1996 (1) TMI 152 - AT - Income Tax

Arrears of Rent Not Income; Collection Charges Disallowed

The Tribunal held that arrears of rent should not be treated as income from house property for the year of receipt but as part of the annual rent of ... Assessment Year, House Property, Income From Other Sources Issues Involved:1. Taxability of arrear rent as income from house property.2. Applicability of Section 25A of the Income Tax Act.3. Disallowance of collection charges.Detailed Analysis:1. Taxability of Arrear Rent as Income from House Property:The primary issue in this case was whether the arrears of rent amounting to Rs. 76,618, received in the assessment year 1988-89 but relating to the period from 24-4-1983 to 30-4-1984, should be treated as income from house property for the year in which they were received.The Income-tax Officer (ITO) included this arrear rent in the income of the assessee for the assessment year 1988-89, arguing that it was not returned as income in the relevant earlier years. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this decision, citing Section 25A of the Income Tax Act.The Tribunal, however, disagreed with this approach. It emphasized that according to Sections 22 and 23 of the Act, only the annual rent received or receivable is taxable as income from house property. The Tribunal clarified that arrears of rent from past years do not form part of the annual rent for the year in which they are received. The Tribunal cited Explanation-I to sub-section (1) of Section 23, which defines 'annual rent' as the actual rent received or receivable for a 12-month period. Therefore, the arrears of rent should be considered part of the annual rent of the earlier years and not the year of receipt.2. Applicability of Section 25A of the Income Tax Act:The CIT(A) had applied Section 25A to justify taxing the arrear rent as income from house property for the year of receipt. Section 25A deals with the taxability of unrealized rent that was previously allowed as a deduction when it is subsequently recovered.The Tribunal found that Section 25A was not applicable in this case because the arrears of rent received by the assessee were not unrealized rent that had been previously allowed as a deduction under Section 24(1)(x). The Tribunal noted that Section 25A applies only when unrealized rent, previously allowed as a deduction, is subsequently recovered. Since the arrears in question were not previously deducted as unrealized rent, Section 25A could not be invoked.The Tribunal also referred to the departmental Circular No. 397 dated 16-10-1984, which supports this interpretation of Section 25A.3. Disallowance of Collection Charges:The second issue was the disallowance of Rs. 5,514 claimed as collection charges by the assessee. The ITO disallowed this amount on the grounds that the assessee had already been allowed Rs. 9,000 as service charges paid to M/s. Ratnakar Buildings Ltd. for rent collection.The CIT(A) upheld this disallowance, and the Tribunal found no relevant material or cogent reason to interfere with the CIT(A)'s decision. Therefore, the disallowance of Rs. 5,514 was confirmed.Conclusion:The Tribunal concluded that the orders of the ITO and CIT(A) to tax the arrears of rent as income from house property for the assessment year 1988-89 were not in accordance with the provisions of law. The Tribunal vacated these orders and deleted the sum of Rs. 76,618 from the taxable income. However, the Tribunal upheld the disallowance of Rs. 5,514 towards collection charges. Thus, the appeal was partly allowed.