Maintenance charges paid directly to the service provider can not be treated as “Rent” in the hands of owner

Maintenance charges paid directly to the service provider can not be treated as “Rent” in the hands of owner Vinod Arora, New Delhi vs Department Of Income Tax Income Tax Appellate Tribunal – Delhi Vinod Arora, New Delhi vs Department Of Income Tax ITA NO. 827/Del/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “H”, NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER I.T.A. No. 827/Del/2012 A.Y. : 2008-09 ADIT, CIR.1(1) (Int. Taxation), vs. Mr. Vinod Arora, 204, Drum Shape Bldg., B-27, Mayfair Garden, I.P. Estate, New Delhi – 110 016 New Delhi – 110 002 (PAN/GIR NO. : AACPA9466A) (Appellant ) (Respondent ) Assessee by : Sh. Sunil Goel, Suhel Goel, CA’s Department by : Sh. Pirthi Lal, Sr. D.R. ORDER PER SHAMIM YAHYA: AM This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XXIX, New Delhi dated 14.10.2011 pertaining to assessment year 2008-09. The grounds raised read as under:- “i) On the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (A) has erred in holding that the interest income earned by the assessee amounting to ` 2,64,172/- was taxable at the rate of 12.5% under the India UAE DTAA instead of at the rate of 40% under the Income Tax Act, failing to ITA NO. 827/Del/2012 appreciate that no tax residence certificate has been produced by the assessee. ii) On the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (A) has erred in holding that the short term capital gains amounting to ` 84,66,054/- were not taxable in India in terms of Article 13(3)of the India UAE DTAA. Failing to appreciate that there was not double taxable in the assessee’s case as UAE has not tax regime and the impugned short term capital gains would not be taxable in UAE. iii) On the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (A) has erred in holding that while computing the annual value of the house property, the assessee is eligible to claim the deduction of ` 22,888/- on account of maintenance charges paid to the cooperative society, failing to appreciate that the Act dopes not provide for any further deduction on account of repair and maintenance, over and above the standard 30% deduction provided u/s. 24 of the Act. iv) The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.” Apropos issue of interest income earned by the assessee amounting to ` 2,64,172/-. ITA NO. 827/Del/2012 The assessee was resident of Dubai and was holding UAE resident’s permit/ visa. The assessee had earned interest income of ` 2,64,172/- during the year under appeal. Assessee offered the interest to tax @ 12.5% under Article 11(2)(b) of Indo-UAE Double Taxation Avoidance Agreement (DTAA). However, Assessing Officer relied upon the assessment order for the assessment year 2007-08 and held that the assessee was not eligible for the benefit of DTAA and taxed the interest income at the normal rate of 40% under the Income Tax Act, 1961. While disallowing the claim of the assessee the Assessing Officer observed that the assessee was not able to produce the tax residency certificate of UAE and the documents filed by it, i.e. the copy of the passport and driving license, were not sufficient evidence to establish that the assessee was a resident of UAE. Upon assessee’s appeal Ld. Commissioner of Income Tax (A) noted that the same issue was considered by the Ld. Commissioner of Income Tax (A) in assessee’s own appeals for assessment years 2006- 07 & 2007-08 and the appeals were allowed in this regard. While allowing the relief to the assessee, the Ld. Commissioner of Income Tax (A) in this regard referred to Circular No. 734 dated 24.1.1996 issued by the CBDT, wherein it was clarified as under:- “2. The Board in its Circular No. 728 (F.No. 500/12/95-FTD) dated 30.10.1995 have already clarified that in case of a remittance to a country ITA NO. 827/Del/2012 with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee. Once again it is clarified that in respect of payments to be made to the Non-resident Indians at UAE, tax at source must be deducted at the following rates: ii) Interest – (b) 12-1/2% of the gross amount of the interest in all other cases.” Considering the above, Ld. Commissioner of Income Tax (A) held that wordings of the circular are clear and unambiguous. In case of Non-resident Indians at UAE, tax on interest income is required to be deducted at source at the rate of 12-1/2% of the gross amount of interest. Hence, Ld. Commissioner of Income Tax (A) decided the issue in favour of the assessee and directed the Assessing Officer to tax the interest income of the assessee @ 12.5% in terms of Article 11(2)(b)of the Indo-UAE DTAA. Against the above order the Revenue is in appeal before us. