Application vs Diversion

This query is : Resolved

CA Ysil Karunai (Querist)
Follow

10 August 2010 Dear sir, please consider the following example:
Mr. X in terms of a will executed by his father, became the owner of a house property on 1/6/2008. The will, inter alia, created a charge on the property for payment of maintenance of Rs. 2,500 per month payable by Mr. X to his mother. The property was let out at Rs. 20,000 per month from 1/8/2008.

Mr. X wants to claim the maintenance as deduction from the property income in the A.Y. 2009-10. Assessing officer denied that deduction on maintenance charges of Rs. 2,500 per month as it is not permitted by Section 24.

Mr. X agree with the assessing officer and argues in different as, the maintenance charges made is in pursuance of an obligation created by a document (will), which is entered into before the house property is transferred to Mr.X and the terms and conditions of which both Mr.X and his father agree.

In such a case, the payment made by Mr. X would really be a diversion of income at source and not merely a case of application of income which accrues to him.
Hence, Mr. X argues only Rs. 17500 per month is taxable in his hand and not entire Rs. 20000 per month.

Pleae clarify the assessee contention is correct or not?

CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
Follow

10 August 2010 The AO is correct in disallowing Rs. 2,500 for maintenance as such deduction is not allowed u/s 24.

As the payment of maintenace is a charge created on the property, it is a diversion of income at source by over riding title and not merely an application of income.

The correct approach would be Mr. X offers only Rs. 17,500 to tax & not Rs. 20,000. Rs. 2,500 should be directly paid by the tenant to Mr.X's mother & not to Mr. X. It would be advisable to insert such clause in the lease agreement.

If Mr. X receives Rs. 20,000 from the tenant & then pays Rs. 2,500 to his mother, it will be only application of income & full amount will be taxed in the hands of Mr. X.