Interesting Case: Brokerage paid for arranging tenant is allowable expenditure?

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Interesting Case: Brokerage paid for arranging tenant is allowable expenditure? 

Piccadily Holiday Resorts … vs Dcit on 21 April, 2005
Income Tax Appellate Tribunal – Delhi
Piccadily Holiday Resorts … vs Dcit on 21 April, 2005
Equivalent citations: 2005 94 ITD 267 Delhi, 2005 278 ITR 154 Delhi, (2005) 97 TTJ Delhi 362
Bench: R Easwar, Vice, P Jagtap

ORDER P.M. Jagtap, Accountant Member

1. This appeal by the assessee company is directed against the order of learned CIT(A)-XVII, New Delhi dated 11/11/2002 and the only issue arising from the grounds raised therein relates to its claim for deduction on account of commission paid to property agent in computation of income from house property which has been disallowed by the authorities below.

2. The assessee in the present case is a company deriving income from its hotel business as well as income from house property. A return of income was filed by it for the year under consideration declaring a total income at Rs. 9,44,390/- which was inclusive of income declared under the head “income from house property” amounting to Rs. 3,90,409/-. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has claimed deduction of Rs. 16,54,000/- on account of commission paid in computation of its income under the head “income from house property”. He, therefore, required the assessee to explain the deduction so claimed and in reply, it was submitted on behalf of the assessee company that the deduction on account of commission has been claimed under the charging Section of “income from house property” and since the rent actually received or receivable by the assessee was only the net amount after payment of commission, such net income was chargeable to tax under the head “income from house property”. The Assessing Officer, however, did not find merits in the submission made on behalf of the assessee company and disallowed the claim of the assessee for deduction of Rs. 16,54,000/- on account of commission. The matter was carried before the learned CIT(A) in an appeal preferred by the assessee company and it was submitted on its behalf before him that it could manage to let out its property only with the help of property agents and since the actual rent received by it was after the payment of commission to the said agents, such net amount only was chargeable to tax under the head “income from house property”. It was also submitted that while computing income from house property, the commission paid should be reduced from the rent received because this amount had never been received by the assessee company. These submissions made on behalf of the assessee company, however, did not find favour with the learned CIT(A) and rejecting the same, he proceeded to confirm the disallowance made by the Assessing Officer on this issue observing that the commission paid to property agent amounting to Rs. 16,54,000/- was not deductible for the purpose of computation of income of the assessee chargeable to tax under the head “income from house property” either under Section 23 or under Section 24. Aggrieved by the order of learned CIT(A), the assessee is in appeal before us.

3. The learned counsel for the assessee submitted before us that the commission amount in question was paid by the assessee company to property agent for the services rendered in connection with letting out of its property on good terms and since the said property could fetch good amount of rent only because of the services rendered by the property agents, commission paid to them was directly related to the rental income received by the assessee company. He submitted that the commission payment thus was directly connected with the rental income and the property agents having overriding title on such rental income to the extent of commission payment, the net amount of rental income after deduction of commission payment actually received by the assessee company only was chargeable to tax under the head “income from house property”. Referring to the provisions of Section 2(24), he submitted that tax is chargeable on income and since such income means net profit after deduction of all expenses, what is chargeable to tax is only the net income after deduction of all the expenses. He also referred to the provisions of Section 4 to contend that income tax is charged in respect of the income which clearly means net income after deduction of all the expenses incurred for the purpose of earning such income.

4. The learned counsel for the assessee contended that classification of income under the different heads has been done merely for the purpose of computation of total income and since such classification is a matter of convenience, the same cannot override the basic charging provisions contained in Section 4. He also contended that since the property agent was having overriding title on the rental income to the extent of his commission, income from rent to the extent of such commission payment did not accrue to the assessee at all. In support of this contention, he relied on the decisions of Hon’ble Supreme Court in the case of CIT v. Imperial Chemical Industries (India) Pvt. Ltd. – 74 ITR 17, CIT v. Travancore Sugars and Chemicals Ltd.- 88 ITR 1, CIT, Bombay City II v. Sitaldas Tirathdas- 41 ITR 367 and on the decision of Hon’ble Calcutta High Court, in the case of CIT v. Jhanzie Tea Association – 179 ITR 295. He further contended that there is no dispute about the fact that expenditure amounting to Rs. 16.54 lakhs was actually incurred by the assessee company on payment of commission and the same could alternatively be allowed under the head “income from other sources” and resultant loss could be allowed to be set off against income from other heads.

