2007 (2) TMI 356 - AT - Income Tax

Summary

Issues involved:
The judgment involves the issue of whether arrears of rent received by the assessee are taxable in the year of receipt.

Issue 1: Taxability of arrears of rent:
The assessee appealed challenging the order of the Commissioner of Income-tax (Appeals) regarding the treatment of arrears of rent as income from other sources instead of income from property. The contention was that the arrears of rent, amounting to Rs. 2,60,000, received during the relevant year for the assessment year 1996-97 should be considered as income from property and not from other sources. The argument was based on the fact that the Income-tax Act exempts arrears of rent as income from property and does not mandate their assessment under income from other sources.

The Appellate Tribunal considered the arguments presented by both parties. The assessee received arrears of rent amounting to Rs. 2,60,000 in the previous year relevant to the assessment year but did not offer it for taxation. The assessee contended that the arrears of rent received relating to the earlier year were not taxable, citing section 25B which came into effect from the assessment year 2001-02. The Tribunal noted that section 25B, which deals with arrears of rent, is applicable from 2001-02 and does not have retrospective effect. The Tribunal referred to legal precedents to support the assessee's position.

The Tribunal analyzed the provisions of section 25B of the Income Tax Act, which specifies the treatment of arrears of rent received by the owner of a property let to a tenant. The section, effective from 2001-02, mandates that such arrears shall be deemed as income from house property and taxed accordingly in the year of receipt. Referring to legal interpretations from previous cases, the Tribunal concluded that arrears of rent received by the assessee for earlier years during the assessment year 1996-97 cannot be taxed. The Tribunal disagreed with the view that if not taxable under "Income from house property," it should be considered under "Income from other sources," emphasizing that rent, whether current or in arrears, retains its character as income from house property.

In conclusion, the Appellate Tribunal allowed the assessee's appeal, directing the Assessing Officer to exclude the amount of Rs. 2,60,000 representing arrears of rent from taxation, as it pertained to a period prior to the relevant previous year. The judgment clarified the tax treatment of arrears of rent and upheld the position that such amounts, received for earlier years, should not be taxed under the head of "Income from other sources."