Sinking Fund collected from Tenant for Maintenance and Repairs of Property not part of Rental Income: ITAT [Read Order]

While hearing the case of M/s Altitus Managment Advisors Pvt. Ltd, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) recently held that receipt of sinking fund from tenant for maintenance and repairs of property not taxable as rental income under the head “Income from House Property”

Assessee Company in the instant case engaged in the business of buying of properties and leasing the same. The Assessee filed its return of income for the assessment year 2011-12 and declared total income of Rs. 13,99,982.

During the course of assessment proceedings, the Assessing Officer (AO) noticed that the Assessee received a contribution of Rs.33,86,952 as sinking fund from the tenants during the year. He was of the view that the part recovery of sinking fund by the assessee from the tenants was liable to be brought to tax as income of the Assessee under the head income from house property.

In response, the counsel for the Assessee, Advocate Niraj Kumar Sheth submitted before the AO that the above mentioned fund is solely meant for regular repairs and maintenance to keep the assets functioning. Such expenses are always revenue in nature. However, sinking fund is created to meet capital expenditure for replacing an asset and not to meet any routine running and maintenance expenses. Therefore the same cannot be considered as rental income.

However, the AO does not accept the contentions of the Assessee. and comleted the assessment by adding the said amount to Assessee’s returns by holding that the tenants had actually made sinking fund payment on behalf of the Assessee Company to ITPL, therefore, the same was to be treated as the rental income of the Assessee and liable to be assessed as the income of the Assessee from house property under section 24 of the Income Tax Act 1961.

On appeal the CIT(A) granted relief to the Assessee by holding the fact that the sinking fund was a fund collected to undertake carrying out of repairs of the building and was usually spent for the upkeep of the property, therefore, the same could not be considered as part of the rental income and also deleted the addition made by the AO. Thereafter, the Revenue carried the matter before the Tribunal on appeal against the order of the authority.

After the careful consideration of the rival submissions of both the parties, the Tribunal bench comprising of Judicial Member Ravish Sood and Accountant Member R.C. Sharma upheld the observations of the CIT(A) and held that contributions of the tenants of the property towards sinking fund cannot be assessed as rental income of the Assessee and also upheld the deletion of the addition of the aforementioned amount.

The division bench further observed while concluding the issue that “where the tenant had agreed to pay the maintenance charges or accepted to bear the cost of repairs the same should not be a ground for holding that the stipulated rent does not represent annual letting value, especially when there was no evidence or finding to show that the rent received was low compared to the prevailing rent for similar premises in the same locality”.

To Read the full text of the Order CLICK HERE