MYSTIQUE REALTY P.LTD,MUMBAI vs. DCIT 3(2), MUMBAI

In this appeal the assessee is aggrieved for not allowing brokerage paid to brokers amounting to Rs.85.95 lakhs for arrangement of lease, out of rental income u/s.23(1)(b) of the IT Act.

Rival contentions have been heard and record perused. The facts of the case are that assessee has received rental income of Rs.1,82,01,040/-, which is assessed under the head income from house property, whereas, assessee has claimed brokerage expenses of 2 Rs.80,95,008/- against the income from house property in addition to interest expenses Rs.37,19,734/- and statutory deduction u/s.24 of the Act @ 30%, whereas AO has not allowed deduction on account of brokerage expenses which has been disputed by the assessee.

By the impugned order the CIT(A) confirmed the action of the AO after having the following observations :- “4. I have considered the facts of the case and submissions of the assessee. Income from house property is taxable on the annual value and annual value is the value at which the property might reasonably be expected to let from year to year and in case actual rent received is more than what is reasonably expected at which the property can be let from year to year than the actual rent is treated as annual value. Any deduction with regard to the expenses relating to renting of property and repair of property are allowed u/s.24. U/s. 24 other than interest 30% of the annual value is allowed as deduction on account of all expenses. This is a statutory deduction allowed on account of all expenses without reference to any bill or expenditure and, therefore, claiming of any such expenditure again will amount to double deduction because 30% of annual value is allowed on account of expenses only, otherwise there is no other reason for allowing such a deduction. If each and every expenditure relating to house property and letting of house property is to be allowed separately, again then there is no logic or reason for allowing the 30% of ALV as standard deduction. Therefore, brokerage or any other such expenditure is not allowable as deduction separately. Assessee has asked it to be reduced from the rent received, but property is taxable on a notional value which is the annual value for which it can be reasonably let and this is substituted by actual rent if actual rent is more than the notional value. Therefore, in all those cases where actual rent has been substituted for notional annual value then there is no reason for reducing this annual value. Otherwise, the case will not be assessed at the rent which it can fetch in the open market. There is no other provision for allowing any such deduction in the Income tax Act. The assessee has claimed that it will amount to double taxation, once in the hands of the landlord then in the hands of the broker, but in the hands of the landlord it is the annual value which is taxed and not the rent as such, whereas, in the hands of the brokers it is the brokerage which is taxed and, therefore, there is no question of any double taxation. The assessee has claimed that had the brokerage been not spent no rent had been earned, but it has nothing to do with the rent received, the property would have been otherwise taxable on notional basis. The assessee has also claimed that the broker has rendered services and has direct nexus with the rent, but all those services and expenses which are related 3 to renting of property and maintenance of property are relatable to rent or the property, but they are allowed as deduction in the form of 30% standard deduction u/s.24(a) and, therefore, there is no reason for allowing the brokerage out of rent as deduction or otherwise.”

Against the above order of CIT(A), the assessee is in further appeal before us.

Ld. AR relied on the order of coordinate bench in the case of Govind S. Singhania, ITA No.4581/Mum/2006, order dated July, 2008 and on the order of ITAT Delhi Bench in the case of Neelam Cable Manufacturing Co., 59 TTJ 474 and contended that brokerage so paid should be allowed while computing income from house property u/s.23(1)(b) of the Act.

On the other hand, ld. DR relied on the decision of Mumbai Tribunal in the case of Excellent Associates, 96 ITD 57, wherein it was held that brokerage paid cannot be allowed insofar as deduction at 1/5th of the annual letting value is allowed under Section 24(1) for repairs and collection charges. Further, reliance was placed by ld. DR on the decision of Chandigarh Tribunal in the case of Piccadily Hotels (P) Ltd., 97 ITD 564, wherein it was held that brokerage paid to the broker for bringing the tenant cannot be reduced while computing income from house property.

We have considered rival contentions, carefully gone through the orders of the authorities below, deliberated on the judicial pronouncements cited at bar by ld. AR & DR in the context of factual matrix of the case and found from the record that assessee has paid brokerage of Rs.85.95 lakhs to the broker which is equivalent to two months rent compensation and 2% of security deposit as a professional 4 fees/brokerage for sourcing the licence and letting out the premises. Reading of s. 23(1)(b) with Expln. 1(a) makes it very clear that the annual value of the property where the property is let throughout the previous year is the actual rent received or receivable by the owner in respect of such year. The word 'actual' occurring in the Expln.1(a) is in contradistinction to the hypothetical rent that may be receivable by the owner. It cannot be construed to mean the rent actually coming into the hands of the owner after various deductions. If it were so, s. 24 would not have been there. While determining annual value under s. 23(1)(b), it is wrong approach to say that the physical receipt of the rent being the basis of the computation, one has to decide what is the actual rent received. It is further erroneous to say that in determining the actual rent receipt, the net amount of money received or receivable by the assessee would be relevant. Even if brokerage was paid for earning rental income, such amount is not permitted to be deducted from the rent so received by the assessee while computing annual letting value. In determination of the annual value what is to be deducted is provided in section itself; for example, where the property is in occupation of a tenant, the tax levied by any' local authority in respect of property, to the extent such taxes are borne by the owner is allowed to be deducted in determination of annual value of the property of that previous year in which such taxes arc actually paid Once the annual value is determined what deductions are to be made from income from house property are provided in s.

Thus, the 5 ITA No.7320/M/12 amount of brokerage paid by assessee cannot be allowed as deduction while determining annual value.

Similar view has been taken by the Hon’ble Punjab and Haryana High Court in the case of Aravali Engineers Pvt. Ltd., 335 ITR 508. Similar view has also been taken by the Hon’ble Rajasthan High Court in the case of Premnath Motors (Raj) Pvt. Ltd., 297 ITR 83.

In view of the above judicial pronouncements, we do not find any infirmity in the order of lower authorities for not allowing deduction on account of brokerage paid while computing income from house property u/s.23(1)(b) of the I.T. Act.

In the result, appeal of the assessee is dismissed. Order pronounced in the open court on this 20/11/2015.