1. The assessee is a private discretionary trust created by trust deed dated 9-2-1976 for the benefit of seven beneficiaries. The trust had income from house property, interest and rent from furniture and fixtures. The ITO found that in the computation of property income, the assessee claimed a sum of Rs, 35,743 being legal expenses incurred in connection with the drawing up of a lease deed. It was claimed before the ITO that the expenses for legal fees and stamp charges adding up to Rs. 35,743 were paid for drawing up the lease deed in respect of property income and, hence, operated by way of overriding title to the rental income. Alternatively it was claimed that it represented collection charges for collecting the lease rent over a period of 9 years over which the lease was spread. A proportionate part of this amount obtained by dividing it by 9 years should be treated as collection charges. Thirdly, it was claimed that since the assessee Was assessed both on income from property and income from furniture, the latter as income from other sources, at least a proportionate portion of the expenditure for the latter source of income should be deducted.
The ITO rejected the assessee's claim as this was neither a deductible item in the computation of property income nor collection charges incurred. This was, according to the ITO, on the contrary a capital expenditure incurred by the assessee. On appeal, the AAC confirmed the ITO's order. He held the expenditure was capital in nature. The alternative grounds also were rejected by him. Hence the appeal before the Tribunal.
2. The learned counsel for the assessee has pointed out that in accordance with the lease entered into on 2-8-1976. the house property along with furniture was leased out for a period of 9 years. Apart from the sum of Rs. 25 to be paid to the lessors per month, the other payments to be made were a sum of Rs. 24,275 as monthly rent, a sum of Rs. 12,150 per month as reimbursement of municipal taxes and all other taxes and outgoings and a sum of Rs. 4,050 per month as charges for fixtures and fittings. The agreement Clause 2 also provided that the lessees were to pay all future increases in municipal rates or taxes in respect of the demised premises which the lessors were permitted in law to recover from the tenants or occupants of the premises. According to the learned counsel what was to be determined as income from property under Section 23 of the Income-tax Act, 1961 ('the Act') is the real income. The concept of real income is imbedded in Section 14 of the Act and would be relevant as much to the provisions of Sections 22 and 23 of the Act dealing with property income as to other type of income. The stamp charges are to be taken into account in fixing the annual letting value. In the present case, the bonafide annual value had been fixed on the basis of the actual rent received. In fact, the assessee could have asked the lessors to bear these expenses and reduce the lease rent to that extent and certainly to this the ITO could not have objected.
Resort is made to the decision in the matter of CIT v. Khandelwal Mining & Ores (P.) Ltd., which referred to a lease for 98 years and where the expenses were allowed. According to the learned counsel, apart from the question of these expenses being allowable deductions, even if they were not considered in that light, the real income under the head 'propetry' alone could be the basis of computation of property income. Reference is made in this connection to the decision in the case of Addl. First TTO v. J.M. Shah  4 ITD 303 (Bom.) where this concept was applied to the case of a salary income and the decision in the case of CIT v. Cinceita (P.) Ltd.  137 ITR 652 (Bom.).
Alternatively, the claim as collection charges admissible up to the permitted limit of 6 per cent is claimed for each of the 9 years of the lease on a proportionate basis. The claim made before the ITO of bifurcating the expenditure between the property income and income from other sources is also pressed.
3. For the department it is pointed out that property income is different from income from other heads like salary, business, etc.
Under the head property, there is a notional computation prescribed which is based on a principle different from the income from other heads. The computation of this latter, therefore, cannot be applied to property income. There are also special restrictions such as the 6 per cent limit for collection charges. According to the learned counsel, therefore, there is a clear indication that the principle of real income cannot be applied to computation of property income as otherwise there would have been no limit such as the 6 per cent limit for collection charges in working out the property income. The expenditure in the present case related to legal charges for drawing up a legal document in respect of the lease. This has a benefit for at least 9 years. There is no provision in the Act for grant of deferred expenditure over a period of 9 years. A proportionate portion cannot also be allowed as collection charges since the allowance of the latter depends on actual incurring of collection charges. The stamp charges while they represent expenditure incurred for entering into an agreement to lease the property can, according to the learned counsel, be scarcely regarded as charges incurred for collecting the lease rent.
