Maintenance charges from letting out services taxable as income from other sources

Premkumar Menon Vs ACIT (ITAT Chennai)

Conclusion: Once the maintenance charges were attributable to the letting out services provided, the same derived from providing services was to be considered under the head “income from other sources”  and not “income from house property”.

Held:  AO considered the maintenance charges as received by the assessee from the premise of the rent agreement as “income from house property” and assessed the same u/s. 24 of the Income Tax Act. On appeal, CIT (A) confirmed the action of the AO in making the addition of maintenance charges received on let out property amounting to Rs. 37,98,900/- as assessable under the head “income from house property” as against claimed by assessee under the head “income from other sources”. It was held that services provided for the charge of maintenance charges was clearly distinguishable from the rental receipt for renting out the portion of the property and it was for only providing services. Once, these maintenance charges were attributable to the services provided, the same derived from providing services was to be considered under the head “income from other sources” as claimed by the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-5, Chennai, in ITA No.75/CIT(A)-5/2018-19 dated 05.09.2019 for the Assessment Year 2016-17. The Assessment was framed by Asst. Commissioner of Income Tax, Non Corporate Circle-17(1), Chennai u/s. 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order dated 29.12.2018.

2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of the A.O in making addition of maintenance charges received on let out property amounting to Rs. 37,98,900/- as assessable under the head “income from house property” as against claimed by the assessee under the head “income from other sources”. For this, the assessee has raised various grounds which are argumentative nature and exhausted and hence, need not be reproduced.

3. The brief facts of the case are that the assessee owns two floors i.e., 8^th & 9^th floors of the commercial property known as Menon Eternity at No.165, St. Mary’s Road, Alwarpet, Chennai. The assessee admitted the rent received pertaining to the ownership of these two floors under the head “income from house property” on the basis of annual letting value of the space. The assessee also declared maintenance charges from these premises as “income from other sources” and the details are given in assessment order and the same is being reproduced for the sake of convenience as under:

The assessee as well as A.O has not disputed the above facts.

4. The A.O relying on the judgment of Hon’ble Punjab & Haryana High Court in the case of Sunil Kumar Gupta Vs. ACIT 389 ITR 38 (P&H) considered the maintenance charges as received by the assessee from the premise of rent agreement as “income from house property” and assessed the same u/s. 24 of the Act. Aggrieved, the assessee preferred appeal before the CIT(A).

5. The CIT(A) relying on the decision of Hon’ble Punjab & Haryana High Court in the case of Sunil Kumar Gupta Vs. ACIT, supra, confirmed the action of the A.O by observing in para 5 of his appellate order as under:

“5. Since the above judgement is squarely applicable to the facts of the appellant’s case, the AO has brought to tax the net of maintenance charges received after allowing necessary deductions u/s 24 of the Act at Rs.25,09,577/- to tax as income from house property. There is no infirmity in the action of the AO on this count. As seen from the written submission furnished by the AR before me, the findings of the AO cannot be disagreed with as there is no other High Court judgment not agreeing with the ratio of Hon’ble Punjab & Haryana High Court cited supra. There is no force in the arguments of the AR in saying that the question whether maintenance charges are to be taxed under the head income from other sources or not because the Hon’ble Punjab & Haryana High Court has categorically stated that the term “rent” includes any amount which is paid in consideration of the property being let out. Further, it is held that that the maintenance charges must form part of the rent. Respectfully following the judgement of the Hon’ble Punjab & Haryana High Court in the case of Sunil Kumar Gupta Vs. ACIT in 389 ITR 38, I am also of the considered view that the maintenance charges received by the appellant at Rs.37,98,900/-constitute income from house property. The addition made at Rs.25,09,577/- after allowing statutory deduction u/s 24 of the Act at Rs.12,89,323/- stands confirmed. The grounds taken in the appeal are dismissed.”

Aggrieved, the assessee came in appeal before the Tribunal.

