Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ABENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of ld. CIT(A)/NFAC dated 26.11.2024 vide DIN & Order No.ITBA/NFAC/S/250/2024-25/1070643592(1) passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”) for the AY 2018-19.
The assessee has raised the following grounds of appeal:
Brief facts of the case are that the assessee filed the return of income for the assessment year 2018-19 on 12.8.2018 declaring total income of Rs.2,45,80,090/-. The said return of income was duly processed u/s 143(1) of the Act. Thereafter, the case of the assessee was selected for limited scrutiny assessment under E- assessment scheme, 2019 on the following issues: i. Details of assets and liabilities Bindumalyam Panduranga Allanharinarayan, Bangalore Page 3 of 17 3.1 Accordingly, the notices u/s 143(2) and 142(1) of the Act were issued calling for the details. The assessee has declared rental income from house property, business income as per provisions of section 44AD, capital gains on sale of shares and income from other sources being interest and dividend income. The AO observed that during the year under consideration, the assessee was in receipt of total income exceeding Rs.50 lakhs in view of which it was mandatory to disclose the assets and liabilities as per schedule AL in the return of income. However, as the assessee failed to report any details of assets and liabilities in the return under schedule AL, the assessee was asked to furnish the complete details of the assets and liabilities as per schedule AL. Further, during the course of assessment proceedings, it was noticed by the AO that there has been an addition to fixed assets to the tune of Rs.1,69,70,504/- (Rs.10,77,85,001/- (-) Rs.9,08,14,497/-). The assessee was also asked to provide the details of the said additions to the fixed assets with copies of the agreement and the sources of acquisition. The assessee had furnished the details as per which the following six properties are included in the details of immovable assets as follows:
Bindumalyam Panduranga Allanharinarayan, Bangalore Page 4 of 17 3.2 The AO accepted the details of immovable properties furnished by the assessee, however, observed that the assessee has shown rental income from only one let out property which is located at Bull Temple Road on which the income has been offered to tax. Further, the residential house which is located at J.P. Nagar was treated as self-occupied property. As regards OMVR Layout is concerned, it is a vacant plot of land & hence, the provisions of section 23 of the Act is not applicable. As regards property at Elita Pramonate, it is a residential apartment and accordingly, the provisions of deemed let out as per section 23 of the Act shall be applicable. Accordingly, the AO taking into account of the details of immovable properties furnished by the assessee, considered the following properties as deemed to be let out:-
3.3 In absence of any submissions made by the assessee in respect of fair rental value/municipal rental value of the property for determining the annual value of the house property as per the provisions of section 23(1)(a) of the Act, the notional value of Rs.28,07,780/- (8.5% of Rs.3,30,32,716/-) is adopted as annual value for the purpose of computing deemed income from house property and accordingly computed the income as below:
3.4 Further, with regard to let out property i.e. situated at Kanaka’s Pride, Bull Temple Road to State Bank of India, the AO found that the total gross rent had been declared at Rs.3,52,81,800/-. Further, the assessee had also received maintenance charges of Rs.59,23,126/- from the SBI. The assessee has computed income under head P/G/B/P at Rs.3,55,388/- (6% Bindumalyam Panduranga Allanharinarayan, Bangalore Page 5 of 17 of gross maintenance charges of Rs.59,23,126/-) as per the provisions of section 44AD of the Act. However, the AO observed that the agreement with the SBI is a composite agreement. The assessee is not into the business of renting out properties and as such, the income from maintenance charges received has direct nexus with the property and derived from the property only and hence the amount received as per the lease deed including the maintenance charges needs to be considered towards letting out of the premises and taxed under the head “income from house property” and accordingly, assessed the net income from let out of the house property at Rs.2,75,65,005/- in place of Rs. 2,34,18,816/- declared by the assessee.
3.5 During the course of assessment proceedings, it has also been contended by the assessee that the case has been selected for Limited Scrutiny with regard to assets & liabilities and therefore the addition with reference to income is not permissible. In this regard, the AO was of the opinion that the issues has been restricted to the verification of the reasons for selections i.e. assets & liabilities and the addition made on the issues which emerged only after filing of the details of assets during the course of the assessment proceedings and so, this issue raised by the assessee was not accepted by AO. Accordingly, the AO completed the assessment u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act on a total assessed income of Rs.3,03,36,335/- as detailed below:
Aggrieved by the assessment completed u/s 143(3) of the Act dated 28.2.2021, the assessee had preferred an appeal before the ld. CIT(A)/NFAC.