The lease rent in fact comes in automatically though it has itself its source in the leasing of the property. With regard to the third contention that the expenditure should be bifurcated between the heads 'property' and 'other sources', it is pointed out by the learned counsel that the question to be asked in this context is whether there is a bare letting out of property or are there any other services rendered for which the assessee is getting an extra income. The answer to this last question is a clear indication. The expenditure, therefore, claimed cannot be allowed.
4. The facts lie in a limited compass. The assessee entered into an agreement to lease out his house property along with fixtures and fittings. He was to receive per month a sum of Rs. 40,500 including Rs. 4,050 charges for fixtures and fittings. On 2-8-1976, the assessee as the lessor entered into an agreement with the Canara Bank as lessee for letting out of the property along with the fixtures and fittings. In drawing up the lease deed in force for the next 9 years, the assessee incurred an expenditure of Rs. 35,743 on account of stamp charges, etc.
This amount was claimed as a deduction in computing the property income for the year or alternatively on a proportionate basis as collection charges for the next 9 years in computing the property income or again alternatively by bifurcating this expenditure between property income and income from other source referrable to the hiring out of the fixtures and fittings.
5. In computing the assessee's income, the ITO worked out the income from house property as under- 6. Apparently, the ITO has, in fixing the bona fide annual value of the property resorted to the provisions of Section 23(1)(b) and not Section 23(1)(a). The actual rent, etc., received by the assessee is the basis of computation of the property income adopted by the ITO. If the notional value of the property income as reduced from the municipal valuation, etc., or the reasonable rent at which the property could be let out from year to year were made, the basis of computation of property income, the ITO should have made the computation under Section 23(1)(a). Apparently, the actual receipt of rent basis was the one more favourable, to the revenue. Hence, the resort to Section 23(1)(b). As the above computation by the ITO would indicate, in taking the rent received by the assessee for the year, he has taken the figure of total receipts by way of monthly rent, reimbursement of municipal taxes, etc., but did not deduct the expenditure incurred by the assessee of Rs. 35,743 for drawing up the lease deed. In rejecting this claim for deduction, the ITO had named the item of expenditure as a capital item of expenditure. The AAC has also followed the same method.
7. In our view, the concept of capital expenditure versus revenue expenditure has no meaning or relevance in the computation of income from property. An item of expenditure can be disallowed or not allowed in the computation of income from a particular head only if it is specifically not allowable under the provisions of the Act. The capital expenditure as contrasted with revenue expenditure is not allowable under the Act only with regard to the computation of income from business or income from other sources and not with regard to property income. If we, therefore, regard the finding of the ITO or the AAC that this item of expenditure of Rs. 35,743 his applying the ordinary canons for deciding whether an expenditure is on capital or revenue account is capital that would have absolutely norelevance in the computation of income from property. It is, therefore, not necessary to apply this test to find out whether the expenditure incurred by way of stamp charges would be capital or revenue. It may be mentioned that if what the assessee claimed was an expenditure in connection with the construction of the property itself, which is leased out perhaps there may be a case for holding that income as the cost of the construction of the property, thus, adding to the capital investment. But that consideration will not be of any significance in the computation of income from property. The expenditure in the present case is incurred not in connection with the construction of the property or relevant to any capital investment or purchase. It is only stamp charges, etc., incurred in drawing up a lease deed between the lessor and the lessee under which the conditions of letting are specified, the amount by way of rent, etc, to be received are indicated and all other matters relevant to the letting out of the property alone are specified.