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that assessee in this case is a UAE resident. The DTAA with the UAE mandates that interest income be taxed @ 12.5% under Article 11(2)(b)of the said ITA NO. 827/Del/2012 DTAA. Furthermore, Board Circular No. 728 referred hereinabove also supports the case of the assessee. We further find that Ld. Commissioner of Income Tax (A) has noted that in assessee’s own case for assessment year 2006-07 and 2007-08, the appeals were allowed in this regard. Ld. Departmental Representative could not controvert these submissions. Under the circumstances, we uphold the order of the Ld. Commissioner of Income Tax (A) on this issue and decide the issue in favour of the assessee. Apropos issue of short term capital gains On this issue Assessing Officer denied the benefit of Indo UAE DTAA to the assessee in respect of short term capital gains of ` 84,55,054/- and levied tax @ 10% alongwith the surcharge and education cess in accordance with the provisions of section 111A of the Act. Assessee claimed that since the assessee was a tax resident of UAE, the income from short term capital gains was not chargeable to tax in accordance with the provisions of Article 13(3)of the Indo-UAE DTAA. While rejecting the claim of the assessee, Assessing Officer relied upon the assessment order for 2007-08 wherein it was held that the benefit of Indo UAE Treaty was not available to the assessee as it was not liable to pay tax in the UAE on its income from short term capital gains. Upon assessee’s appeal Ld. Commissioner of Income Tax (A) noted that the said issue was considered by his predecessor in the appeal filed by the assessee for the assessment year 2007-08. While deciding this appeal his predecessor relied upon his own order dated 30.3.2010 in the case of Mustaq Ahmed Vakil in Appeals No. 269/06- 07, 104/07-08 and 71/08-09 wherein it was held as under:- ITA NO. 827/Del/2012 “I have carefully considered the points made by the Assessing Officer in the assessment order, submissions of the appellant and the various decisions relied upon by the appellant. The issue has been dealt with extensively by the AAR in its various orders. Two AAR rulings are in favour of the department. In the case of Cyril Eugene Pereira (239 ITR 650) it was held that as individuals do not pay tax in the UAE, the applicant Cyril Pereira was not a tax resident of the UAE and was not entitled to the beneficial provisions of the India-UAE tax treaty. In the case of Abdul Razak Memam, (146 Taxman 115) the AAR held that investors of the UAE have to pay Capital Gains tax on their investments in India. The AAR was of the view that DTAA between India and the UAE was not useful for the purpose since UAE does not have a tax regime. Two of the AAR’s rulings i.e. in the case of M.A. Rafique and Emirate Fertilizers Trading are in favour of the appellant. In M.A. Rafique (213 ITR 317), dated 23.12.1994, the AAR held that the applicant was eligible to the benefits of the India-UAE tax treaty and that the capital gains would not be subject to tax in India. The AAR observed – “That though there was no income tax or wealth tax on individuals in any of the UAE nations, the fact that a comprehensive agreement (tax treaty) was considered necessary in spite of a clear knowledge that there was no such tax on individuals in UAE could only mean that the agreement was intended to encourage the inflow of funds from Dubai and other Emirates to India for investment.” In the case of Emirates ITA NO. 827/Del/2012 Fertilizer Trading (192 CTR (AAR) 590), dated 27.10.2004, AAR has held that merely because there is no tax incidence in the other country, it does not imply that such income can be taxed in India and that under article 13(3) of the treaty capital gains realized by a UAE resident were taxable only in the UAE and not in India. Based on the provisions of the Income Tax Act, the AAR held, “The tax treaty has an overriding effect over the provisions of the I.T. Act. Thus, the capital gains arising to the UAE resident on sale of the shares of an Indian company cannot be taxed in India.” The Mumbai Tribunal in the case of Green Emirates Shipping and Travels (99 TTJ 988), dated 30.11.2005, after considering various rulings of the AAR and the judgement of the Hon’ble Supreme Court in Azadi Bachao Andolan held that ‘Liable to Tax’ in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would also cover the cases where the other Contracting State has the right to tax such persons, whether or not such a right is exercised. The same Tribunal in the case of Meera Bhatia (2010-TIOL-46-ITAT-Mum) dated 29.10.2009 after relying on the Green Emirates Shipping case held that “It may result in double non-taxation but then we cannot be oblivious to the fact that double non taxation is also a fact of life, and tax sparings, which find place in several Indian tax treaties, are also a reality in international taxation.” ITA NO. 827/Del/2012 Keeping in view the above mentioned decisions, it is held that the benefit of the Indo-UAE tax treaty is available to the appellant and Article 13(3) of the Indo-UAE treaty is applicable in its case. This view gets further support from notification no. 282/2007-08 – FTD (F.No. 503/5/2004-FTD) dated 28.11.2007 whereby the treaty between India and UAE was amended and capital gains on transfer of shares were made taxable in India w.e.f 1.4.2008 which means that the same were not taxable before 1.4.2008.” Ld. Commissioner of Income Tax (A) noted that the order of his predecessor in Mustaq Ahmed Vakil has been upheld by the ITAT, Delhi vide order dated 24.9.2010 in I.T.A. Nos. 3424, 3425, 3426/Del/2010 by holding as under:- “The Ld. Commissioner of Income Tax (A) has also followed the order of the Tribunal in the case of Green Emirate Shipping & Travels referred to above. Respectfully following the order of the Tribunal in the case of Ramesh Kumar Goenka, we do not find any reason to interfere in the order of Ld. Commissioner of Income Tax (A). All the three appeals filed by the Revenue are dismissed.” Considering the above, Ld. Commissioner of Income Tax (A) noted that it is not in dispute that the facts of the case are squarely covered by the ratio of decision of ITAT in the case of Mustaq Ahmed Vakil. Ld. Commissioner of Income Tax (A) further noted that the provisions of amended treaty are applicable in respect of income arising on or after 1.4.2008. Therefore, Ld. Commissioner of Income Tax (A) considered the precedent and held that benefit of Indo UAE ITA NO. 827/Del/2012 Treaty is available to the assessee and Short Term Capital Gains derived by him for shares/securities in India were not taxable in India in terms of Article 13(3)of the Indo-UAE tax treaty. Accordingly, Ld. Commissioner of Income Tax (A) decided the issue in favour of the assessee. Against the above order the Revenue is in appeal before us. