2025 (6) TMI 636 - AT - Income Tax

Scope of limited scrutiny - Income from house property - annual letting value (ALV) addition made as deemed let out property u/s 23 - determination of fair rental value/municipal rental value of the property for determining the annual value of the house property as per the provisions of section 23(1)(a) - HELD THAT - After furnishing the details of fixed assets the AO added the income as deemed let out under income from house property amounting to Rs. 19, 65, 446/- and also assessed the income from let out of house property to Rs. 2, 75, 65, 005/- by holding that the maintenance charges received separately over and above the house/lease rent are taxable under the head income from house property and not under the head Profits gains of business or profession . We are of the opinion that as rightly contended by the AO that the additions made on the issues emerged only after filing of the details of the assets during the course of assessment proceedings which the assessee ought to have furnished in the return of income. Therefore we are unable to hold that the AO passed the assessment order beyond the scope of the limited scrutiny initiated and accordingly we dismiss this ground of the assessee. We have to give importance to the substance over the form principle. Merely because the assessee had not executed a separate agreement for maintenance charges it cannot be said that the same were income from house property chargeable u/s 22 of the Act. Undisputedly the maintenance charges are being received by the assessee in return for providing specific services like external house-keeping round the clock security upkeepment of lifts UPS electrical fittings borewell pumpsets CCTV Firefighting systems Digisets Split ACs etc. as mentioned in annexure A of the lease deed. It is not disputed by the revenue that these services by way of maintenance have actually not been rendered by the assessee. In the present case it is quite evident that the said services are distinct from letting out the property and therefore the assessee is justified in asserting that the same be taxed as business income. Thus on this aspect we set aside the order of ld. CIT(A)/NFAC and direct the AO to accept the maintenance charges as declared by the assessee as income u/s 44AD of the Act under the head Profits Gains of Business or Profession . Accordingly this ground of the assessee is allowed. Purvankara Flat Elita Promenade treated as deemed let-out - Requirement that the house is actually let during the year is not to be taken as a prerequisite for bringing the case of an assessee within the sweep of section 23(1)(c) of the Act. If the house is found vacant for the whole year subject to the condition that such vacancy of property is not for self occupation of the same by the assessee who continues to hold the same for the purpose of letting out. The usage of the term property is let in section 23(1)(c) of the Act had purposively been made to exclude those properties from the ambit of the clause which are held by the owner for self occupation purposes because even though the annual value of one self occupied property so chosen by the assessee is taken at NIL however the annual value of all the remaining properties are to be determined in terms of section 23(1)(a) of the Act. As per section 23(1)(a) of the Act for the purpose of section 22 of the Act 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. Further as per the provision of section 23(1)(c) of the Act 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 shall be treated as annual value. In the present case the property is not let for the entire year under consideration. Therefore in our view the AO has rightly considered the fair rental value for determining the annual value of the house property as per provisions of section 23(1)(a) of the Act as the assessee has not provided/furnished any fair rental value before the authorities below. Therefore this ground of appeal of the assessee is dismissed.

Summary

The core legal questions considered in this appeal arising from the assessment order under the Income Tax Act, 1961 for the assessment year 2018-19 are:

1. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) erred in making additions to the income of the assessee beyond the scope of the limited scrutiny initiated, particularly with respect to assets and liabilities.

2. Whether the annual letting value (ALV) addition made on the Purvankara flat as deemed let out property under section 23 of the Act was justified.

3. Whether the maintenance charges received from the tenant (State Bank of India) should be treated as income from house property or as business income under section 44AD of the Act.

4. Whether the assessee was entitled to claim deductions of expenses against the maintenance charges received.

5. Whether the assessment order was valid considering the opportunity of hearing was provided or not.

Issue-wise Detailed Analysis:

1. Scope of Limited Scrutiny and Additions Beyond It

The AO initiated limited scrutiny under the e-assessment scheme focusing on verification of assets and liabilities as per schedule AL, due to the assessee's failure to disclose such details despite income exceeding Rs. 50 lakhs. The assessee contended that additions relating to income were beyond the scope of this limited scrutiny.

The AO accepted the details of immovable assets but made additions by treating certain properties as deemed let out under section 23 and including maintenance charges as income from house property. The AO reasoned that these additions arose from issues emerging only after the submission of asset details and thus were within the scope of scrutiny.

The Tribunal upheld the AO's view, holding that the additions were consequential to the asset details furnished and did not exceed the scope of limited scrutiny. The contention that the assessment order was beyond the limited scrutiny scope was dismissed.

2. Addition of Annual Letting Value on Purvankara Flat (Deemed Let Out Property)

Section 23(1) of the Act governs determination of annual value for income from house property under section 22. The provision contemplates three scenarios: (a) expected rent if let out, (b) actual rent received if higher than expected, and (c) actual rent received if lower due to vacancy.

The assessee claimed the Purvankara flat remained vacant despite genuine efforts to let it out, thus no notional rent should be charged under section 23(1)(c). The AO disagreed, estimating annual letting value at 8.5% of the property value as per section 23(1)(a).

