By TIOL News Service

CHANDIGARH, OCT 06, 2016: THE issue is - Whether where the maintenance charges are stipulated under the sub-sub licence agreement to be payable by the sub-licencee to the builder, it must form a part of the 'rent' for the purpose of computing the annual value of the concerned property. YES IS THE VERDICT.

Facts of the case:

The assessee entered into a sub-sublicence agreement with one M/s RSM & Company, whereby the Sub-Licencee hereby demises unto the Sub-Sub-Licencee all that the Demised Premises situated on the fourth floor of the commercial building known as World Trade Centre Barakhamba Lance, Connaught Circus, New Delhi for the term of 2 years together with the right in the Sub-Sub-Licence and their employees and authorized agent and staff to use in common with the other Sub-Sub-Licencee 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. Accordingly, the maintenance charges payable under the Sub-Sub-Licence Agreement was included as a part of the rent chargeable u/s 23 of the Income tax Act.

On appeal, the High Court has held that:

++ the counsel for assessee firstly contended that the maintenance charges are payable by the sub-sub-licencee directly to the builder and not to the sub-licencee i.e. the assessee. This is contrary to the plain language of Clause-1. After subclause (ii) are the words "and the Sub-Sub-Licencee paying and yielding thereto unto the Sub-Licencee 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-licencee is to pay to the sub-licencee 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-licencee to pay the assessee all the maintenance charges payable to the builder. It does not require the sub-sublicencee to pay the same to the builder. If that is so, it is pursuant to an understanding between the assessee and the sub-sub-licencee 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-licencee to the assessee. That then is the annual value of the property being the actual rent received or receivable by the assessee;

++ in any event the maintenance charges ought to be included as a part of the rent. The ambit of the term "rent" u/s 23 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 section 23(2) 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. 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. U/s 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. 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.

++ 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 licencee. 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 licencee or the lessor it must form a part of the rent for the purpose of computing the annual value of the property. 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. 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-licencee 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 u/s 24 as well as under the proviso to section 23 of the Act.

(See 2016-TIOL-2387-HC-P&H-IT)