2016 (9) TMI 1198 - HC - Income Tax

Income from house property - annual value of the property computation - inclusion of maintenance charges as part of the rent - Held that - The actual rent received would be much higher where the facilities are better. Section 23 provides that the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year or where the property is let, the actual rent received or receivable by the owner whichever is higher. In either case the rent that is received in respect of the premises in a building where the common amenities are better is bound to be higher than the rent that is expected to be received or is received in a building where the amenities are not as good. Where the agreement provides that the owner shall pay the amounts for the common facilities, maintenance charges, outgoings etc. it is obvious and reasonable to presume that the same is factored into the rent, fee or compensation payable by the lessee or the licencee. In that event the same cannot be added to the rent agreed to be paid. However, if the maintenance charges etc. are stipulated to be payable by the licencee or the lessor it must form a part of the rent for the purpose of computing the annual value of the property. A view to the contrary would enable a party to undervalue the annual value of the property for the purpose of section 23 by the simple expedient of providing for the payment of the maintenance charges etc. and the rent separately. The maintenance charges must be included as part of the rent for the purpose of computing the annual value of the property. The assessee is not prejudiced thereby in any event. We are informed that the amounts received under the sub-sub-licencee had been brought under the head Income from house property . Section 24 provides that the income chargeable under the head Income from house property shall be computed after making the deductions specified therein. Under clause (a) of Section 24, a sum equal to thirty percent of the annual value is liable to be deducted. The assessee has, therefore, the benefit of deductions under section 24 as well as under the proviso to section 23 of the Act. - Decided against the assessee.

Issues:
1. Whether maintenance charges can be included as part of rent?
2. Interpretation of Section 23 of Income Tax Act, 1961.
3. Whether maintenance charges given by sub-sub-licensees to the builder can be included as part of rent?
4. The sustainability of orders Annexures A-1 to A-3 in law.

Issue 1: Maintenance Charges as Part of Rent

The appellant, a sub-licensee, entered into a sub-sublicence agreement with a company, including clauses for rent and maintenance charges. The question was whether maintenance charges under the agreement could be considered part of the rent. The court analyzed the agreement's language and concluded that the sub-sub-licensee was required to pay maintenance charges to the sub-licensee, not directly to the builder. The court emphasized that the maintenance charges should be included as part of the rent, as per the wide ambit of the term "rent" in Sections 22 and 23 of the Income Tax Act, 1961.

Issue 2: Interpretation of Section 23 of Income Tax Act, 1961

The court examined Section 23 of the Income Tax Act, 1961, which determines the annual value of property for taxation purposes. It noted that the annual value should include any amount paid in consideration of the property being let, which encompasses maintenance charges. The court highlighted that failing to include maintenance charges in the rent could lead to undervaluing the property for taxation purposes, allowing parties to avoid paying tax on the true annual value of the property.

Issue 3: Inclusion of Maintenance Charges from Sub-Sub-Licensees

The court clarified that if an agreement stipulates that maintenance charges are payable by the licensee or lessor, those charges must be part of the rent for computing the property's annual value. Failing to include maintenance charges in the rent could enable parties to undervalue the property for taxation purposes, which goes against the legislative intent of determining the property's true annual value.

Issue 4: Sustainability of Orders

The court found that the maintenance charges should be included as part of the rent for computing the property's annual value. It ruled in favor of the revenue, stating that the appellant was not prejudiced as deductions under Section 24 of the Income Tax Act were available. Consequently, the court dismissed the appeal, upholding the inclusion of maintenance charges as part of the rent for taxation purposes.

This comprehensive analysis of the judgment highlights the court's interpretation of the agreement clauses, relevant sections of the Income Tax Act, and the implications of including maintenance charges as part of the rent for computing the property's annual value.

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