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Judges
  • Hon'ble Mr. Justice S.J. Vazifdar
  • Hon'ble Mr. Justice Deepak Sibal
Acts
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  • Hon'ble Mr. Justice S.J. Vazifdar
  • Hon'ble Mr. Justice Deepak Sibal
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Smart Summary

Structured Summary of the Opinion — S.J. Vazifdar, Chief Justice

Factual and Procedural Background

This is an appeal against the order of the Income Tax Appellate Tribunal (ITAT) which had confirmed the order of the Commissioner of Income Tax (Appeals). The appeal concerns the assessment year 2002-03 and was admitted on substantial questions of law arising from that order.

The appellant is a sub-licensee of an apartment measuring 367 sq. ft. in a commercial building (World Trade Centre, Barakhamba Lane, New Delhi). The appellant (assessee) entered into a sub-sub-licence agreement dated 03.05.2000 with M/s RSM & Company. Clause 1 of that agreement granted use of the premises for office purposes for two years from 1.5.2000 and provided for payment of (a) rent at Rs. 40 per sq. ft. (Rs. 14,680 per month) and (b) maintenance charges payable "to the Builders, M/s Bharat Hotels Limited, as per their current bills" presently fixed at Rs. 14.22 per sq. ft. per month, with certain rules for future enhancements and electricity tariff-related increases.

Legal Issues Presented

  1. Whether in the facts and circumstances of the case the maintenance charges could be included as part of rent?
  2. Whether the interpretation given to Section 23 of the Income Tax Act, 1961 is correct in the facts and circumstances of the case?
  3. Whether the maintenance charges given by the sub-licensees to the builder can be included as part of rent?
  4. Whether the impugned orders (Annexures A-1 to A-3) are sustainable in law?

Arguments of the Parties

Appellant's Arguments

  • Counsel for the appellant, Mr. Jhingan, contended that the maintenance charges were payable by the sub-sub-licensee directly to the builder (M/s Bharat Hotels Limited) and not to the sub-licensee (the assessee), implying that such maintenance charges should not be treated as part of the rent received by the assessee.
  • It was also submitted as a factual point that the sub-sub-licensee had been paying the maintenance charges to the builder.

The opinion does not contain a detailed account of any other side's specific submissions framed as distinct arguments in the same level of detail.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeded in a sequence of interpretative and statutory steps, summarized below as the opinion sets them out.

  1. Contractual interpretation:
    • The court examined Clause 1 of the sub-sub-licence agreement, noting the words preceding sub-clauses (a) and (b): "and the Sub-Sub-Licensee paying and yielding therefore unto the Sub-Licensee during the said period of terms -".
    • Reading sub-clauses (a) (rent) and (b) (maintenance charges) together with those preceding words, the court held that the maintenance charges were to be paid to the sub-licensee (the assessee). The phrase "all maintenance charges payable to the Builders" identifies the nature of the charges but does not name the payee; thus, the maintenance charges are payable to the sub-licensee under the agreement as framed.
    • The court observed that if the maintenance clause were read in isolation to mean payment directly to the builder, the drafting would have been unnecessaryly segmented; the natural reading links sub-clauses (a) and (b) to the words that require payment unto the sub-licensee.
    • Even if, as a factual matter, the sub-sub-licensee paid the builder directly, the court held that such payments would be pursuant to a subsequent understanding and would not alter the contractual obligation that the sum of rent and maintenance was payable to the sub-licensee.
  2. Statutory interpretation — Sections 22 and 23:
    • The court reproduced Sections 22 and 23 of the Income Tax Act, 1961 (as they stood at the relevant time) and emphasized that the term "rent" in those sections has a wide ambit: it includes any amount paid in consideration of the property being let.
    • The court reasoned that maintenance charges must therefore form part of the rent for purposes of determining the annual value under section 23 because they are consideration connected to the letting of the premises and to the provision of common amenities.
    • The court relied on the proviso to section 23(1) (which provides a specific deduction for taxes levied by local authorities when actually paid) to illustrate that where Parliament intended particular deductions it did so expressly; maintenance charges are not included in that proviso and therefore are not excluded from the concept of rent.
  3. Policy and anti-avoidance reasoning:
    • The court observed that excluding maintenance charges from rent would permit an assessee to understate the true annual value of the property by artificially segregating maintenance from rent, thereby enabling avoidance of tax on the full consideration for use of the property.
    • The court explained that the annual value under section 23(1) is the sum for which the property might reasonably be expected to let or, where let, the actual rent received or receivable — both formulations would reflect higher amounts where common facilities (and associated maintenance) are better.
    • The court noted that where the agreement provides that the owner pays for common facilities, it is reasonable to presume such costs are factored into the rent and cannot be added again; conversely, where the licensee or lessee is stipulated to pay maintenance, those payments must form part of the rent for computing annual value.
  4. Interaction with Section 24:
    • The court pointed out that the assessee is not prejudiced by inclusion of maintenance in annual value because the income under the head "Income from house property" is computed after deductions under section 24, including the standard 30% deduction under clause (a) of section 24. Thus tax consequences reflect allowable deductions.
  5. Conclusion of analysis:
    • On the combined contractual and statutory analysis, the court concluded that maintenance charges must be included as part of rent for the purpose of computing annual value under the Income Tax Act.

