2025 (9) TMI 440 - AT - Income Tax

Receipts under facility agreement and CAM charges held business income; municipal tax deduction under proviso to s.23 restored

ITAT MUMBAI - AT held receipts under a facility agreement and CAM services are taxable as 'Income from Business' (not House Property) and directed the AO ... Income from House Property OR Income from Business - Nature of Receipts under the agreement for facility - assessee has provided the premises and the condition as required by the licensee, only in order to earn rental income HELD THAT:- We find that in Sarabhai (P.) Ltd. [2002 (11) TMI 32 - GUJARAT HIGH COURT] while deciding a similar issue in a case, wherein the assessee, apart from letting the premises on rent, was also providing various services, such as Housekeeping which includes watch and ward, sweepers, maintenance staff and liftman, Canteen facilities, Internal telephone exchange, (iv) Maintenance staff for central air-conditioning including air-conditioning units, electrical fittings, etc. Providing water coolers, Recreation corner, Creation and Maintenance of facilities for locating central air-conditioning plant, Providing furniture and fixtures, Electrification, Providing costly electrical installations, Providing special facilities for external telephones and telex, held that the income received towards rent is taxable under the head “Income from House Property”, while income received towards rendering different services to the tenants is taxable under the head “Income from Business”. Thus, income from Leave and Licence Agreement and income from Agreement for Facilities are taxable under two separate heads. Since one of the business activities of the assessee is to render services to its tenants through various facilities, we are of the considered view that the income therefrom is taxable under the head “Income from Business”. Accordingly, we direct the AO to compute the income of the assessee by treating the income earned from the Agreement for Facility as “Income from Business”. Receipt from providing Common Area Maintenance (“CAM”) Services - We find that the coordinate bench of the Tribunal in DCIT vs. Arham IT Infrastructure (P.) Ltd. [2021 (8) TMI 210 - ITAT DELHI] held that maintenance charges received by the assessee, owner of a property, from tenants for undertaking maintenance of common areas of the property were to be assessed as income from business and profession. Thus, we direct the AO to compute the income of the assessee by treating the receipts from CAM Services as “Income from Business”. Accordingly, grounds raised in assessee’s appeal are allowed. Disallowance of municipal taxes claimed against the rental income received by the assessee - In the present case, there is no dispute regarding the fact that, as per the provisions of the proviso to section 23 of the Act, while computing the annual value of the property, the taxes which are actually paid during the year are deductible. Therefore, we restore this issue to the file of the AO with a direction to allow the deduction as per the proviso to section 23 of the Act in respect of the taxes actually paid by the assessee during the year under consideration, after necessary verification of the details as may be submitted by the assessee. Disallowance of interest claimed by the assessee against the “Income from House Property” - From the record, it is evident that the assessee before the lower authorities did not furnish any details regarding the interest-bearing fund flow utilised for acquiring properties with supporting documents. Accordingly, in the larger interest of justice, we deem it appropriate to grant one more opportunity to the assessee to furnish the details as regards the utilisation of interest-bearing funds. Therefore, this issue is restored to the file of the jurisdictional AO for de novo adjudication after considering the details as may be filed by the assessee. With the above directions, the impugned order on this issue is set aside, and ground no.4 raised in assessee’s appeal is allowed for statistical purposes. Disallowance of the insurance premium paid by the assessee on the insurance policy of one of the partners - It cannot be disputed that the loan was utilised by the assessee for its business purpose. Thus, any expenditure incurred by the assessee for availing such a loan is an allowable business expenditure. Since, in the present case, the loan was granted to the assessee on the condition of obtaining an insurance policy, we are of the considered view that the insurance premium paid by the assessee is an allowable expenditure. Disallowance of interest on account of non-deduction of TDS - AR reiterated the submissions made before the learned CIT(A) and submitted that the recipient has paid the due tax and therefore the pre-EMI interest paid by the assessee should be allowed. However, apart from making the aforesaid submission, the assessee could not place on record any documents fulfilling the requirement of the provision of the Act in this regard. Accordingly, we grant one more opportunity to the assessee to make necessary compliance with the statutory requirements in respect of this issue. Addition to the annual letting value of the property let out to one of the partners of the assessee - We find merit in the submission of the learned AR that only a bare shell property given on rent by the assessee can be compared with another bare shell property. However, at the same time, it is for the assessee to prove with necessary documentary evidence that both the properties given on rent by the assessee are of a similar nature, i.e., bare shell property. Therefore, for