With regard to the property at J.P. Nagar declared at Rs.2,67,07,891/-, the assessee claimed that the property shown in the site on which the building is constructed is a part of the self- occupied property only. Further the assessee had also submitted the copy of purchase deed before the ld. CIT(A)/NFAC and accordingly, the ld. CIT(A)/NFAC found merit in the submission 5.1 With regard to maintenance charges, the ld. CIT(A)/NFAC held that the income received by way of entering into lease deed does not fall under the purview of business income and the provisions of section 44AD of the Act cannot be applied & uphold the view taken by the AO.
5.2 Accordingly, the ld. CIT(A)/NFAC partly allowed the appeal of the assessee.
Aggrieved by the order of ld. CIT(A)/NFAC, the assessee has filed present appeal before this Tribunal. The assessee has also filed a written submission comprising 13 pages, compilation comprising 110 pages and paper book comprising 164 pages in support of his case.
Before us, the ld. A.R. of the assessee vehemently submitted that ld. CIT(A)/NFAC erred in confirming the addition of annual letting value of Rs.3,76,327/- with respect to Purvankara flat. Further, the ld. A.R. of the assessee submitted that the maintenance charges of Rs.59,23,126/- received from the tenant, namely State Bank of India is income from business/profession and not the income from house property.
The ld. D.R. on the other hand supported the order of the ld. CIT(A)/NFAC & submitted that the entire property is leased out to one party i.e. State Bank of India and accordingly, the rent as well as the incidental maintenance charges received are to be taxed under the head “income from house property” as the maintenance charges received has direct nexus with the property. Further, the Bindumalyam Panduranga Allanharinarayan, Bangalore Page 8 of 17 ld. D.R. submitted that the assessee is not in the business of renting and therefore, the AO has rightly treated the maintenance charges as “income from house property”.
We have heard the rival submissions and perused the materials available on record. On going through the order of AO, we find that the case was selected for Limited Scrutiny on the sole ground to verify details of assets and liabilities. The AO in para 3.1 of his assessment order has observed that during the year under consideration although the assessee was in receipt of total income exceeding Rs.50 lakhs but the assessee failed to report/disclose the assets & liabilities as required under schedule AL in the return and accordingly, the AO asked to furnished the details of assets & liabilities as per schedule AL. The assessee submitted the details of fixed assets which in our opinion, the AO accepted the same without making any specific observation on the additions to fixed assets amounting to Rs.1,69,70,504/-. However, after furnishing the details of fixed assets, the AO added the income as deemed let out under income from house property amounting to Rs.19,65,446/- and also assessed the income from let out of house property to Rs.2,75,65,005/- by holding that the maintenance charges received separately over and above the house/lease rent are taxable under the head “income from house property” and not under the head “Profits & gains of business or profession”. We are of the opinion that as rightly contended by the AO that the additions made on the issues emerged only after filing of the details of the assets during the course of assessment proceedings which the assessee ought to have furnished in the return of income. Therefore we are unable to hold that the AO passed the assessment order beyond the scope of the limited scrutiny initiated and accordingly we dismiss this ground of the assessee.
9.1 Before proceeding further, it is apposite to mention here the provision of section 22 of the Act which is a chargeable section of “income from house property”
“22. Income from house property. - The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
On plain reading of the above charging section, we find that the annual value of the property of which the assessee is the owner shall be chargeable to income tax under the head “Income from house property”.
9.2 Now more specifically, section 23 of the Act enumerate how the annual value is to be determined. The relevant section 23(1) of the Act is reproduced below for ease of reference & convenience- Annual value how determined.
(1) For the purposes of section 22, the annual value of any property shall be deemed to be- (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:
Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly Bindumalyam Panduranga Allanharinarayan, Bangalore Page 10 of 17 employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
Explanation: For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.
(2) *** 9.3 Thus, section 23 of the Act talks about the manner in which the annual value is to be determined. Income from house property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. In our considered opinion the words “ to let” used in clause (a) of sub section (1) of section 23 of the Act cannot be divorced from the earlier words. These words are qualified by the words preceding them, especially the word “expected”. Grammatically, the word “expected” normally is followed by the word “to”. What the provision means that you have to estimate the sum which the property would fetch if let from year to year and that sum would represent the annual value. The words “to let” do not denote even in a stretch of imagination the maintenance charges separately charged for the extra services to be rendered by the landlord to the tenant.