Holding and Implications

Final Holding: The court answered the substantial questions of law in favour of the revenue and against the assessee, and the appeal was dismissed.

Core ruling emphasized: APPEAL DISMISSED

Direct consequences for the parties

  • The maintenance charges payable by the sub-sub-licensee are to be included as part of the rent/annual value of the property for assessment year 2002-03.
  • The assessee's sums received from the sub-sub-licensee (including maintenance) fall under "Income from house property" and are subject to computation after deductions available under section 24 (including the 30% standard deduction under clause (a)).
  • The impugned orders (Annexures A-1 to A-3) were held to be sustainable in law in the sense that the questions were decided in favour of the revenue.

Broader implications

The opinion explains a legal principle of interpretation applicable to similar arrangements: where maintenance or common-facility charges are stipulated as payable by the occupant/licensee, those charges are part of the consideration for letting and thus form part of "rent" for computing annual value. The opinion also cautions against contractual drafting that separates maintenance from rent to achieve a lower taxable annual value. The court did not purport to lay down any new statutory amendment; it applied existing provisions (Sections 22, 23 and referred to Section 24) to the facts at hand.

The provided opinion does not cite any prior judicial precedents in support of these conclusions.

Show full summary ...

    Sunil Kumar Gupta v. Assistant Commissioner Of Income Tax, Circle-Ii, Amritsar

    S.J. Vazifdar, Chief Justice. - This is an appeal against the order of the Income Tax Appellate Tribunal confirming the order of the Commissioner of Income Tax (Appeals) in respect of the issue that falls for consideration. The appeal pertains to the assessment year 2002-03.

    2. The appeal is admitted on these following substantial questions of law which really raise only one point.

    (i) Whether in the facts and circumstances of the case the maintenance charges could be included as part of rent ?

    (ii) Whether in the facts and circumstances of the case interpretation given to Section 23 of Income Tax Act, 1961 is correct ?

    (iii) Whether in the facts and circumstances of the case the maintenance charges given by the sub licensees to builder can be included as part of rent ?

    (iv) Whether in the facts and circumstances of the case orders Annexures A-1 to A-3 are sustainable in law ?

