KANTILAL G GOWANI (HUF),MUMBAI vs. ACIT CIR 12(3), MUMBAI

This appeal by the assessee is directed against the order of the CIT(A)- 23, Mumbai dated 07.11.2012 for A.Y. 2009-10.

Kantilal G. Gowani (HUF) appeal, thereby upholding the disallowance of the assessee’s claim of service tax of `18,66,223/- made by the Assessing Officer. 3.1 Aggrieved by the impugned order of the learned CIT(A)-23, Mumbai dated 27.11.2012 for A.Y. 2009-10, the assessee has preferred this appeal before the Tribunal raising the following grounds: - “

1. On the facts and n the circumstances of the case the learned Commissioner of Income tax (Appeal)-23, Mumbai erred in law in confirming the disallowance of `18,66,223/0 made by the ACIT Circle-12(3), Mumbai in determining annual value u/s. 23(1)(b) of the Act of the lease out property at 1st Floor, ‘C’ Wing, Trade World, Kamala Mills Compound, Senapati Bapt Marg, Lower Parel, Mumbai-400013.

2. The appellant craves leave to amend, alter, change, modify and/or add to the above grounds of appeal”. 3.2.1 From a perusal of the grounds raised, the only issue in dispute in this appeal is in respect of the disallowance of `18,66,223/- on account of service tax while determining the annual value of the leased out property to HDFC Securities Ltd. at 1st Floor, “C” Wing, Trade World, Lower Parel, Mumbai-400013 (in short ‘the said property’). The facts of the matter, as emanate from the record before us, are that in the course of assessment proceedings, the AO observed that the assessee had claimed deduction on payment of service tax of `18,66,223/- from the lease rent received by it but which was not collected by the assessee from the tenant. According to the AO, the assessee’s claim was not allowable, since the deduction available to the assessee on income under the head ‘income from house property’ is either as per the provisions of the proviso to section 23(1) or under section 24 of the Act. The AO was also of the view that service tax is not the actual burden of the assessee, but that of the consumer of the service; and the assessee as ‘the service provider’ was only responsible to collect the same from the lessee of the said property and pay/deposit the same in the government account. In that view of the matter, the AO held that in the factual matrix of the case, the assessee’s claim for allowing the payment of service tax in this instance cannot be allowed as a deduction. The assessee’s contention that the service tax paid by the assessee on the Kantilal G. Gowani (HUF) said property leased to M/s. HDFC Securities Ltd. should be allowed as a deduction since the actual rent realized by the assessee should be reduced by the amount of service tax not paid by the tenant, was negatived by the AO for the reason that the tenant/lessee of the said property has paid the rent as determined by the Leave and Licence Agreement and therefore the service tax paid by the assessee on behalf of the tenant, not being actually the burden of the assessee as per the relevant provisions of the Act, the assessee’s claim was not allowable as a deduction as there is no unrealized rent. 3.2.2 On appeal, after considering the assessee’s submission as laid out at para 2.2 of the impugned order, the learned CIT(A) upheld the aforesaid disallowance of `18,66,223/- made by the AO on account of service tax payment made by the assessee which was claimed as a deduction by the assessee from its income from house property. At para 2.3 of the impugned order, the learned CIT(A) dismissed the assessee’s appeal, holding as under: - “2.3 The assessment order, submissions made for the appellant and materials on record have been considered. The assessee claimed service tax paid as an expense against the income from house property. The liability to pay service tax on behalf of his tenant is not the part of his obligation in terms of the agreement nor such service tax is a part of the gross rent receipts from his tenant, thus, clearly showing that it is not the annual charge on the property let out. The Assessing Officer has rightly pointed out that the service tax paid by the assessee in respect of the letting out of the property is not permissible as the deduction under section 24 of the Act. Annual letting value of the property is defined u/s 23 of the I.T. Act and in case of property let out, if the actual rent received is more than the expected rental value, the actual rent is treated as the ALV of the property. Out of the said ALV, deduction permissible are specified under section 24 of the Act. In this case the rental value is not disputed. It is also not disputed that deduction of service tax does not fall within a specified deduction under section 24 of the I.T. Act. It is also pertinent to mention that section 24(1) provides deduction equal to 30% of the annual value without assessee having to establish the incurring of any expenditure. Thus, the expenditure which is incurred by the assessee can be said to be covered under the statutory deduction allowed to the assessee. Since, the legislature in its wisdom has not provided any separate deduction on account of taxes other than municipal taxes, the A.O. has rightly held that the assessee is not eligible to claim such deduction.

