Overriding title prevents property income from accruing to purchaser where prior licence arrangement allocates rent to earlier owner.

A pre-existing registered leave and licence arrangement prevented the purchaser from receiving the licence fee and physical possession during the stipulated period, so the annual letting value and alleged lease rent did not accrue to the purchaser in that year and were diverted by overriding title in favour of the earlier owner; the corresponding addition was therefore not sustainable. Notional interest on the security deposit was also not assessable, because the deposit arose from the same prior arrangement and there was no entitlement to the underlying rent during the relevant period. The disputed lease-related additions were deleted, and the property income was not taxed in the purchaser's hands.

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Issues: (i) Whether the annual letting value and alleged lease rent of the flat were taxable in the assessee's hands under the head income from house property for the relevant year. (ii) Whether notional interest on the security deposit was assessable in the assessee's hands.

Issue (i): Whether the annual letting value and alleged lease rent of the flat were taxable in the assessee's hands under the head income from house property for the relevant year.

Analysis: The purchase agreement made the property subject to a pre-existing registered leave and licence arrangement, under which the license fee for the stipulated period had already been earmarked for the earlier owner and the assessee was not entitled to claim it for that period. The agreement also postponed physical possession until expiry of the licence period. On these facts, the income did not accrue to the assessee during the year and, even otherwise, the amount was diverted at source by an overriding title in favour of the earlier owner.

Conclusion: The addition of lease rent and the corresponding annual letting value could not be sustained and was deleted in favour of the assessee.

Issue (ii): Whether notional interest on the security deposit was assessable in the assessee's hands.

Analysis: The security deposit arose under the earlier leave and licence agreement and was connected with the period during which the earlier owner retained the right to receive the licence fee. Since the assessee was not entitled to the underlying rent during the relevant year, there was no basis to attribute deemed interest on that deposit to the assessee.

Conclusion: The addition of notional interest on the security deposit was unjustified and was deleted in favour of the assessee.

Final Conclusion: The assessee was held not liable to tax on the disputed lease-related additions, and the appeal succeeded in full.

Ratio Decidendi: Where income from property is pre-allocated under a prior binding arrangement and is diverted before it can accrue to the purchaser, it is not assessable in the purchaser's hands under the head income from house property.

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