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that the identical facts were considered by the ITAT in the case of Mustaq Ahmed Vakil cited above. The tribunal decided the issue in favour of the assessee. These facts were not controverted by the Ld. Departmental Representative. Hence, we find that there is no infirmity in the order of the Ld. Commissioner of Income Tax (A). Accordingly, we hold that the benefit of Indo-UAE Treaty is available with the assessee and short term capital gains derived by him from sale of shares/ securities in India were not taxable in India terms of Article 13(3)of the Indo-UAE Tax Treaty. Apropos issue of claim of deduction of ` 22,888/- On this issue the assessee claimed deduction of ` 22,888/- paid to the cooperative society while computing the Annual Letting Value (ALV) of the property u/s. 23 of the Act. Assessing Officer rejected the claim of the assessee on the ground that deemed deduction of 30% of the net annual value u/s. 24 of the Act subsumes the repair and maintenance expenses of all kind and no further deduction was to be allowed while computing ALV of the residential house. ITA NO. 827/Del/2012 Before the Ld. Commissioner of Income Tax (A) assessee submitted that the impugned charges were paid by it towards common maintenance of the building including provision of lift, cleaning of common areas etc. provided by the society to the occupants of the flats. It was further submitted that under clause 3 of the agreement entered into by the assessee with the tenant, the rent paid by the tenant included charges paid to the society utilities, services etc. by the assessee on behalf of the tenant for availing such facilities. Assessee contended that while computing the rent received by it from the tenant, the amount of ` 22,888/- should have been excluded from the gross amount of the rent received by the assessee since it was only reimbursement of the utility charges paid by the assessee to the society on behalf of the tenant for the services enjoyed by the tenant. Assessee further relied upon the catena of case laws. 15.1 Considering the above, Ld. Commissioner of Income Tax (A) held that he agreed with the assessee that amount of service charges received by the assessee from the tenant should be netted, i.e. the rent received by the assessee from the tenant should be arrived at after reducing the amount of ` 22,888/-, being the reimbursement of service charges paid to the society by the assessee on behalf of the tenant for the services such as provision of lift, cleaning of commons areas etc., enjoyed by the tenant. Ld. Commissioner of Income Tax (A) further observed that the identical issue was considered by his ITA NO. 827/Del/2012 predecessor in assessee’s own appeal in assessment year 2007-08 and the issue was decided in favour of the assessee and it was held that services charges were not required to be reduced from the gross receipt received by the assessee arriving at the ALV. Considering the above Ld. Commissioner of Income Tax (A) held that the Assessing Officer is directed to allow the deduction of ` 22,888/- while computing the netted ALV of the house. Against the above order the Revenue is in appeal before us. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that assessee has claimed a sum of ` 22,888/- was paid by it towards common maintenance of the building including the provision of lift, cleaning of common areas etc. provided by the assessee to the occupants of the flat. Thus, it is the assessee’s argument that while determining the rent receipt by it from the tenant, the amount of ` 22,888/- should have been excluded from the gross amount of the rent received by the assessee since it was only reimbursement of the utility charges paid by the assessee to the society on behalf of the tenant for the services enjoyed by the tenant. In our considered opinion, the view adopted by the Ld. Commissioner of Income Tax (A) is cogent one. We further note that Ld. Commissioner of Income Tax (A) has noted that assessee’s own case for A.Y. 2007-08, the said issue was decided in favour of the assessee by the Ld. Commissioner of Income Tax (A). ITA NO. 827/Del/2012 This fact was not controverted by the Ld. Departmental Representative. Under the circumstances, in the facts and circumstances of the case, we do not find any illegality or infirmity in the order of the Ld. Commissioner of Income Tax (A). Accordingly, we uphold the same. In the result, the appeal filed by the Revenue stands dismissed. Order pronounced in the open court on 31/8/2012. SD/- SD/- [C.M. GARG] GARG] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Date 31/8/2012 “SRBHATNAGAR” Copy forwarded to: – Appellant 2. Respondent 3. CIT 4. CIT (A) DR, ITAT TRUE COPY By Order, Assistant Registrar, ITAT, Delhi Benches