Since decades there has been much controversy on Whether Charges received by\u00a0<\/span>an Assessee\u00a0<\/span>for providing services \/ facilities and amenities to\u00a0<\/em><\/span>his tenants, using the nomenclature as \u2018Service Charges<\/em>\u2019, would or would not\u00a0\u00a0<\/span>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 \u2018let\u2019 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 \u2018Income from House Property\u2019. 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).<\/span><\/p>\n

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.\u00a0Various 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 \u2018Other sources\u2019 and not income from house property. In a recent
\njudgment of the Hon\u2019ble Delhi High Court in the case of\u00a0<\/embed>” class=”undefined”>\u00a01<\/strong>Garg Dyeing and Processing Industries vs. ACIT<\/em>\u00a0\u00a0it 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<\/span>\u00a0MadrasHigh Court in case of<\/span>\u00a0\u00a0<\/span><\/em>^{2<\/sup><\/strong>CIT Vs. Halai Memon Association<\/span>\u00a0<\/span>\u00a0and the Hon\u2019ble Supreme Court of India in the case of<\/span>\u00a0\u00a0<\/span><\/em>3<\/sup><\/strong>CIT Vs. National Storage (P) Ltd.<\/em><\/span><\/p>\n}

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.\u00a0The Hon\u2019ble High Court of Calcutta in the case of\u00a0\u00a0<\/em>^{4<\/sup><\/strong>CIT Vs. Model Manufacturing Co. (P)\u00a0Ltd\u00a0<\/em>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\u2019t 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\u00a0Income
\nfrom Other Sources.<\/em>\u00a0\u00a0It 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\u00a0\u2018Income from Business\u2019 (Karnani properties Ltd Vs. CIT) [(1971) 82 ITR 547 (SC)<\/em>].<\/p>\n}

It is to be kept in mind as a Principle that the expression \u2018letting out<\/em>\u2019 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 \u2018Income from Business\u2019<\/em>\u00a0<\/em>and not\u00a0\u2018Income from House Property<\/em>\u2019. 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 \u2018Income form House Property<\/em>\u2019.<\/p>\n

\u00a0Contrary to the above scenario has been held by the ITAT (Mum) in the case of\u00a0Marwar Textiles (Agency) Ltd. Vs. Income Tax Officer<\/em>\u00a0vide its judgment dated\u00a024^{th<\/sup>\u00a0April 2008<\/em>, but further again, this case has already been admitted in the Hon\u2019ble High Court on the question of law raised by the Assessee vide its order of admission dated\u00a020\/09\/10<\/em>. Supreme Court in the case of\u00a05<\/sup><\/strong>Shambhu Investments Vs. CIT<\/em>upheld the order of the\u00a0Hon\u2019ble Cal. High Court<\/em>\u00a0and 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 \u201cSecurity fee advance\u201d from the occupants and its intention was not to exploit the premises by way of \u2018complex commercial activities\u2019 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\u00a06<\/sup><\/strong>Sultan Brothers Pvt Ltd. Vs. CIT\u00a0<\/em>for not including the Income under the head of \u2018House Property\u2019.<\/span><\/p>\n}

Thus as far as inclusion of Service charge (disputed rental income) under the head \u2018Income from Business<\/em>\u2019 is considered, the position is controversial but keeping in mind the above bearings, an Assessee can safely include it under the head \u2018Income from Other Sources<\/em>\u2019 if his case falls under the conditions of composite letting.<\/span><\/p>\n

Bombay \u2013 High Court.<\/p>\n

1.\u00a0\u00a0[(2012) 28 taxmann.com 287, Delhi]<\/p>\n

2.\u00a0\u00a0[(2000) 243 ITR 439]<\/p>\n

3.\u00a0\u00a0[(1967) 66 ITR 596 SC]<\/p>\n

4.\u00a0\u00a0[(1986) 159 ITR 270]<\/p>\n

5.\u00a0\u00a0[(2003) 264 ITR 143 SC]<\/p>\n

6.\u00a0\u00a0[(1964) 51 ITR 353 SC]<\/p>\n

Other Relevant Judgments:<\/p>\n

a. CIT v. Admiralty Flats Motel [(1982) 133 ITR 895 Mad]<\/p>\n

b. CIT v. K. L. Puri (HUF) [(1998) 233 ITR 43]<\/p>\n

c. Mukherjee Estate (P.) Ltd. v. CIT [(2000) 244 ITR 1]<\/p>\n

d. CIT v. Associated Building Co. Ltd. [1982] 137 ITR 359 (Bom)<\/p>\n

\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Since decades there has been much controversy on Whether Charges received by\u00a0an Assessee\u00a0for providing services \/ facilities and amenities to\u00a0his tenants, using the nomenclature as \u2018Service Charges\u2019, would or would not\u00a0\u00a0constitute the income from house property. As per section 23 of the Income tax Act, 1961, the Annual Letting Value of the premises is the … Read more<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[4],"tags":[71],"class_list":["post-109","post","type-post","status-publish","format-standard","hentry","category-income-tax","tag-house-property"],"yoast_head":"\n