6. Before us, the Ld. counsel for the assessee Mr. R. Vijayaraghavan, Advocate stated the fact that the assessee has actually let out these two floors i.e., 8^th & 9^th floors of the building Menon Eternity and admitted the rental income and offered for taxation under the head “income from house property”. The assessee also paid expenses on maintenance charges and claimed the maintenance charges as “income from other sources” i.e., the surplus arising out of the same. The Ld. counsel for the assessee explained that the property has got parking lots for parking vehicles belonging to the tenants and their clients in the basement, ground and first floor. The building has 400KV power supply, pest control services for common areas, security services both physical security and electronic surveillance system ,central AC plant, Diesel Generator, Motors, Fire hydrants, Fire Alarm system, Extinguishers, Transformers, External Glass ACP cleaning services, water management, solid waste management, Landscaping services. The building has got lifts, numbering 5, which are used by all the tenants. The building requires constant repairs and painting and maintenance for seeping it in good condition and proper use. The ld. counsel further explained that the building of this nature, obviously, requires separate maintenance services. Earlier this building was maintained by the builder, viz., Lancor Holdings through its sister concern, ‘Lancor Maintenance & services Limited’. In view of certain disputes between the assessee and the Lancor Holdings, an Arbitration suit was filed. In the meantime, Lancor Maintenance & services Limited refused to maintain the property and walked out, the fact of which was informed to the Arbitrator. The whole building consists of 9 floors. 4 ¹/₂ floors belong to the Landowners. The other 4 ¹/₂ floors was earmarked for the builder. Owing to fraud, the builder has lost his case and all his alleged tenants have vacated the said 4 ¹/₂ floors in the year 2016. Nevertheless, the cost of maintaining the full building which is only half tenanted, is double of maintenance charges received from the tenants. Therefore originally, the maintenance charges were payable by the tenants directly to ‘Lancor Maintenance & services Limited’ and not to the owners. Later Mr. Premkumar Menon, the assessee, had to undertake the maintenance of the building. The maintenance pertains to basement, ground floor and 10 floors to cater to all tenants, though the assessee owns two floors only. The maintenance charges are paid to the individual owners. The relevant vouchers were produced before the Assessing Officer.

7. On the other hand, the Ld. Sr. D.R, Shri P. Sajit Kumar, JCIT relied on the judgment of Hon’ble Punjab & Haryana High Court in the case of Sunil Kumar Gupta Vs. ACIT, supra, and also relied on the Tamil Nadu Apartment Ownership Act, 1994 and he referred to s. 6 of sub s. (1)(2), which reads as under:

“6. Common areas and facilities –

(1) Each apartment owner shall be entitled to an undivided interest in the common areas and facilities in the percentage specified in the Deed of Apartment and the limited common areas and facilities. Such percentage shall be computed by taking as the basis the extent of the plinth area available in the apartment in relation to the total extent of the plinth area available in the building.

(2) The parentage of the undivided interest of each apartment owner in the common areas and facilities, and in the limited common areas and facilities, if any, as expressed in the Deed of Apartment shall have a permanent character, and shot be altered without the consent of all apartment owners. The percentage of the undivided interest in such common areas and facilities and the limited common areas and facilities shall not be separated from the apartment to which it appertains, and shall be deemed to be conveyed or encumbered with the apartment whether or not such interest is expressly mentioned in the conveyance or other instrument.”

8. Subsequently, he also referred s. 19, 20 and 21 of this Act, which reads as under:

“19. Common profits and expenses-

(1) The common profits shall be distributed among, and the common expenses shall be charged to, the apartment owners according to the percentage of the undivided interest of the apartment owners in the common areas and facilities specified in the Deed of Apartment.

(2) Every apartment owner shall, notwithstanding his waiver of the use or enjoyment of any of the common areas and facilities and the limited common areas and facilities or his abandonment of his apartment, be liable to be charged to the common expenses under sub-section (1).

(3) Where the apartment owner is not in occupation of the apartment owned by him the common expenses payable by such apartment owner may be recovered from the person in the occupation of the apartment.

20. Common expenses to be charged on property-

All sums assessed by the society or the Association of Apartment owners as the share of thee common expenses chargeable to any apartment shall, subject to the prior claim, if any,-

(i) of the Government in respect of land revenue or any money recoverable as land revenue,

(ii) of any municipality or other local authority in respect of tax or other assessment, and

(iii) of the mortgage, in respect of all sums unpaid, constitute a charge on such apartment.

