2012 (11) TMI 889 - HC - Income Tax

Court rules surcharge collected by property owner for commercial use is part of rent under Income Tax Act.

The Court affirmed the Tribunal's decision that the surcharge collected by the owner from tenants for commercial use of the property constitutes part of ... Determination of annual value - income from house property - Whether surcharge of the Municipal Tax was part of the question and/or annual value for the purpose of Section 23(1) of the Income Tax Act – Held that:- When commercial surcharge collected is by the owner assessee of the house it becomes part of rent - moment the commercial surcharge is recovered irrespective of the provisions of the agreement entered into by and between the landlord and tenant it immediately become exigible to tax as rental income from house property for agreement binds the parties thereto and it becomes irrelevant the moment it is found to be in conflict with legal provision on the subject -If the argument of Mr. Khaitan is accepted that Commercial surcharge cannot be treated as receipt by way of rent as income from house property, and if it is withheld and not deposited then the very object of imposition of Commercial surcharge under KMC Act will be frustrated until the same is recovered - surcharge of the Municipal Tax was part of annual value for the purpose of Section 23(1) of the Income Tax Act Issues Involved:1. Whether the surcharge of the Municipal Tax was part of the annual value for the purpose of Section 23(1) of the Income Tax Act 1961 prior to its amendment by the Finance Act 2001.2. Whether the Tribunal was justified in holding that the surcharge of municipal tax should be included in the determination of annual value under Section 23 of the Income Tax Act.3. Whether the surcharge collected by the assessee from tenants should be considered part of the actual rent received within the meaning of Section 23(1)(b) of the Income Tax Act.Detailed Analysis:Issue 1: Surcharge as Part of Annual ValueThe primary question was whether the surcharge of the Municipal Tax should be considered part of the annual value for the purpose of Section 23(1) of the Income Tax Act 1961 before its amendment by the Finance Act 2001. The Tribunal held that the surcharge collected by the assessee from tenants is part of the actual rent received within the meaning of Section 23(1)(b). This inclusion is necessary for determining the income under the head 'income from house property'. The Court affirmed this view, emphasizing that the surcharge is a statutory obligation under the Kolkata Municipal Corporation Act (KMC Act) and forms part of the consolidated rate payable by the owner, which can be recovered from the tenant.Issue 2: Justification of Tribunal's DecisionThe Tribunal's decision to include the surcharge in the annual value was challenged. The Court noted that under the KMC Act, the owner is primarily liable for the consolidated rate, including the surcharge, which can be recovered from the tenant. The Court referred to Sections 230 and 231 of the KMC Act, which allow the landlord to recover the surcharge from the tenant as if it were rent. The Court concluded that the surcharge collected by the owner from the tenant for commercial use of the property constitutes rent paid for the use of the premises, thus forming part of the annual value under Section 23 of the Income Tax Act.Issue 3: Surcharge as Part of Actual RentThe Court examined whether the surcharge collected by the assessee from tenants should be considered part of the actual rent received. The Court referred to the Supreme Court's decision in Calcutta Gujarati Education Society v. Calcutta Municipal Corporation, which held that the surcharge, though primarily payable by the landlord, is recoverable from the tenant. The Court also referred to the proviso to Section 23(1), which allows deduction of municipal tax borne by the owner from the rent. The Court concluded that the surcharge collected by the owner forms part of the income from house property and must be included in the gross rent receipt for the purpose of determining the annual value.Conclusion:The Court affirmed the Tribunal's decision, holding that the surcharge collected by the owner from tenants for commercial use of the property forms part of the actual rent received and must be included in the annual value under Section 23 of the Income Tax Act. The Court emphasized that the statutory provisions of the KMC Act and the Income Tax Act require the inclusion of the surcharge in the rental income, irrespective of any agreement between the landlord and tenant. The Court also noted that any amount collected as surcharge and paid to the municipal authorities can be deducted from the taxable income in the relevant year.