2005 (4) TMI 265 - AT - Income Tax

Chargeable to tax under Income From House Property - rental income - deduction on account of commission paid to property agent - HELD THAT - We are of the view that the rent actually paid by the tenant and accepted by the owner has to be taken as the 'annual value' of the house property for the purpose of computing income which is chargeable to income-tax under the head 'Income from house property'. For this proposition, we derive support from the decision of Hon'ble Delhi High Court in the case of CIT v. H.G. Gupta Sons 1983 (12) TMI 54 - DELHI HIGH COURT wherein it was held that deduction of expenditure incurred on stamp duty and registration in connection with execution of lease deed is not allowable as neither section 23 nor section 24 provides for such deduction. Explaining further, their Lordships of Delhi High Court have observed that use of the word 'namely' in section 24 shows that heads of expenditure whereof deduction can be claimed in the computation of income from house property are exhaustive. In the present case, it is observed that the rental income was received by the assessee-company directly from the tenants which constituted its income at the point when it reached or accrued to it whereas commission was paid separately to the property agents to discharge its contractual liability. In the case of Imperial Chemical Industries (India) (P.) Ltd. 1969 (2) TMI 15 - SUPREME COURT by the learned counsel for the assessee, the Hon'ble Supreme Court has held that an obligation to apply income which has accrued or arisen or has been received amounts merely to application of such income. In the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT 1997 (7) TMI 4 - SUPREME COURT , the Hon'ble Supreme Court has observed that the tax is attracted at the point when the income is earned and taxability of income is not dependent upon its destination or manner of its utilization. Keeping in view these decisions of Hon'ble Supreme Court, we hold that the payment of commission by the assessee-company to property agents did not amount to diversion of income by overriding title and the contentions raised by the learned counsel for the assessee in this regard are not acceptable being devoid of any merits. The commission expenditure in question was laid out for earning rental income arid since the said income admittedly was chargeable to tax under the head 'Income from house property' and not under the head 'Income from other sources', we are of the view that the same could not be allowed u/s 57. Hence, we find it difficult to accept even the alternative contention raised by the learned counsel for the assessee before us. Thus, we are of the considered opinion that the commission paid by the assessee-company to the property agent was not deductible in computing its income chargeable under the head 'Income from house property' and the Assessing Officer was fully justified in disallowing the claim of the assessee for such deduction. The impugned order of learned CIT(A) confirming the disallowance made by the Assessing Officer on this count is, therefore upheld and this appeal filed by the assessee is dismissed. In the result, the appeal of the assessee is dismissed.

Issues Involved:

1. Deduction of commission paid to property agents in computation of income from house property.
2. Applicability of the concept of diversion of income by overriding title.
3. Relevance of accounting principles in determining allowable deductions.
4. Interpretation of Section 23(1)(a) concerning annual value computation.
5. Alternative claim for deduction under the head 'Income from other sources'.

Issue-wise Detailed Analysis:

1. Deduction of Commission Paid to Property Agents:

The core issue in this appeal is whether the commission paid by the assessee-company to property agents can be deducted while computing income from house property. The assessee argued that since the rent received was net of commission, only this net amount should be taxable. However, the Assessing Officer and CIT(A) disallowed this deduction, stating that neither Section 23 nor Section 24 of the Income Tax Act allows for such a deduction. The Tribunal upheld this view, emphasizing that the deductions specified in Section 24 are exhaustive and do not include commission paid to property agents.

2. Applicability of the Concept of Diversion of Income by Overriding Title:

The assessee contended that the commission payment created an overriding title, thus the rental income to the extent of the commission did not accrue to the assessee. The Tribunal rejected this argument, citing the Supreme Court's decision in CIT v. Sitaldas Tirathdas, which clarified that only obligations that create a charge on the source of income can be considered as diversion by overriding title. In this case, the rental income was received directly by the assessee, and the commission was a separate contractual obligation, not a charge on the rental income itself.

3. Relevance of Accounting Principles in Determining Allowable Deductions:

The assessee argued that accounting principles recognize the 'act of balancing,' meaning expenses incurred to earn income should be adjusted against that income. The Tribunal dismissed this argument, stating that while accounting principles are important, they cannot override specific statutory provisions. The deductions allowed under the Income Tax Act must be explicitly provided for, and in this case, there is no provision for deducting commission expenses from rental income under the head 'Income from house property.'

4. Interpretation of Section 23(1)(a) Concerning Annual Value Computation:

The assessee claimed that Section 23(1)(a) implies that any expenditure incurred before letting out the property should be deducted when computing the annual value. The Tribunal disagreed, explaining that the term 'to let' in Section 23(1)(a) is part of the phrase 'reasonably be expected to let,' which is used to estimate the annual value, not to determine deductible expenses. The actual rent received is to be taken as the annual value without deducting any commission paid.

5. Alternative Claim for Deduction under the Head 'Income from Other Sources':

The assessee alternatively argued that if the commission cannot be deducted under 'Income from house property,' it should be allowed under 'Income from other sources' and the resultant loss should be set off against other income. The Tribunal rejected this argument, stating that Section 57, which governs deductions under 'Income from other sources,' only allows deductions for expenses incurred to earn income chargeable under that head. Since the rental income is chargeable under 'Income from house property,' the commission expense cannot be deducted under 'Income from other sources.'

Conclusion:

The Tribunal upheld the disallowance of the deduction for commission paid to property agents in computing income from house property. It confirmed that the deductions under Section 24 are exhaustive and do not include such commission expenses. The Tribunal also rejected the arguments based on the concept of diversion of income by overriding title, accounting principles, and the interpretation of Section 23(1)(a). The alternative claim for deduction under 'Income from other sources' was also dismissed. Consequently, the appeal by the assessee was dismissed.

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