The Tribunal referred to authoritative precedent holding that notional rent can be taxed if the property is available for letting and there is no legal or physical impediment to tenancy. Mere failure to find a tenant does not prevent application of notional rent provisions. The Tribunal concluded the AO rightly applied section 23(1)(a) and dismissed the assessee's ground on this issue.

3. Treatment of Maintenance Charges Received from Tenant

The assessee received maintenance charges of Rs. 59,23,126 from State Bank of India, in addition to rent. The assessee declared this amount as business income under section 44AD, claiming the charges related to services rendered.

The AO and CIT(A) treated the maintenance charges as income from house property, reasoning that the assessee was not in the business of renting properties and the charges had direct nexus with the property.

The Tribunal conducted a detailed analysis of the lease deed and annexures, noting that the lease contained two distinct agreements: one for leasing the premises and another for providing maintenance services such as housekeeping, security, lift maintenance, electrical fittings upkeep, fire-fighting systems, and other facility management services.

The Tribunal emphasized the principle of substance over form, observing that the maintenance charges were for services that could be provided by a third party and were distinct from rent. It referred to section 2(13) defining business to include any trade, commerce, or adventure in the nature thereof, including rendering services.

Reliance was placed on a precedent from the Gujarat High Court which held that income from letting property is chargeable under income from house property, but income from services rendered to tenants is business income under section 28.

The Tribunal concluded that maintenance charges are business income and must be assessed under section 44AD as profits and gains of business or profession. Accordingly, it set aside the CIT(A) order on this point and directed the AO to accept the assessee's treatment.

4. Deduction of Expenses Against Maintenance Charges

This issue was raised by the assessee without prejudice, contending that expenses related to maintenance charges should be allowed as deductions.

Though not elaborated extensively in the order, the Tribunal's direction to treat maintenance charges as business income under section 44AD implicitly allows for expenses to be claimed in accordance with the provisions of that section and the Act.

5. Opportunity of Hearing and Validity of Assessment Order

The assessee contended that the assessment order was invalid as no opportunity of hearing was provided.

The Tribunal did not find merit in this ground, implicitly holding that proper procedure was followed and opportunity was given. This ground was dismissed.

Significant Holdings and Principles Established:

"Income from house property is thus an artificially defined income and the liability arises from the fact that the assessee is the owner of the property."

"The words 'to let' used in clause (a) of sub section (1) of section 23 of the Act cannot be divorced from the earlier words. These words are qualified by the words preceding them, especially the word 'expected'. Grammatically, the word 'expected' normally is followed by the word 'to'. What the provision means that you have to estimate the sum which the property would fetch if let from year to year and that sum would represent the annual value. The words 'to let' do not denote even in a stretch of imagination the maintenance charges separately charged for the extra services to be rendered by the landlord to the tenant."

"In a single lease deed the assessee had in fact entered into two separate agreements i.e. one for the renting the premises on lease and another for providing maintenance services with the State Bank of India."

"We do not agree with the view of ld. CIT(A)/NFAC that the income received by way of lease deed do not fall under the purview of the profits & gains of business/profession."

"According to Section 2(13) of the Act, the term 'business' includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture. Thus the adventure or activities which may amount to business need not necessarily be by way of trade, commerce or manufacture. They may even consist of rendering of services as in the case of selling agents, managing agents and these services may be of multicolored character."

"Merely because the assessee had not executed a separate agreement for maintenance charges, it cannot be said that the same were income from house property chargeable u/s 22 of the Act."

"If the owner of a property carries on upon the property some activities which results in profits & gains arising, not from the ownership but from the use thereof, such profits & gains would be chargeable to tax as business income and not income under the head 'income from house property'."

"The assessee is justified in asserting that the maintenance charges be taxed as business income."

"The assessee's failure in being able to find a tenant leading to vacancy of the premises for the entire year cannot prevent AO in applying the provisions of section 23(1)(c) of the Act especially when there is no legal disability or physical disability in creating a tenancy due to which the property is left vacant."

"The requirement that the 'house is actually let' during the year is not to be taken as a prerequisite for bringing the case of an assessee within the sweep of section 23(1)(c) of the Act."

"If the house is found vacant for the whole year subject to the condition that such vacancy of property is not for self occupation of the same by the assessee who continues to hold the same for the purpose of letting out."

Final Determinations:

- The additions made by the AO and confirmed by the CIT(A) were within the scope of limited scrutiny and valid.

- The annual letting value addition on the Purvankara flat as deemed let out property was justified and upheld.

- The maintenance charges received from the tenant are business income assessable under section 44AD and not income from house property under section 22.

- The assessee is entitled to claim deductions of expenses against the maintenance charges as business income.

- The assessment order was valid with no violation of principles of natural justice.

- The appeal is partly allowed in favor of the assessee on the issue of maintenance charges classification and dismissed on other grounds.