In Hon'ble ITAT, Amritsar Bench in the case of Rai Bahadur Kishorechand & Sons vs. ITO 117 ITD 57 has held that only those items of expenses mentioned in the sections can be allowed against income from house property. In the case of CIT vs. Sreelekha Banerjee 179 ITR 46, the Hon'ble High Court of Calcutta had an occasion to deal with the issue of deduction u/s 24 of the I.T. Act on the issue of salary paid to the caretaker of the property. The Hon'ble Court while holding the claim of the assessee unsustainable remarked as under : "5. Sec. 22 provides that the annual value of a property consisting of any building 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". Sec. 23(1)(a) provides that, for the purposes of s. 22, the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. The figure of annual value determined for municipal purposes, actual rent realised, existence of rent control legislation, etc., are all relevant factors to be taken into account in determining the municipal valuation. Service charges for lift, water pump, water tax, etc., may have to be deducted from the gross rent but not the salary of a caretaker which has nothing to do with the determination of municipal valuation. Where actual rent is taken as the basis for the determination of the annual value, salary of a caretaker cannot be deducted. The application of the provisions does not depend on the capacity of the owner to let the property out or on its own power to receive rent or income from bona fide annual value in determining the annual value. No expenditure which is allowable as deduction in computing the municipal valuation can be taken into account in the computation of annual value. The deductions under ss. 23(1) and 24(1) are exhaustive.

3.2.3 Before us, the learned A.R. for the assessee basically reiterated the submission put forth the authorities below, i.e. at para 2.2 of the CIT(A)’s order and para 4.1 and 4.2 of of the order of assessment. 3.2.4 Per contra, the learned D.R. for Revenue strongly supported the views and findings in the order of the authorities below that as per the provisions of the Act, the deductions available to an assessee on income from house property are specifically provided for either under the proviso to section 23(1) or under section 24 of the Act and since the payment of service tax by the assessee, in the factual matrix of the case, is not covered therein. Therefore, it was prayed that the assessee’s claim being untenable, the same may be dismissed and the orders of the authorities below be upheld. 3.2.5 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The facts on record are that the assessee while computing its income from house property has claimed thereunder a deduction of `18,66,223/- on account of service tax paid. That this expenditure claimed is not the annual charge on the property let out by the assessee is clear from the terms of the agreement which show that the liability to pay the said service tax on behalf of the tenant was neither part of the assessee’s obligation nor did such service tax form a part of the gross rent receipt from the tenant. We concur with the view of the authorities below that the deductions permitted to the assessee while computing the income from house property are specifically provided under the provisions of the proviso to section 23(1) or under section 24 of the Act and that the service tax paid by the assessee in respect of the said property as in the factual matrix of the case (vis. Which was not part of the gross rent for the said property as per the agreement) is not allowable as a deduction thereunder. Since no material has been placed before us to contravene the factual/legal findings of the authorities below in the matter, we uphold the findings of the learned CIT(A) at para 2.3 of his order (extracted supra at para 3.2.2) that the disallowance of Kantilal G. Gowani (HUF) service tax of `18,66,223/- made by the AO of the assessee’s claim for deduction in computing its income from house property is in order. Consequently, the grounds of appeal raised by the assessee are dismissed.