8. The question is, therefore, whether the expenditure in the present case would be deductible in computing the property income. The ITO, in the present case, has computed the property income basing it on the actual rent received. The physical receipt of the rent (or its right to be received) being the basis of the computation, one has to decide what is the actual rent received which could come under Section 23(1)(b). As allegedly pointed out by the learned counsel for the assessee in determining the actual rent received, certainly the net amount of money received or receivable by the assessee as the owner of the property and for letting out the property would only be relevant. If the assessee were to receive a large amount out of which he has to part with certain amounts for meeting certain liabilities of the tenant, certainly what he receives as rent would be only the net amount. To take an instance, if the lessee were to pay the lessor a sum of Rs. 25,000 per month with instruction from the lessee to pay Rs. 5,000 to the lessee's son for his education, Rs. 2,000 to incur some other expenditure from the lessee and another Rs. 3,000 to pay the lessee's wife on some account, the net amount of rent received by the lessor would be only Rs. 25,000-5,000-2,000-3,000, i.e., a net amount of Rs. 15,000 and not the original amount of Rs. 25,000. This is what exactly the learned counsel for the assessee has referred to as "real income' basis for ascertaining the rent receipt. We see nothing wrong in accepting this argument. What the lessor receives as rent would be what flows into his hands as net figure of money and not the gross amount out of which he has to incur so many items of expenditure in connection with the letting out of the property. These are different from the allowances specified in Section 24 of the Act. Thus, in the present case even though the lessor has received a sum of Rs. 4,24 155 under various heads, the net amount he receives from letting out the property will be less by a sum of Rs. 35,743 which he had to spend during the year by way of stamp fees, etc. In computing the income from property by resorting to the provisions of Section 23(1)(b). viz., the actual receipt of rent for the year, certainly the sum of Rs. 35,743 which indisputably goes out from the assessee's hands in connection with the letting is to be deducted. We leave open the question whether the deduction would be allowed if the notional BAV without reference to Section 23(1)(b) is adopted. The concept of capital expenditure being foreign to the computation of property income under the provisions of Section 23(1)(b), the actual receipt of rent being made the basis of computing the property income, the sum of Rs. 35,743 has, therefore, clearly to be deducted from the gross figure of Rs 4,24,155 in computing the property income. We, therefore, accept the assessee's contention and direct that the sum of Rs. 35,743 be deducted from the figure of rent for arriving at the bona fide annual value of the property for the assessment year. The deductions by way of repairs, collection charges, etc., where there are statutory limitations of one-sixth and 6 per cent respectively would operate also on the net figure of rent after deducting the sum of Rs. 35,743. Since we have accepted the assessee's main contention, it is not necessary to go into the alternative claims for deduction.
1. I agree with my learned brother Shri V. Balasubramanian, Vice President that the assessee is entitled to the deduction of Rs. 35,743 in the computation of its income from property. However, I would like to add the following reasons in support of the same.
2. The facts of the case have been fully set out in the order of my learned brother and, therefore, they do not require repetition. The claim of the appellant is for the deduction of a sum of Rs. 35,743 representing the stamp and registration charges and legal fees for the lease deed executed by them in favour of the Canara Bank leasing the premises for a period of 9 years. The argument on behalf of the revenue is that this amount is not admissible as a deduction as the income computed under the head 'property' in accordance with Section 22, is a notional income and does not permit of any other deduction, apart from those specified in Sections 23 and 24. In my view, this argument of the revenue is only partially correct to the extent that the income ultimately computed under the head 'property' is notional income. This argument does not take note of the changes brought about by the amendment made in the opening paragraph of Sub-section (1) of Section 23, by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976. Section 23(1) in its amended form which is applicable to the year under appeal reads as follows : 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 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 As rightly held by my learned brother, the assessment in the present case in respect of the property income has been made under Section 23(1)(b) and not under Section 23(1)(a). Under this provision of law, if the annual rent received or receivable by the owner of the property is in excess of the sum referred to in Clause (a) of Section 23(1) then the actual amount of rent so received or receivable by the owner has to be taken into account The question for our consideration is what is the actual amount received or receivable by the assessee as the annual rent for the property in the year in question. Though the actual amount of rent received by the assessee is the amount specified in the lease deed it will be the gross amount of rental income only. The assessee would be entitled to the deduction of the stamp and registration charges and legal fees for execution of the lease deed in favour of the lessee, so far as this year is concerned. Such a deduction may not be permissible if the computation of income is made under Section 23(1)(a), but, certainly such a deduction would be permissible under Section 23(1)(b) which proceeds on the basis of the actual amount of rent received or receivable by the assessee from the tenant in respect of the property leased by him. [In any such computation of property income made under Section 23(1)(b), it is necessary that all the outgoings for earning the said rental income has to be considered as an admissible deduction.
