My leave and licence agreement splits the receipt into rent and separate facility charges for housekeeping and security. Can the officer tax the facility charges as house property income too?
No, not where the services are actually rendered. The Mumbai Tribunal held that facility service charges of Rs 9,60,000 received for housekeeping, caretaker and security were business income, not income from house property. Applying CIT v Sarabhai (P) Ltd, where an owner carries on activities on the property that yield profits not from ownership but from the use of the property, those profits are business income. The Revenue's argument that the services were routine and of the kind a landlord would provide was held to be of no consequence, since it was not disputed that the services were in fact rendered and that the assessee had incurred Rs 10,11,900 on them. The rent itself remained assessable as house property income.
Decided by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'A'; G.S. Pannu, Accountant Member, and Joginder Singh, Judicial Member) on 2016-06-15, reported as ITA No. 4886/Mum/2014, ITAT Mumbai Bench 'A', assessment year 2009-10. It bears on section 22, section 28, section 143(3) of the Income Tax Act 1961, in House Property and Deductions & Disallowances matters.
Splitting a letting into rent and service charges is common in commercial lettings, and officers routinely collapse the two on the ground that both come from the same tenant. This order shows the test that actually decides it: whether the receipt flows from mere ownership of the property or from an activity carried on upon it. It rejects the two arguments the department usually makes, that the payer is the same person and that the services are of a kind any landlord would provide, and holds instead that the nature of the services must be deciphered from the terms and conditions in each case. The presence of matching outgoings, here housekeeping of Rs 5,34,900 and security of Rs 4,77,000 against receipts of Rs 9,60,000, is what carries the point, and the Tribunal notes that the assessee actually made a small loss on the service activity. The order is also useful on a second front, that a company with no operating business is still entitled to the bare minimum expenditure needed to maintain its corporate status.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For assessment year 2009-10 the assessee company had let out a property under a leave and licence agreement which bifurcated the receipts between rent and charges for various facilities. In the assessment under section 143(3) dated 5 December 2011 the Assessing Officer found rent received on the property and facility service charges of Rs 9,60,000. He did not dispute that the rent was assessable under the head income from house property. The assessee had returned the facility service charges as business income. The officer held that because the sum came from the same person who paid the rent, it too was assessable as income from house property, and he was not satisfied that specific services had been rendered, taking the view that the services were not of any special nature but were of the routine kind expected of a landlord. He treated the charges as part and parcel of the rental income. He also disallowed expenses of Rs 18,96,428 on the ground that no business had been achieved during the year and that the expenses debited in the profit and loss account related to the earning of rental income. The Commissioner (Appeals), by order dated 2 May 2014, affirmed the treatment of the facility charges, holding that they were received primarily because of the letting out of the property, and did not adjudicate the ground on the disallowance of expenses. Before the Tribunal the assessee showed that the charges were received under separate terms and conditions for housekeeping, caretaker and security services, that it had incurred housekeeping expenses of Rs 5,34,900 and security charges of Rs 4,77,000, and that it had in fact made a small loss because the service provider recovered more than it earned. It relied on A.R. Complex v ITO, (2008) 292 ITR 615 (Mad), CIT v Sarabhai (P) Ltd, (2003) 263 ITR 197 (Guj), and ACIT v Vijay S. Mallya.
The appeal was partly allowed. On the facility service charges the Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to recompute the income accordingly. It held that the providing of housekeeping, security and similar services does not show that the income by way of facility service charges is derived from mere ownership of the property, that on the terms of this arrangement the services were distinct from the letting out of the property, and that the assessee was justified in asserting that the charges be taxed as business income. It recorded that there was no dispute that income derived from mere letting out of property is assessable only under the head income from house property, and that the rent received for letting the property stood assessed under that head. On the disallowance of Rs 18,96,428 the Tribunal held that the Assessing Officer had mechanically disallowed the entire expenditure without appreciating that certain bare minimum expenses must be incurred by a company to maintain its status as a corporate body, and restored the matter to him to examine the allowability of the expenditure afresh in that light and recompute the income, the assessee succeeding on that ground for statistical purposes.