9.4 In the present case, the assessee had let out the property namely Kanaka’s Pride, Bull Temple Road, Basavanagudi, Bangalore to State Bank of India. As can be seen from the lease deeds dated 23.9.2010 and 13.1.2011 entered into with the tenant “SBI” for letting out the premises admeasuring 34,260 sq.ft. and 11,860 sq.ft. respectively and the Annx-A thereto, the premises have been let out for a term of 10 years. The rent for the first 5 years being Rs.51/- per sq.ft. and maintenance charges is Rs.7/- per sq.ft. Further, as per the lease deed, the rent shall increase by 25% of the existing rent at the end of 5 years period for the Bindumalyam Panduranga Allanharinarayan, Bangalore Page 11 of 17 remaining 5 years period during the term of lease. (Both lease dated 23.9.2010 as well as dated 13.1.2011 are placed in the paper book page 83 to 111). It is undisputed fact that the assessee is not only receiving the amount of rent from the tenant for the lease out of the property but was also receiving separately the amount in consideration of the services rendered to its tenant. The assessee in the present case is under the lease agreement received the maintenance charges over and above the rent. As per Annexure A of the lease deed dated 23.9.2010 placed at page 94-95 of the paper book, the assessee shall provide the following services as detailed below:
9.5 On going through the above, we are of the opinion that in a single lease deed the assessee had in fact entered into two separate agreements i.e. one for the renting the premises on lease and another for providing maintenance services with the State Bank of India. We do not agree with the view of ld. CIT(A)/NFAC that the income received by way of lease deed do not fall under the purview of the profits & gains of business/profession. In the present case, Bindumalyam Panduranga Allanharinarayan, Bangalore Page 13 of 17 the list of services relatable to the maintenance charges are such as the assessee could have provided merely as a facility management services provider even if it were not the owner of the relevant immovable property. Further, If the assessee would not have agreed to provide the maintenance services to the State Bank of India, then that could be provided by some other third party separately as an independent business. According to Section 2(13) of the Act, the term "business" includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture. Thus the adventure or activities which may amount to business need not necessarily be by way of trade, commerce or manufacture. They may even consist of rendering of services as in the case of selling agents, managing agents and these services may be of multicolored character.
9.6 We have to give importance to the substance over the form principle. Merely because the assessee had not executed a separate agreement for maintenance charges, it cannot be said that the same were income from house property chargeable u/s 22 of the Act. In this connection, it would be relevant here to refer to the judgement of Hon’ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Sarabhai (P.) Ltd. reported in (2003) 263 ITR 197 (Gujarat), which lays down that if the owner of a property carries on upon the property some activities which results in profits & gains arising, not from the ownership but from the use thereof, such profits & gains would be chargeable to tax as business income and not income under the head “income from house property”. In fact in the case before the Hon’ble Gujarat High Court, the assessee was the owner of the property, which was let out to the tenants. Apart from letting out, assessee was also rendering certain services by providing various amenities for which amount was being separately earned. The Hon’ble High Court held that amount received from Bindumalyam Panduranga Allanharinarayan, Bangalore Page 14 of 17 the tenants as “rent” for letting of the property was assessable u/s 22 of the Act as “income from house property” and the other receipts in respect of services rendered to the tenants was liable to assessed u/s 28 of the Act as business profit. In our view, the ratio laid down by the Hon’ble Gujarat High Court in the case of Sarabhai (P) Ltd. (supra) covers the instant situation. Undisputedly the maintenance charges are being received by the assessee in return for providing specific services like external house-keeping, round the clock security, upkeepment of lifts, UPS, electrical fittings, borewell, pumpsets, CCTV, Firefighting systems, Digisets, Split ACs, etc. as mentioned in annexure A of the lease deed. It is not disputed by the revenue that these services by way of maintenance have actually not been rendered by the assessee. In the present case, it is quite evident that the said services are distinct from letting out the property and therefore, the assessee is justified in asserting that the same be taxed as business income. Thus, on this aspect, we set aside the order of ld. CIT(A)/NFAC and direct the AO to accept the maintenance charges as declared by the assessee as income u/s 44AD of the Act under the head “Profits & Gains of Business or Profession”. Accordingly, this ground of the assessee is allowed.
