2019 (1) TMI 197 - AT - Income Tax

Tribunal rules no rental income as conditions precedent were unmet

The Tribunal upheld the CIT(A)'s decision, ruling that the payments received were advances dependent on conditions precedent. As these conditions were ... Addition on account of alleged House Property income at accrual basis - the possession of the property was given to the lessee in which it started carrying out the structural changes - Held that:- Proposed lessee had treated the amount of ₹ 2.10 crores given to the proposed lessor during the impugned period as 'advance' and that AO during last year in scrutiny assessment accepted the claim of the assessee that the amount received was only an 'advance' and did not form taxable income. AO also did not consider the fact that only advance of ₹ 2.10 crores has been received during the impugned period and no further advance was received after 30.06.2012. The AO did not take into consideration the confirmation given by the proposed lessee that amount given pending compliance of conditions precedent (obtaining of approval from MOEF and later OC from MCGM) has been treated in its (lessee) books of accounts as 'advance'. As conditions precedent have not been complied with, so nothing has become due to the proposed lessor. In this background, finding of the AO that amount of compensation / advance/ revised advance was due to the lessor at the rate of ₹ 4.20 crores per quarter is not tenable. The addition made by AO on selective reading of the proposed lease agreement was not justified. The detailed finding so recorded by CIT(A) are as per material on record which do not require any interference on our part. Furthermore the finding so recorded are supported by our above observation, which has not been controverted by bringing any positive material on record. - Decided against revenue Issues Involved:1. Deletion of addition made on account of alleged House Property income at accrual basis.2. Nature of payment received by the assessee, whether it is compensation or rent.3. Commercial exploitation of the property and its impact on the classification of income.4. Tax deduction at source by the lessee and its implications.Issue-wise Detailed Analysis:1. Deletion of addition made on account of alleged House Property income at accrual basis:The Revenue contended that the CIT(A) erred in directing the Assessing Officer (AO) to delete the addition of Rs. 11,68,50,670 made on account of alleged House Property income on an accrual basis. The AO had made this addition based on the premise that the possession of the property was given to the lessee, Junobo Hotels Pvt. Ltd., which started carrying out structural changes. However, the CIT(A) observed that the lease rent would commence only upon the fulfillment of certain conditions precedent, specifically obtaining approvals from the Ministry of Environment & Forests (MOEF) and the Municipal Corporation of Greater Mumbai (MCGM). Since these conditions were not fulfilled by 31.03.2013, the CIT(A) concluded that no rental income had accrued to the assessee, and thus, the addition was not warranted.2. Nature of payment received by the assessee, whether it is compensation or rent:The CIT(A) noted that the payments received by the assessee were termed as 'advance' in the lease agreements and not as rent. The agreements clearly stipulated that these payments were contingent upon the fulfillment of the conditions precedent, and until such conditions were met, the payments would remain as advances. The CIT(A) found that the lessee had not occupied the property due to the lack of necessary approvals, and thus, the payments could not be considered as rental income.3. Commercial exploitation of the property and its impact on the classification of income:The Revenue argued that the property was being commercially exploited for earning income, which should be classified under House Property income. However, the CIT(A) and the Tribunal both observed that the lease agreement specified a 'Fit-Out Period' during which no rent was payable, and the 'Rent Commencement Date' would only begin after the conditions precedent were met. Since these conditions were not fulfilled, the commercial exploitation did not result in rental income during the assessment year in question.4. Tax deduction at source by the lessee and its implications:The Revenue pointed out that the lessee had deducted tax at source from the payments made to the assessee under Section 194-I of the Income Tax Act, which deals with rent. However, the CIT(A) and the Tribunal noted that the nature of the payment, as specified in the lease agreements, was an advance and not rent. The Tribunal emphasized that the payment of Rs. 2.10 crores received during the year was treated as an advance in the books of the lessee and was not considered as rental income.Conclusion:The Tribunal upheld the CIT(A)'s order, concluding that the payments received by the assessee were advances contingent upon the fulfillment of conditions precedent, and since these conditions were not met, no rental income had accrued. The Tribunal dismissed the Revenue's appeal, affirming that the addition made by the AO was not justified based on the material on record. The Tribunal's decision was pronounced in the open court on 11/10/2018.