RAJENDRA R. CHATURVEDI,MUMBAI vs. DCIT CC 2(3), MUMBAI

The AO, after considering explanations of the assessee observed that the wordings and expressions used in the amenities' agreement pointed out that receipts from the use of amenities were in the nature of "Income from house property" only. The AO further observed that the amenities provided by the assessee were part and parcel of the premises let out and no separate services were rendered by the assessee in any manner as contended. The assessee merely split rent agreement into two parts to make it convenient so that it can offer one part as "Income from house property" and the other part as "Income from business" so as to claim expenditure. Once the licensor has leased the premises, the licensee is automatically entitled to use those facilities. Mere splitting up of rent into two parts does not mean that income from amenity charges is not from letting out of the property. The AO, after analyzing the agreements entered into by the assessee observed that the so- called amenities provided to the assessee is in the nature of inseparable facilities attached with the premises which cannot be considered as a separate activity of business so as to claim the said income under the head, "Income from business". The AO further observed that it was pertinent to mention that the licensee has deducted tax at source on the entire amount including the compensation paid to the assessee u/s 194-I as 'rent'; therefore, tacitly accepting that all the receipts relating to the said property are in the nature of house property income. Accordingly, the AO treated receipts from amenity charges as part of rental income and assessed the same under the head "Income from house property". Insofar as expenditure claimed against compensation charges, the AO observed that since assessee has no other business activity and is only earning Income from house property, the claim of business expenditure inclusive of interest was to be disallowed; however, the assessee was allowed standard deduction as per section 24 on compensation receipt.

Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before CIT(A), the assessee reiterated its submissions made before the AO. The assessee further submitted that as per the provisions of section 23 of the Income-tax Act, 1961, the annual letting value of the premises is the amount for which the property might reasonably be expected to let out from year to year or the actual rent received or receivable, whichever is more. Therefore, for computation of annual value, only the rental income has to be ITA No.351/Mum/2015 considered and not the service charges for providing extra facilities and services. The assessee, referring to the decision of Hon'ble Supreme Court in the case of CIT vs National Storage Pvt Ltd (1967) 66 ITR 596 (SC) submitted before CIT(A) that income derived from rendering services in addition to letting out of the property was income derived from carrying on an adventure in the nature of trade, therefore, compensation received from the tenant for providing additional services, which are not connected to the letting out of premises has been rightly assessed under the head, "Income from business". The AO, without appreciating the facts, has simply considered amenity charges under the head "Income from house property", which is incorrect. In support of its arguments, the assessee relied upon the decision of Hon'ble Madras High Court in the case of CIT vs Chennai Properties & Investments Ltd (2008) 303 ITR 33 (Mad).

The CIT(A), after considering the relevant submissions of the assessee observed that the ground was covered by his earlier decision in assessee's own case for AY 2008-09 wherein at paragraph 5.1 of the order it was held that amenity charges received from providing facilities was assessable under the head, "Income from house property". Since the facts are almost identical for the year under consideration, he held that the entire income from amenity charges is taxable under the head "Income from house property". Insofar as disallowance of expenditure is concerned, the CIT(A) observed that interest was allowed to assessee in assessment years 2009-10 & 2010-11; however, without any convincing reasons, the AO has not allowed interest during the year under consideration besides noticing that on perusal of balance-sheet of the assessee, the amount of the borrowed capital almost matched with the assets, i.e. the building which has been utilised has yielded income from house property meaning thereby that the borrowed funds are utilized for acquisition of property and there is no proof of diversion of borrowed funds. Under these circumstances, the AO was directed to allow interest claimed by the assessee. With these observations, the CIT(A) partly allowed the appeal filed by the assessee. Aggrieved by the order of CIT(A), the assessee is in appeal before us.

The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in considering compensation for use of amenities and facilities as "Income from house property" without appreciating the fact that the assessee has provided additional facility such as security services, additional load of electricity supply, parking service and other related services which are not connected to letting out of premises. The AR further submitted that if the main object of the assessee is letting out of premises and earns rent therefrom, income so earned should be treated as business income. Since the assessee is involved in the business of providing facility management services and infrastructure for business, it has rightly treated compensation received towards providing amenities under the head "Income from business". In support of his argument, the Ld.AR relied upon the decision of Hon'ble Supreme Court in the case of Rayala Corporation Ltd vs ACIT 2016) 386 ITR 500 (SC) and also ITAT Mumbai Bench decision in the case of Kavita Marketing Pvt Ltd vs ITO (2016) 47 CHH 228 (Mum Trib).