21. Separate assessment-

Notwithstanding anything to the contrary contained in any law for the time being in force,-

(a) each apartment and its percentage of undivided interest in the common areas facilities and the limited common areas and facilities of such apartment, shall be deemed to be separate property for the purpose of assessment to tax on lands and buildings leviable under such law and shall be assessed and taxed accordingly; and

(b) the building, or the property or any of the common areas and facilities and the limited common areas and facilities shall not be assessed to any such tax separately.”

9. In view of the above, the Ld. CIT-DR stated that the maintenance charges are part of rent for the purpose of computing the annual value of the property. He referred to s. 24 of the Act which provides that the income chargeable under the head “income from house property” shall be computed after making the deductions specified therein. He also stated that even the amounts received under sub license had been brought under the head “income from house property” and the consequent maintenance charges are to be included in the rent. He argued that the annual value of the property which provides several common amenities such as swimming pool, gymnasium, security, car parking and elevators would be the same as the annual value of such property in the same area, but without these facilities. He argued that where the agreement provides that the owner shall pay the amounts for the common facilities, maintenance charges, outgoings etc. then, it is obvious and reasonable to presume that the same is factored into the rent, fee or the compensation payable by the lessee or the licensee. Hence, the maintenance charges are nothing but rent and should be assessed under the head “income from house property”.

10. We have heard the rival contentions and gone through the facts and circumstances of the case. The facts are undisputed. The assessee is owner of two floors i.e., 8^th & 9^th floors in the property of Menon Eternity, Alwarpet, Chennai. The assessee admitted the rent receipt pertaining to the ownership of these two floors under the head “income from house property”. The disputed point is the assessment of maintenance charges whether the same are to be assessed as “income from house property” or these are “income from other sources”. We noted that this property has got parking lots for parking vehicles belonging to the tenants and their clients. The building has other facilities like 400KV power supply, pest control services for common areas, security services, central AC plant, Diesel Generators, Fire Hydrants, buildings lifts etc. We also noted that the building requires constant repairs, paintings and maintenance. As informed by Ld. Counsel for the assessee that earlier this building was maintained by the builder Lancor Holdings Ltd. through its sister concern Lancor Maintenance & Services Ltd. Subsequently, due to arbitration disputes the assessee started maintaining the building. The maintenance charges presumes ground floor and 10^th floor to cover to all tenants, that the assessee owns two floors only, the maintenance charges are paid to the individual owners. The assessee has produced the relevant vouchers before the A.O. The assessee also filed copy of lease deed dated 09.12.2010 entered between the assessee and Fichtner Consulting Engineers (India) Ltd. and also lease deed dated 14.02.2011 entered between the assessee and Cognizant Technology Solutions India P. Ltd. The Ld. counsel for the assessee drew our attention to the first lease deed dated 09.12.2010 entered between the assessee and Fichtner Consulting Engineers (India) Ltd. thereby they entered to lease deed i.e., for monthly rent as well as maintenance charges separately. He drew our attention to clause 2.2 of the lease deed, which reads as under:

“2.2 The LESSEE shall also required to pay to the LESSOR along with the monthly rent, e charges as is made applicable which is presently at Rs.7/- Sq.ft. per month. The LESSEE agrees to pay to the LESSOR increased maintenance charges if and when the same is The LESSEE shall pay the monthly maintenance charges every month in advance to the LESSOR. That in the event of the LESSOR failing to pay the monthly maintenance charges to the Association/Company formed for the purpose of maintaining the common amenities, in such an event, the LESSOR shall pay the said maintenance charges directly to the said Company/Association and in such an event, the LESSEE need not pay the maintenance charges to the LESSOR for the said month.”

