Common Area Maintenance Charges Not Taxable as Rental Income: ITAT Deletes ₹17.08 Lakh Addition [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted an addition of Rs. 17,08,908 made by the Assessing Officer ( AO ) and held that the recovery of Common Area Maintenance Charges ( CAMC ) by assessee from its tenant is not taxable as rental income under the Income Tax Act, 1961.

LYSA Trading LLP (assessee) engaged in leasing commercial property, faced scrutiny for the Assessment Year (AY) 2023-24. The AO observed a shortfall between the rental income reported in the assessee’s Income Tax Return (ITR) and the amount reflected in the Tax Deducted at Source (TDS).

The AO held that this difference to Rs. 17,08,908 recovered as CAMC from SEPL, treating it as rental income under the head "Income from House Property" and making an addition to the assessee’s income.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the CAMC of Rs. 17,08,908 was a reimbursement for 50% of the total CAM charges of Rs. 34,29,816 paid to the original property owner, Star Line Leasings Limited, as SEPL occupied 50% of the leased space.

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The CIT(A) upheld the AO’s addition, citing the absence of invoices from SEPL to substantiate the CAM charges paid. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The assessee’s counsel contended that both the AO and CIT(A) misconstrued the facts, as the CAM charges of Rs. 34,29,816 were paid to Star Line Leasings Limited, not SEPL, and the assessee had recovered Rs. 17,08,908 from SEPL as per the lease agreement.

The counsel submitted documentary evidence, including invoices from Star Line Leasings Limited (charging Rs. 3,37,265 per month for CAMC) and invoices raised by the assessee on SEPL (recovering Rs. 1,42,409 per month for CAMC), to support the claim.

The two-member bench, comprising Annapurna Gupta (Accountant Member) and T.R. Senthil Kumar (Judicial Member), observed that the AO and CIT(A) erred in rejecting the assessee’s explanation due to a misunderstanding that the CAM charges were paid to SEPL.

The Tribunal noted that the assessee had furnished complete evidence, including invoices from Star Line Leasings Limited and recovery invoices issued to SEPL, proving that the CAMC was a reimbursement and not rental income.

The Bench noted that the assessee’s accounting treatment netting off the recovered amount and not claiming the balance as a deduction aligned with the contention that the CAMC was not taxable income.

The bench held that the addition of Rs. 17,08,908 was unjustified, as the CAM charges were not in the nature of income but a recovery of expenses incurred by the assessee. It deleted the addition made by the AO. The appeal of the assessee was allowed.

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