Further, with regard to grounds taken with respect to Purvankara Flat, Elita Promenade treated as deemed let-out, the assessee submitted that it is on account of the failure of the assessee in being able to find a tenant that the property remained vacant. Further it cannot be presumed that the assessee would simply retain immovable property without seeking to gain income by way of rent from it. Therefore, the authorities below erred in invoking section 23(1)(C) of the Act. The AO on the other hand held that the assessee’s treatment of annual value as Nil in terms of section 23(1)(c) of the Act is impermissible. Accordingly, the AO Bindumalyam Panduranga Allanharinarayan, Bangalore Page 15 of 17 considered the value of flat to be Rs.63,24,825/- and estimated the annual letting value at Rs.5,37,610/-. Further, after providing for deduction in terms of section 24(a) of the Act @ 30%, the income was assessed to be Rs.3,76,327/-. We are of the opinion that the Income Tax Act deals with cases of “notional income” which may be contradistinguished from the real income and the aptest illustration is found in the taxation of income from house property. Income from house property is an artificially defined income and the liability arises from the fact that the assessee is the owner of the property. It is undisputed fact that the premise owned by the assessee was although vacant but was available for let out as submitted by the assessee. The main contention of the AR of the assessee is that when there are genuine efforts to let out the property but same cannot be let out then no notional rent can be estimated. We are of the considered opinion that the assessee’s failure in being able to find a tenant leading to vacancy of the premises for the entire year cannot prevent AO in applying the provisions of section 23(1)(C) of the Act especially when there is no legal disability or physical disability in creating a tenancy due to which the property is left vacant. The coordinate bench of the Tribunal in the case of Kamal Kumar v. ACIT reported in [2022] 195 ITD 572 has held as under- “9. In this context, the view is confirmed by looking back to section 23(1)(c) of the Act, which provides that:
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable 9.1 The word receivable refers to the payment not being realised. The use of word "receivable" in section 23(1)(c) of the Act, indicates that there should be, not mere possibility of receiving the rent, but rent can become payable in all the probability, as the property is available for being given on rent. Then it can be considered to be "receivable". Therefore the correct interpretation is that in case the property is vacant then the notional rent can be taxed if it can be considered Bindumalyam Panduranga Allanharinarayan, Bangalore Page 16 of 17 as "receivable" as mentioned in section 23(1)(a) of the Act. When there is some legal disability or physical impossibility in creating a tenancy and due to which the property is left vacant, in any part or whole of the year, then there is no possibility of rent being realized and so the rent cannot be said to be "receivable" and accordingly on basis of notional rent no tax liability can be created. The tax authorities below have thus fallen in error in taxing the assessee on basis of notional rent. Thus, the bench is inclined to decide the grounds raised in favour of the assessee.”
10.1 We are of the opinion that the requirement that the ‘house is actually let’ during the year is not to be taken as a prerequisite for bringing the case of an assessee within the sweep of section 23(1)(c) of the Act. If the house is found vacant for the whole year subject to the condition that such vacancy of property is not for self occupation of the same by the assessee who continues to hold the same for the purpose of letting out. The usage of the term ‘property is let’ in section 23(1)(c) of the Act had purposively been made to exclude those properties from the ambit of the clause which are held by the owner for self occupation purposes, because even though the “annual value” of one self occupied property so chosen by the assessee is taken at “NIL”, however the annual value of all the remaining properties are to be determined in terms of section 23(1)(a) of the Act.
10.2 Further we are of the considered opinion that as per section 23(1)(a) of the Act for the purpose of section 22 of the Act, the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. Further, as per the provision of section 23(1)(c) of the Act, where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable shall be treated as annual value.
Bindumalyam Panduranga Allanharinarayan, Bangalore Page 17 of 17 In the present case, the property is not let for the entire year under consideration. Therefore, in our view the AO has rightly considered the fair rental value for determining the annual value of the house property as per provisions of section 23(1)(a) of the Act as the assessee has not provided/furnished any fair rental value before the authorities below. Therefore, this ground of appeal of the assessee is dismissed.
In the result, appeal filed by the assessee is partly allowed.