The Tribunal separated the two sources. Income from the mere letting of property belongs to section 22 and nothing turns on that. The question was whether the facility service charges also arose from ownership. It applied CIT v Sarabhai (P) Ltd, in which the Gujarat High Court held that if the owner of a property carries on upon the property activities which result in profits and gains arising not from the ownership but from the use of the property, those profits are chargeable as business income. The facts there were the same in outline: the owner let the property to tenants and separately rendered services by providing amenities for which it earned a separate amount, and the High Court held the rent assessable under section 22 and the receipts for services assessable under section 28 as business profits. The Tribunal held that ratio to cover this case, since it was undisputed that the facility service charges were received in return for providing specific services such as housekeeping and security, and noted the Madras High Court's decision relied on to the same effect. Two features of the record supported the conclusion. The charges carried their own outgoings, the assessee having hired service providers, and indeed produced a loss on the activity. And the services were separately provided for under the terms of the agreement. Against that the Tribunal rejected the Revenue's argument that the services were not of a special nature but of a routine kind expected of a landlord, holding it of no consequence, because factually it was not disputed that the services had been rendered, and because the nature of the services provided by an owner to a tenant has to be deciphered from the terms and conditions in each case, in order to decide whether they are distinct from an activity flowing merely from ownership. On the expenses, the Tribunal examined Schedule 8 of the profit and loss account and found repairs and maintenance, filing fee, post and telegraph, bank charges, accounting charges and audit fee debited alongside the housekeeping and security costs. Following its own decision in Preimus Investment & Finance Ltd v DCIT, based on the Allahabad High Court in Rampur Timber & Turnery Co. Ltd, it held that expenditure incurred to maintain a company's status is allowable and that a blanket disallowance for want of business activity would not do.
if the owner of a property carries on upon the property some activities which results in profits and gains arising, not from the ownership but from use thereof, such profit and gains would be chargeable as 'business income'
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Handle my notice → Ask a CA on WhatsAppNo, not where the services are actually rendered. The Mumbai Tribunal held that facility service charges of Rs 9,60,000 received for housekeeping, caretaker and security were business income, not income from house property. Applying CIT v Sarabhai (P) Ltd, where an owner carries on activities on the property that yield profits not from ownership but from the use of the property, those profits are business income. The Revenue's argument that the services were routine and of the kind a landlord would provide was held to be of no consequence, since it was not disputed that the services were in fact rendered and that the assessee had incurred Rs 10,11,900 on them. The rent itself remained assessable as house property income. This was decided by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'A'; G.S. Pannu, Accountant Member, and Joginder Singh, Judicial Member) and bears on section 22, section 28, section 143(3) of the Income Tax Act 1961. It is reported as ITA No. 4886/Mum/2014, ITAT Mumbai Bench 'A', assessment year 2009-10. Splitting a letting into rent and service charges is common in commercial lettings, and officers routinely collapse the two on the ground that both come from the same tenant. This order shows the test that actually decides it: whether the receipt flows from mere ownership of the property or from an activity carried on upon it. It rejects the two arguments the department usually makes, that the payer is the same person and that the services are of a kind any landlord would provide, and holds instead that the nature of the services must be deciphered from the terms and conditions in each case. The presence of matching outgoings, here housekeeping of Rs 5,34,900 and security of Rs 4,77,000 against receipts of Rs 9,60,000, is what carries the point, and the Tribunal notes that the assessee actually made a small loss on the service activity. The order is also useful on a second front, that a company with no operating business is still entitled to the bare minimum expenditure needed to maintain its corporate status. If it applies to you, the first step is this: Draft the agreement so that the rent and the service component are separately identified, with the services specified, and keep the arrangement with the service provider on record.