5. The learned counsel for the assessee also submitted that expenditure on account of commission was incurred prior to letting out the property and since the income from rent was subject to payment of such commission, only the net rent after payment of commission actually received by the assessee could be taxed as per the provisions of Section 23. Relying on the decisions of Hon’ble Supreme Court in the cases of CIT, Bombay City I v. Shoorji Vallabhdas and Co. – 46 ITR 144 as well as in the case of Godhra Electricity Co. Ltd. v. CIT – 225 ITR 746 and that of Hon’ble Gauhati High Court in the case of Shree Construction and Investment Co. v. ACIT – 262 ITR 73 and of Bombay High Court in the case of Seth Motilal Manekchand v. CIT, Bombay North – 31 ITR 735, he contended that the concept of real income also has to be taken into account while deciding the claim of the assessee for deduction on account of commission. He also contended that the deductions specifically provided under Section 24 are for the expenses incurred by the assessee after letting out the property and since the expenditure on commission was incurred prior to letting out, the same has to be considered on different footing.

6. The learned counsel for the assessee further submitted that the accounting principles recognize the “act of balancing” which, according to him, means that any expenditure incurred to earn the income must be adjusted against the same so that a balance is maintained. He also pointed out that the commission payment made by the assessee forms part of the income of the commission agent against which he would claim expenditure incurred by him to earn the commission and so on and so forth. It was thus contended that a disallowance of the commission payment in the assessee’s case would upset the whole “act of balancing” which is a well accepted accounting principle.

7. Another contention taken by the learned counsel for the assessee was that the reason why Section 24 does not take into account commission payment as a deduction is that the commission expenditure is to be allowed even before the property is let. In this connection, he pointed out that under Section 23(1)(a) of the Act, the annual value shall be deemed to be the sum for which the property might reasonably be expected “to let” from year to year and thus in point of time any expenditure incurred before the property is let would fell to be deducted even while computing the annual value under the above-mentioned provision.

8. The learned DR, on the other hand, submitted that the Income Tax Act is a self-contained code wherein subject matter as well as rights and liabilities are well defined and computation methods are specifically provided. He submitted that there is no dispute about the position that rental income earned by the assessee company is chargeable to tax under the head “income from house property”. He contended that such income, therefore, has to be computed in accordance with the provisions of Section 22 to 27. Referring to the provisions of Section 23, he submitted that the annual value of the property has to be taken as the sum for which the property might reasonably be expected to let from year to year or where the property is let and if the annual rent received or receivable by the owner in respect thereof is in excess of the said sum, the amount so received or receivable. He submitted that the property in question was actually let out by the assessee company in the year under consideration and the rent actually received was required to be taken as annual value without allowing any deduction from such actual rent in accordance with the provisions of Section 23. He also submitted that the deductions provided in Section 24 from “income from house property” are very specific and since the word used therein is “namely” which means “only”, no deduction other than those specifically provided in Section 24 can be allowed in computing income chargeable under the head “income from house property”. He submitted mat since the commission payment is not covered in the said deductions provided in Section 24, the same was not deductible under the said provisions for the purpose of computing the income chargeable under the head “income from house property”. He contended that the commission expenses thus were not deductible either under Section 23 or under Section 24 and the authorities below were fully justified in disallowing the claim of the assessee for deduction on this count.

9. The learned DR also contended that the charge in respect of commission payment was created by the assessee voluntarily and the same, therefore, could not be considered as transfer of income by overriding title as held by Hon’ble Supreme Court in the case of MSR Jagdish Chandra – 227 ITR 240. He submitted that income chargeable to tax under Income Tax Act as defined in Section 2(24) is required to be computed as per the computation provisions and even Section 4 also makes it clear that income tax shall be charged in accordance with and subject to the provisions of the Income Tax Act in respect of the total income.

