M/S PICCADILY HOTELS PVT LTD V. COMMISSIONER OF IT & ANR

ITA/348/2005

AI Insights

The case revolves around the dispute concerning the deductibility of commission paid to property agents by M/s Piccadily Hotels Private Limited from its rental income while calculating the income from house property under the Income Tax Act, 1961. The Assessing Authority initially disallowed the deduction, which was later overturned by the CIT(A). However, the Tribunal restored the Assessing Authority's decision, leading to the present appeal by the assessee. The core legal issue was whether the commission paid to the brokers should be considered a deductible expense while computing the annual value of the property under Sections 22, 23, and 24 of the Act.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 727277 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 16-01-2014
• Assessment Year: misc
• Other Referred Cases: Richram Dharmsala Trust Estate (1992) 197 ITR 132 (Orissa), CIT v. Gwalior Commercial Co. Ltd. 141 ITR 930 (Cal), CIT Vs. H.G. Gupta & Sons (1984) 149 ITR 253, Aravali Engineers (P) Ltd. Vs. CIT & Anr. (2011) 49 DTR 68 (P&H)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: URVASHI DHUGGA
• Assessee Lawyers: PANKAJ JAIN; DIVYA JAIN
• Keywords: Brokerage; Commission Deduction; Income from house property; Rental income
• Section: 22; 23; 4; 24; 2(24); 260-A

