2020 (5) TMI 488 - AT - Income Tax

Disallowance under the head Maintenance Expenses - AO held that maintenance income should be charged as income from house property only and that the maintenance charges were not deductible as expenditure once the benefit of statutory deduction u/s 24 (a) had been given - CIT (A) held that maintenance expenses were deductible although the loss was to be disallowed - Department seeks relief by praying for restoration of disallowance of maintenance expenses whereas the assessee seeks taxing of maintenance income under income from other sources after deduction of the maintenance expenses incurred therefrom - HELD THAT - We are in agreement with the contention of the Ld. Sr. Department Representative that the Ld. CIT (A) could not have deleted the disallowance of expenditure of maintenance services if he was treating the entire income from rent and maintenance charges as income from house property and thereafter was allowing statutory deduction u/s 24(a) of the Act @ 30% of the annual value. It is settled law that no other expenditure apart from the standard statutory deduction of 30% and the municipal taxes actually paid can be claimed as deduction from income from house property. Only the rental income should be charged to tax under income from house property after allowing deductions in respect of the Municipal taxes paid and of the 30% standard statutory deduction u/s 24(a) of the Act. On the other hand, the income from maintenance services should be brought to tax under income from other sources after allowing benefit of deduction towards expenditure incurred on maintenance charges. Accordingly, we set aside the order of the Ld. CIT (A) and direct the Assessing Officer to charge only the rental income under income from house property and allow the statutory permissible deductions there from. The expenditure on maintenance services is not to be deducted from income from house property and neither the income from maintenance charges recovered is to be treated as income from house property. Thus, the appeal of the Department stands allowed to that extent. Gross income from maintenance charges and the expenditure incurred thereon would have to be charged to tax under income from other sources and to that extent the assessee also gets relief and the Cross Objections stands allowed to that extent. However, the quantum of the maintenance charges received and the maintenance expenses incurred by the assessee, as claimed by the assessee, would have to be necessarily verified by the Assessing Officer and the computation under income from other sources would have to be made only after due verification of the income and expenditure by the Assessing Officer with respect to maintenance income and charges. Accordingly, this issue is restored to the file of the Assessing Officer who will recomputed the assessee s income in terms of our directions after giving proper opportunity to the assessee to present its case.

Summary

Issues involved:
Challenge to deletion of disallowance of maintenance expenses by the Department for Assessment Year 2011-12.

Analysis:

Issue 1: Disallowance of Maintenance Expenses
The Department challenged the deletion of disallowance of maintenance expenses amounting to ?2,11,03,333 by the Ld. CIT (A). The Department argued that maintenance charges received should be considered part of the composite rent for calculating income from house property, and no further deduction for maintenance expenses should be allowed after the statutory deduction under section 24(a) of the Income Tax Act. The Department contended that the term 'rent' includes maintenance charges and excluding them would allow the assessee to evade tax on the property's true annual value.

Issue 2: Treatment of Maintenance Income
The authorized representative of the assessee supported the Ld. CIT (A)'s decision to delete the disallowance of maintenance expenses. The representative highlighted a similar treatment in the Assessment Year 2016-17 where the Assessing Officer treated maintenance income under 'income from other sources' and allowed deduction for maintenance charges. The representative requested a consistent approach for the current year.

Judgment:
The ITAT agreed with the Department's contention that if the entire income from rent and maintenance charges is treated as income from house property and statutory deductions are allowed, no further expenditure can be claimed. However, the ITAT noted that in a subsequent assessment year, the Assessing Officer treated maintenance income and expenditure under 'income from other sources,' following a relevant High Court judgment. The ITAT decided that only rental income should be taxed under income from house property, with deductions for municipal taxes and statutory deduction under section 24(a). Maintenance income should be taxed under income from other sources after deducting maintenance charges. The ITAT allowed the Department's appeal partially and the assessee's cross-objection partly, directing the Assessing Officer to verify the income and expenditure related to maintenance charges before final computation.

Conclusion:
The judgment restored the issue to the Assessing Officer for proper computation, maintaining that rental income falls under income from house property, while maintenance income should be treated as income from other sources. The decision provided clarity on the treatment of maintenance charges and income, ensuring proper taxation in line with legal precedents.