2003 (12) TMI 21 - HC - Income Tax

Court rules arrears of rent from earlier years not taxable in current year

The High Court upheld the decision of the Income-tax Appellate Tribunal, ruling that arrears of rent relating to earlier years cannot be taxed as income ... Arrears of rent relating to the earlier year - '1. Whether Tribunal was correct in law in deleting the addition of Rs. 4,07,286 being the arrears of rent, made by the Assessing Officer to the income of the assessee? 2. Whether the amount of Rs. 4,07,286 being the arrears of rent could be taxed under the head 'Income from house property' or under the head 'Income from other sources'? - A bare reading of section 23(1) with Explanation 1 appended thereto, makes it clear that any rent not relating to the relevant previous year cannot form part of the 'annual rent' for the previous year, for determining the annual value of the property for the purposes of section 22 of the Act. - The above being the position, no fault can be found with the view taken by the appellate authorities below. Thus, the order of the Tribunal does not give rise to a question of law, much less a substantial question of law, to fall within the limited purview of section 260A – Revenue’s appeal dismissed Issues:1. Whether the Income-tax Appellate Tribunal was correct in law in deleting the addition of arrears of rent made by the Assessing Officer to the income of the assesseeRs.2. Whether the amount of arrears of rent could be taxed under the head 'Income from house property' or under the head 'Income from other sources'Rs.3. Whether the provisions of section 25B introduced by the Finance Act, 2000, are clarificatory in nature and therefore have retrospective effectRs.Analysis:Issue 1: The respondent-assessee received arrears of rent for a property leased out to a bank. The Assessing Officer included the entire amount of arrears of rent received during the previous year as income for the assessment year. The Commissioner of Income-tax (Appeals) deleted the addition, stating that arrears of rent should be assessed in the year to which they relate, not in the year of receipt. The Tribunal upheld this decision. The High Court agreed, citing provisions of the Income-tax Act that determine the annual value of property for taxation purposes. The Court concluded that arrears of rent relating to earlier years cannot be taxed as income from house property in the year of receipt.Issue 2: The High Court analyzed the provisions of sections 22 and 23 of the Income-tax Act regarding the determination of the annual value of property for taxation. It emphasized that the annual rent considered for taxation purposes must relate to the relevant previous year. The Court explained that the actual rent received or receivable in respect of the previous year should be considered as the annual value of the property. Therefore, any rent not pertaining to the relevant previous year cannot be included in the annual rent for taxation purposes.Issue 3: The High Court declined to entertain the appeal on the grounds that the order of the Tribunal did not raise a substantial question of law under section 260A of the Income-tax Act. The Court refrained from commenting on the issue of whether the adjustment made by the Assessing Officer under section 143(1)(a) was valid, as the assessee did not file an appeal or cross objection before the Tribunal on this matter. The Court noted the substance in the assessee's stand but did not provide a definitive ruling on the issue.