2020 (10) TMI 747 - AT - Income Tax

Tribunal Denies Deduction of Watchman Salary from Rental Income; Remands Service Charges and Tenancy Premium Issues for Review.

Asst. CIT 4 (3) (1), Mumbai Versus The New Piece Goods Bazar Co. Ltd.

The ITAT disallowed the deduction of watchman salary from rental income, increasing the assessee's house property income. It remanded the issues ... Maintainability of the allowance of watchman salary claimed from the rental income assessed u/s. 22, i.e., prior to the claim of standard deduction u/s. 24(a) at the rate of 30% thereof - HELD THAT:- The matter would require a factual examination and finding. Two, the volume of the expenditure incurred, with the watchman salary alone accounting for nearly 90% of the gross revenue, pegged at, as stated, ₹ 500 p.m. per shop, even as the scope of the services gets continually enhanced, resulting in continued losses, even ignoring watchman salary (and which though cannot be), which therefore need to be explained from a business man’s point of view, issuing clear finding/s of fact. This is as the same, inferably on account of commonality of interest, assumes thus the nature of a self-inflicted loss, which cannot be regarded as genuine? Business decisions are, after all, grounded in market realities and economic rationale, and must therefore be explainable in terms thereof. Rather, a non-explanation and, consequently, absence of any finding on this aspect, has led it to be a subsisting issue between the assessee and the Revenue. The law in the matter being clear, the matter stands accordingly set aside, for a decision as per law, delineating the onus cast on either side by law. Our order is, besides the orders by the Revenue authorities, also based on the arguments advanced during hearing. Further, though this may not appear to be the controversy arising, going by the Revenues’ Gd. 2 before us, our adjudication is with reference to the issue discerned as arising; the AO at para 6.3 of his order clearly stating that the assessee is supposed to recover at least the cost of its’ activities (the various services being provided), and the loss sustained cannot, thus, be accepted as a genuine business loss. Nature of the receipt - premium or transfer charge on the transfer of tenancy by one tenant (of the assessee) to another - Capital gain or income from other sources - HELD THAT:- We set aside the matter for fresh adjudication in accordance with law to the file of the ld. CIT(A), after affording the parties before him a reasonable opportunity of hearing, within the time frame, if any, stipulated by law. Inasmuch as we are setting aside the matter, the first appellate authority shall not be bound by our observations, except have regard to them to the extent they are consistent with or otherwise explain the order by the Tribunal in Vinod V. Chhapia [2013 (2) TMI 556 - ITAT MUMBAI] a valid judicial precedent, and relied upon in the assessee’s own case. And decide the matter per a speaking order, issuing definite findings of fact and of law, answering the various aspects of the issue as delineated by us. The twin elements of ‘capital gain’ are ‘capital asset’ and ‘transfer’; the transfer making the capital asset the property of the transferee. The capital asset acquired by the incoming tenant from the assessee is to be specified. The gain arising is to be categorized on the basis of the holding period of the capital asset by the transferor – and not another, prior to its transfer. Then there is the aspect of the head of income under which it is taxable, i.e., where the same is held as not assessable as capital gains. We decide accordingly. We wish to make it clear, that we have, in rendering our decision, kept uppermost the need to eschew any prejudice being caused to either side, while at the same time discharging the duty cast on the Tribunal as the final fact finding body, i.e., to deal with and determine questions which arise out of the subject-matter of the appeal in the light of the evidence, and consistently with the justice of the case, as explained by the Apex Court in many a case (CIT v. Walchand & Co. (P.) Ltd. [1967 (3) TMI 2 - SUPREME COURT] Issues Involved:1. Maintainability of the allowance of watchman salary from rental income.2. Taxability of service charges income.3. Nature of receipt by way of premium on transfer of tenancy rights.Issue-wise Detailed Analysis:1. Maintainability of the Allowance of Watchman Salary from Rental Income:The assessee claimed watchman salary as part of the tenants' burden borne by it, referencing its past history where this was allowed. However, the Revenue argued that the law changed with the Finance Act, 2001, which substituted sections 23 and 24, thus altering the deductions allowed. The Tribunal held that the watchman salary has no legal basis for deduction under the current law. The law now allows a composite deduction at 30% of the annual value, irrespective of actual expenses incurred. The Tribunal concluded that the entire rental income should be considered as the annual value, and the assessee is entitled to a standard deduction of 30% under section 24(a). The claim of watchman salary against rental income was disallowed, resulting in an increase in the assessee's income from house property.2. Taxability of Service Charges Income:The assessee charged service charges to tenants and claimed this as business income, resulting in a business loss after deducting expenses. The Revenue contended that these charges should be assessed as income from house property, referencing the decision in CIT v. J.K. Investors (Bombay) Ltd. The Tribunal noted that the issue is primarily factual, depending on whether the services provided are related to the occupancy of the house property or independent of it. The Tribunal observed that the Assessing Officer (AO) should have bifurcated the services into those related to tenancy and those independent of it. The matter was restored to the file of the CIT(A) for fresh adjudication, directing a detailed examination of the services provided and associated expenses.3. Nature of Receipt by Way of Premium on Transfer of Tenancy Rights:The assessee treated the premium received on the transfer of tenancy rights as capital gains, while the Revenue assessed it as income from other sources. The Tribunal noted that the issue had been decided in the assessee's favor in previous years by the Tribunal. However, a conflicting decision by the Tribunal in Vinod V. Chhapia vs. ITO was not considered in those orders. The Tribunal in Vinod V. Chhapia held that the receipt for granting tenancy at a minimal rent was neither a capital nor rental receipt but was assessable as income from other sources. The Tribunal in the present case found that the premium received by the assessee did not involve the transfer of any capital asset by the assessee-owner. The matter was set aside for fresh adjudication by the CIT(A), directing a detailed examination of the nature of the receipt and the head of income under which it should be assessed.Conclusion:The Tribunal partly allowed the Revenue's appeal for statistical purposes, setting aside the issues related to service charges income and premium on transfer of tenancy rights for fresh adjudication by the CIT(A). The allowance of watchman salary from rental income was disallowed, resulting in an increase in the assessee's income from house property. The Tribunal emphasized the need for a detailed examination of the facts and proper application of the law in deciding these issues.