    3. The appellant is a sub-licensee of an apartment admeasuring 367 sq. feet in a commercial building. The assessee entered into a sub-sub-licence agreement dated 03.05.2000 with one M/s RSM and Company. Clause-1 of the sub-sub-licence agreement reads as under :-

    "1. That the Sub-Licensee hereby demises unto the Sub-Sub-Licensee all that the Demised Premises comprised of the area known and identified as Flat No. 412, measuring about 367 sq. ft. (super area), situated on the fourth floor of the commercial building known as World Trade Centre Barakhamba Lance, Connaught Circus, New Delhi-110001 and more specifically described in schedule I herein below for the term of 2 (two) years commencing from the 1.5.2000 together with the right in the Sub-Sub-Licence and their employees and authorised agent/agents/visitors and staff to use in common with the other Sub-Sub-Licensee/occupants of the Building at all times during the terms of Sub-Sub-Licence Agreement hereby created for Office purpose connected with the Demised Premises, but not for any other purpose.

    (i) The main gate, doors, entrance hall, passages and the staircase and landings of and in the building leading to the Demised Premises for unrestricted ingress to and egress from the Building and the Demised Premises ; and

    (ii) The passenger lifts, provided that nothing greater in weights and bulk other than handbags, brief case and attached cases shall be taken into passenger lifts;

    and the Sub-Sub-Licensee paying and yielding therefore unto the Sub-Licensee during the said period of terms :-

    (a) Rent in respect of the Demised Premises calculated @ Rs. 40/- (Rupees Forty only) per sq. ft. (Super Area) total monthly rent is Rs. 14,680/- (Rupees Fourteen thousand six hundred eighty only) of the area comprised in the Demised Premises, the said rent be paid quarterly in advance. The first payment, however, will be for two months (May and June, 2000).

    (b) In addition to the monthly rent, monthly and proportionately for any part of the month, all maintenance charges payable to the Builders, M/s Bharat Hotels Limited, as per their current bills in respect of the Demised Premises. Presently the maintenance charges fixed by the Builders are Rs. 14.22 (Rupees fourteen and paisa twenty two only) per sq. ft. per month. All reasonable and future enhancements, if any, will also be to the Sub-Sub-Licensee account. Any abnormal increase will be to the Sub-Licensee account. However, any increases in maintenance charges due to increase in electricity tariff by N.D.M.C. would be to Sub-Sub-Licensee account."

    4. The question is whether the maintenance charges payable under sub-clause (b) of Clause-1 of the Sub-Sub-Licence Agreement can be included as a part of the rent.

    Mr. Jhingan, learned counsel appearing on behalf of the appellant firstly contended that the maintenance charges are payable by the sub-sub-licensee directly to the builder and not to the sub-licensee i.e. the assessee.

    5. This is contrary to the plain language of Clause-1. After sub-clause (ii) are the words "and the Sub-Sub-Licensee paying and yielding thereto unto the Sub-Licensee during the said period of terms". This is followed by sub-clause (a) which specified the rent and sub-clause (b) which specified the maintenance charges. Sub-clauses (a) and (b), however, must be read with these words. So read it is clear that the sub-sub-licensee is to pay to the sub-licensee the maintenance charges. Sub-clause (b) cannot be read in isolation. If the words that immediately precede, sub clauses (a) and (b) are to be read as limited to clause (a), there would have been no need to identify sub-clauses (a) and (b). Sub-clause (a) would have been merged with these words and sub-clause (b) would have been an independent clause. The words in sub-clause (b) "all maintenance charges payable to the builders" identify the maintenance charges and not the payee. In other words sub-clause (b) requires the sub-sub-licensee to pay the assessee all the maintenance charges payable to the builder. It does not require the sub-sub-licensee to pay the same to the builder.

    6. Mr. Jhingan submitted that as a matter of fact, the sub-sub-licensee has been paying the maintenance charges to the builder.

    7. If that is so, it is pursuant to an understanding between the assessee and the sub-sub-licensee and not as per the terms of the agreement. The sum of the rent and the maintenance charges are, therefore, payable by the sub-sub-licensee to the assessee. That then is the annual value of the property being the actual rent received or receivable by the assessee.

