Income from house property: Section 22: A. Y. 2004-05: Where service agreement is dependent upon rent agreement, service charges have to be included as a part of its rental income.

In the A. Y. 2004-05, the assessee received rent and service charges in respect of a property owned by it. It claimed both rent income and service charges as ‘Income from house property’. The Assessing Officer accepted the rent income as ‘Income from house property’. So far as service charges were concerned, he held that these service charges were for ancillary services and, therefore, assessable under the head ‘Income from other sources’ and not as ‘Income from house property’. The CIT(A) allowed the claim of the assessee. The Tribunal held that the assessee was providing no services/facilities to the occupants of its property. The services, if any, were being provided by the society. Mere splitting of rent was not decisive and each case had to be examined on its own facts to determine whether the service charges were part of the rent. Therefore, the service charges could not be taxed under the head ‘Income from other sources’, but had to be taxed along with rent income as ‘Income from house property’. Further, the service charges received by the assessee were considered by the Assessing Officer to determine the net maintainable rent and fair market value of the property under the provisions of the Wealth-tax Act. It, therefore, upheld the order of the CIT(A).

 On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) There are concurrent findings of fact by the Commissioner (Appeals) as well as the Tribunal that no services are being provided by the assessee to the occupants of its property and that the service charges have to be included as a part of its rental income.

 ii) The test to determine whether the service agreement is different from the rent agreement would be whether the service agreement could stand independently of the rent agreement. In the instant case, the service agreement is dependent upon the rent agreement, as in the absence of the rent agreement there could be no service agreement.

iii) It may also be pointed out that according to the assessee, the services being provided under the service agreement are in respect of staircase of the building, lift, common entrance, main road leading to the building through the compound, drainage facilities, open space in/ around the building, air condition facility, etc. These are services which are not separately provided, but go along with the occupation of the property. iv) Therefore, the amounts received as service charges are to be considered as a part of the rent received and subjected to tax under the head ‘Income from house property’.”