I charge rent under one agreement and service charges for air-conditioning and building facilities under another. Which head do the service charges fall under?
It depends on whether the service agreement can stand on its own feet. The Bombay High Court held the test to be whether the service agreement could stand independently of the rent agreement. On these facts it could not. The amenities charged for - the staircase, the lift, the common entrance, the main road through the compound, drainage, the open space in and around the building and air-conditioning - were not separately provided but went along with the occupation of the property. Rs 1.23 crores of service charges was therefore part of the rent, taxable under section 22 as income from house property and not as income from other sources.
Decided by the High Court (High Court of Bombay - S.J. Vazifdar and M.S. Sanklecha, JJ.) on 2012-07-25, reported as [2012] 25 taxmann.com 12 (Bombay); [2012] 211 Taxman 383 (Bombay); Income Tax Appeal No. 1089 of 2011 [Assessment year 2004-05]. It bears on section 22, section 56 of the Income Tax Act 1961, in House Property matters.
Splitting a letting into a rent agreement and a service agreement is standard practice in commercial buildings, and the head under which the service charges fall decides real money: section 24(a) gives a flat thirty per cent deduction against house property income, while under section 56 only actual expenditure comes off. Here it was the department that wanted the charges out of house property, and the Court refused. The value of the case is the test it states in one line - can the service agreement stand independently of the rent agreement? - and the illustration of what does not pass it. Amenities that any occupier gets simply by occupying the building are rent by another name. Where a landlord genuinely supplies something separable, the case leaves that route open.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2004-05 the assessee owned two floors in Mahindra Towers, Worli, Mumbai. It received Rs 492.73 lacs as rent and a further Rs 123 lacs as service charges under a separate agreement with the same tenant. The services said to be covered were the staircase of the building, the lift, the common entrance, the main road leading to the building through the compound, drainage facilities, the open space in and around the building and an air-conditioning facility. The Assessing Officer accepted the rent as income from house property but held the service charges to be consideration for ancillary services and assessed them as income from other sources. The Commissioner (Appeals) allowed the assessee's appeal and treated the service charges as part of the house property income. The Tribunal upheld that view, finding that no independent services had in fact been provided by the owner. The Revenue appealed under section 260A, framing two substantially identical questions on whether the Rs 1.23 crores was chargeable under section 22 or as income from other sources.
The Revenue's appeal was dismissed and both questions were answered against it. The High Court held that the service charges of Rs 1.23 crores formed part of the rent and were chargeable under section 22 as income from house property, not as income from other sources. The Court proceeded on the concurrent findings of the Commissioner (Appeals) and the Tribunal that the owner had provided no services independent of the letting itself, and declined to disturb them. The amenities the assessee was said to be charging for were held to go along with the occupation of the property rather than to be separately supplied, so the service agreement could not stand apart from the rent agreement and the amount received under it took the character of rent.
The Court framed the question as one of substance rather than form. Two agreements had been executed, but the existence of a second document does not by itself create a second source of income. Applying the approach in its own earlier decision in CIT v. Bhaktawar Construction Pvt. Ltd. (162 ITR 452), it asked whether the service agreement could stand independently of the rent agreement. It then examined what was actually being supplied. The staircase, the lift, the common entrance, the access road through the compound, the drainage, the open space around the building and the air-conditioning were not things a tenant could obtain or decline separately; they came with the premises. Because these were not separately provided but went along with the occupation of the property, there was nothing left of the service agreement once the letting was taken away. Since the service agreement had no independent existence, the consideration paid under it was part of the consideration for the letting, and section 22 - which charges the annual value of property of which the assessee is owner - covered it. The findings that no independent service was rendered were concurrent findings of fact by two appellate authorities, and the Court saw no reason to interfere with them in an appeal under section 260A.
The test to determine whether the service agreement was different from the rent agreement would be whether the service agreement could stand independently of the rent agreement.
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Handle my notice → Ask a CA on WhatsAppIt depends on whether the service agreement can stand on its own feet. The Bombay High Court held the test to be whether the service agreement could stand independently of the rent agreement. On these facts it could not. The amenities charged for - the staircase, the lift, the common entrance, the main road through the compound, drainage, the open space in and around the building and air-conditioning - were not separately provided but went along with the occupation of the property. Rs 1.23 crores of service charges was therefore part of the rent, taxable under section 22 as income from house property and not as income from other sources. This was decided by the High Court (High Court of Bombay - S.J. Vazifdar and M.S. Sanklecha, JJ.) and bears on section 22, section 56 of the Income Tax Act 1961. It is reported as [2012] 25 taxmann.com 12 (Bombay); [2012] 211 Taxman 383 (Bombay); Income Tax Appeal No. 1089 of 2011 [Assessment year 2004-05]. Splitting a letting into a rent agreement and a service agreement is standard practice in commercial buildings, and the head under which the service charges fall decides real money: section 24(a) gives a flat thirty per cent deduction against house property income, while under section 56 only actual expenditure comes off. Here it was the department that wanted the charges out of house property, and the Court refused. The value of the case is the test it states in one line - can the service agreement stand independently of the rent agreement? - and the illustration of what does not pass it. Amenities that any occupier gets simply by occupying the building are rent by another name. Where a landlord genuinely supplies something separable, the case leaves that route open. If it applies to you, the first step is this: Ask of any service agreement whether it could survive if the rent agreement ended - if it could not, expect the charges to be treated as rent.