    8. In any event the maintenance charges ought to be included as a part of the rent. Sections 22 and 23 of the Income Tax Act, 1961 as they stood at the relevant time read as under :-

    "Income from house property.

    22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".

    Annual value how determined.

    23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be -

    (a) the sum for which the property might reasonably be expected to let from year to year ; or

    (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable ; or

    (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable :

    Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

    Explanation. - For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.

    (2) Where the property consists of a house or part of a house which -

    (a) is in the occupation of the owner for the purposes of his own residence; or

    (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.

    (3) The provisions of sub-section (2) shall not apply if -

    (a) the house or part of the house is actually let during the whole or any part of the previous year; or

    (b) any other benefit therefrom is derived by the owner.

    (4) Where the property referred to in sub-section (2) consists of more than one house-

    (a) the provisions of that sub-section shall apply only in respect of one of such houses, which the assessee may, at his option, specify in this behalf;

    (b) the annual value of the house or houses, other than the house in respect of which the assessee has exercised an option under clause (a), shall be determined under sub-section (1) as if such house or houses had been let."

    The amendment is not relevant for the purpose of this appeal.

    9. The ambit of the term "rent" in these sections is wide. It includes any amount which is paid in consideration of the property being let. The maintenance charges must form a part of the rent. The proviso to subsection (2) of section 23 suggests that where the legislature intended deducting any amount in determining the annual value of the property it did so specifically. More important, it indicates that rent includes even taxes levied by local authorities. The same are however to be deducted in determining the annual value of the property of that previous year in which such taxes are actually paid by the assessee. Thus if the taxes are not paid they cannot be deducted. In that event they remain included in the annual value of the property. The proviso does not include the maintenance charges paid by the assessee.

    10. If the maintenance charges are not included in the rent, it would enable an assessee to avoid paying tax on the true annual value of the property. Under section 23(1) for the purpose of section 22 the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. The amount of rent would also be dependent upon the common facilities of a building. The better the facilities, qualitatively and or quantitatively, the higher the rent. It can hardly be suggested that the annual value of a property which provides several common amenities such as a swimming pool, gymnasium, security car, parking and elevators would be the same as the annual value of a property in the same area but without these facilities. The actual rent received would be much higher where the facilities are better. Section 23 provides that the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year or where the property is let, the actual rent received or receivable by the owner whichever is higher. In either case the rent that is received in respect of the premises in a building where the common amenities are better is bound to be higher than the rent that is expected to be received or is received in a building where the amenities are not as good.

    11. Where the agreement provides that the owner shall pay the amounts for the common facilities, maintenance charges, outgoings etc. it is obvious and reasonable to presume that the same is factored into the rent, fee or compensation payable by the lessee or the licensee. In that event the same cannot be added to the rent agreed to be paid. However, if the maintenance charges etc. are stipulated to be payable by the licensee or the lessor it must form a part of the rent for the purpose of computing the annual value of the property.

    12. A view to the contrary would enable a party to undervalue the annual value of the property for the purpose of section 23 by the simple expedient of providing for the payment of the maintenance charges etc. and the rent separately.

    13. The maintenance charges must be included as part of the rent for the purpose of computing the annual value of the property. The assessee is not prejudiced thereby in any event. We are informed that the amounts received under the sub-sub-licensee had been brought under the head "Income from house property". Section 24 provides that the income chargeable under the head "Income from house property" shall be computed after making the deductions specified therein. Under clause (a) of Section 24, a sum equal to thirty percent of the annual value is liable to be deducted. The assessee has, therefore, the benefit of deductions under section 24 as well as under the proviso to section 23 of the Act.

    14. In the circumstances, the questions of law are answered in favour of the revenue and against the assessee.

    15. The appeal is accordingly dismissed.

     

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    Comments

    Sunil Kumar Gupta v. Assistant Commissioner Of Income Tax, Circle-Ii, Amritsar
    (Sep 27, 2016)