Judgement Text

"ITA No. 348 of 2005 1 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 348 of 2005 Date of Decision: 16.01.2014 M/s Piccadily Hotels Private Limited ... Appellant vs. Commissioner of Income Tax and another ... Respondents CORAM: HON'BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MRS. JUSTICE ANITA CHAUDHRY Present:- Mr. Pankaj Jain, Advocate and Ms. Divya Jain, Advocate for the appellant. Mrs. Urvashi Dhugga, Advocate for the revenue. --- ANITA CHAUDHRY, J. 1. The instant appeal filed under Section 260-A of the Income Tax Act, 1961 (for brevity, the 'Act') is directed against the order dated 28.06.2005 (Annexure A-1) passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B” (hereinafter, to be referred as 'Tribunal', in short) in ITA No. 535/Chd./2002 relating to the assessment year 1998-99. 2. On 7.8.2006, the instant appeal was admitted to determine the following substantial question of law:- “That whether under the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in law and on interpreting various other Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 2 provisions of Section 22, 23, 24 r.w Section 2(24) and Section 4 that the amount of commission of brokerage paid to the Property Dealers to the extent of ` 16,54,000/- is not allowable as a deduction against the rental income and the assessee is to be taxed on the total rental income received without any such deduction.” 3. The factual matrix. The appellant - assessee is engaged in the business of running a Hotel, a Cinema Hall and owns a commercial building No. 275, situated at Captain Gaur Marg, Sriniwas Puri, Okhla, New Delhi. During the year under appeal, the appellant assessee rented out the said commercial site and showed the annual income thereof under the head “income from house property” to the tune of `51,00,000/- and consequently showed the income to be taxed under the said head to the extent of `12,45,734/-. However, the assessee claimed deduction of `16,54,000/- as commission being paid to two different commission agents, namely, Ever Bright Agencies and M/s Jain Estates, also claimed to be income tax assessees and were instrumental in letting the commercial building on rent. The assessee claimed that only because of intervention of these property agents, it got the best rent of its property and according to it, the commission paid to the said agents was normal expenditure in the nature of this trade. The assessee claimed that the commission paid is a charge on rental income and, thus, liable to be deducted from the actual amount of rent received by it. 4. The Assessing Authority did not accept the argument and Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 3 while relying upon the provisions contained in Section 24(1) of the Act, disallowed the commission paid by the assessee to the property agents, vide order dated 15.11.2000. 5. Aggrieved by the order of Assessing Authority, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) Chandigarh (in short, the CIT(A)] and reiterated stand taken before the Assessing Authority. This time, its argument was accepted by the CIT(A) and vide order dated 21.3.2001 the commission of `16,54,000/- paid to the property agents was held to be a charge on the rent and it was ordered to be deleted. 6. Dis-satisfied with the same, Revenue-respondent filed an appeal before the Tribunal, which differed with the view taken by the CIT(A) and held that the amount of commission paid by the assessee cannot be deducted from the income of the assessee. Consequently, while setting aside the order of CIT(A), the Tribunal restored that of the Assessing Authority, leading to the filing of the instant appeal. 7. We have heard the learned counsel for the appellant as well as for the revenue and have perused the paper-book carefully. 8. The argument of learned counsel for the appellant- assessee is that the rent received or receivable was expected to be one which would be after the deduction of this commission or brokerage. Reference has been made to the Explanation 1(a) to Section 23 (1) of the Act which existed at the relevant time. According to the learned counsel for the assessee-appellant in terms of said explanation, 'annual rent' means in a case where the property is let throughout the previous Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 4 year, the actual rent received or receivable by the owner in respect of such year. Elaborating his arguments, learned counsel for the assessee has further contended that the assessee could not have got high rent and the brokers were instrumental in coming to its help and the assessee was bound to pay the brokerage and the commission paid to the brokers ought to have been deducted while determining the annual rent of the property. It was sought to be contended that there were two transactions, one between the owner and the brokers and the other one between the owner and the tenants and the second transaction could not have come into existence without there being the first transaction and the amount of brokerage paid was having an overriding title over rent. In other words, to determine actual rent amount of brokerage paid should be deducted. Reference was made to the judgment in Richram Dharmsala Trust Estate (1992) 197 ITR 132 (Orissa). 9. On the other hand, learned counsel for the revenue supported the order passed by the Tribunal. 10. For adjudication of the substantial question as noticed hereinabove, it is necessary to refer to Sections 22, 23 and 24 of the Act. In terms of Section 22 of the Act, income from house property is chargeable to tax. The said section stipulates that the annual value of property consisting of any buildings or land appurtenant thereto of which the assessee is the owner shall be chargeable to income tax under the head 'income from house property'. Section 23 prescribes the method of determination of the 'annual value' for the purpose of Section 22. Sub-section (1) of Section 23 indicates that, for the Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 5 purpose 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 be let from year to year; or (b) where the property is let and the annual 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. In other words, the rent received or receivable in respect of property let constitutes the annual value of the property. Section 24 enumerates the deductions from income from house property. 11. From the plain reading of aforesaid provisions, we find that there is no express provision allowing any expenditure, brokerage or commission to be deducted in determining the annual letting value. A formula has been enshrined in Section 23 and a combined reading of clauses (a) and (b) would lead to an inference about the words used i.e. “actual rent received or receivable”. Thereafter deduction is allowed under Section 24 of the Act. The statute does not empower the assessing authority or the assessee to add anything to the provisions where the words used in the statute are plain, precise and unambiguous. Neither Section 23 nor Section 24, which are exhaustive, provides for the deduction of the commission paid to the broker or the agent while letting out the property. Furthermore, the learned counsel for the appellant was unable to demonstrate as to how any aid could be derived from Explanation 1(a) to Section 23(1) of the Act. The letting out of property with the assistance of broker at an annual rent received or receivable is one which the tenant has agreed Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 6 to pay to the landlord. Any expense by way of brokerage or commission paid by owner to the broker in such circumstances cannot be reduced to determine annual rent received or receivable by the landlord. Once this is so, equally the plea of amount of brokerage paid to have overriding title over rent cannot be accepted. 