High Court rules lease rent not taxable on accrual basis, citing lack of proper accounts

The High Court of Bombay ruled in favor of the assessees, determining that the lease rent from properties should not be taxed on an accrual basis. The court upheld the Tribunal's decision, considering the pending proceedings for standard rent fixation that jeopardized the right to receive the lease money. Since the assessees did not maintain proper accounts or use the mercantile accounting system, the Income-tax Department could not enforce accrual basis taxation. Legal precedents supported this decision, emphasizing that disputed income in court proceedings cannot be taxed on an accrual basis.

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Issues involved: The assessment of lease rent from properties in the hands of the assessee on receipt basis and the discretion of the Income-tax Officer to tax the lease rent on accrual or receipt basis.

Summary:
The High Court of Bombay was tasked with determining whether the Appellate Tribunal was correct in assessing the lease rent from properties in the hands of the assessee on a receipt basis and if the Income-tax Officer had the discretion to tax the lease rent on an accrual or receipt basis. The assessees, co-owners of certain plots in Bombay, had leased out the properties and earned income from various sources, including rent. The Income-tax Officer added the lease money to the total income on an accrual basis, but the Tribunal overturned this decision, stating there was no justification for adding income from lease rent on an accrual basis.

The Tribunal's approach was deemed correct, especially considering the pending proceedings for fixation of standard rent in a court of law, which put the right to receive the agreed lease money in jeopardy. As the assessees did not maintain regular account books or follow the mercantile system of accounting, the option regarding the accounting system was with the assessee, not the Income-tax Department. The Department could not compel the adoption of the mercantile system of accounting, which was not followed in this case. Therefore, the income from lease rent could not be taxed on an accrual basis.

Referring to legal precedents, including the case of CIT v. Hindustan Housing and Land Development Trust Ltd., the court emphasized that income under real dispute in court cannot be included as income on an accrual basis. Additionally, the court cited the case of J. K. Bankers v. CIT, where it was established that income from lease money falls under income from other sources, allowing the assessee to follow any accounting system for that source.

In conclusion, the court answered both questions in the affirmative and in favor of the assessees, highlighting that the income from lease rent could not be taxed on an accrual basis.

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