A discussion on D. C. I. T., Kolkata Versus M/s. Haldia Riverside Estates Ltd. 2013 (5) TMI 254 - ITAT KOLKATA

[CA DEV KUMAR KOTHARI]

Statutory deduction under section 24:

In case of income assessed under the head ‘income from house property’ a standard deduction is allowed from annual value of property. This deduction is allowed for expenses in relation to up-keep and maintenance of building, repairs of building, collection of rent, administration related with building etc. At present deduction allowed is equal to 20% of annual value of property.

The repairs include all sort of repairs, like recurring repairs and non-recurring repairs. Therefore, in a year when non –recurring repairs are carried, there can be excessive actual expenses and the amount of deduction may not be sufficient to cover cost of such repairs. However, in other years expenses on account or repair and other expenses can be much less than standard deduction.

Direct Tax Code (DTC):

In DTC it is proposed to reduce the deduction equal to 20% of ALV.

The deduction is not for depreciation of building:

It would be wrong to say that deduction is inclusive of deduction for depreciation on building. This is for the reason that deduction is with reference to rent. Rent includes rent for building let out, common areas, and land on which building is constructed. In case of ownership apartment rent will be for apartment let out, common areas, and proportionate share in land and common facilities etc.

Furthermore, for computing deduction, annual value is rent minus tax on building. Thus suppose in case of a residential premises rent is Rs.10,000/- and local tax is Rs.3000/- the collect ion of rent is Rs.10000/-, tax paid is Rs.3000/- and deduction allowed is 30% of Rs.7000/- that equals to Rs.2100 in this case.

In another case suppose in case of a commercial premises rent is Rs.10,000/- and local tax is Rs.6000/- the collect ion of rent is Rs.10000/-, tax paid is Rs.6000/- and deduction allowed is 30% of Rs.4000/- that equals to Rs.1200 in this case.

In many old tenancies, the rent is too low- fixed long ago and could not be revised. Expenses for upkeep, repair and maintenance have increased but the deduction remain same or slightly increased with small increase of rent if any.

Therefore, we find that there is not justification of deduction of local tax on premises for determining ALV for the purpose of the base amount on which deduction is allowed. The deduction should be allowed on the basis of gross rent, if the rent is current one or at on actual basis.

Therefore, the deduction allowed is not in relation to the amount of rent collected. If we consider that a part of deduction u/s 24 is for collection of rent, then we find that it is not with reference to the rent collected and a perfect equation of deduction with amount of rent collected is not found.

Depreciation is not allowable in respect to the cost of land or proportionate share in land. Therefore, it will be wrong that deduction u/s 24 is partly in lieu of depreciation allowable on building.

The deduction presently allowed is equal to 30% of annual value or rent net of municipal / local taxes on property. In the DTC the proposed deduction is equal to 20% of rent.

Actual expenses and depreciation should be allowed:

To tax real income, it is desirable that actual expenses should be allowed as deduction instead of standard deductions. It is noticed that even in cases where any expenditure is not incurred, claim is allowed. When actual expenses are incurred which are highly excessive, but deduction is allowed in a limited way. Therefore, real income is not computed.

To compute real income depreciation on cost of construction should also be allowed. This will help in assessing real income and also making provision for replacement cost of building in due course.

Rental income is hardly about 4-5% of market value of property:

This is ground reality that rental income is hardly about 4-5% of value of property. Many times rent remain same over a long period of time. Therefore, we find that even a minimum return by way of cash inflows is not available in case of letting out of property. The deduction u/s 24 being related with rent, it cannot be said that any part of deduction will be towards depreciation of building or for making a provision for replacement of building.

Section 24 deduction will not made building a depreciable asset forming part of block of asset:

A deduction under section 24 will not lead to conclusion that the building is part of block of asset on which depreciation has been allowed while allowing deduction u/s 24. Therefore, in case of such buildings, section 50 shall not apply when such building is sold.  

Haldia Riverside Estates Ltd:

In case of Haldia Riverside Estates Ltd, assessee claimed deduction of depreciation in respect of service buildings and facilities. However, since deduction under section 24 was allowed, CIT(A) held that deduction u/s 24 covers deprecation, therefore, further deduction will amount to double deduction so he denied deprecation allowance. On appeal Tribunal confirmed the decision of the CIT(A). The order of the Tribunal on this issue is analysed below:

1. CIT(A) rightly considered that section 24(1) of the Act provides for claiming of such type of expenditure repairs and maintenance which repairs and maintenance are basically for claiming of depreciation without having actually incurred are in line with the proposition that the assessee cannot claim depreciation after having put them to use.
2. Whether the net result is income or loss was considered by the ld. CIT(A) appropriately and in accordance with the provision of the Income Tax Act.
3. We do not find any infirmity in the contention of the ld. DR that the same assets which are part and parcel for generating the income from house property cannot be segregated on the basis of the contention of the assessee /appellant alone was considered by the ld. CIT(A),
4. in so far as, the licence fee and service charges were also considered by the ld. CIT(A) to be considered as part of earning income from house property and not as income from other sources for rendering pure income without claim of expenses as was considered by the AO.
5. The loss returned by the assessee includes claim of depreciation which depreciation being less than 30% was claimed against 30% statutorily allowable u/s 24(a) would therefore lead to double deduction. Therefore, we do not find any infirmity in the order of the ld. CIT(A) on the issues raised by the rival parties hereto, the same is upheld.

The order needs a reconsideration:

Whether, income should be computed as ‘business income’ or ‘income from other sources’ or as ‘income from house property’ are different aspects and it will be dependent on facts and circumstances of the case.

Whether depreciation is allowable or not ? is also a different question and aspect of the case. It can be a case that in case of income from house property there is no provision to allow depreciation.

However, the view that deduction u/s 24 is in lieu of depreciation allowance is not correct. As discussed earlier, the deduction u/s 24 is  in respect of up-keep, maintenance, repairs, collection and administration etc. and not for depreciation allowance. Depreciation is allowable only on cost of building (except cost of land). Therefore, a deduction computed with reference to annual value or actual rent cannot be inclusive of depreciation on building.

A view that deduction u/s 24 is also in respect to depreciation of building, can lead to many complications. This view need reconsideration.

Strategy of assessee and its parent company:

On reading of the judgment we find that the assessee Haldia Riverside Estates Ltd (HRE)is a subsidiary company of M/s.Haldia Petrochemicals Ltd (HPL). HRE developed the township in Haldia and let out to the holding company (HPL) and derived rental income and service charges etc.

The alternate available to the group was that housing should also be constructed in the holding company HPL. In that case there will be no rental income , and consequent tax deduction at source, from rent paid by HPL to HRE. The possibility of questions arising for levy of service tax on rent and applicability of arm’s length pricing etc. would not arise. Any question All buildings would be considered as used for business purposes, depreciation on buildings cost of construction would have been allowed in hands of HPL . Thus the matter will be much simple than in case of construction of buildings in subsidiary company HRE. It would also be simple from administrative angles. In case of own use of properties usually local taxes are also lower in comparison to let out properties. Therefore, justification of a separate company, for providing housing facility to a company owning an industrial undertaking is apparently missing. There may be some strategy about holding of properties beyond of industrial risks, financing aspects, keeping properties in control of promoters etc. These may be typical secrets in any given case. However, from administrative angles, taxation angles, having housing in the main industrial company apparently seems most advantageous and simple.  

D. C. I. T., Kolkata Versus M/s. Haldia Riverside Estates Ltd. 2013 (5) TMI 254 - ITAT KOLKATA