2008 (5) TMI 307 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of brokerage paid against rental income.
2. Deduction of brokerage related to maintenance and furnishing charges.
3. Disallowance of interest paid to parties.

Summary:

Issue 1: Disallowance of Brokerage Paid Against Rental Income
The primary dispute concerns the disallowance of brokerage of Rs. 7,79,502 paid by the assessee while computing income from house property. The assessee, engaged in the real estate business, claimed this brokerage as a deduction u/s 24(1)(iv) of the Income-tax Act. The Assessing Officer (AO) disallowed the claim, stating that the brokerage was a one-time expenditure and not an annual charge on the property. The CIT(A) upheld this view, referencing the judgment in AV.R.A. Veerappa Chattiar v. CIT [1959] 35 ITR 322, and further noting that the brokerage did not qualify as a deduction under section 23 or section 24. The Tribunal agreed, emphasizing that only specified expenditures under section 24 are deductible and brokerage does not fall under these categories, citing the case of CIT v. H.G. Gupta & Sons [1984] 149 ITR 253.

Issue 2: Deduction of Brokerage Related to Maintenance and Furnishing Charges
The alternative plea raised by the assessee was for the deduction of Rs. 2,79,879 out of the total brokerage, which related to maintenance and furnishing charges, assessed as business income. The CIT(A) rejected this claim, stating no material evidence was provided to show that the brokerage was linked to securing maintenance contracts. However, the Tribunal found that since the income from maintenance and furnishing was assessed as business income, the brokerage paid for securing tenants who paid these charges should be allowed as a deduction u/s 37(1). The Tribunal distinguished this case from Piccadily Hotels (P.) Ltd., where the brokerage was not linked to business income.

Issue 3: Disallowance of Interest Paid to Parties
The AO disallowed Rs. 20,129, considering the interest rate of 21.5% paid by the assessee to flat owners as excessive, reducing it to 18%. The CIT(A) upheld this, noting no evidence of an agreement for the higher rate. The assessee presented a letter dated 1-3-2000 indicating the revised interest rate, which was not considered by the lower authorities. The Tribunal restored this matter to the AO for reconsideration, allowing the assessee to present this new evidence.

Conclusion:
The appeal is partly allowed, with the brokerage related to maintenance and furnishing charges being deductible as business expenditure, and the issue of interest disallowance remanded for further consideration.