1984 (9) TMI 87 - AT - Income Tax

Tribunal affirms treatment of education cess as part of rent for tax calculation

The Tribunal upheld the Commissioner (Appeals)'s decision, ruling that State education cess should be treated as part of the rent for calculating the ... Annual Letting Value, Annual Value, Education Cess, House Property Issues:- Allowability of State education cess against the annual value under section 24(1)(vii) of the Income-tax Act, 1961.Detailed Analysis:1. The appeals raised the issue of whether the State education cess is allowable against the annual value under section 24(1)(vii) of the Income-tax Act, 1961, or against the gross income for the assessment years 1977-78, 1978-79, and 1979-80. The contention was whether the education cess paid by tenants should be considered as part of the rent for determining the annual value of the property.2. The assessee, a company owning immovable properties occupied by tenants, paid State education cess under the Maharashtra Education and Employment Guarantee (Cess) Act, 1962. The dispute revolved around the interpretation of sections 3, 4, 8, 12, and 13 of the Cess Act regarding the levy, collection, and recovery of the cess. The assessee claimed that the education cess should be included in the gross amount for determining the annual value under section 23(1) and subsequently allowed as a deduction under section 24(1)(vii).3. The Income Tax Officer (ITO) initially disallowed the deduction of education cess from the net property income, arguing that the payment of education cess by the assessee did not impact the annual letting value of the property. However, the Commissioner (Appeals) supported the assessee's contention, directing the ITO to allow the deduction against the annual rateable value under section 24(1)(vii).4. The department contended that the education cess should be deducted from the gross rent paid by tenants to determine the annual value under section 23(1), thereby eliminating the need for a separate deduction under section 24(1)(vii). Conversely, the assessee argued that the education cess paid by tenants should be treated as part of the rent, leading to its inclusion in the annual value calculation and subsequent deduction under section 24(1)(vii).5. The Tribunal analyzed previous decisions, including one concerning Laxmi Properties Ltd., to determine the treatment of education cess in rent calculations. The Tribunal concluded that education cess should be considered part of the rent payable by tenants, following the Supreme Court's ruling that such cess should be added to the contractual or standard rent for computing the rateable value. Therefore, the education cess was deemed deductible from the annual value under section 23(1) as per section 24(1)(vii).6. Ultimately, the Tribunal upheld the Commissioner (Appeals)'s order, confirming that the education cess should be treated as part of the rent for determining the annual value under section 23(1) and allowing the deduction under section 24(1)(vii). The appeals by the department were dismissed, affirming the treatment of State education cess against the annual value rather than the gross income.