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Income Tax Appellate Tribunal, VIRTUAL COURT
Before: SHRI S. RIFAUR RAHMAN, HONBLE & SHRI AMARJIT SINGH, HONBLEShri Ritu Kamal Kishor
IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “D” BENCH, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, HON'BLE JUDICIAL MEMBER ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., v. Income Tax Officer – Circle – 12(3)(4) Aayakar Bhavan, M.K. Road CTS 156, D.B. House Yashodham Mumbai - 400020 Goregaon (E), Mumbai -400063 PAN: AAFCM6714R (Appellant) (Respondent) Assessee by : Shri Ritu Kamal Kishor Department by Shri Neha Thakur
Date of Hearing : 31.01.2022 Date of Pronouncement : 31.03.2022 O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) – 20, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 31.08.2018 A.Y. 2015-16.
Assessee has raised following grounds in its appeal: - “1. On the facts and circumstances of the case and in law, the learned CIT(A) ought to have directed the learned AO to reduce the
2 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd.,
unrealized rent of Rs. 2,27,15,776/ - being service tax borne by the appellant, from the amount of rent received during the year for computing the annual value in terms of section 23 of the Act and the income from house property ought to have been determined accordingly. 2. On the facts and circumstances of the case and in law, the learned CIT(A) ought to have directed the learned AO that the property tax of Rs. 2,96,42,384/- which has been paid during the year be deducted in terms of first proviso to section 23(1) of the Act from the rentals, in determining the annual value in terms of section 23 of the Act and the income from house property ought to have been determined accordingly. 3. It is humbly prayed that the reliefs as prayed for hereinabove should be granted. 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
The assessee had filed its return of income electronically on 30.09.2015 declaring total loss of Rs. 2,22,164/-. The case was selected for scrutiny and assessment was completed u/s 143(3) vide order dated 26.12.2017 assessing total income at Rs. 16,11,209/-.
The brief facts are that the assessee is engaged in the business of real estate development, had constructed a shopping complex with cinema theatre (Milan Mall) which was given under a Leave and License Agreement dated 23.12.2006 to M/s Pantaloon Retail (I) Ltd (Subsequently called Future Retail Ltd) which Agreement expired on 31.12.2021. However, the Mall was vacated by Licensee only in August ,2012. The assessee filed legal suits against M/s Pantaloon Retail (I)
3 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., limited for the recovery of rent, compensation, interest, other recoveries and service tax for the period January, 2012 to August, 2012. Under the said eventuality, the assessee and successors of M/s Future Retail Limited being Agro Properties and Services Limited entered into a settlement agreement in May, 2014 to settle various disputes and the assessee was paid a sum of Rs. 5,32,54,644/- net of TDS (Gross amount Rs. 5,75,00,000/-).
While filing the return of income, the assessee offered Rs. 4,41,50,219/- as leave and license fees recovered under the head Income from House Property and also wrote back an amount of Rs. 63,74,568/- as no longer required to be paid. After claiming as deduction service tax paid and property tax paid, the assessee has offered net loss of Rs. 18,33,373/- from house property as shown below:-
Income from House Property Amount Leave and License Fees 4,41,50,219 Add: Amount written back 63,74,568 on settlement 5,05,24,787 Less : Unrealized Rent 2,27,15,776 (Service Tax paid) 2,78,09,011 Less Property tax paid 2,96,42,384 Loss from the property -18,33,373
4 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., 6. From the facts as mentioned above it is observed that the assessee has recovered the service tax for the period December, 2011 to August, 2012. According to the assessee the liability for service tax for the period July, 2008 to November, 2011 amounting to Rs. 2,27,15,776/- got devolved on the assessee and the same has been paid by the assessee and claimed as deduction during the year under consideration i.e., FY 2014-15. The assessee has also claimed deduction in respect of property tax of Rs. 2,96,42,384/- pertaining to the period October, 2013 to March, 2015.
During assessment proceedings, the AO has disallowed the deduction claimed in respect of service tax and property tax paid on the ground that as per provisions of section 25AA, unrealized rent is taxable under the head ‘Income from House Property’ without allowing any deduction u/s 23 and 24 of the Income Tax Act, 1961. Further, as per the AO the property taxes paid pertains to October, 2012 to March, 2015. However, the unrealized rent offered to tax pertains to period January, 2012 to August, 2012 and in the year under consideration, no rental income has been returned by the assessee. The provisions of section 25AA provides for taxability of receipt of unrealized rent, whereas the deduction on account of property tax is contemplated while calculating the ‘Annual
5 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., Lettable Value’ and not unrealized arrears of rent. On the said reasoning the AO has held that unrealized rent is to be taxed directly without allowing any benefit of deduction. In respect of claim of service tax, it has been held by the AO that only specific deductions are allowed which are mentioned in sections 23 & 24 of the Income Tax Act, 1961. The list of deductions is exhaustive and it does not include deduction in respect of service tax. Service tax is a liability that is to be collected from the tenant and paid to the Government and it has no impact or is in any manner concerned /connected with computation of House Property income.