The Ld.DR, on the other hand, supported the orders of authorities below and submitted that the issue has been already considered by the ITAT, in assessee's own case in the earlier years and observed that the receipts towards amenities are to be considered as part of rental income. The Ld.DR further submitted that the assessee has earned compensation for providing amenity charges to the same tenant, who occupied the premises by splitting rental agreement into two parts which is evident from the fact that the tenant has deducted tax at source u/s 194-I of the Income-tax Act, 1961 on total payments including compensation paid for providing amenities. Therefore, the AO has rightly assessed compensation received under the head "Income from house property and his order should be upheld. In support of his argument, he relied upon the decision of the Hon'ble Supreme Court in the case of Shambhu Investment (P) Ltd vs. CIT (2003) 263 ITR 143 (SC) and submitted that income ITA No.351/Mum/2015 derived from letting out furnished premises on monthly rent to various parties along with furniture, fixtures, etc. and also providing them common services like watch and ward, electricity, water and other amenities without any separate charge was assessable as "Income from house property" and not as business income.

We have heard both the parties and considered the material available on record. The factual matrix which leads to the impugned addition is that the assessee has let out premises by entering into two separate agreements for letting out premises and providing amenities. The assessee has considered rental receipts under the head "Income from house property", whereas compensation received for providing amenities has been considered as "Income from business". The AO has assessed compensation received from providing amenities under the head "Income from house property" on the ground that mere splitting up of rental agreement cannot change the character of income which has to be assessed under a particular head of income. The AO further observed that as per the details furnished by the assessee, like leave & licence agreement, these two agreements are inseparable from each other which is evident from the annexure annexed to the agreement which states that the assessee needs to provide certain amenities in pursuance to leave & licence agreement. The AO further observed that the tenant has deducted TDS on total payments including compensation paid for providing amenities u/s 194-I. Therefore, it is abundantly clear that the socalled compensation received for providing amenities is part and parcel of rental receipts. It is the claim of the assessee that its main object is to provide business facilities and infrastructure for business and once it is involved in the business of providing premises on rental basis, then the rental receipts received is assessable under the head "Income from business". The assessee further submitted that it has entered into separate agreement for providing amenities which is not connected to the letting out of the premises, therefore, any charges received for providing additional services cannot be considered as annual letting value as per section 23 of the Income-tax Act, 1961. The assessee further contended that it is providing additional services like watch and ward, additional load of electricity supply and other related services for which it has separately charged the tenant against which the assessee has incurred expenses. Therefore, the said activities come under the head "Income from business".

The question to be resolved here is whether on the facts and in the circumstances of the case, the compensation received by the assessee for providing amenities to the tenant, who occupied the premises of the assssee, is assessable under the head "Income from house property" or "Income from business". A similar issue has been considered by the ITAT, SMC Bench, ITA No.351/Mum/2015 Mumbai in assessee's own case for AY 2008-09 in ITA No.349/um/2015 dated 22- 06-2016. The co-ordinate bench of this Tribunal, under similar facts, has held that receipts towards amenities are to be considered as part of rental income. However, the expenses incurred towards security service and pantry services are not connected to the rental income and hence, they should be deducted from the receipts from amenities. The relevant pat of the order of the co-ordinate bench is extracted below:- "6. I further notice that the assessee has let out the two storey building to only one tenant. The nature of amenities claimed to have been provided consisted of security services, building maintenance, car parking facility, pantry services. The electricity expenses incurred by the assessee are being reimbursed by the tenant. I notice that the security services and pantry services are not germane to the letting of building, but other services are part and parcel of letting of building.

Having heard both the sides and considered material available on record, we find that the AO has disallowed total expenditure claimed by the assessee against business receipts on the sole ground that compensation received for providing amenities is assessable under the head "Income from house property". However, the AO has allowed standard deduction u/s 24 while computing "Income from house property". Insofar as other expenses including interest paid on loan is concerned, the AO has disallowed the expenditure. It is the claim of the assessee that out of the total expenditure incurred, major portion of expenditure is incurred towards providing additional load of electricity which has been reimbursed by the service receiver which is included in compensation paid for amenity charges which needs to be excluded. We find force in the argument of the assessee for the reason that providing additional services in the form of electricity and security services is not part and parcel of providing premises on rental basis, therefore, any charges received towards services provided in the form of electricity supply and security services need to be excluded from the gross receipts received. In respect of amenity charges, the assessee has filed necessary details in support of expenditure incurred for providing electricity and security services. On perusal of the details filed by the assessee, we find that the assessee has incurred an amount of Rs.44,44,226 towards electricity expenses and claims that the same has been reimbursed by the service receiver which is included in the compensation provided for amenities. Therefore, we are of the view that any amount paid towards reimbursement of electricity charges needs to be excluded for the purpose of compensation received from providing amenities for the purpose of computation of "Income from house property". Accordingly, we set aside the issue to the file of the AO and direct the AO to examine the claim of the assessee in regards to the details furnished. In case it is found that electricity charges incurred and reimbursed is included in compensation payments, then the AO is directed to exclude such charges for the purpose of computation of gross receipts under the head "Income from house property". We further direct the AO to consider reimbursement of electricity charges and allow expenditure incurred by the assessee for providing such services separately under the head "Income from other ITA No.351/Mum/2015 sources". Accordingly, the ground raised by the assessee is partly allowed, for statistical purposes.