Otherwise, it will present an unrealistic picture of the true income of the assessee from the property in question for this year.
3. This view is supported by the decision of the Tribunal in the case of J.M. Shah (supra) at pages 313 to 315 to which I am a party.
4. Apart from the above decision, the decision of the Bombay High Court in Khandelwal Mining & Ores (P.) Ltd.'s case (supra), relied on by the learned counsel for the assessee also supports the above conclusion. A perusal of the said decision will show that the facts of the said case are similar to the facts of the present case though the claim in the said case was under Section 57(iii) of the Act. In paragraph 7 of the judgment their Lordships of the Bombay High Court held as follows : ...It is, however, difficult for us to appreciate the contention that when the assessee entered into a contract of lease with Ishwardas Bhatia, he was acquiring any new source of income or that the contract of lease was any new asset for the acquisition of which the amount of Rs. 59,500 in qusstion had been spent by the assessee.
A right to lease out land is clearly an incident of ownership of land and when land is leased out to a tenant on rent, the income in the form of rent is income from land. The source of income is thus the land itself. The contract of lease cannot by any stretch of imagination be described as source of income. The contract of lease may no doubt regulate the relationship between the lessor and the lessee, but that does not serve as a source of income because rent paid is for the use of land and, therefore, the land alone is the source of income. Thus whenever a contract of lease is entered into between a landlord and tenant, no new source of income is brought into being. (p. 106) I am unable to see any reason as to why the ratio of this decision will not apply to the facts of the present case before us. The other decision of the Bombay High Court in Cinceita (P.) Ltd.'s case (supra), is not directly in point and is of no assistance in deciding the issue in the present case. I would, therefore, respectfully follow the decision of the Bombay High Court in the case of Khandelwal Mining & Ores (P.) Ltd. (supra), referred to above and hold that the assessee would be entitled to this deduction of these expenses of Rs. 35,743 under Section 23(1)(b) itself.
5. Apart from the above, these expenses would be admissible on the same parity of reasoning by which service charges of Rs. 11,664 paid by the assessee to the housing society for various services like security, passage light, operation of lift and services of sweepers, etc., have been allowed by the AAC in paragraph 3 of his order. It is not disputed that there is no provision under Section 24 which would entitle the assessee to get this deduction. However, this has been allowed not only in this case but in quite a number of cases. It can only be allowed only under Section 23(1)(b) and not under any other provision of law.
6. Assuming for the sake of argument that the revenue is right in its submission that this deduction is not permissible under Section 23(1)(b), even then, I am of the view that on the facts of the present case, the assessee would be entitled to this deduction of Rs. 35,743 against its income from other sources under Section 57(iii). There is no dispute that a sum of Rs. 47,163 has been assessed as the rent for furniture and fixtures received from the Canara Bank under the lease deed, under the head 'income from other sources'. Against this income, the assessee would be entitled to claim this entire deduction of Rs. 35,743 under Section 57(iii) in view of the decision of the Bombay High Court in the case of Khandelwal Mining & Ores (P.) Ltd. (supra), referred to above.
7. I would, however, like to state that the assessee's alternative claims for deduction of this amount either as collection charges or as deferred expenditure are clearly untenable as they are opposed to facts and unsustainable in law.
8. I, therefore, agree with my learned brother that the assessee's appeal has to be allowed.