Aggrieved, assessee preferred an appeal before CIT(A) and The Ld CIT (A) has upheld the action of the AO . The Ld CIT(A) has confirmed the disallowance made by the AO in respect of property tax on the ground that in the instant case, what is chargeable to tax is the rent recovered and not the annual value of property. Thus, the question of deduction of property tax and service tax does not arise in this case. The Ld CIT(A) also did not agree with the alternate plea made by assessee in the course of appellate proceedings before him. It was the alternate contention that service tax being an indirect tax was to be recovered from the licensee; that since in this case the service tax could not be recovered from the licensee, the same ought to be treated as unrealized rent and ought to be
6 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., reduced from the amount received from tenant which was offered to tax. The CIT (A) has rejected the alternate claim of the assessee stating that:-
(a) The service tax component was never included in the gross rent shown in the return of income. Therefore, the question of treating the service tax as unrealized rent does not arise. (b) The assessee has claimed that unrealized rent included service tax component of Rs. 2,27,15,776/-. But actually, the settlement agreement was a 'package deal' and therefore, not possible to relate portions of the money recovered to claims under various heads such as rent, service tax liability, interest, penalty on arrear of rent etc. Therefore, it is also not possible to ascertain quantum of claim foregone by the assessee under various heads such as rent, service tax liability, interest, penalty on arrear of rent etc. Therefore, the assessee's claim that the amounts forgone included service tax component of Rs.2,27,15,776/-has no basis. (c) Unrealized rent is allowable as deduction in the computation of annual value of the property as per explanation to section 23. But in this case, as mentioned above, rent received is chargeable to tax as per the provisions of section 25AA of the Act.
Aggrieved, the assessee has preferred appeal before us. At the time of hearing, the Ld AR of the assessee has drawn our attention to the provisions of section 25AA of the Act which are reproduced as under: - “25AA. Where the assessee cannot realise rent from a property let to a tenant and subsequently the assessee has realised any amount in respect of such rent, the amount so realised shall be deemed to be income chargeable under the head “Income from house property” and accordingly charged to income-tax as the income of that
7 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., previous year in which such rent is realised whether or not the assessee is the owner of that property in that previous year.”
It is the contention of the Ld AR that as per section 25AA the words “the amount so realised shall be deemed to be income chargeable under the head Income from house property” tantamount to providing the same treatment as normal rent received by the assessee and thus, the computation has to be in accordance with the provisions of section 23 and 24 of the Act. Accordingly, the unrealised rent is also subject to claim of deduction as provided for under section 23 and 24 of the Act. If the intention of legislation was otherwise it would have explicitly provided in the Section 25AA of the Act that no deduction of whatsoever nature would be available for such arrears of rent and in absence thereof, the provisions cannot be interpreted in such manner. Section 22 is the substantive provision which deals with annual value and Section 23 provides for the manner of computing the annual value. Section 24 provides for deduction in computing the income from house property, therefore one has to pass through this machinery provision for computing the income under the head income from house property. The provisions of Section 25AA of the Act in a nutshell only provides for taxing the arrears of rent in the year of receipt under the head income from house property even if the relevant assessee has ceased to be the owner of the property.
8 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., 11. As regards the facts in this regard, the Ld AR drew our attention to the Para 1 of the Settlement Agreement as per which the ASPL has agreed for payment of Service Tax only effective December, 2011 to August 2012. And thus, the liability for payment of Service Tax for the period July, 2008 to November, 2011 of Rs. 2,27,15,776/ got devolved on the assessee, which was accounted in the current year, i.e. year ended 31 March, 2015. In support of its contention, the assessee has also filed statement showing details of payment of service tax liability along with proof of payment of the said Service Tax liability. In respect of disallowance of Property Tax, the AR contended that the assessee is eligible for claiming deduction in respect of property tax in the year in which it is paid. The Ld AR also submitted the receipts of taxes paid.