10. We have considered the rival submissions and also perused the relevant material on record. It is observed that the rental income in question earned by the assessee is chargeable to tax under the head “income from house property” and this position is not in dispute. The only dispute is whether the commission paid by the assessee company to property agents could be allowed as deduction in computing such income or not. In this regard, it is observed that charge of income tax is created by virtue of the provisions contained in Section 4 according to which the income tax is charged for any assessment year in accordance with and subject to the provisions of the Income Tax Act in respect of total income of the previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to the respective head of income. Section 22 to 27falling under Chapter IV-C deal with assessment of income under the head “income from house property” and Section 22 to 24 particularly provide the manner and method of computing the income chargeable to tax under the said. Section 22 lays down that the “annual value” of house property shall be chargeable to income tax under the head “income from house property”. The expression “annual value” has been defined in Section 2(2) which lays down that “annual value” in relation to any property means its annual value as determined by Section 23. Section 23 as is applicable to the year under consideration provides that actual rent received would represent the annual value if such actual rent received exceeds the sum for which the property might reasonably be expected to let from year to year. The sum called “annual value” in Section 23(1) is really gross annual value because deductions mentioned in the first and second proviso to sub-section (1) and in sub-sections (2) & (3) of Section 23are required to be made from the said amount in order to arrive at the net amount and even from that net amount, deductions as specified in Section 24 are to be made in order to arrive at the income chargeable under the head “income from house property”. It is pertinent to note here that the deductions so specified do not include expenditure incurred on account of commission/brokerage paid to the property agent In order to determine the sum for which the property might reasonably be expected to let from year to year, the annual rent actually paid by the tenant and accepted by the owner would be relevant. If a property is let in the ordinary course and no extraneous circumstances have intervened in fixation of contractual rent, it can be reasonably inferred that the sum representing the actual rent is the sum for which the property might reasonably be expected to let from year to year. Normally, the actual rent received corresponds to the rent that a person can reasonably be expected to receive as the tenant and the landlord can be presumed to act rationally.

11. In the present case, the actual amount received by the assessee company as rent from its property was Rs. 39,15,000/- and this amount thus was rightly taken by the Assessing Officer as annual value in accordance with the provisions of Section 23(1). The stand of the assessee, however, is that since the amount of commission payable to the property agent was agreed even prior to receipt of rent, the assessee company actually received only the net rental income after payment of the said commission and this net amount alone ought to have been taken as “annual value” of its house property. We, however, find it difficult to accept this stand of the assessee. As already observed, the actual rent received corresponds to the rent which a person can reasonably be expected to receive and such annual rent is the amount of rent actually paid by the tenant and accepted by the owner. This being so as well as keeping in view the specific provisions contained in Section 23(1), we are of the view that the rent actually paid by the tenant and accepted by the owner has to be taken as the “annual value” of the house property for the purpose of computing income which is chargeable to income tax under the head “income from house property”. For this proposition, we derive support from the decision of Hon’ble Delhi High Court in the case of CIT v. H.G. Gupta & Sons – 149 ITR 253 wherein it was held that deduction of expenditure incurred on stamp duty and registration in connection with execution of lease deed is not allowable as neither Section 23 nor Section 24 provides for such deduction. Explaining further, their Lordships of Delhi High Court have observed that use of the word “namely” in Section 24shows that heads of expenditure whereof deduction can be claimed in the computation of income from house property are exhaustive. In the case of Indian City Properties v. CIT – 55 ITR 262, Hon’ble Calcutta High Court has held that deduction specified in Section 24(1) are exhaustive and in order that a particular expenditure may be claimed as permissible deduction, it should come within the ambit of one of the clauses of Section 24(1). It was also held by the Hon’ble Calcutta High Court that deduction cannot be claimed under any general principle of law or on the considerations of equity.

