2000 (9) TMI 221 - AT - Income Tax

Rental income taxed post-lease; car expenses partly allowed for directors

The appeal for the assessment year 1990-91 was dismissed, confirming the taxability of rental income for the entire period post-lease expiration. The ... Accrual Of Income Issues Involved:1. Taxability of rental income for the period after the expiration of the lease agreement.2. Disallowance of car maintenance expenses due to presumed personal use by directors.Issue-Wise Detailed Analysis:1. Taxability of Rental Income:The primary issue revolves around the taxability of rental income for the period after the lease agreement expired. The assessee entered into a lease agreement on 26th November 1979 and subsequently sub-leased the premises to Traders Bank. The lease expired on 15th June 1989, and the Bank of Baroda, which took over from Traders Bank, failed to pay rent thereafter. The assessee terminated the tenancy agreement on 31st January 1989 due to non-payment of rent. Despite this, the assessee included rental income in its returns for the assessment years 1989-90 and 1990-91 for the period up to 30th June 1989. The Assessing Officer included rent for the entire year, arguing that the assessee was maintaining its accounts on a mercantile basis and had a right to receive the rent.The assessee contended that it followed the cash method of accounting for rent and had no right to receive rent post-expiration of the lease. The assessee also cited various legal precedents, including the Supreme Court's decision in Hindustan Housing & Land Development Trust Ltd., to argue that disputed income could not be taxed. The Departmental Representative, however, maintained that the assessee's accounts were on a mercantile basis, making the income taxable when the right to receive it was established.Upon review, it was determined that the assessee had indeed acquired the right to receive the rent, as the Bank continued to occupy the premises and sent cheques for the rent, which were received but not encashed by the assessee. The Tribunal concluded that the rental income was taxable under both mercantile and cash accounting systems, as the right to receive the income was established. The Tribunal upheld the CIT (Appeals) decision, confirming the inclusion of rental income for the entire period in question.2. Disallowance of Car Maintenance Expenses:For the assessment year 1991-92, the Assessing Officer disallowed 1/3rd of the car maintenance expenses, suspecting personal use by the directors. The CIT (Appeals) reduced this disallowance to 1/5th. The Tribunal referred to the Special Bench decision in Daks Copy Services (P.) Ltd v. ITO, which held that no disallowance for personal use by directors could be made in the case of company-assessees. Consequently, the Tribunal ruled in favor of the assessee on this ground, disallowing the reduction of car maintenance expenses.Conclusion:The appeal for the assessment year 1990-91 was dismissed, confirming the taxability of the rental income for the entire period post-lease expiration. The appeal for the assessment year 1991-92 was partly allowed, overturning the disallowance of car maintenance expenses due to presumed personal use by directors.