this limited examination, we restore this issue to the file of the jurisdictional AO for consideration afresh after examining the rent agreement and other details as may be filed by the assessee in respect of the impugned property, as well as the alleged comparable rental property. We further direct that if both properties are found to be of a similar nature, i.e., bare shell properties, then the rent charged in the comparable scenario should be considered for computing the annual let-out value of the property given on rent to M/S The Master Clock and Watch Works Private Limited. Appeal by the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts under a separate 'Agreement for Facility' for providing finished premises/infrastructure are taxable as Income from House Property or as Income from Business (including Common Area Maintenance receipts). 2. Whether municipal/property taxes claimed as deduction against income from house property are allowable in the assessment year claimed or only in the year of actual payment (application of proviso to section 23). 3. Whether interest expense claimed against income from house property is allowable in full or requires pro rata disallowance when interest-bearing funds exceed amounts used for acquisition (allocation of interest-bearing funds). 4. Whether payment of insurance premium on a partner's life (required by lender as loan condition) is an allowable business expenditure. 5. Whether pre-EMI interest paid without proof of TDS deduction is disallowable under the proviso to section 40(ia) (reliance on TDS compliance by payee). 6. Whether annual let-out value (ALV) of property let to a partner should be computed on rent charged to unrelated parties when rent charged to partner is significantly lower-i.e., whether the rent is not at arm's length and comparable rates should be adopted. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of 'Agreement for Facility' receipts and CAM receipts - House Property vs Business Income Legal framework: Distinction among heads of income (Income from House Property; Profits and Gains of Business or Profession; Income from Other Sources); section 56(2)(iii) (inseparability test/letting of building with machinery/furniture); principles for determining whether services ancillary to letting convert the receipt into business income. Precedent Treatment: The Tribunal applied and followed the Supreme Court's test of 'intention and inseparability' (Sultan Brothers principles) and high-court/tribunal authorities holding that income for distinct services rendered to tenants is taxable as business income (notably a High Court decision treating rent as house property and service receipts as business income; coordinate bench decision treating CAM receipts as business income; Supreme Court decisions recognizing continuous organized services as business activity). Interpretation and reasoning: The Court examined both the Leave & License Agreement and the separate Agreement for Facility. It found that the facility agreement was optional for the tenant (tenant not obliged to procure facilities from the assessee), included explicit consideration for infrastructure/technical facilities and deposits, and documented vendor-wise furnishing and equipment supplies. The Court held that the facility agreement and letting are separate transactions and that many facilities were provided at the tenant's instance; thus services were rendered as a business activity separate from mere letting. By analogy and applying prior authoritative decisions distinguishing rent and service receipts, the Court treated CAM receipts similarly as business income. Ratio vs. Obiter: Ratio - where the facility/service arrangement is contractually separable, optional to tenant and involves organized, recurring provision of services/infrastructure, receipts under such agreement (including CAM) are taxable as business income rather than as income from house property. Obiter - observations on specific vendor invoices and particulars that do not change the general test. Conclusions: The Court directed the Assessing Officer (AO) to compute income by treating the Agreement for Facility receipts and CAM receipts as Income from Business. The Tribunal followed and applied earlier authorities that separate service receipts from rent where services are rendered in an organized manner. Issue 2: Deductibility of municipal/property taxes - year of deduction Legal framework: First proviso to section 23 of the Act - taxes levied by local authorities are deductible in determining annual value in the previous year in which such taxes were actually paid. Precedent Treatment: The Court adhered to the statutory proviso requiring actual payment in the relevant previous year; it relied on verification of payments and documentary evidence to determine year of allowance. Interpretation and reasoning: The AO disallowed the entire claimed amount contending taxes related to periods prior to possession/acquisition; the assessee submitted payment particulars showing portions paid in the relevant assessment year and some paid in subsequent year. The Tribunal noted no dispute on the legal rule but found factual issues unresolved and therefore remitted the matter to the AO to allow deduction only for taxes actually paid in the year after verification of records. Ratio vs. Obiter: Ratio - deduction for municipal taxes under section 23 proviso is allowable only in respect of taxes actually paid in that previous year; factual verification is necessary. Obiter - background on conversion of tax regime in the municipal authority not decisive to override statutory proviso. Conclusions: Issue