12. Before us, the learned counsel for the assessee has contended that the commission payable to the property agent being contractual liability directly relatable to the rental income, there was a diversion of rental income by an overriding title to the extent of such commission payment and the same, therefore, was not the income belonging to the assessee chargeable to tax under the head “income from house property”. In this regard, we may observe that even though the assessee company was under an obligation to pay the commission amount to the property agents, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on the source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged with an overriding title, the same can be considered as diversion of income by overriding title. The true test for the application of rule of diversions of income by an overriding title has been explained by the Hon’ble Supreme Court in the case of CIT v. Shitaldas Tirathdas – 41 ITR 367 as follows.

“In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation, which is the decisive fact. There is a difference between an amount, which a person is obliged to apply 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. Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequences, in law, does not follow. It is the first kind of payment, which can truly be excused, and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.”

In the present case, it is observed that the rental income was received by the assessee company directly from the tenants which constituted its income at the point when it reached or accrued to it whereas commission was paid separately to the property agents to discharge its contractual liability. In the case of CIT v. Imperial Chemical Industries (India) Pvt. Ltd. (supra) cited by the learned counsel for the assessee, the Hon’ble Supreme Court has held that an obligation to apply income which has accrued or arisen or has been received amounts merely to application of such income. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT – 227 ITR 172, the Hon’ble Supreme Court has observed that the tax is attracted at the point when the income is earned and taxability of income is not dependent upon its destination or manner of its utilization. Keeping in view these decisions of Hon’ble Supreme Court, we hold that the payment of commission by the assessee company to property agents did not amount to diversion of income by overriding title and the contentions raised by the learned counsel for the assessee in this regard are not acceptable being devoid of any merits.

13. The contention based on the supposed principle of accounting namely the “act of balancing” cannot also be, with respect, accepted at all. No authority or text book was cited before us to show whether such a principle actually existed in the field of accounting. Even otherwise, the mere fact that there is some such principle of accounting does not ipso-facto mean that the expenditure by way of commission has to be deducted, in the absence of a clear statutory provision to that effect. It is no doubt true that normally, sound accounting principles have to be followed while computing the income but the accounting principle cannot control the allowability of any expenditure under the Income Tax Act. We are not also impressed by the argument that if the commission expenditure is not allowed as a deduction in the assessee’s case, it would upset the principle of balancing. As already pointed out, the expenditure can be allowed as a deduction only if there is an express provision in the computation provisions relating to the income from house property and merely because the balancing principle would be upset, it does not follow that the expenditure should be allowed as a deduction. We therefore reject this contention of the learned counsel for the assessee.

14. The argument based on the phraseology of Section 23(1)(a) is also devoid of merit. This Section provides a yardstick for measuring the annual value of the property and while doing so, says that the sum for which the property might reasonably be expected “to let” from year to year shall be the measure of the annual value. The words “to let” 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 is 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 any point of time so that it can be said that the commission expenditure or any other expenditure incurred before the property is let is to be deducted while measuring the annual value of the property under the provision. This argument is also without any merit and is, accordingly, rejected.

15. As regards the alternative contention of the assessee to allow the commission expenditure in question under the head “Income from other sources” and also to allow the resultant loss under the said bead to be set off against income from other heads, it is observed that Section 57 specifies deductions allowable in computing the income chargeable under the head “Income from other sources” and clause (iii) thereof is a residuary provision which lays down in express terms that in respect of every item of income chargeable under Section 56, revenue expenditure which is laid out wholly and exclusively for earning that income would be allowable. In the present case, the commission expenditure in question was laid out for earning rental income and since the said income admittedly was chargeable to tax under the head ” Income from house property” and not under the head ” Income from other sources’, we are of the view that the same could not be allowed under Section 57. In that view of the matter, we find it difficult to accept even the alternative contention raised by the learned counsel for the assessee before us.

16. As such, considering all the facts of the case as well as keeping in view the legal position emanating from the interpretation of relevant provisions as well as aforesaid judicial pronouncements, we are of the considered opinion that the commission paid by the assessee company to the property agent was not deductible in computing its income chargeable under the head “income from house property” and the Assessing Officer was fully justified in disallowing the claim of the assessee for such deduction. The impugned order of learned CIT(A) confirming the disallowance made by the Assessing Officer on this count is, therefore, upheld and this appeal filed by the assessee is dismissed.

17. In the result, the appeal of the assessee is dismissed.

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