12. The Tribunal while declining the claim of the assessee in para 10 had concluded as under:- “After hearing the rival submissions, we find that the issue to be decided before is whether in computation of income from house property annual value should be reduced by the amount of brokerage paid. For facility of reference, we reproduce hereunder the relevant portion of clause 23(1):- “23(1) For the purpose 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. From the plain reading of the above, we do not find any express provision regarding allowance of any expenditure, brokerage, commission or by any one name, for determining ALV of the property. Rental income from property is assessed under the head 'income from house property'. It will be pertinent to mention here that computation of income from different sources is done and taxed under five heads, i.e. i) income from salary; ii) income business; iii) capital gains; iv) income from house property; and v) income from any other source. There are Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 7 express provisions in each head for computation of income. Under the business head, actual expenditure is allowed as cash for mercantile basis, as per sections 28 to 43, while under the head salary only standard deduction is allowed. Likewise, under house property, only deduction is allowed. Likewise, under property, only standard deduction is sought to be allowed u/s 24. Under the head 'income from house property' ALV is computed on the basis of deemed rent as per set formula enshrined in sections' 23 and thereafter standard deduction is allowed u/s 24, as specifically provided under the Act. For computation of ALV, a formula has been enshrined in section 23. Combined reading of clauses (a) and (b) lead to the inference about the words used actual rent received or receivable. To distinguish expected rent, which is deemed in clause (a), words 'actual rent received or receivable' have been put in clause (b) and to infer that actual rent means net rent after allowance of expenditure in connection with rent will lead to only absurd conclusion contrary to the object of legislature. What is not expressly provided in the statute should not be thrust in own inference. More so, that statute does not empower the assessing authority or the assessee either to add or subtract anything from ALV. In the case of CIT v. Gwalior Commercial Co. Ltd. 141 ITR 930 (Cal), it was held that no account of expenditure incurred in connection with air-conditioning, furniture, etc. should be added to the annual value conversely, it can be inferred that ALV is not to be disturbed which is coming out as a result of computation, as per formula u/s 23. Also the plea of the ld AR regarding overriding title cannot be accepted as no obligation has been cast on the assessee to pay brokerage. Brokerage is one time expenditure for procuring the tenant. It is upto the Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 8 assessee whether he needs the services of a broker or not. There is a difference between an amount which a person is obliged to pay out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Hence, on this account also the plea of the assessee fails. Also the assessee's alternative plea that the brokerage should be allowed to be deducted from the business income is not tenable in law, as the said brokerage as not paid for the purpose of its existing business. Law provides only the expenditure incurred wholly and exclusively for the purposes of business.” 13. In the case of CIT Vs. H.G. Gupta & Sons (1984) 149 ITR 253, the Delhi High Court turned down the plea of assessee deducting the expenses incurred towards stamp duty or registration charges in respect of the lease by observing that neither Section 23 nor Section 24 provides for deduction of any expenses incurred towards this purpose and once a particular type of expenditure is not specifically provided to be deductible, deduction therefor cannot be allowed. It was noticed as under:- “The annual value of the property, which is the subject of charge, was originally defined in s. 23(1) as \"The sum for which the property might reasonably be expected to be let from year to year\". The annual value is thus the sum of which a landlord could let the premises having regard to the condition of the property and of the prevailing circumstances as the language suggests. The taxes are charged on the artificial or national income. It is based on the annual value of the property. The authorities under the Act, Therefore, have to make the assessment on the basis of the national annual value. Section 23 lays Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 9 down how the annual value is to be determined. Section 24 provides that income chargeable under the head \"Income from house property\" shall, subject to the provision of sub-s. (2), be computed after making the deductions specified therein. The Legislature has used the word \"namely\" and this shows that the heads of expenditure wherefore deduction can be claimed are exhaustive. The expenses incurred in providing the proper stamp paper in the case of a lease or arrangement to lease is by virtue of the provisions contained in s. 29 of the Indian Stamp Act, 1899, and is on the lessee or intended lessee, in the absence of an agreement to the contrary. It may be for this reason the at the Legislature did not include such expenses in the permissible deductions under s. 23 or s. 24. If a particular type of expenditure is not specifically provided to be deductible, deduction Therefore cannot be claimed from out of the annual value. Neither s. 23 nor s. 24 provides for the deduction of the expenses incurred towards stamp duty or registration charges in respect of the lease.” 14. In the case of Aravali Engineers (P) Ltd. Vs. CIT & Anr. (2011) 49 DTR 68 (P&H), the question raised was whether the brokerage paid by the assessee was an admissible expenditure. This Court, while referring to provisions contained in Section 24 of the Act, answered it in negative by observing that the brokerage paid was an independent transaction envisaging payment to the broker and, thus, is not a permissible deduction. It was observed as under:- “As regards question (iii), learned counsel for the assessee submits that rent to the extent of brokerage paid having never been received by the assessee, the assessee Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 348 of 2005 10 was not liable to include the said rent in the income. This submission cannot be accepted. Rent admittedly was payable to the assessee and brokerage was an independent transaction envisaging payment to the broker. Where ever deductions out of income from property are permissible, the same have been specified in Section 24. De-hors the said provision, deduction from income is not permissible. This view has also been taken by Delhi High Court in Commissioner of Income-Tax, Delhi-I Vs. H.G. Gupta & sons [1984] 42 CTR(Del.) 178: (1984) 149 ITR 253 (Del).” 15. Adverting to the judgment in Richram Dharamsala Trust's case (supra), it has been held that computation has to be made before the expenses are adjusted from the rent received. However, this is not the issue in the instant case. 16. We are, thus, not inclined to concur with the analogy on which the assessee has set up its case, especially when a particular type of expenditure is not specifically provided to be deductible, deduction cannot be claimed from it. We find no ground to differ with the view taken by the Tribunal while upholding the order of Assessing Authority. We, therefore, answer the question against the assessee and in favour of the revenue. The appeal is dismissed. (AJAY KUMAR MITTAL) (ANITA CHAUDHRY) JUDGE JUDGE 16.01.2014 Jiten Sharma Jiten 2014.03.21 15:10 I attest to the accuracy and integrity of this document High Court Chandigarh "