.

It is a well settled position that the income from sub-letting property is classified under “Income from Other Sources”. The section 57 of the Act provides that all expenses laid out or expended wholly and exclusively for the purpose of making or earning such income are allowable as deductible expenses against such income. On the basis of this clear understanding and position, the Appellant submitted a detail of expenses incurred by her in order to maintain the property and claimed such expenses while calculating her tax liability. For the ready reference of your honor, we have provided below the said details:

The above details were submitted before the learned AO vide submission dated 7 October 2024 and 28 January 2025 enclosed herewith as Annexure 3 and Annexure 4 respectively. Further, the Appellant submitted the evidences of the expenses before the learned AO incurred vide submission dated 17 February 2025. All the above expenses were incurred for the maintenance of the property and hence, claimed by the Appellant.

The allegation of the learned A 0 that the Appellant is not the owner and hence, cannot claim the maintenance expenses does not have a valid base. If the assessee had been the owner of the property, she would have offered the rent received as Income from House Property. The only fact that the Appellant is not the owner of the property is the reason that the Appellant had offered the income as “Income from Other Sources”. It has not been the allegation of the learned AO that the income should have been offered to tax as income from house property. Where the learned AO has agreed that the income is ‘income from other sources’, the expenses incurred to earn such income cannot be disallowed. This is as per the mandate as per section 57(iii) of the Act which clearly states that any expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income should be allowed as deduction against the taxable income.

Further, the learned AO has also given a reason that since the Appellant has not furnished PAN or Aadhar card along with rent deed in respect of the owner of the property, expense cannot be allowed. In this regard, the Appellant had explained to the learned AO that the appellant is an old lady and does not have much support! strength to keep following up with the owner to share his details. Further, appellant has lost her husband in April, 2021 due to COVID-19, which has adversely affected her health and hence she didn’t able to keep the documentation properly. The Appellant tried but could not obtain. The only fact that the PAN of the owner is not available should not be the reason to disallow the rent paid by the Appellant to the owner.

The learned AO had also put the allegation that the documents of rent receipt or receipts on account of payments made to maid do not seem genuine. In this regard, it is humbly submitted that the amounts paid to maids/ plumber/painter who work as daily wagers. Neither do they have PAN nor any local identity proof of Delhi region. The workers were looking for the work and the Appellant hired them to do the work. The Appellant did not keep their records safe and hence, could not produce the same before the learned AO. The details of amounts paid to these workers along with the evidences were submitted before the learned AO vide submission dated 17 Feb 2025.

Ground of appeal 3: The learned Assessing Officer has erred in law and facts by initiating penalty u/s 270A of The Income Tax Act, 1961, which is arbitrary, uncalled for, and bad in law.

Ground of appeal 4: The Appellant craves to add, alter, delete, modify or withdraw any of the above grounds of appeal.

The above grounds being consequential in nature, can be adjudicated once the main grounds are adjudicated.

5. After considering the detailed submissions, ld. CIT (A) sustained the additions made by the Assessing Officer and dismissed the appeal filed by the assessee.

6. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-

“1. The assessment order dated 17/03/2025 passed by the ld. Assessing Officer, Assessment Unit, Income Tax Department, New Delhi [in short “Ld. AO”] under section 143(3) r.w.s 144B of the Income-tax Act [in short “the Act”] and upheld by the Commissioner of Income Tax (NFAC) [in short “Ld. CIT(A)”] vide its order dated 09/01/2026 is bad at law & on facts both hence, the same is void ab initio and liable to be quashed.

2. That on the facts and in circumstance of the case and in law, the Ld. CIT(A) has erred in upholding the additions made by the ld. AO to the tune of Rs. 9,90,0001- under the head “other sources”.

3. That on the facts and in circumstances of the case, the Ld. CIT(A) has grossly erred in upholding the levying the interest u/s 234B of the Act.

4. All the above grounds are independent and without prejudice to others.”

7. At the time of hearing, ld. AR of the assessee brought to my notice relevant facts on record and submitted that assessee has taken the property on rent and earned the rental income, declared the same as income from other sources, claimed the relevant expenditure. She prayed that the assessee may be allowed relevant expenditure as against income offered to tax. She brought to my notice rental agreement and submitted that all other expenditure incurred by the assessee are in cash and prayed that the relevant expenditure may be allowed.

8. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities and submitted that assessee has not substantiated the claim of expenditure with relevant documents.

9. Considered the rival submissions and material placed on record. I observed that assessee has taken a property on rent and earned the rental income of Rs.13,20,000/- during the year under consideration which was accepted by the Assessing Officer. The issue is that assessee has paid rent and other expenditure relating to maintenance of the above property to the extent of Rs.9,90,000/-. The Assessing Officer has disallowed the whole expenditure as it is not substantiated. It is fact on record that assessee is not the owner of the property through which the assessee has earned the rental income, therefore, the claim of the assessee on rent paid cannot be denied. The assessee has filed before us unregistered rental agreement to claim the payment of Rs.45,000/- per month and also submitted rental receipt in support of the same. With regard to other expenditure incurred by the assessee towards maintenance of the property, since the assessee has declared rental income, the assessee had to incur certain expenditure towards maintenance of the same. I noticed that apart from rental payment, the assessee has incurred salary of caretaker and gardener, painting expenditure and other sundry repairs towards water and electricity. After careful consideration, in my considered view, assessee should be given benefit of payment of rent and sundry repair charges towards water, pipe repair and electricity charges of Rs.11,000/- and Rs.19,000/-. Apart from the above,

the assessee had to maintain and appoint caretaker to run the same. Therefore, we are inclined to allow Rs.10,000/- per month towards above charges. Therefore, we are inclined to sustain the other disallowances made by the Assessing Officer. Accordingly, the assessee is allowed to claim rental payment of Rs.5,40,000/-, Rs.30,000/- towards sundry repair expenditure and Rs.1,20,000/- towards salary to caretaker. Thus, the grounds raised by the assessee are partly allowed.

10. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on this 9^th day of September, 2026.