On the other hand, the Ld DR relies on the orders of authorities below. The Ld DR relied upon the order of AO and CIT(A), wherein, the deduction in respect of service tax and property tax was not allowed on the ground that no deduction is allowable from unrealized rent and entire unrealized rent is taxable without allowing any benefit of deduction. Further the DR also argued that there is no point in treating the service tax paid by the assessee as unrealised rent and thus, no deduction can be allowed in respect of service tax.
9 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., 13. Considered the rival submissions and the material placed on record. We observe that the authorities below have declined to allow claims of service tax borne by the assessee and property tax paid against the unrealized rent realised during this year and offered to tax for the reasons as mentioned. In order to have clarity on the matter it is prudent to examine the provisions of section 25AA of the Income Tax Act. As per the provisions, the amount of arrears of rent received from a tenant or the unrealised rent received subsequently from a tenant, as the case may be, by an assessee shall be deemed to be income from House Property in the year in which such rent is received or realised. Thus, the provision envisages subsequent receipt of two types of rent, namely arrears of rent or unrealized rent. As per the scheme of this amendment i.e., 1st day of April 2017, when unrealised rent pertaining to assessment year 2018-19 or any earlier year, which was earlier allowed as deduction is subsequently received, then amount so received will be brought to tax under the head ‘House Property’. The natural corollary is that such amount will be charged to tax without allowing any deduction. However, when unrealised rent pertaining to assessment year 2018-19 or any subsequent year is realised, the amount to the extent to which it has not been included in the annual value earlier, shall be deemed to be income from House Property as per section 23 of the Act and will be chargeable to tax in the previous year in
10 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., which it is received. It therefore follows that in such case, the assessee will be entitled to claim deduction from House Property from the ‘annual value’ of the property.
There is no doubt that any tax paid to Government is to be allowed as deduction from the annual value as computed. In the case of the assessee, it is observed that all conditions have been satisfied for claiming and allowing property tax paid. It has been borne by owner of property and paid by owner of the property as well as paid during this year. Irrespective of how it is being claimed, whether it is claimed in regular rent or unrealised rent, it does not make any difference. Hence there is no ground for rejecting the claim of property tax paid. For the said reasons we direct the claim of property tax be allowed.
As regards Service tax, there is no doubt it is levied on the service provider though to be borne by the customer using the service. This is a mandatory levy and to be deposited to Government treasury. It has been brought to our notice by assessee that though the Licence Agreement dated 23.12.2016 in respect of Milan Property entered into with Pantaloon Retail (India) Pvt Ltd had expired on 31.12.2011 but the premises were vacated by licensee in August 2012. As per Settlement Agreement the
11 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., licensee agreed to payment of service tax for the period December 2011 to August 2012. However, service tax for the period July 2008 to November 2011 amounting to Rs. 2,27,15,776/- got devolved on assessee and being mandatory levy, was accounted for in the impugned year and payment made to the Government. The fact of payment made to Service Tax authorities by the assessee is not in doubt by the lower authorities. It is also not in doubt that the rentals for the disputed period had been offered to tax in the respective years. Further we observe that the assessee has not defaulted the payment of service tax even though it has failed to recover from the licensee. It is apparently loss to the assessee. The fair way to deal with the issue is, the assessee should be allowed the adjust the service tax paid against the unrealised rent first and the balance alone should be the rent realised. That being so we find merit in the contention of the assessee that the amount of service tax now paid by assessee represent the rentals which assessee could not realize, being disputed and not accepted by Licensee. Hence, we are unable to uphold the finding of the lower authority that the Settlement being a “package deal”, it is not possible to apportion portions of sum received under various heads such as “rent”, “service tax” etc. When the assessee has discharged a mandate which is a statutory levy, and when rentals corresponding to disputed period has been offered as income under the
12 ITA NO. 76/MUM/2019 (A.Y: 2015-16) M/s. Milan Theatres Pvt. Ltd., head House Property and brought to tax accordingly, the claim of the assessee that the obligation has the effect of reducing the unrealized rent to said extent, is not without merit. Therefore, we have no hesitation in holding that the assessee is eligible for reduction of said service tax from income offered on account of receipt of unrealized rent as the same merely represents the reimbursement of service tax and thus, the amount to the extent of service tax can be considered as unrealised rent from tenant. The AO is accordingly directed to allow said claim of assessee.
In the result the appeal is allowed.
Order pronounced in the open court on 31.03.2022. Sd/- Sd/- (AMARJIT SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 31/03/2022 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum