2021 (4) TMI 205 - AT - Income Tax

Tribunal rules on rental income accrual for tax, rejects space rent addition

The Tribunal upheld the decisions in favor of the assessee, ruling that rental income should be accounted for and offered for tax on an accrual basis ... Taxability of notional income - accrual of income under mercantile system - treatment of disputed rent receivable - addition based on disclosure in notes to accounts - precedential value of coordinate bench decisionAccrual of income under mercantile system - treatment of disputed rent receivable - taxability of notional income - addition based on disclosure in notes to accounts - Whether addition of space-rent income can be sustained where rent is disputed between parties and income has not accrued despite entries in books - HELD THAT: - The Tribunal accepted the coordinate-bench reasoning applied to earlier assessment years, holding that where entitlement to space rent is disputed (ownership/possession contested), the income cannot be treated as having accrued merely because an entry appears in the books or in notes to accounts. The CIT(A)'s conclusion that the dispute prevented accrual of rent - and therefore the addition was unsustainable - was supported by documentary material on record and by absence of any material showing that the dispute had been resolved in favour of the Revenue. Consequently, notional or contested rent shown as receivable/sundry debtor cannot be taxed as income until accrual is established or the dispute is finally determined. [Paras 5, 6]Tribunal dismissed the Revenue's appeals and sustained the CIT(A)'s deletion of the addition.Final Conclusion: The appeals by the Revenue for A.Y. 2013-2014 and A.Y. 2014-2015 are dismissed, the Tribunal following coordinate-bench decisions that disputed space-rent cannot be treated as accrued income merely on book entries or disclosures in notes to accounts. Issues:1. Whether rental income should be accounted for in the books and offered to tax on an accrual basis.2. Whether the addition of space rent income is sustainable when disputed by Government Departments.3. Whether the findings of the Coordinate Bench in previous years should be followed in the current appeals.Detailed Analysis:1. The appeals (ITA. No. 1692/Del./2018 and ITA. No. 1693/Del./2018) involved a common grievance by the Revenue against the Orders of the Ld. CIT(A)-40 for the A.Ys. 2013-2014 and 2014-2015. The issue was whether the assessee, following the mercantile system of accounting, should have accounted for rental income in the books and offered it for tax on an accrual basis. The Tribunal noted that similar issues had been decided in favor of the assessee in previous years by the Coordinate Bench. The Counsel for the assessee argued that the Tribunal had ruled in favor of the assessee in A.Ys. 2009-2010, 2010-2011, and 2011-2012 on the same matter.2. Regarding the addition of space rent income, the Tribunal referred to the decision of the Coordinate Bench in AYs 2009-10, 2010-11, and 2011-12. In those cases, the ld. CIT(A) had deleted the addition based on the dispute raised by Government Departments regarding ownership of the land and rent. The Tribunal upheld the decision of the ld. CIT(A) stating that since the dispute remained unresolved, the addition was not sustainable. The Tribunal emphasized that when income has not accrued due to a dispute, no rent should be considered taxable, even if there is a notional income entry in the books. The absence of resolution in the dispute was crucial for determining the taxability of the income.3. The Tribunal, after considering the Orders of the authorities below and the previous decisions of the Coordinate Bench, decided to follow the findings of the Coordinate Bench. The Tribunal dismissed both appeals of the Revenue, stating that they were respectfully following the decisions of the Coordinate Bench in similar matters from previous years. Consequently, the appeals of the Revenue were dismissed based on the precedents set by the Coordinate Bench in earlier cases.In conclusion, the Tribunal upheld the decisions in favor of the assessee based on the principles of the mercantile system of accounting, the unresolved dispute regarding space rent income, and the consistency in following the findings of the Coordinate Bench from previous years.