2012 (8) TMI 239 - HC - Income Tax

Addition to the income under the head income from house property - amount paid by the tenants to DSL was nothing but a part of the rent and the same should be added to the rental income received by the assessee - Held that - No case has been made out to prove that the entire transaction was the result of a collusive arrangement to divert the income which was in truth and fact earned by the assessee. The assessee being the owner of the property, is assessable under Section 22 only in respect of the annual letting value of the same as the services for maintenance of the common areas and facilities were found to have been actually rendered by DLS and not by the assessee. DLS may be part of the same group, but it is a separate corporate entity carrying on business as service provider for maintenance of properties. The arrangement between the tenants and DLS is a part of the business transaction entered into in the regular course of the business of DLS - assessee firm has not been found to have actually enjoyed the service charges paid to DLS and had no domain over the recovery of the maintenance charges nor had any role to play in the business activities of DLS - in favour of assessee.

Summary

Issues:
Assessment of rental income including maintenance charges in the hands of the assessee.

Analysis:
The case involved an appeal by the Commissioner of Income Tax against the Income Tax Appellate Tribunal's order for the assessment year 2004-05. The assessee, a partnership firm engaged in real estate business, earned rental income from a building named Gateway Tower in Gurgaon. The Assessing Officer added maintenance charges paid by tenants to a company, DLF Service Ltd. (DSL), to the assessee's rental income. The Tribunal, however, noted that the service charges were directly paid to DSL for maintaining common areas and facilities, which were included in DSL's business income and taxed accordingly. The Tribunal emphasized that only rent received or receivable is taxable under Section 23(1) of the Income Tax Act, and as the assessee did not provide maintenance services or charge tenants for the same, the maintenance charges were not assessable in its hands.

The Tribunal examined the lease agreement clause, which clarified that DSL was responsible for maintaining common areas and facilities, and the assessee was not involved in providing or charging for maintenance services. The Tribunal found no collusion to avoid taxation and observed that DSL actually rendered the services. Additionally, the Tribunal highlighted the lack of control by the assessee over maintenance charges recovery or DSL's business activities. Noting the past assessments and consistency in treatment, the Tribunal deleted the addition to the assessee's income and allowed the appeal.

The High Court upheld the Tribunal's decision, emphasizing that the assessee, as the property owner, was only assessable for the annual letting value under Section 22. The Court reiterated that the maintenance services were provided by DSL, a separate corporate entity, and not enjoyed or controlled by the assessee. The Court found no evidence of collusion or diversion of income, supporting the Tribunal's factual and legal findings. It concluded that no substantial question of law arose for consideration and dismissed the appeal with no costs.

In conclusion, the judgment clarified the taxability of rental income and maintenance charges, highlighting the distinction between the responsibilities of the property owner and service provider. The decision emphasized adherence to legal principles, lack of collusion, and the absence of grounds to challenge the transaction, ultimately affirming the Tribunal's deletion of the addition to the assessee's income.