11. The Ld. counsel for the assessee stated that it is very clear that the maintenance charges are separately charged and for this although it is same lease deed, but for maintenance charges a separate clause is there for collection of maintenance charges. In view of these, the assessee contended that it is established that he has engaged in systematic and organized activity of providing services to the occupiers of all the floors of the premises and therefore, the receipts from these occupiers of all the floors, the maintenance charges received are “income from other sources”. We have noted that when the owner of the building gets along-with the rent, rent or charges for different services provided in the building, then if the composite rent is separable then the portion of rent for building will be taxed as “income from house property” and the rent for other things under “Income from other sources”. In this case, the rent is separable from the maintenance charges, the maintenance charges is fixed at Rs. 7/sq. ft. What s. 22 attempts to assess is the annual value of the property consisting of any building or land appurtenant thereto, of which the assessee is the owner. The rent being charged by the assessee is the annual letting value. The expenditure on the items, i.e., the maintenance of 400KV power supply, nest control services for common areas, security services both physical security and electronic surveillance system, central AC plant, Diesel Generator, Motors, Fire hydrants, Fire Alarm system, Extinguishers, Transformers, External Glass ACP cleaning services, water management, solid waste management, Landscaping services, lift, etc., as well as that on the electricity consumed in respect of any common area is not attributable directly to the house property as such, but to its enjoyment by the tenants/users thereof. We also noted that rent for property was determined, charged separately and charges for fit outs and facilities were fixed separately. The amount of rent for the letting out the building is fixed based on extent of area let out, location of the building etc., whereas the Maintenance charges is fixed at Rs. 7/sq. ft. and therefore does not partake the nature of rental income. The whole building consists of 9 floors. 4 ¹/₂ floors belong to us the Landowners. The other 4 ¹/₂ floors was earmarked for the builder. The builder has lost his case and all his alleged tenants have vacated the said 41/2 floors in the year 2016. Nevertheless, the cost of maintaining the full building which is only half tenanted, is double of the income earned from the tenants. The average monthly cost of maintenance is around Rs. 12 lakhs whereas the income from the tenants with regard to maintenance is less than half of that.

12. As relied on by the Ld. counsel for the assessee of Hon’ble Supreme Court in the case of Karani Properties Ltd. Vs. CIT 82 ITR 547 (SC), wherein the Hon’ble Supreme court has held that the income derived by an assessee i.e., the owners of the flats and shops from services rendered in an organized and systematic manner with the help of large staff of the same, the income is to be assessed as income from business or profession. Honb’le Supreme Court considered this issue in Para 6, 7 & 8, which reads as under:

“6. We are referring to these observations only to show that the activities of the assessee with which we are concerned in these appeals are business activities. We should not be understood as having laid down that in assessing the profits and gains of a business, the profits and gains arising from the several activities of that business can be separately computed or separately brought to tax. If the facts are as found by the Tribunal—we must assume for the purpose of this case that the facts were correctly found by the Tribunal as there was no challenge to the correctness of those findings in the question referred to the High Court—then it is quite clear that the assessee had two sources of income and not one source as found by the High Court.

7. Mr. Manchanda, learned counsel for the department, contended with some emphasis that there was no justification for the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal for coming to the conclusion that the services rendered by the assessee was an activity independent of letting out the premises to the tenants. According to him the primary activity of the assessee was to let out the premises and the services rendered were merely incidental. In support of his contention he relied on the ratio of the decision of this court in Commissioner of Income-tax v. National Storage Private Ltd. [1967] 66 ITR 596 (SC): TC13R.914. He alternatively contended that the income said to have been realised as a result of rendering the services by the assessee should have been brought to tax under section 12(4). For that contention he relied on the decision of this court in Sultan Brothers Private Ltd. v. Commissioner of Income-tax [1964] 51 ITR 353 (SC) : TC13R. 796. The High Court after reassessing the evidence on record has also taken the view that there was only one source of income and that source was of letting out the premises to the tenants. Mr. Manchanda contended, and the High Court has accepted that contention, that the authorities under the Act have not properly construed the lease deeds nor have they properly appreciated the evidence on record. It may well be so. We say nothing about it as it is not within our province to reappreciate the evidence on record. The question as to the correctness of the facts found by the Tribunal was not before the High Court nor is it before us. When the question referred to the High Court speaks of “on the facts and in the circumstances of the case”, it means on the facts and circumstances found by the Tribunal and not about the facts and circumstances that may be found by the High Court. We have earlier referred to the facts found and the circumstances relied on by the Tribunal, the final fact finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement: see Kshetra Mohan Sannyasi Char an Sadhukhan v. CEPT [1953] 24 ITR 488 (SC).

8. Mr. Manchanda was apprehensive that our decision in this case may have far-reaching effect inasmuch as the same may be considered as having laid down the rule that, whenever a premises is let out with fixtures and furnitures for a consolidated rent or when the landlord in addition to providing fixtures and furnitures also renders services incidental to the letting out of the premises and charges a consolidated rent, it may be considered that the rent realised would have to be split up and assessed separately partly under section 9 and partly under some other provision. There is no basis for this apprehension. Herein we are not considering any abstract proposition of law. We are only laying down the law applicable to the facts found.”