For assessment year 2009-10 the assessee company had let out a property under a leave and licence agreement which bifurcated the receipts between rent and charges for various facilities. In the assessment under section 143(3) dated 5 December 2011 the Assessing Officer found rent received on the property and facility service charges of Rs 9,60,000. He did not dispute that the rent was assessable under the head income from house property. The assessee had returned the facility service charges as business income. The officer held that because the sum came from the same person who paid the rent, it too was assessable as income from house property, and he was not satisfied that specific services had been rendered, taking the view that the services were not of any special nature but were of the routine kind expected of a landlord. He treated the charges as part and parcel of the rental income. He also disallowed expenses of Rs 18,96,428 on the ground that no business had been achieved during the year and that the expenses debited in the profit and loss account related to the earning of rental income. The Commissioner (Appeals), by order dated 2 May 2014, affirmed the treatment of the facility charges, holding that they were received primarily because of the letting out of the property, and did not adjudicate the ground on the disallowance of expenses. Before the Tribunal the assessee showed that the charges were received under separate terms and conditions for housekeeping, caretaker and security services, that it had incurred housekeeping expenses of Rs 5,34,900 and security charges of Rs 4,77,000, and that it had in fact made a small loss because the service provider recovered more than it earned. It relied on A.R. Complex v ITO, (2008) 292 ITR 615 (Mad), CIT v Sarabhai (P) Ltd, (2003) 263 ITR 197 (Guj), and ACIT v Vijay S. Mallya. The matter was decided on 2016-06-15 by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'A'; G.S. Pannu, Accountant Member, and Joginder Singh, Judicial Member). On those facts the ITAT held as follows. The appeal was partly allowed. On the facility service charges the Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to recompute the income accordingly. It held that the providing of housekeeping, security and similar services does not show that the income by way of facility service charges is derived from mere ownership of the property, that on the terms of this arrangement the services were distinct from the letting out of the property, and that the assessee was justified in asserting that the charges be taxed as business income. It recorded that there was no dispute that income derived from mere letting out of property is assessable only under the head income from house property, and that the rent received for letting the property stood assessed under that head. On the disallowance of Rs 18,96,428 the Tribunal held that the Assessing Officer had mechanically disallowed the entire expenditure without appreciating that certain bare minimum expenses must be incurred by a company to maintain its status as a corporate body, and restored the matter to him to examine the allowability of the expenditure afresh in that light and recompute the income, the assessee succeeding on that ground for statistical purposes.
The Tribunal separated the two sources. Income from the mere letting of property belongs to section 22 and nothing turns on that. The question was whether the facility service charges also arose from ownership. It applied CIT v Sarabhai (P) Ltd, in which the Gujarat High Court held that if the owner of a property carries on upon the property activities which result in profits and gains arising not from the ownership but from the use of the property, those profits are chargeable as business income. The facts there were the same in outline: the owner let the property to tenants and separately rendered services by providing amenities for which it earned a separate amount, and the High Court held the rent assessable under section 22 and the receipts for services assessable under section 28 as business profits. The Tribunal held that ratio to cover this case, since it was undisputed that the facility service charges were received in return for providing specific services such as housekeeping and security, and noted the Madras High Court's decision relied on to the same effect. Two features of the record supported the conclusion. The charges carried their own outgoings, the assessee having hired service providers, and indeed produced a loss on the activity. And the services were separately provided for under the terms of the agreement. Against that the Tribunal rejected the Revenue's argument that the services were not of a special nature but of a routine kind expected of a landlord, holding it of no consequence, because factually it was not disputed that the services had been rendered, and because the nature of the services provided by an owner to a tenant has to be deciphered from the terms and conditions in each case, in order to decide whether they are distinct from an activity flowing merely from ownership. On the expenses, the Tribunal examined Schedule 8 of the profit and loss account and found repairs and maintenance, filing fee, post and telegraph, bank charges, accounting charges and audit fee debited alongside the housekeeping and security costs. Following its own decision in Preimus Investment & Finance Ltd v DCIT, based on the Allahabad High Court in Rampur Timber & Turnery Co. Ltd, it held that expenditure incurred to maintain a company's status is allowable and that a blanket disallowance for want of business activity would not do. In the words reproduced by the source cited on this page: "if the owner of a property carries on upon the property some activities which results in profits and gains arising, not from the ownership but from use thereof, such profit and gains would be chargeable as 'business income'"
