1983 (10) TMI 79 - AT - Income Tax

Deduction of legal expenses for lease deeds allowed under property income calculation. Real income concept applied.

The Tribunal allowed the deduction of legal expenses incurred for drawing up a lease deed by a private discretionary trust in computing property income. ... Annual Value, House Property Issues Involved:1. Deductibility of legal expenses incurred for drawing up a lease deed.2. Classification of the expenditure as capital or revenue.3. Applicability of the concept of real income in computing property income.4. Alternative claims for deduction as collection charges or deferred expenditure.5. Bifurcation of expenditure between property income and income from other sources.Summary:1. Deductibility of Legal Expenses:The assessee, a private discretionary trust, claimed Rs. 35,743 as legal expenses for drawing up a lease deed. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this claim, considering it a capital expenditure. However, the Tribunal held that the expenditure should be deductible in computing property income, as it was incurred in connection with the letting out of the property and not for any capital investment or purchase.2. Classification of Expenditure:The Tribunal clarified that the concept of capital expenditure versus revenue expenditure is irrelevant in the computation of income from property. The expenditure in question was not related to the construction or capital investment of the property but was incurred for drawing up a lease deed, which specifies the conditions of letting and the amount of rent.3. Real Income Concept:The Tribunal accepted the assessee's argument that the real income basis should be applied. The actual rent received should be the net amount after deducting the legal expenses incurred for drawing up the lease deed. The Tribunal emphasized that the net amount received by the lessor, after such deductions, should be considered as the actual rent under section 23(1)(b) of the Income-tax Act, 1961.4. Alternative Claims:The Tribunal found it unnecessary to address the alternative claims for deduction as collection charges or deferred expenditure, as the main contention of deducting the legal expenses from the property income was accepted.5. Bifurcation of Expenditure:The Tribunal did not find merit in bifurcating the expenditure between property income and income from other sources, as the entire expenditure was related to the letting out of the property.Separate Judgment by Judicial Member:The Judicial Member agreed with the Vice President but added that the deduction is permissible under section 23(1)(b) and supported by the decision in CIT v. Khandelwal Mining & Ores (P.) Ltd. Additionally, if not deductible under section 23(1)(b), the expenditure could be claimed under section 57(iii) against income from other sources. The Judicial Member also dismissed the alternative claims as untenable.