13. The Ld. counsel also relied on the decision of Hon’ble Madras High Court in the case of A.R. Complex Vs. ITO 292 ITR 615 (Mad.), wherein the maintenance charges or charges for certain services was held to be “income from other sources” or “income from business or profession”. The Hon’ble Madras High Court has considered this issue in Para 7, as under:

“7. An alternative argument is also advanced that the whole receipt amount should not be assessed under the head ‘Income from house property’ on the ground that certain portion of the amount is related to services provided as per the agreements which are independent ones. The rental receipts shows only the consolidated amount, instead of apportioning it into different heads. The revenue should have apportioned the amounts and such apportioned amounts should be assessed under the head ‘Income from business’ or ‘Income from other sources’. In the present cases, there are service-cum-lease agreements entered into on 1-4-1997, by the assessees with their respective occupants. For convenient purpose, we reproduce below the clauses contained in one of the tax cases, namely TC No. 75 of 2004 :

1. The consolidated service charges payable shall be Rs. 1,200 (rupees one thousand and two hundred only) per month or such sum as agreed upon mutually by both the parties.

2. The advance amount shall be Rs. 30,000 (Rupees thirty thousand only) which shall be interest free.

3. The occupant/service receiver shall also be entitled to sub-lease this facility with the prior permission of landlord /service provider.

4. The service-cum-lease agreement shall be valid for a maximum of 11 months, which can however be extended further/terminated by mutual agreement at any time.

5. The landlord/service provider shall provide services of security, supervisor, sweeper, water, sanitation and such other services such as common reception, telephone booth, generator etc. as may be required by the occupants for their peaceful and conducive as well as smooth and efficient conduct of business and agreed upon by both the parties from time to time.

6. The landlord/service provider shall bear the cost of municipal/corporation taxes, common electricity charges, maintenance of building, supervisor, security, water, sanitation and such other services as agreed upon from time to time.

7. The premises is being utilised for business purpose only. “

From a reading of the above clauses, it is clear that the assessee-firm has to provide certain services. For the purpose of providing such services, the occupant has to pay a consolidated charge of Rs. 1,200 per month in the case of TC No. 75 of 2004. There is no dispute regarding the actual services provided by the assessee-firms and the revenue also did not deny the same. The only reason given by the Tribunal is that the assessees failed to substantiate their claims. The relevant portion of the order of the Tribunal reads as under:

“3. We have given very careful consideration to the submissions and to the various documents filed before us. Referring to the balance-sheet of the firms we notice that there are no generators. There is a land and building. Referring to the profit and loss account we find the salary at Rs. 27,600 and depreciation claimed and partners remuneration and some general expenses. This is only to show that the claim of the assessee that it had maintained some office and incurred expenditure in this regard is not substantiated. The authorities therefore were justified in coming to the conclusion that such rental receipts are assessable as income from house property. Upholding their orders, both the appeals are dismissed.”

P&L as well as balance-sheet were filed before the authorities wherein all the details regarding expenditure as well as receipts were reflected. There is no proper consideration of the details regarding providing services as well as receipt of the same by the authorities below. The authorities ought to have considered the same. If it is necessary, they have to bifurcate a portion of the rental receipt into various heads. In such circumstances, in the interest of justice, we direct the Assessing Officer to consider the details regarding the services provided as well as the amount received for the same and the said receipt amounts derived from providing services may be considered under the head ‘Income from other sources’ or under the head ‘Income from business’ and pass orders in accordance with law after giving opportunity to the assessees.”

14. We have considered that in the present case before us also, the portion of clause 2.2 of lease deed entered into between the assessee and Fichtner Consulting Engineers (India) Ltd. clearly reveals that the services provided for the charge of maintenance charges is clearly distinguishable from the rental receipt for renting out the portion of the property and it is for only providing services. Once, these maintenance charges are attributable to the services provided, the same derived from providing services is to be considered under the head “income from other sources” as claimed by the assessee. Hence, we reverse the findings of the lower authorities on this issue and allow the appeal of the assessee.

15. In the result, the appeal of the assessee is allowed.

Order pronounced on 21^st September, 2022.