Whether surcharge collected by landlord, along with municipal taxes from tenants, forms a part of income from house property - YES: Calcutta HC

THE issues before the Bench are - Whether surcharge received by the landlord, along with municipal taxes from the tenants forms a part of income from 'house property' and Whether when the surcharge collected by the landlord is not used for his own purpose and the same is paid to the municipal authorities, the same can be deducted from the total income. And the verdict goes against the assessee.

Facts of the case

Assessee company was having 1/3rd ownership in a property situated at Kolkata, prior to the AY 1997-98, and remaining 2/3rd portion was being owned by M/s. Poddar Udyag Ltd. Subsequently under the scheme of arrangement sanctioned by the HC, the assessee acquired 50 per cent ownership of the said building from the AY 1997-98 onwards. Since the land and building
were standing in the name of the Poddar Udyag Ltd. all formalities relating to municipal assessment were made in the name of Poddar Udyag Ltd and this company used to collect rent from tenants. The assessee disclosed rental income from the said property under the head ‘income from House property’ and collected municipal tax as well as surcharge. The assessee included the amounts of municipal tax collected from the tenants as income from house property by way of gross rent receipt but excluded the amount of surcharge for the purpose of determining annual value of the property on the basis of the actual rent received. During assessment, AO included the amount of commercial surcharge as part of the rent for the purpose of assessment of income under the head income from house property. On appeal, CIT(A) decided in favour of the assessee following decision of the Tribunal in the assessee’s own case, wherein it was held that surcharge of municipal tax collected by the assessee cannot be considered to be the income of assessee. On further appeal by revenue, Tribunal's division bench had created a larger bench for reconsideration of the issue. Tribunal's larger bench decided that the surcharge as referred to in Kolkata Municipal Corporation Act and collected by the assessee as the owner of the premises from the tenants/ occupiers, is part of actual rent received by the assessee within the meaning of Section 23(1)(b) consequently it has to be included for the purpose of determination of income under heading income from house property.

Before HC, the assessee's counsel contended that commercial surcharge u/s 171(4) of the KMC Act was imposed because of use of commercial and non-residential purpose of the property by the tenant. As per decision of SC in the case of Calcutta Gujarati Education Society v. Calcutta Municipal Corporation, it was held that though the landlord is primarily liable for the surcharge but it is paid by him on behalf of the tenant. Thus it is not borne by the landlord. On the basis of decision of SC in case of Abdul Kader v. G.D. Govindraj it was contended that the said question should not have been decided only with reference to the provisions of the KMC Act. It was further submitted that in respect of the property occupied by the tenant, the municipal tax to the extent borne by the owner shall be deducted in the year of actual payment. As per the provisions of section 23, no deduction can be made in respect of the municipal taxes if the same do not form part of the rent. Thus, in terms of the proviso only the municipal tax borne by the owner can be deducted and in casebthe landlord pays the municipal tax out of the rent he is entitled to deduction of such municipal tax. It was further contended that object of the proviso of Section 23 is that where the tenant of the property had undertaken to bear any part of the taxes levied by local authority the owner cannot be allowed to claim deduction in respect thereof. On the other hand, the revenue's counsel submitted that consolidated tax payable by the owner under KMC Act includes surcharge on consolidated rate payable in respect of the premises used for commercial or nonresidential purposes. It was submitted that primary liability to pay consolidated rate including surcharge in respect of the tenanted premises is on the owner of the premises. They submitted that merely because the KMC Act empowers the owner to recover the surcharge from the tenant does not discharge the owner of the premises from its primary liability to pay the surcharge to the Municipal Corporation. It was further contended that when tenant is allowed to use the premises for commercial purposes it would certainly include whatever amount is payable by the tenant for the use of premises for commercial purpose. Therefore, surcharge collected by the owner from the tenant would certainly constitute rent paid for the use of premises for commercial purposes.

Having heard the matter, the High court held that:

++ it appear from Section 5 that whether the income is really appropriated for its own purpose or not is not the germane of the matter and it would be clear from Section 5(1)(a). Once the income is received the same is exigible to tax. Ultimately if it is found the same is not enjoyed or appropriated by the assessee as being his own, the amount so received would be deducted from its total income. Neither of the Counsels has disputed the legal position that commercial surcharge has to be paid under the KMC Act and is to be paid by the actual occupants if it is used for commercial or non residential purposes. Be it tenant or the owner himself. Therefore, under the law the user occupant (here the tenant) is under obligation to pay the surcharge. It is significant that it has not been mentioned how it is to be paid or recovered. The said sub-section (4) merely provides for charging but does not say that the occupant has to pay and/or deposit to the Corporation authority had it been the position then there would not have been problem in this case. By an agreement it can be worked out that the tenant can be obliged to pay directly or the owner take the responsibility to pay rate including the surcharge realizing the same with rent. Thus, in this case the assessee being the lessor and/or landlord and/or owner is under obligation to pay the consolidated rates of taxes on the land and buildings. Thus under the conjoint reading of the aforesaid provisions of the KMC Act the owner is enjoined with statutory right to recover commercial surcharge from occupants on recovery of the same it is his obligation to pay to the Corporation authorities. On reading of the provision of the KMC Act, it is clear that the amount collected by way of commercial surcharge cannot be appropriated or enjoyed by the owner of the property so collected as it is to be paid to the Corporation authorities but then it is receipt of total income within the meaning of Section 5;

++ the moment the amount collected in relation to any transaction whatever may be the nomenclature that receipt has to be termed income. Here the commercial surcharge is receivable or received in connection with the legal relationship of landlord and tenant. This principle has been well settled long time back as has been correctly pointed out in the case of Chowringhee Sales Bureau Pvt. Ltd v. CIT. In the case of Sinclair Murray & Co. P. Ltd. v CIT following the ratio in the case of Chowringhee Sales Bureau P. Ltd. the SC held that if an amount collected by way of tax in connection with the sale and if it is paid then the same does lose the character of income from business or trading receipt. If the money is withheld and not paid to the taxing authority or not refunded to the purchaser this amount so received has to be treated as trading receipt and as such exigible to tax. As per the decision in case of Paprika Ltd. & Anr. v. Board of Trade, it was held that when the seller poses on the tax and the buyer agrees to sales tax in addition to the price, the word ‘tax’ is really part of the entire consideration and the distinction between the two amounts tax and the price loses all significance;

++ from the aforesaid discussions and reading of the ratio of these decisions we find conceptual similarity in case when commercial surcharge collected is by the owner assessee of the house it becomes part of rent. Consequently we hold that the moment the commercial surcharge is recovered irrespective of the provisions of the agreement entered into by and between the landlord and tenant it immediately becomes exigible to tax as rental income from house property as agreement binds the parties thereto and it becomes irrelevant the moment it is found to be in conflict with legal provision on the subject. Therefore, we do not find any illegality and infirmity in the judgment of the learned tribunal. We hereby affirm it.