It was decided by the ITAT on 2016-06-15 and is reported as ITA No. 4886/Mum/2014, ITAT Mumbai Bench 'A', assessment year 2009-10. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 22, section 28, section 143(3), 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 appeal was partly allowed. On the facility service charges the Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to recompute the income accordingly. It held that the providing of housekeeping, security and similar services does not show that the income by way of facility service charges is derived from mere ownership of the property, that on the terms of this arrangement the services were distinct from the letting out of the property, and that the assessee was justified in asserting that the charges be taxed as business income. It recorded that there was no dispute that income derived from mere letting out of property is assessable only under the head income from house property, and that the rent received for letting the property stood assessed under that head. On the disallowance of Rs 18,96,428 the Tribunal held that the Assessing Officer had mechanically disallowed the entire expenditure without appreciating that certain bare minimum expenses must be incurred by a company to maintain its status as a corporate body, and restored the matter to him to examine the allowability of the expenditure afresh in that light and recompute the income, the assessee succeeding on that ground for statistical purposes. It arises in House Property and Deductions & Disallowances matters, on section 22, section 28, section 143(3) of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Mumbai Bench 'A'; G.S. Pannu, Accountant Member, and Joginder Singh, Judicial Member. 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. Evidence the outgoings head by head, since it was the housekeeping and security expenditure actually incurred that established the services were rendered rather than merely recited. Meet the argument that the services are routine by pointing out that what matters is whether the receipt arises from ownership or from an activity on the property, and that the department has not disputed that the services were provided. Where the officer disallows all expenses because there was no business in the year, take the point separately: expenses needed to maintain a company's corporate status are allowable and cannot be disallowed mechanically.
Still good law. A Tribunal order of 15 June 2016 applying CIT v Sarabhai (P) Ltd, (2003) 263 ITR 197 (Guj). The source page records no case citing it. Whether the Revenue appealed to the Bombay High Court was not checked in this session. The order turns on the terms of the particular agreement and on services actually rendered, and the Tribunal itself says the nature of the services must be deciphered case by case. 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.
The rent figure is given inconsistently: ground 1.1 puts the rent at Rs 11,40,000 and the facility charges at Rs 9,60,000, while the body of the order records rent of Rs 13,80,000 with the same facility charges, and the order does not reconcile them. The Madras decision relied on is called A.R. Complex when the assessee's authorities are listed and A.K. Complex when it is applied. The order does not set out the terms of the leave and licence agreement or the contract with the service provider, so a reader cannot see how the services were specified. It does not address the consequence of treating the charges as business income for the standard deduction under section 24 on the rent, nor whether the housekeeping and security costs are then deductible only against the service income. The second issue was remanded rather than decided, so nothing is settled about the quantum of allowable expenditure. The batch line gave the sections as 22, 28 and 28(i); the order refers to sections 22 and 28 without the clause. The orders of the Assessing Officer and the Commissioner (Appeals), and the decisions relied on, were not read in this session beyond what this order records of them. 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 appeal was partly allowed. On the facility service charges the Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to recompute the income accordingly. It held that the providing of housekeeping, security and similar services does not show that the income by way of facility service charges is derived from mere ownership of the property, that on the terms of this arrangement the services were distinct from the letting out of the property, and that the assessee was justified in asserting that the charges be taxed as business income. It recorded that there was no dispute that income derived from mere letting out of property is assessable only under the head income from house property, and that the rent received for letting the property stood assessed under that head. On the disallowance of Rs 18,96,428 the Tribunal held that the Assessing Officer had mechanically disallowed the entire expenditure without appreciating that certain bare minimum expenses must be incurred by a company to maintain its status as a corporate body, and restored the matter to him to examine the allowability of the expenditure afresh in that light and recompute the income, the assessee succeeding on that ground for statistical purposes.
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