restored to AO for verification; deduction to be allowed as per proviso to section 23 for taxes actually paid in the year under consideration (direction to verify supporting documents). Issue 3: Allocation of interest expense - pro rata disallowance where interest-bearing funds exceed utilisation for property Legal framework: Deductibility of interest to the extent funds are used for income-earning assets; need to establish utilisation of interest-bearing funds to claim full deduction against house property income. Precedent Treatment: The AO applied a proportionality approach based on balance-sheet totals to segregate allowable interest; the CIT(A) upheld due to lack of supporting fund-flow documents; the Tribunal granted opportunity for fuller proof. Interpretation and reasoning: The Tribunal observed that assessee had not furnished adequate details regarding interest-bearing fund flows before the lower authorities but during hearing claimed specific loan utilised for property acquisition. In the interest of justice, the Tribunal restored the issue to AO to enable the assessee to file detailed evidence of loan utilisation and supporting documents for reassessment of allowable interest. Ratio vs. Obiter: Ratio - where an assessee cannot demonstrate linkage/actual utilisation of borrowed funds for acquisition of property, only proportionate interest commensurate with proven utilisation may be allowed; opportunity to furnish evidence is required. Obiter - acceptance of a specific loan utilisation statement if supported by documents. Conclusions: Matter remitted to AO for de novo adjudication after assessee files detailed loan/utilisation evidence; impugned disallowance set aside for statistical purposes pending verification. Issue 4: Insurance premium on partner's life as loan condition - allowability Legal framework: Business expenditure allowable if incurred wholly and exclusively for business; expenses incurred to obtain/secure business loans that are conditions of lending can be deductible. Precedent Treatment: The Tribunal treated lender-imposed insurance premium as an expense in connection with obtaining loan for business and allowable. Interpretation and reasoning: The record contained the loan offer letter showing lender required insurance for the loan; the loan was used for business purposes. The Tribunal held the premium was incurred to secure a business loan and therefore was an allowable business expenditure. Ratio vs. Obiter: Ratio - insurance premium paid as a condition for obtaining a business loan, where loan is used for business, is an allowable deduction. Obiter - none significant. Conclusions: Addition disallowing INR 2 lakh insurance premium deleted; expenditure allowed. Issue 5: Pre-EMI interest disallowance for non-deduction of TDS - compliance and opportunity to cure Legal framework: Provisions disallowing expenditure where TDS provisions are not complied with (proviso to section 40(ia)); compliance may be evidenced by payee's tax payment and other documents satisfying statutory conditions. Precedent Treatment: Lower authorities disallowed due to absence of documentary proof of TDS compliance; Tribunal allowed the assessee an opportunity to produce compliance documents. Interpretation and reasoning: The assessee asserted payee had discharged tax liability but failed to produce requisite documentary evidence before the Tribunal. In fairness, the Tribunal remitted the issue to the AO for de novo adjudication after the assessee is permitted to produce documents establishing TDS compliance as required by law. Ratio vs. Obiter: Ratio - absence of documentary proof of TDS compliance permits disallowance, but assessee should be afforded opportunity to produce statutory evidence; factual determination by AO after compliance is shown. Obiter - none significant. Conclusions: Issue restored to AO for fresh consideration on production of documents; impugned order set aside for statistical purposes pending compliance. Issue 6: Adoption of comparable rent for computing Annual Let-Out Value where lessee is related party Legal framework: ALV determination requires use of actual rent received or municipal/assessable value; where rent to related party is not at arm's length, AO may adopt comparable market rent; burden lies on assessee to establish comparability of properties. Precedent Treatment: AO increased ALV by adopting market rate charged to unrelated parties; CIT(A) upheld; Tribunal required assessee to produce documentary evidence proving the impugned unit was a bare shell and comparable to the other bare shell let at a different rate. Interpretation and reasoning: The Tribunal accepted that rent for a bare shell cannot be compared with fully finished premises; it also found that if a truly comparable bare shell let to an unrelated party exists, that rate may be used. However, it placed the onus on the assessee to prove similarity with documentary evidence (agreements, particulars of fittings/furnishings). Therefore issue remitted for AO to examine agreements and comparables; if properties are similar, comparable rent should be applied; parties must be given hearing. Ratio vs. Obiter: Ratio - where related-party rent is challenged, a comparable market rent for a truly similar property may be substituted, but factual comparability must be demonstrated by the assessee. Obiter - illustrative discussion on nature of bare shell vs finished premises. Conclusions: Issue remitted to AO for fresh consideration of documentary evidence on comparability; no final substitution without giving the assessee opportunity to be heard; impugned addition set aside for statistical purposes.