Notional lease rent cannot be taxed on a mere sale agreement, but contractual interest on unpaid instalments remains taxable.

A mere agreement to sell a flat, even with possession delivered, did not justify taxing notional lease rent as either income from other sources or house property income where no registered conveyance had passed and no real rent had accrued; the estimated rental additions were deleted. By contrast, interest separately stipulated and actually received on unpaid instalments under the same agreement was contractual income and remained taxable as income from other sources, so that addition was sustained.

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Issues: (i) Whether the notional lease rent alleged to arise from the agreement for sale of the flat was taxable either as income from other sources or as income from house property for the assessment years in question. (ii) Whether the interest received from the vendee on the unpaid instalments was taxable as income from other sources for assessment year 1986-87.

Issue (i): Whether the notional lease rent alleged to arise from the agreement for sale of the flat was taxable either as income from other sources or as income from house property for the assessment years in question.

Analysis: The property had not been conveyed by a registered sale deed during the relevant previous years, but possession had been handed over under the agreement. The absence of a completed conveyance meant that the assessee could not be treated as having derived actual or accrued income by way of rent, and the estimated amount could not be brought to tax as income from other sources. On the question of house property income, the Tribunal held that, on the facts, the assessee was not the owner for section 22 purposes, and in any event the flat, being occupied under the agreement, was not realistically capable of being let out so as to justify the notional annual value adopted by the authorities. Even otherwise, the computation could not exceed the standard rent principle.

Conclusion: The notional lease rent additions of Rs. 4,08,000 and Rs. 6,00,000 were not sustainable and were deleted in favour of the assessee.

Issue (ii): Whether the interest received from the vendee on the unpaid instalments was taxable as income from other sources for assessment year 1986-87.

Analysis: The interest was separately stipulated under the agreement and was actually received during the year. It was not part of the sale consideration itself, but income arising from the contractual obligation to pay interest on the unpaid amount.

Conclusion: The addition of Rs. 1,65,389 was rightly sustained and was decided against the assessee.

Final Conclusion: The appeals were disposed of with relief on the notional rental additions but with retention of the interest addition for assessment year 1986-87.

Ratio Decidendi: A mere agreement to sell, even with possession handed over, does not by itself justify taxing a notional rent as accrued income or as house property income where no real rental income has arisen and the property is not fit for reasonable letting on the facts; but contractually stipulated interest on unpaid instalments remains taxable as income.

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