For assessment year 2004-05 the assessee owned two floors in Mahindra Towers, Worli, Mumbai. It received Rs 492.73 lacs as rent and a further Rs 123 lacs as service charges under a separate agreement with the same tenant. The services said to be covered were the staircase of the building, the lift, the common entrance, the main road leading to the building through the compound, drainage facilities, the open space in and around the building and an air-conditioning facility. The Assessing Officer accepted the rent as income from house property but held the service charges to be consideration for ancillary services and assessed them as income from other sources. The Commissioner (Appeals) allowed the assessee's appeal and treated the service charges as part of the house property income. The Tribunal upheld that view, finding that no independent services had in fact been provided by the owner. The Revenue appealed under section 260A, framing two substantially identical questions on whether the Rs 1.23 crores was chargeable under section 22 or as income from other sources. The matter was decided on 2012-07-25 by the High Court (High Court of Bombay - S.J. Vazifdar and M.S. Sanklecha, JJ.). On those facts the High Court held as follows. The Revenue's appeal was dismissed and both questions were answered against it. The High Court held that the service charges of Rs 1.23 crores formed part of the rent and were chargeable under section 22 as income from house property, not as income from other sources. The Court proceeded on the concurrent findings of the Commissioner (Appeals) and the Tribunal that the owner had provided no services independent of the letting itself, and declined to disturb them. The amenities the assessee was said to be charging for were held to go along with the occupation of the property rather than to be separately supplied, so the service agreement could not stand apart from the rent agreement and the amount received under it took the character of rent.
The Court framed the question as one of substance rather than form. Two agreements had been executed, but the existence of a second document does not by itself create a second source of income. Applying the approach in its own earlier decision in CIT v. Bhaktawar Construction Pvt. Ltd. (162 ITR 452), it asked whether the service agreement could stand independently of the rent agreement. It then examined what was actually being supplied. The staircase, the lift, the common entrance, the access road through the compound, the drainage, the open space around the building and the air-conditioning were not things a tenant could obtain or decline separately; they came with the premises. Because these were not separately provided but went along with the occupation of the property, there was nothing left of the service agreement once the letting was taken away. Since the service agreement had no independent existence, the consideration paid under it was part of the consideration for the letting, and section 22 - which charges the annual value of property of which the assessee is owner - covered it. The findings that no independent service was rendered were concurrent findings of fact by two appellate authorities, and the Court saw no reason to interfere with them in an appeal under section 260A. In the words reproduced by the source cited on this page: "The test to determine whether the service agreement was different from the rent agreement would be whether the service agreement could stand independently of the rent agreement." The decision followed or applied CIT v. Bhakhtawar Construction (P.) Ltd. [1986] 162 ITR 452/27 Taxman 7 (Bom.).
It was decided by the High Court on 2012-07-25 and is reported as [2012] 25 taxmann.com 12 (Bombay); [2012] 211 Taxman 383 (Bombay); Income Tax Appeal No. 1089 of 2011 [Assessment year 2004-05]. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 56, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed and both questions were answered against it. The High Court held that the service charges of Rs 1.23 crores formed part of the rent and were chargeable under section 22 as income from house property, not as income from other sources. The Court proceeded on the concurrent findings of the Commissioner (Appeals) and the Tribunal that the owner had provided no services independent of the letting itself, and declined to disturb them. The amenities the assessee was said to be charging for were held to go along with the occupation of the property rather than to be separately supplied, so the service agreement could not stand apart from the rent agreement and the amount received under it took the character of rent. It arises in House Property matters, on section 22, section 56 of the Income Tax Act 1961, and was decided by High Court of Bombay - S.J. Vazifdar and M.S. Sanklecha, JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the two agreements genuinely separate in substance: identify services that are supplied and priced apart from mere occupation of the premises. Do not rest on the existence of two documents; the Court looked at what was actually provided, not at how the papers were drawn. If the department is trying to push the charges into other sources to deny you the section 24(a) deduction, cite this decision and the concurrent findings point.
Validity check could not be completed. I searched for later history and found no reversal, and the decision itself applies the Bombay High Court's earlier ruling in Bhaktawar Construction. But I could not check a citator or trace whether an SLP was filed, so I am not asserting the position is settled. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read on Indian Kanoon's copy of the judgment; the Bombay High Court's own site could not be searched for the appeal. The judgment is short and rests on concurrent findings of fact, so it does not lay down when a service agreement would pass the independence test - only that this one did not. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed and both questions were answered against it. The High Court held that the service charges of Rs 1.23 crores formed part of the rent and were chargeable under section 22 as income from house property, not as income from other sources. The Court proceeded on the concurrent findings of the Commissioner (Appeals) and the Tribunal that the owner had provided no services independent of the letting itself, and declined to disturb them. The amenities the assessee was said to be charging for were held to go along with the occupation of the property rather than to be separately supplied, so the service agreement could not stand apart from the rent agreement and the amount received under it took the character of rent.
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