Since decades there has been much controversy on Whether Charges received by an Assessee for providing services / facilities and amenities to his tenants, using the nomenclature as ‘Service Charges’, would or would not constitute the income from house property. As per section 23 of the Income tax Act, 1961, the Annual Letting Value of the premises is the sum for which the property might reasonably be expected to be ‘let’ from year to year or where the property is let, the actual rent received or receivable by letting out of the premises. The Higher of these two values is considered as the ALV. Section 22 of the Income tax Act is the charging section for Income under the head ‘Income from House Property’. This section attempts to charge the Annual Value of such portion of the self owned property, which is not used for carrying on usual Business/profession of the said Assessee. Section 23(4) provides an option to the Assessee to opt for any one of properties as being occupied for self use, and the others will be deemed to be let out, the annual value of which will be computed as per section 23(1).
From the plain reading of these sections it can be inferred that for computation of Annual value, only the Rental income and not the Service Charges for providing the extra facilities/services is relevant. Various Courts have held that where the facilities provided by the assessee are inseparable from the premises in question, then the receipt of such service charges are liable to be assessed as income from ‘Other sources’ and not income from house property. In a recent
judgment of the Hon’ble Delhi High Court in the case of ” class=”undefined”> 1Garg Dyeing and Processing Industries vs. ACIT it has been held that where letting of building and letting of Fixtures / Machinery / Furniture / Air-conditioning etc. were inseparable, Rental Income has to be assessed as Income from Other Sources. Similar view has been taken by the MadrasHigh Court in case of 2CIT Vs. Halai Memon Association and the Hon’ble Supreme Court of India in the case of 3CIT Vs. National Storage (P) Ltd.
The major problem arises for the Assessee who is actually engaged in the business of receiving Service charge, on properties bought which have further been let for running business centre, by incurring huge expenditure on setting-up customized infrastructure like Fixtures, Machinery, furniture, etc. and the Assessing Officer denies the claim of Depreciation on such infrastructure due to change in head of Income. The Hon’ble High Court of Calcutta in the case of 4CIT Vs. Model Manufacturing Co. (P) Ltd had faced this issue of claim of depreciation but did not decide this particular issue saying that since the facts w.r.t. the depreciation claim were not before it, such issue can’t be decided. But in this instant case, the Assessee did not conduct the business of earning service charges in an organized manner and also this was not the normal business activity of the Assessee. Based on such facts, the Cal. High Court allowed all the expenses wholly and exclusively connected with earning of service charge except the depreciation claimed and therefore parked it under the head Income
from Other Sources. It however said that depreciation claim of the Assessee can be allowed u/s 57 if the conditions given in 56(2)(vii) are satisfied. But if such is not the case and the Assessee carries some ancillary activities simultaneously in connection to the premises being let, and such business is done in an organized manner with a view to earn profits, the income has to be assessed under the head ‘Income from Business’ (Karnani properties Ltd Vs. CIT) [(1971) 82 ITR 547 (SC)].
It is to be kept in mind as a Principle that the expression ‘letting out’ is used for a limited purpose. If premises remain under control of the owner and the owner receives a charge only against a license granted for a limited purpose, the income ought to be included under the head ‘Income from Business’ and not ‘Income from House Property’. In other words, if an Assessee transfers the benefits of enjoying the property as it is, wholly with a view to earn an amount and without any transfer or provision of extra facilities connected with the said premises, only then income can be assessed as ‘Income form House Property’.
Contrary to the above scenario has been held by the ITAT (Mum) in the case of Marwar Textiles (Agency) Ltd. Vs. Income Tax Officer vide its judgment dated 24th April 2008, but further again, this case has already been admitted in the Hon’ble High Court on the question of law raised by the Assessee vide its order of admission dated 20/09/10. Supreme Court in the case of 5Shambhu Investments Vs. CITupheld the order of the Hon’ble Cal. High Court and held contrary to the above scenario on the basis of a finding that Assessee had already recovered substantial amount of the cost of the property by way of “Security fee advance” from the occupants and its intention was not to exploit the premises by way of ‘complex commercial activities’ but the sole intention was just to let out the property with a furnished accommodation. It followed the tests laid down by the apex court in 6Sultan Brothers Pvt Ltd. Vs. CIT for not including the Income under the head of ‘House Property’.
Thus as far as inclusion of Service charge (disputed rental income) under the head ‘Income from Business’ is considered, the position is controversial but keeping in mind the above bearings, an Assessee can safely include it under the head ‘Income from Other Sources’ if his case falls under the conditions of composite letting.
Bombay – High Court.
1. [(2012) 28 taxmann.com 287, Delhi]
2. [(2000) 243 ITR 439]
3. [(1967) 66 ITR 596 SC]
4. [(1986) 159 ITR 270]
5. [(2003) 264 ITR 143 SC]
6. [(1964) 51 ITR 353 SC]
Other Relevant Judgments:
a. CIT v. Admiralty Flats Motel [(1982) 133 ITR 895 Mad]
b. CIT v. K. L. Puri (HUF) [(1998) 233 ITR 43]
c. Mukherjee Estate (P.) Ltd. v. CIT [(2000) 244 ITR 1]
d. CIT v. Associated Building Co. Ltd. [1982] 137 ITR 359 (Bom)
